The Candian National Post reports, in an article Gold’s rise points to inflation on David Ranson, president of an econometric consulting firm. Ranson
- defines inflation as a decline in the purchasing power of a national currency. He prefers that definition to flawed ones like the rising cost of living or increasing labour costs.
Official government-massaged measures such as the consumer price index (CPI) do not detect the onset of inflation as quickly as financial markets, he says. The latter indicate “current inflation is much higher than policymakers realize and is still accelerating.
- These views seems to jibe with those of the average man in the street, who feels prices are rising higher than the benign rate governments portray.
Consumers and investors experience inflation at what Ranson calls “market-clearing prices.”
As we all know from daily experience, such prices can jump quickly. Some components of the CPI, such as clothing, are accurately picked up but the index is distorted by the way the United States and other countries account for housing.
Shelter makes up 37.4% of the CPI but the U.S. uses what Ranson terms a “mythical figure” based on old historical data.
Wainright’s Proxy Index of Market-Clearing Consumer Prices eliminates the parts of the CPI that use historical prices. The revised index showed shelter rose 13% in 2005 and energy at 16.7%. Food and beverages rose only 2.3%, transportation 0.4% and food and beverages 2.3%, all in line with the CPI.
However, the weighted average was 8.4%, which Ranson suggests is “the true inflation rate; 8.4% is what is happening now, which should correlate with the performance of financial markets, where we always measure what is happening now.”
Ranson’s views are consistent with the findings of John Williams, reported elsewhere on this blog. Both economists are calling attention to the measurement techniques that produce a politically-motivated unrealistically low rate of inflation.
Ranson also found that “found rising gold prices predicted rising consumer price indexes in [six European] nations.”. Ranson believes that the gold market is faster to sniff out inflation in the pipeline than consumer prices. The rising price of gold over the last six years, according to Ranson:
- is giving an ominous early warning on inflation. However, it takes time before the CPI fully reflects the trend signaled by gold. Ranson found it takes six years for the CPI to reflect even half the trend signaled by gold.
“This is a serious matter,” Ranson said. “It’s a very big deal if what I’m saying is correct.”
This time lag also creates “the enormous gulf in opinion” between the conventional view of inflation and the minority view that inflation shows up first in the price of commodities.
“One indicator says nothing is happening at all and the other says something very big is happening.”
Another indicator of ongoing currency debasement is that the melt value of US currency is now worth more than its face value. This creates a profit opportunity by melting currency and selling the metals as scrap. In response the, U.S. Mint bans melting pennies, nickels
- U.S. Mint officials said Wednesday they were putting into place rules prohibiting the melting down of 1-cent and 5-cent coins. The rules also limit the number of coins that can be shipped out of the country.
“We are taking this action because the nation needs its coinage for commerce. We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer,” Mint Director Edmund Moy said in a statement.
Officials said they had received a number of inquiries from the public in recent months concerning the value of the metal in the coins and whether it was legal to melt them.
The new regulations prohibit the melting of 1-cent and 5-cent coins, with a penalty of up to five years in prison and a fine of up to $10,000 for people convicted of violating the rule.
The rules also require that shipments of the coins out of the country be for legitimate coinage and numismatic purposes and cap the size of any one shipment to $100 worth of the coins.
{ 42 comments }
I wonder, “just how can the government presume to tell me what I can and cannot do with my penny, which by its laws I was compelled to exchange for a thing of value?”, but then I recall the Roosevelt confiscation of gold (by executive order no less) and I just slump further in disgust. The Mint’s fiat should be front page news and the next headline should be “Why?” Once everyone starts to ask that question, the fiat money system will end by popular revolt.
I don’t get the big deal with inflation but rather with real buying power. As a previous blogger had said, and I agree, it is purchasing of your work that is important. In other words, how many work hours does it take to purchase something?
For example: if you were earning $1000 per week and the grocery bill is $100, then the grocery took you 10% of a working week to purchase. But if suppose inflation rose the grocery bill to $200 but your wages stayed the same then its up to 20%. But if your wages kept with inflation then you’d be back to 10%. But, of course, if you lost your job, found part-time work that paid $250 per week and there was no inflation at all and the grocery bill is $100 then the time-cost is 40%! But then if the price was $100 but you got a promotion to $2000 the time-cost is now 5%!
I would only regard inflation as dangerous when prices (or currency depreciation if you like) are rising fast enough that you are trying to buy anything just to get rid of the money before prices rise again.
After all I sure most people are simply are more concerned with trying to put food on the table and a roof over their heads.
By the way, do Libertarians cringe when Homer Simpson holidaying in Japan said, “Oh no, I’m down to my last one million yen!”?
Sam, inflation is (unfortunately) always harmful. A decade of double digit inflation will destroy the lifetime of savings of an entire generation. Worst of all, inflation hurts the poor the most, since they tend to be on a fixed income more often.
In addition, inflation reminds us of the reality that, whereas money used to have worth because people valued it, now it has the worth that governments attach to it. Therefore, when the government tweaks and alters the money supply, everyone suffers.
