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Source link: http://archive.mises.org/8468/is-gold-money/

Is Gold Money?

September 5, 2008 by

Is gold money? Many would say so, including owners of the top-level domains GoldIsMoney.com and GoldIsMoney.info. A web search returns 18,000 additional affirmative responses. If you want to start a fight with a gold bug, take the opposite view. But is it so? To answer the question of whether gold is money requires a definition. I suggest that while gold is not money but a type of shadow money; it was conventional money once and could become so again. FULL ARTICLE

{ 34 comments }

fundamentalist September 5, 2008 at 9:53 am

Excellent article! What’s interesting to me is that so many economists who specialize in international finance are demanding that states create an international currency to replace the dollar and euro. They ignore the fact that we already have an international currency in gold and silver because they can’t manipulate them. But what good would another paper currency be if you can manipulate it as we currently do the dollar and euro? The problems with the dollar and euro are the manipulation of the money supply that they want for an international currency.

Kavius September 5, 2008 at 10:05 am

I agree: Gold is not money… now (“yet” may be a better word). It is not readily exchangable.

I recently had some repairs done to my house, and offered to pay in one of three ways: dollars, gold, or silver. He chose dollars.

While disapointed, I was not surprised: he had paid dollars for the material; he was going to have to pay dollars for the beer he was going to buy his crew; and his mortgage is due in dollars.

I will continue to make offers such as that, but I doubt I will have many takers for a very long time.

wuzacon September 5, 2008 at 11:45 am

Kavius,

Your offer of payment in gold, silver or paper is interesting. However, your test may not reveal the power of gold or silver as money. You may have more luck offering gold or silver in exchange for longer term contracts, such as heating oil or a multi-month construction project.

In these cases, both parties to the exchange will be able to benefit from the stability of gold relative to other commodities over time.

jp September 5, 2008 at 2:13 pm

Robert, thanks for the article. Some thoughts:

You said: “However, according to the Austrian economist Carl Menger, its acceptability in trade is the defining property. While money undoubtedly does serve as a store of value and a unit of account, these properties are derivative, not definitional properties.The reason that a medium of exchange necessarily is also a store of value is the anticipation of its exchange value in the future. ”

Menger never said the store of value function was a derivative of its exchange function. Here’s what he said:

“[I]t appears to me to be just as certain that the functions of being a “measure of value” and a “store of value” must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.”

Menger says the store of value function is accidental and non essential, but not derivative. It was Mises who would go further by claiming that the store of value function was derived from its exchange function. See below:

“Nevertheless, certain tendencies in recent literature on money make it appear advisable to examine
briefly these secondary functions – some of them are co-ordinated with the basic function by many writers – and to show once more that all of them can be deduced from the function of money as
common medium of exchange.” Mises, ToMC

Mises probably made store of value subservient to medium of exchange because he needed to find a way to banish money’s function as a store of value completely. Menger, as evident in the quote below, never wrote off money’s function as a store of value enough to satisfy Mises:

“But the notion that attributes to money as such the function of also transferring “values” from the present into the future must be designated as erroneous. Although metallic money, because of its
durability and low cost of preservation, is doubtless suitable for this purpose also, it is nevertheless clear that other commodities are still better suited for it. Indeed, experience teaches that wherever less easily preserved goods rather than the precious metals
have attained money-character, they ordinarily serve for purposes of circulation, but not for the preservation of “values.””

Menger would only go as far as saying that money’s store of value function was inferior to other commodities’ stores of value, and that in certain cases like cigarettes in POW camps, money would have no store of value function. He never wrote said function off.

Mises found a creative way to write off the store of value function. Why did he need to do this? With money being only a means of exchange, an increase in the supply of money would lead to rising prices – this is standard Austrian thinking. But if a theory allows money to function as as store of value, an increase in the money supply will lead to falling interest rates. This is because people will horde. ie save money for money’s store of value sake. This is an Austrian no-no.

It was Keynes who brought back the definition of money as a store of value, and that’s why Misesians hate Keynesians.

Systems of economic thought depend to a large degree on various definitions. Define money one way and someone else’s economic system can entirely collapse. Define it another way and you can make your own system.

Eric September 5, 2008 at 2:24 pm

Of the various properties of Gold vs. Fiat money, the one that was not mentioned was the better ability to avoid violence when transactions are made in the government approved money.

Rothbard and Mises have written that all money comes into existence through the market place and begins as a commodity.

This is not necessarily true of fiat money. There is a story of an ancient Chinese mandate to use paper paper money. The penalty for refusal was death. The paper money was an overnight success.

I think that any government that can enforce this rule will be able to create a new money over night.

To some extent, that’s just what we have today. I suspect the Chinese didn’t have to kill too many merchants over refusal to use paper money either. The threat was likely sufficient. But had the Ron Paul Dollar group resisted the theft of their possessions, I suspect that they might have been killed.

Deacon September 5, 2008 at 3:02 pm

#######
#######

Strictly speaking, any
object may be called
“money”: sea shells,
large circular rocks
with holes in them
(some east islanders
used them), etc.