Here are some good starts on the nature, and destructive aspects of, inflation:
http://jim.com/econ/chap23p1.html (Henry Hazlitt – Economics in One Lesson; chapter 23: ‘The Mirage of Inflation’)
http://mises.org/money/3s1.asp (Murray Rothbard – What Has the Government Done to Our Money?)
articles:
http://mises.org/fullstory.aspx?control=1570 (the best article, in my opinion)
http://mises.org/daily/1947
http://mises.org/daily/1273
But what of real purchasing power of the money? If prices and wages double, nothing has happened other than the numbers have changed. I thought the argument usually went along the lines of inflation hurts savers and bondholders.
The poor usually have to spend the money as they make and are unlikely to hold bonds.
And yes, I did say the higher the inflation equals greater hardships. I meant that very low inflation (under 5% perhaps) doesn’t have much effect on savings except over very long periods.
P.S. Aren’t bonds just government shares anyway? Since private shares tend to increase with inflation why would anyone bother with bonds?
Sam,
You didn’t look at a single link, did you?
(This sentence, among others, really gave it away: “If prices and wages double, nothing has happened other than the numbers have changed.”)
We can’t really discuss this until we’re on the same page with our definitions and basic understandings of what inflation might be. Why don’t you look at the Austrian perspective and then come back with ideas, questions, objections, etc.?
OK, D Coleman. I have read the first link and I have yet to see the light. Of course, the best monetary policy would be one of 0% inflation (0% deflation?). But the arguments seem to come back to the complaint that one dollar doesn’t buy the same amount of goods and service as it did 50 years ago, 100 years ago.
Similarly, I thought saving meant holding on to cash. I hadn’t heard till now that saving can apparently mean the same as investment.
And what of uneven cost-push inflation? You know where, one person gets a head-start before others gets a chance to raise their prices? In a gold coin economy, a person could just as easily shave a tiny strip of gold off the coin before passing it onto others and profit until people suddenly notice the coins gets lighter.
And printing money to go to war? In the day of Ancient Rome, Hannibal seized silver mines in Spain to fund his war against Rome . . .
Obviously I am missing a vital point here, but what?
I read the second link D. Coleman and found strangely hilarious. That article told that ALL currencies have the capacity to be debased. What’s the point of trading directly in gold when people are going to add various base metals and dilute it anyway? Why should one standard necessarily be better than another then?
I think the point of currency is not whether you value it as much as to whether someone else values it, that THEY are willing to exchange goods and/or services, lest ye be holding on to a worthless yellow metal.
Your third link was a little strange inasmuch as there a was a lot said about debt. Yet the problem and its solution seemed pro-prohibitionist.
The notion that people are getting into debt (and lending money) foolishly, risk corrupting the system and we should go back to a system where people have less access to debt is the same style of arguing for things such as gun control. You know, a person going on a killing spree is going to do more damage with an automatic weapon than a knife, so lets ban guns . . .
Sam, you’re killing me. I don’t doubt the sincerity of your questions, and i’m not skilled enough to answer all of them, but i’ll try my best. I just don’t want this to turn into a Dan v Sam. The only books I have read (besides Free to Choose) have been Hazlitt’s One Lesson and Rothbard’s What has Govt done to our money/The Case for the 100% Gold Standard. I intend to do some massive reading over break, but with these two books, I believe inflation and fiat money are the greatest threat to freedom.
I think the vital point you’ve missed is the difference between free market money, and government money. governments by their nature of desiring more control inevitably turn to debasement/inflation for funding instead of direct taxes. The simple (but not only i think) reason for this is it is a less odious tax for the citizenry, especially when dressed up in language to make it seem desirable.
The difference between the gold coin and the fiat dollar lies in their physical properties. A pure gold coin and a debased (or reduced) gold coin will have different physical properties, and can be detected with the proper equipment and procedure. However, a dollar bill that is backed by real savings (to make a simplification, a dollar that was bought with work or a good), has no physical difference with one that is not backed by any real value, but was just printed (for a cost much less than the face value of the bill). Since the bills are identical (the original dollar bills were exchangable for gold, and therefore represented a weight of gold), being produced by the same printer, it impossible to tell which is the bill which represents real savings and which does not. I won’t attempt a definition of how a hard money standard could work, since I need to read Rothbards work on it, which has all of the above much more clearly stated.
I’d disagree with Dan on his link though. I think an understanding of what money is, what it represents, and how it arises is critical to understanding the damage of inflation, so I’d recommend reading Rothbards entire book, not just the chapter on govt inflation.
Hazlitt is also very clear on the difference between saving and hoarding. “hoarding” is holding cash, and is traditionally attacked as being miserly. Saving, especially today, implies putting your money at the disposal of a bank, which can invest the money in the form of loans. That is how saving is investment. To counter the argument of withdrawl of money on demand from a bank, that is simply a flaw of our fractional reserve banking system. They lend out most of the money deposited to them, while saying that you can still withdraw it. This creates distortions in the market, since money represents real savings, while the loan does not, allowing the same money to be used twice for the same amount of goods produced. I’m clumsy with my description here; I promise you, Rothbard is much more eloquent.
I sortof addressed your cost-push when I talked about identical bills. really the difference is that altered coins can be detected, even on first use if our two parties check their coins (which they would if short weight or debased coins were a problem). With bills printed by the same mint, it is impossible to tell which represents real savings, and which is simply the shavings of the coins in the form of a coin not backed by real savings.
I object to the Hannibal example though. Thats certainly a violation of property rights. Happily we live in a slightly more enlightened age where the ruling party cannot quite so easily confiscate property. However, the mine owners are certainly worse off. And everyone using Hannibal’s silver coins suffer, as the flood of silver coins into his realm cause the relative goods to silver prices to rise. The people who benefit are Hannibal (the rulers) and the early receivers of money, who are able to purchase goods before their prices rise due to the pressure from the influx of silver. I’m of the opinion it would be more difficult these days for a govt to seize mines to finance their war under a hard money system.
****************
Your next comment simply shows you don’t know what money is. Neither did I, until I read Rothbards What has govt done with money/100% gold standard book. Now in my mind, there is no other way for money to arise, except from a useful commodity. Why else did we use gold for so long? Why is the only reason we do not use gold today (or gold backed dollars) that FDR confiscated it during the depression? The reason is because of gold’s properties, which satisfy our requirement of money. Again, Rothbard’s your man for this. My single objection here is – worthless yellow metal? perhaps, if you desired only food. But, philosophers for a long time pondered why a diamond was more valuable than water. Gold of course has value for its beauty, and these days has value for its electrical properties, since its a great conductor (possibly better than copper, i forget). It would only become worthless if people no longer thought it beautiful, or could make no used of its physical properties (such as malleability and that it will not corrode).
I can’t tackle your problem with debt. I can only say, I’m fairly sure the austrian business cycle theory would provide the answer, but I’m not well enough read to try to discuss it intelligently.
No offense meant, i’m just a novice here myself.
Thanks
Sam,
Hmm, I’m still not sure I understand where you’re coming from with your critiques. I think we still don’t hold certain definitions in common (like ‘money’ and ‘inflation’, among others). If you are interested in libertarian answers to some of your questions, I’d highly recommend taking a few minutes to read through Rothbard’s ‘What Has the Government Done to Our Money?’ at
http://mises.org/money/1.asp
If you get through even the first few chapters you will have a much better idea of what an Austrian means when they talk about inflation. You will also find an answer to your ‘gold shaving’ scenario (Rothbard, for instance, discusses “Gresham’s Law” in section II).
Axel, thanks for the help. It was a mistake of mine to point Sam to very specific articles and chapters without first pointing him to Austrian introductions to the concept of money.
I also consider myself a novice when it comes to Austrian economics, being only self-educated and having read only about a half dozen books so far (although I have also spent countless hours on this website reading material).
When it comes to Sam’s questions, the best service I can do is point him to the scholars that have answered these questions over and over again. You made a nice summary in your post, though — I wish I had some of those summarizing skills.
Sam,
The basic response to your question is “time”. Sure, if prices and wages rose in lock-step, at the same rate, and to the same end-point, the problems would be minimal (although still problems). However, inflation, especially as practiced by the Fed, doesn’t work in that manner. As someone above mentioned, the poor tend to get hit the worst, for multiple reasons, including the fact that wages are almost always the last factor to react to inflation, as well as the fact that the poor tend to keep their savings in “liquid” cash, rather than in hard assets that tend to keep pace with inflation.
Inflation tends to help (enrich) politically connected bankers and brokers, as they are the first to get their hands on the new money, before the effects of inflation have moved their way through the economy.
what. didn’t you guys get today’s CPI?? no inflation.. lol..
how long can this joke continue. the article in the post was excellent. hopefully, more and more economists start thinking like this.
Quite frankly any/all currency is really a form of Good And/Or Services IOU. Indeed using currency is a debt system on its own. You perform some service for a type of currency: gold, silver, shells, coloured paper/plastic, electronic pulses, etc. But like debt the problem is still one of honour. Worst still is the fact to whom you might spend the currency usually isn’t the person you rendered goods/services to, hence they may be less likely to agree what goods/service should be given.
But of course currency is only needed for multi-person, time-shifted bartering. If currency dasement seems too risky people could go to back basically an equity trade, i.e. a direct swap.
Then, of course, there can STILL be arguing, due shortages/surpluses, supply/demand, etc., where one barterer might have an advantage over the other poor sap. Which, in turn, (gasp!) if that seem too offensive as well then the only safest, surest alternative is to be self-sufficient! X)
P.S. Interestingly base metals can nowadays be coverted to gold. Right now it’s way too expensive . . .
Sam, you wrote:
Quite frankly any/all currency is really a form of Good And/Or Services IOU. Indeed using currency is a debt system on its own.