HOWEVER:

An object only
becomes “money”
at the time of an
exchange; that is,
like with art pieces,
they are “art” only
while they are
being observed.

Gold is not money
when is it not being
traded for something.

Until an object used
as a medium exchange
is traded, it is called
“a store of value.”

Why the distinction?

Because, using the
rules of logic, if
you are going to
quibble about whether
or not “gold” may be
defined as MONEY,
then why not quibble
about every object
known to man, all of
which may be used
as a medium of ex-
change–as MONEY.

By my above hypo-
thesis, the entirety
of the article must
be called into ques-
tion; i.e., quibbling
over whether gold
may be called,
“money.”

Begin here, folks:

Webster’s Dictionary:
“money”…”any article
or substance used as
a medium of exchange.”

#######
#######

Michael A. Clem September 5, 2008 at 3:32 pm

Thanks, Deacon, but I expect economists to be able to go into more detail and more accuracy than a dictionary definition. Money might be considered anything used as a medium of exchange, but as Kavius made clear, not everybody is willing to accept gold at this time, and thus, it is not “money” for those people.
I’m a bit puzzled as to why JP thinks there is a conflict between Austrians and money as a store of value, though. It seems clear to me that other things can also be used as a store of value, and thus, they simply don’t consider it as an essential or defining feature of money. And since unstable or unsound money makes for a bad store of value, that secondary feature of money is a strong argument against fiat paper money.
And now, wait for it: “There’s no such thing as fiat money!” Thank you, Mike Sproul. ;-)

Mike Sproul September 5, 2008 at 3:48 pm

Eric:
“This is not necessarily true of fiat money. There is a story of an ancient Chinese mandate to use paper paper money. The penalty for refusal was death.”

One government might issue paper money that says on its face that it is redeemable at a government office for 1 ounce of gold. Assuming the government is able to meet that demand, the paper will trade publicly for 1 ounce. If the government loses the ability to pay out 1 ounce, the paper will lose value.

Another government might issue paper money that says on its face that the government will accept it for taxes instead of one ounce. Assuming the government is able to take that ounce from you, that paper will also trade publicly for 1 ounce. If the government loses the ability to collect taxes, the paper will lose value.
Both of these kinds of paper money are backed–one by the government’s ability to pay out gold, the other by the government’s ability to take away gold. Neither kind of money could properly be called fiat money, in the sense of having no backing. A fairly simple arbitrage argument shows that money that has no backing will have no value.

Deacon September 5, 2008 at 3:58 pm

#######
#######

Hi, Clem:

You may have made my
above-posted point:

You opine:

“Money might be considered
anything used as a medium of
exchange, but as Kavius made
clear, not everybody is willing
to accept gold at this time,
and thus, it is not “money”
for those people.”

No, under that condition, it
remains A STORE OF
VALUE.

Every object is a “store of
value”; e.g, a rock is a store
of value of the NATURE of
a rock; ergo, even though
some do not value gold
as “money,” the gold has
not lost its intrinsic value/
nature.

In any exchange, the store
of value remains, although
the degree of value neces-
sarily shifts in the minds
of those doing the trading.

Again, no object becomes
MONEY until at the time it
is being traded.

EVERY OBJECT IN THE
UNIVERSE is a store of
of its own intrinsic nature/
value.

When one object is traded
for another object, it is
called, “money,” at that
moment of exchange; and,
thereafter, a store of value
until it is traded once again.

That’s why I suggest that
we not quibble about whether
or not gold may be called:
“money”.

And, yes, we may all agree
to use the term, “money,”
to describe whatever we
wish to call “money”.

It’s the quibbling that’s
illogical.

#######
#######

Jacob Steelman September 5, 2008 at 4:41 pm

That Friedman et al could be so wrong on the 1971 de-linking calls in to question his standing as an economist and understanding of how markets work which is incredible given his numerous economic publications. Any economist worth his salt should know that markets exist and function every day and that state intervention merely intrudes into the private market actions of the participants and distorts the functioning of the market – markets function less efficiently as a result of state intervention. Thus if the government de-links gold to the dollar as Nixon did in 1971 the effect must ultimately be to increase the price (the number of dollars needed to purchase goods and services) required to buy gold, copper, oil, land, professional services, etc. Clearly Friedman did not understand pricing of goods and services in our market economy. It is the reason that “black markets” or “informal markets” function and function very efficiently – these are markets functioning outside the politically contrived market. Why, because politically contrived markets substitute the requirements of politicians and bureaucrats and their clients (the ruling elite or the establishment) for those of private market participants. When intervention is so extensive that a large number of market participants are deprived of their livelihood or would otherwise be deprived of many of the goods and services they require to live or to live more comfortably then a black market or underground economy develops. This is why in Latin America and Asia there are large informal or underground markets – otherwise millions of people in those areas would perish. Political leaders know that and for that reason provide a “knowing wink” to the existence of such black markets. The same thing happens with money – let the political money (fiat currency) reach such a level of inflation such as existed in Germany in the 1920s or exists in Zimbabwe in 2008 and market participants will resort to barter (direct exchange) as the political currency collapses. Once the fiat currency is repudiated and barter re-instituted then private currency (such as gold and silver) can begin to be used as the medium of indirect exchange for exchange of goods and services required by the market participants.