I hate to beat a dead horse here, but this is simply an untrue statement. Money in the free market isn’t an IOU, but a commodity that over time proves itself to be useful as a medium of exchange.
At this point, I can’t recommend Rothbard’s book highly enough.
Of course money has to be an IOU for good and/or services, after all what else can you do with it? What would point of a huge store of gold just sitting there do nothing? Don’t we really want heaps of money (in whatever form) because we can BUY lots of stuff with it? Just as when you loan someone money and they can’t repay it, people may not necessarily accept money as payment, such as being in another country where you would be told to bugger off and exchange your money for local currency and then come back perhaps.
Ultimately, if you’re stuck in the middle of the desert with a suitcase of gold, you stuffed, right?
Wait a tick D.C. I did read that link, that was the one I referred to as the second link . . .
Sam, real currency can never be an IOU. Our problem here is we’re mixing up ideas from the hard currency system, and the fiat money system (where the fiat money is unbacked). Dan and I and quasibill are all on Rothbard’s side here, where he describes that hard currency can only be a commodity that fulfills the requirements we need for money, like tabacco, like sugar, like butter, gold is highly divisible, has a high value to do a low supply, retains its value, and is a commodity with value beyond that as a use for money. The appearance of bank notes, as IOU claims on money in their vaults, so that people did not need to carry their gold and silver around, but could keep them on account, leads to the fallacy of money in general to be an IOU. With bank notes, if i sell you a cow, and you give me your bank notes (instead of going to the bank and withdrawing your gold to give to me, which i would then redeposit, incurring a transaction charge from the bank/gold warehouse), i now have a claim on your (now mine) gold in the bank. This of course assumes that banks don’t lend out money that they have guaranteed to be available on demand (our current banking system).
Money as an IOU falls apart if you think of it like this. Why do you accept dollars for payment for your good or service? Its certainly not an IOU from the buyer, he has made no contract to pay you in goods and services. Its certainly not a claim on anyone else, because no one has an obligation to sell to you and accept your dollars (except our current legal system would label that discrimination…and force a seller to accept money, especially fiat money that can be printed by our dear govt monopoly – the mint). So money isn’t a “claim on society”. No individual has an obligation to take your money in exchange for any good or service, at whatever value you think your money has. The whole concept of trade rests on unequal valuation of the goods/service in their possession by two parties acting without coercion. It then is apparent that the reason i accept money as payment, is because it was accepted yesterday as payment, and I expect it to be accepted in the future. But there were not always gold coins. There were not always paper dollars. Where did they come from? Why did people suddenly decide to use coins or dollars when they had not been accepted as payment in the past? The answer lies in Rothbard’s illuminating that money can only grow out of a useful commodity. This is why tabacco and sugar could be used as money. People also demanded them as commodities as well as for their use as money. Gold has always been demanded as a commodity first. But since it has great properties to be used as money (apparently better than all other commodities, except perhaps silver), it eventually became the main money in our world.
To kill your example, I need only say that of course in situations where the commodity has no value (where the person refusing gold does not have any use for it, and does not believe that in the future he will be able to exchange the gold for any good he values), it will not be accepted, since it would be a worthless commodity to one of the parties. Due to the unequal valuation of goods, this would lead to no trade taking place, since one party would not value the gold more than anything in his possession, unless perhaps a rock on the ground, which the party in possession of the gold would be unlikely to value more than his gold. So in order for our desert wanderer to make it to the desert with a briefcase full of gold, he must believe that the gold will have some future value to other people he will meet before he expires. Gold is a commodity, nothing more. A very useful commodity as far as money is concerned, and a very beautiful commodity, but still only a commodity.
The only reason dollars have present value, is because they had value yesterday. Tracing the dollar far enough back, we see that it was based in gold, and was exchangable for gold. So the value of the dollar was based in our commodity, gold. That our government has divorced money from the commodity is in no way a good thing for us, its citizens.
All of my argument comes from Rothbard’s ‘What has govt done to our money/100% gold standard’. Theres no way I could think of that on my own. Except I have a sneaking feeling that the “money having value only because it had value yesterday” trace back to the commodity roots came from von Mises, but I can’t remember where I read it, since I’ve only read a couple essays by him.
Hope you found this helpful
A Riemer, your reply against money being an G&S IOU stranglely seemed to confirmed it. Namely we all want gold only because OTHER people value it and value it at roughly the same capacity as we do. As long as enough people see gold as meeting all the criteria for a type of currency then it is good. If it is too common or too rare or enough people do not value it then it fails to become a currency.
I suppose this is a disclaimer point where I am not saying that gold is necessarily worse than other currencies. It is just that gold currency can be debased too. Unfortunately it would seem that anyone with a melting pot could theoretically debase gold currency if they choose.
Interestingly the so-called ‘gold-backed paper money’ is generally referred to as ‘fiduciary money’, Latin for ‘trust’? Namely we’d be hoping that the government would only produce enough bank notes at the corresponding ratio for gold and no more? Yet isn’t the cause of bankruptcy in those days was when people found there were more gold IOUs than gold? And the ones with the true gold IOUs where simply the ones who quicky traded the paper money for gold? Leaving the others with a fake paper money promise of exchange for gold?
Similarly I was particularly perturbed to see governments of times past introducing base metals into otherwise precious metals coins. Meaning that going back to a time of gold and silver coins may eventually come to grief as the low-quality coins come into circulation and destroying people’s faith in precious metal coinage.
Hence all currency is at the very least based on honour, peeople will agree on what trading for a unit of currency is, and, most importantly, people will not take the oppurtunity to debase it.
I’d still argue that gold isn’t an IOU because it is a commodity, and people value it for different reasons. i.e. I value it for its monetary value, whereas a goldsmith or an artisian values it for its beauty and his ability to shape it into something that is worth more than the original gold.
But you have hit an important point: trust. Inevitably governments will tend to debase or inflate, leading to a loss in faith in the denomination. However, I think that in the free market, where coersion is absent, debased coins would simply trade at their weight, not their face value. With the penny issue (bringin it back, oh yeah!) we have the government coercing us to spend pennies for their face value, not the value of their weight.
Rothbard makes an important point that making the government the monopoly in charge of regulating the purity etc of coinage, simply makes it easy for them to debase in the name of whatever. He states that the key to having good dependable coinage depends on competition within the mints/coiners, so that they could market themselves based on customer desires – namely purity of coins, and dependability.
Good call on the trust
I have two reply points to A. Reimer:
1. As long gold is not too rare, not too common, not going to debased and finally everyone agrees on gold’s value in trading then gold currency WILL work. I don’t want to be appearing to suggest gold is anyway worse, indeed if everyone around the world agrees the gold makes the best fit, then gold should be currency then. But gold has no real stand-alone factor that would make it VERY valuable other than its rarity. It would be still used for plating, alloying and wiring though.
2. What does competition between minters mean? What would these different minters produce? The whole point of trading in gold weights is to remove minting? Only gold miners and fossickers would add gold into the circulation or something?
There are two “economies” in the USofA. First, the economy of the coupon clippers who do not work for wages but sell assets when they want cash for consumer goods and services. The official CPI applies to them because when there is inflation they must sell off more of their assets in a year to buy the amount of consumer goods. They generally don’t borrow money – they are the lenders. When inflation occurs they can buy less with the interest that they receive on contracts they hold with the working class.
There is the economy of the working class which is paid in wages and deals mostly with cash and credit. All they care about is the hours they must work to buy goods and services. The CPI could be flat but if they must work more hours to buy the same goods then their economy is inflating.
But maybe the wage worker was sufficiently smart to buy a house with a 30 year fixed mortgage 20 years ago. Thanks to inflation, their house payment takes half the percentage of their work week that it cost them 20 years ago and the coupon clippers can only buy half the consumer goods with the interest payment they receive.
In other words, a moderate inflation helps the working class and harms the people who own them.
Don’t dismiss him as a crank, don’t dismiss him as a crank, don’t dismiss him as a crank.
billwald, if owning bonds* is such an easy, guaranteed, effortless source of income that allows you to command so much of the labor of others without any input on your part, er … why don’t you just buy bonds yourself? I mean … if it’s such an instant path to wealth?
*billwald is using the term “coupon clipper” in the archaic sense to refer a bondholder (who thus collects coupon payments which were originally represented as things that must be physically cut off of a certificate), not in the modern sense of someone who tries to save money with coupons on retail items.
When someone explains why it is okay for the Federal Reserve to print money and give that money to Congress for them to spend, then I will say central banks are a good thing.
Of course, though, that will never happen. The point of printing money is to spend it without having to exchange anything for the currency. Remember prices are fractions ($/gallon of milk, $/hour of work, etc..). As the new currency is filtered through the banking system from the point of injection prices change to reflect the newly printed money. The farther away you are from the point of injection the more you are getting screwed. Just look at the record profits on Wall Street and look at M3. Coincidence? I think not.
In reply to Sam,
I agree with the first part of your first statement: not too rare, not too common. These make gold more valuable than sand (along with the physical properties that are desirable). I disagree with the last part, “everyone agrees on gold’s value”. Impossible. That would be like agreeing on the value of an apple or a nail. The value changes depending on the individual and also time.
However, some factors to gold that I haven’t mentioned are its absolute purity. gold is gold. gold from Africa is indistinguishable from Californian or Alaskan gold. It does not corrode, unlike the majority of metals – this is an enabler of saving. If we saved in slabs of beef (or spices, or alcohol, or gasoline), they have a much shorter lifespan, and therefore are not good materials to store value. It is this reason that gold is more valued than materials that do have a limited lifespan, such as iron, bronze, brass, copper, and silver.
The point I tried to make (Rothbard is far better) is that if I have gold, I am likely to carry it in chunks, not dust, for conveniency. These are discrete amounts. Therefore, it is desirable to find some sort of base weight (dollars, cents, pieces of eight, pounds sterling) that is widely accpetable for people in casual use. We are limited these days in everyday transactions – i cannot get a half penny from someone. When pennies used to be a specific weight of copper, a half penny would have been half that weight in copper. However, since the government holds a monopoly on the minting process, I can’t get half pennies.
Let me try an example.. Say we have gold coins, and private “mints”. At the moment, people are trading mainly in 1 oz gold coins. If, however, I find that I can be profitable, charging in fractions of ounces (like 5.5 oz, or 1/4 oz), I need to be able to give change in fractions. (I’m assuming a single metal standard here). Who can I trust to make coins of a specific weight for me? A mint, or coin producer. I go to them and say, I need fractional coins, that contain 1/4 or a 1/2 oz of gold. I pay them to recast a certain amount of my own gold (here is where the mint makes money – in casting) in the correct denomination. Now, if there are multiple mints, I need to choose one. This may be based on their price, their reputation, their skill, their beautiful design, or any other reason. Now, Rothbard has the idea that coins would be self regulating for purity and weight, in the same fashion that nuts and bolts conform to a specific standard. The important thing is that the standard was not arbitrarily set by a government agency, but by the demands for specific nuts and bolts. The cheapest, most reliable nuts and bolts producers were the ones that retained their business, and now, who hears about a scandal with poor standards in the nuts and bolts industry?
What I’m trying to say, is the private mints would be in the business of trying produce coins (and larger denominations) that are most widely accepted by consumers. Consumers and producers would pay these mints to reshape gold into more acceptable shapes. Different mints will have different costs, and so the most efficient mints will be the ones that survive. Beyond finding the correct coin denomination weight (i mean, I don’t want to reshape all my gold into 1/2 oz coins for change if i want to charge my customers lower prices), consumers of gold will also take into account purity and beauty. (I’d rather buy a beautiful car than an ugly car). To this end, the gold minters must advertise themselves, and monitor each other, to be sure that one of their competitors is not passing low weight coins. To combat the cartel idea – just look at the example of Hill and the Great Northern Railroad. I remember reading that he took great pleasure in underselling his competitors that entered into rate agreements. There will always be entrepreneurs that take advantage of cartels that sell above the market price.
what do you think?
If the safest currency, as it’s probably going to get, is gold weights, then why do the gold chunks have to be in coin form? Why should a gold coin be more preferable or give any protection over a gold chunk?
But of course people would still have to verify they are using pure gold and not some alloy and does that involve a lot of time wastage or something?
Billwald’s posts provide a lots of fun for their readers. At some points he seem to offer opinions which may be very common amongst those who are ordinary people and not very interested about economics. If billwald could write his posts in Finnish and change his name I couldn’t make difference between his opinion and some other opinion which is written in discussion page of my local newspaper.
Some bad ideas seem to be universal and good ideas not.
Now we’re just getting into semantics
. I have no idea why coin form is prefered. Why not cubes or squares or spheres? I don’t really know, but I could guess that the coin shape is easy to make a mold for, and round things are more comfortable to carry than pointy squares. I’d assume coins are better than lumps, because then there is the guarantee of a reputable mint behind the coin of what the purity and weight are. Of course, the mint would always have to guard against rumors (true or false) of its coins being of less purity or short weight than the mint’s rivals. Therein the importance of competition.
But to take it further, banks started using paper notes, which are much easier to carry. If the bank has a good reputation, and the users know that they can get the weight of gold guaranteed by the note from the bank, then it becomes easier to trade using bank notes instead of lugging around gold. Of course, this makes it possible for banks to print unbacked notes to loan out. Then, if its customers sense that it has printed more notes than it has gold, they will rush to remove their (very dependable) gold from the bank, and there being more notes than gold, this run precipitates the failure and bankruptcy of the bank. To tie in with other topics, we see the run for cash occur in It’s a Wonderful Life
. Of course, if the government intervenes and suspends payment of specie, it is enabling banks to act in the fraudulent manner of printing unbacked notes. Thats totally Rothbard again..
But yes, people would need to protect against coins that are in reality other than their face value. Its in the interest of a mint (if it has competition) to be honest, lest it lose its customers to its competitors. It seems likely that an industry of people who are efficient at guaranteeing the weight of coins would spring up. For me, this is a prime example of “where government sees a need to restrict” as in its response to the east coast brownout some years ago, was that people need to lower their energy consumption, the entrepreneur sees an opportunity to sell the consumer something the consumer wants, in that case cheaper, more abundant energy. In this case, my engineering background shouts for a small, easy-to-use, inexpensive device that could be marketed to store owners, that would eliminate or interface with current registers. Imagine a funnel like opening that feeds down into a register that you pour your coins in. Coins are rapidly recognized and verified, or the actual weight totaled, based on pure gold, or by recognizing known coins and comparing physical properties, and then sorted. Change disposal would be automatic, with the proper coins shooting out into a tray. It might even speed up the checkout process, especially if RFID tags were in all the products, (with produce etc, you weigh it and get a printed sticker RFID at the scale), so that you simply walk to a checkout station, which recognizes all your tags, and you pour your coins into the register (or feed your bank notes into a bill taking slot) and take your change from the tray.
I get enthusiastic about engineering stuff.. sorry
This thread has included an excellent discussion of the Austrain veiw of money, by the way the correct view. The problem is that the discussion has avoided the issue I believe was ythe point of the article, that is the Government manipulation of the inflation statistics to understate the rise in prices. Over the past 40 years government definations have changed and quality adjustments made in the name of “fairness” is guess.
The real issue is the impact of these changes and are we the citizens thinking about the implications. Just one inflation adjusted bonds.
Sam
You should read this:
Recessions and The Great Depression were caused by Government Interventions! This will only give you an overview:
http://depression-was.blogspot.com/
and:
What Has Government Done to Our Money?
http://mises.org/money.asp
and:
America’s Great Depression
by Murray N. Rothbard
http://mises.org/rothbard/agd/contents.asp
Best regards
Björn Lundahl
Göteborg, Sweden
Quite frankly it would seem the standard cause which you presented, Björn Lundahl, is one I related to earlier, in the case of fudiciary money, i.e. more gold IOUs notes were printed than the actual amount of gold. And as I said (let’s suppose an initial ratio of 1 paper note per 1 gold chunk), that people suddenly found out that, shock and horror, there were really twice as many gold IOUs as there should be. Half were holding onto fake notes and half were holding real ones. And the real IOUs were the one that were first to be cashed and the ‘too-late’ other half were left with fake IOUs.
I suppose the fiat equivalent would sound like notes, coins and computer numbers are created willy-nilly, and people are supposed to be wondering why not use leaves from trees then since there is no pegging on the value of money.
But in the real world people pretend not to notice money being ‘created’ for no real purpose other than to buy and lend without thought of where it’s coming from. Then one day when people find there’s no counterbalance to the money, that it’s all just play dollars, it all comes crashing down and, oops, reality set in.
The problem of the crash then is one of people wondering why they should bother trading again and until people restore their faith in the economy does the cycle start all over again.
However I still wondering even in a scenario where there was 0% inflation/deflation, prices will still fluctuate anyway. Prices go up and down due to things like supply/demand, shortage/surplus, wants/need, saving/reckless spending, investing/speculating, and most importantly sensible lending vs easy credit. Even in a gold economy people could lend money out a venture, the borrower can’t repay for whatever reason and lenders are still out of pocket and might refuse to lend at all and slow the economy down and cause a recession of sorts.
Perhaps even in a direct gold-trading currency, with no government intervention, people suddenly find that the gold pieces are really alloys created by various individual smart-arses and likewise people could suddenly suspend trading until the whole mess is sorted out, causing a recession until faith in gold currency is resumed.
By the way A. Reimer, I wasn’t playing with semantics rather I meant since gold has a reasonably low melting point why would there be anyone employed as a minter? Couldn’t everyone who has a found gold in them thar hills, melt it all down and recast it into gold chunks of an agreed weight and trade the new currency (which if there is no economic growth such insertion would technically be inflation)? But similarly, in a gold currency economy, anyone could mix copper, lead, even silver, with gold and hence becoming a private counterfeiter/debaser. Or alternatively people could create a gold ingot with a lead centre, i.e. there isn’t any actual mixture but rather lead sealed in a gold coating perhaps.
I couldn’t just help wondering the time-cost of the necessary gold-testing for a gold ingot relative to a modern economy . . .
Sam, that’s precisely why you want mints, that will “cast” it into gold chunks of a known weight and purity that people can trust (and only check occasionally, to be sure the mint is doing what it promises), rather than “chunks” cast by whoever, which would likely require an independent assay for every coin spent.
Say money doesn’t exist, I have a surplus of potatos, and my neighbor wants some. The neighbor can trade me for his goods and services or can give me an IOU for future delivery of goods and services. Assuming the neighbor is honest, I can trade his IOU to other neighbors for their goods and services. Govt money is useful because it provides a universal form of IOU acceptable to strangers.
Second, money provides a arithmatical unit of exchange. We don’t have to know how many tons of potatos equals a new car because we know the dollar equivalent of both.
Sam
Hi, banknotes are not IOUs but receipts of gold (gold claims) in a gold reserve money standard.
http://mises.org/money/2s12.asp
Yes, as you have said, prices fluctuate all the time.
As customers in a free market, would not want to deposit their gold in a randomly chosen bank, banks would have incentives to prove their creditability. They would voluntarily, probably, submit themselves to inspections, join trusted associations etc. Insurance companies would, probably, impose stiff controls too. Reputation, competition and the risk of being prosecuted etc will keep the banks checked.
In a free market, gold coins, gold bars etc will be genuine (like the famous Credit Suisse, Johnson Matthey etc). Naturally, as always, there will be some people who are criminals, but to fake gold on such a large scale that it would cause a recession, I think would be impossible.
The market, as always, will do all the necessary procedures smoothly. And best of all, everything would be demanded i.e. people would voluntarily want to pay for them.
Today we have worldwide currencies which are debased 100% by governments and this has been going on for about 70 years. Nothing can beat that.
Björn Lundahl
Credit Suisse gold bars:
http://www.taxfreegold.co.uk/creditsuissegoldbars.html
Johnson Matthey gold bars:
http://www.taxfreegold.co.uk/johnsonmattheygoldbars.html
Björn Lundahl
Is there any laws that would prevent anyone from bartering with gold in small day-to-day transaction at its going rate?
In other words, is there anything stopping a secondary ‘underground’ currency trading in gold for those for willing to exchange goods/services for actual gold, right now?
Sam
By the way, I posted for you a few links because you earlier wrote†I don’t get the big deal with inflation but rather with real buying power.â€
One “big deal†with inflation is not purchasing power but that inflation causes the business cycle.
Another “big deal†is that increases in the supply of money will increase the incomes of some people at the expense of others.
Thirdly, the issuing of fiat money is based on fraud.
Björn Lundahl
A wire story on 12/19 reported that (as I recall, over the last 5 years) large corporation’s very large net profits have not been reflected in gains to the worker’s net compensation. The buying power of the worker’s pay has dropped. In other words, the Libertarian mantra that increases in productivity is passed on to the working class is not correct.
Saw a PBS program on Andrew Carnagie (sp?). He apparently justified paying starvation wages while building libraries on the belief that the workers would blow any wage increases on booze instead of improving their education. He was a Social Darwinist and concluded that building libraries would assist the superior workers at a cost to inferior workers who don’t matter in the vast scheme of things. In other words, a capitalistic sort of communism which gives every person what they need. The superior person needs education and the inferior person needs sufficient food and shelter to serve the superior man.
Isn’t this the bottom line for many Libertarians? Most of the Libertarians I know think they are above average, the superior person who would succeed at the cost of the inferior person if only the government would leave them alone and allow them to perculate to the top. The joke is that many are working at unionized government jobs and for public non-profits.
Billwald, I dont believe that I’m more superior than any other fellow human being. I just know that I dont believe that govt can know better what people need.
Wages and compensation for your labour is determined by the skills what you have and demand for those, not any evil scheme from the part of “capitalist exploiters”.
China, Hong Kong and Sweden
China is still a very poor country. Productivity is very low so wages are, therefore, also very low. Productivity and wages goes hand in hand. For an example, go to; http://www.rieti.go.jp/en/china/02083001.html. Once, a long time ago, I was in Hong Kong*, and wages there were among the highest in Asia. Real wages increased about 10% per year, for the reason that productivity per hour work increased that much. Unions were very weak and had no influence, but wages increased anyway, because of competition between employers. As productivity increases, cost per employee gets lower and, therefore, the demand for labour increases and wages goes up. Productivity goes up for the reason that increased savings leads to ever higher capital investments per employee. That is the recipe for high wages and all Western countries have gone through that process.
Wages and living standards in China are higher than ever, but compared to the western countries, extremely low. In poor countries the average worker wants to work more hours than the average workers wants to do in the Western countries. Why? Isn’t that obvious? If your wage barely can support your family, life will be easier if you can work and earn more. We must remember that. Japan, Taiwan, South Korea, Hong Kong and Singapore once were very poor countries and today are better off, China also, will in the future, be richer and the living standard higher. Working hours will then be a lot shorter. There is no “short cut†for a higher standard of living and for a shorter working week. Many companies are “forced†by market forces to invest in countries like China. Consumers have a tendency to buy the cheapest goods and if they are not produced in those countries where they are produced for the lowest costs, they can’t compete. It is no point in accusing businesses for being greedy, they are, but so are we consumers.
Today, Hong Kong is even richer than Sweden. Hong Kong has accomplished in a much shorter time a higher GNP per capita and also a higher life expectancy than Sweden. The Swedish economic growth rate was also higher relatively to other countries when the economy was more free market oriented in the period before 1970. Sweden has also avoided two world wars.
For some information about Hong Kong, go to;
http://www.answers.com/hong+kong?gwp=11&ver=2.0.1.458&method=3
And for some information about Sweden, go to;
http://www.answers.com/sweden?gwp=11&ver=2.0.1.458&method=3
Free enterprise in action, just look at all those symbols of creativity and wealth, I really feel sorry for the people in the People’s Republic of China, go to;
http://my.tdctrade.com/photolib/hk/0100063L.jpg
If China, 50 years ago, had chosen the same path which it is now following, living standards in today’s China would probably be about the same as it is in Hong Kong. The Communist religion was really encouraging long working days and low wages in China.
Some information about rising wages in China, go to;
http://www.businessweek.com/the_thread/economicsunbound/archives/2006/03/rising_wages_in.html
Björn Lundahl
Göteborg Sweden
•Hong Kong is a free port with no tariffs and exchange controls and is probably the most free market oriented region in the world.
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