Michael A. Clem September 5, 2008 at 4:45 pm

When one object is traded
for another object, it is
called, “money,” at that
moment of exchange; and,
thereafter, a store of value
until it is traded once again.

Now you’ve gone too far. Money is not merely a ‘medium of exchange’, but a medium of indirect exchange, as noted in the article. Thus, straight barter between two people is not a use of money, since they don’t intend to turn around and exchange their items for other goods, and the items they bartered for are usually consumed, and not used as a store of value.

David Hillary September 5, 2008 at 6:10 pm

JP: ‘an increase in the money supply [stock?] will lead to falling interest rates’

You are the first person other than myself I’ve heard say such a thing.

Do you mean to say that an increasing stock of metallic money results in a lower marginal rate of return on that as a form of capital and hence a lower interest rate?

andras September 5, 2008 at 7:37 pm

Why can not we just say that gold is by definition money. Are not 5000 years of monetary history enough as a proof?
If you want to decorate gold with variable exchange properties then just say it is a low velocity money to use a non-Misesian attribute for those who can not understand Mises. Now we have a common language.

Deacon September 5, 2008 at 8:48 pm

#######
#######

Michael Clem:

Isn’t that just more quibbling?

I’ll not argue about how many
angels can dance on the
head of a pin.

And how do you know that
“they don’t intend to turn
around and exchange their
items for other goods…”;
and how do you know the
items being bartered are
“consumed”?

A chair may be a “MEDIUM
OF INDIRECT EXCHANGE”
if the chair is loaned for
a certain amount of time, in
exchange for the chair and,
say, a bushel of potatoes
being returned as full pay-
ment for time-use of the
chair.

The chair is money at the
initial exchange, and at the
time the chair and potatoes
are returned as payment
for the time-use of the
chair. And nothing has
been consumed, although,
after the farmer craps
the potatoes into his
compost pile, he might
turn around and sell those
“potatoes” to a gardener
or use them as money in
exchange for, say, a hoe.

Whew!!!

How many angels…?

#######
#######

Deacon September 6, 2008 at 5:50 am

=======
=======

Oops!

Attn: Michael Clem

I’d meant to write
(( note word change
from ALTHOUGH
to AND in below
paragraph )):

And nothing has
been consumed, AND,
after the farmer craps
the potatoes into his
compost pile, he might
turn around and sell those
“potatoes” to a gardener
or use them as money in
exchange for, say, a hoe.

- sorry! -

=======
=======

fundamentalist September 6, 2008 at 9:05 am

Jp: “But if a theory allows money to function as as store of value, an increase in the money supply will lead to falling interest rates. This is because people will horde. ie save money for money’s store of value sake. This is an Austrian no-no.”

Hording money in not an “Austrian no-no.” I don’t know where you got that idea. If people thinking hoarding is necessary, then that’s what they should do. And lower interest rates will not cause people to hoard, though it may persuade them to keep more cash and fewer investments in their portfolio. Mises saw money as gold and silver, the supply of which can increase only in a very limited manner. Gold and silver are not absolutely without-any-negatives stores of value. But what is? They’re still the best stores of value we have. Mises did not try to “write off the store of value function.” Increases in gold and silver money will lower interest rates to a very small degree because increasing their supply is so very difficult. But increased savings will also lower interest rates and Austrian economists are definitely in favor of savings. Money supply isn’t the only thing that affects interest rates. Time preferences and marginal productivity play a major role, too.

Jp: “It was Keynes who brought back the definition of money as a store of value, and that’s why Misesians hate Keynesians.”
Misesians don’t hate Keynesians. Followers of Mises disagree with Keynesian economics. If you think money was the only reason for disagreement, you have a lot of reading left to do.

fundamentalist September 6, 2008 at 9:10 am

Jacob: “That Friedman et al could be so wrong on the 1971 de-linking calls in to question his standing as an economist…”

Exactly. Austrians don’t admire Friedman’s economics. He was just a warmed over Keynesian. We they appreciated his forcing Keynesians to acknowledge the role of money in economics. Keynes had made it almost totally unimportant. Still, Friedman’s treatment of money was simplistic compared to Austrian treatment of it. And Austrians appreciate Friedman’s defense of liberty which showed him at his best.

bill wald September 6, 2008 at 11:31 pm

If gold is intrinsically worth so much more than dollars then why are there so many companies on talk radio who want to give me their gold in exchange for my dollars?

jp September 7, 2008 at 1:44 am

Michael Clem and fundamentalist:

If money is allowed to have a store of value function (along with a medium of exchange function) than it is able to transfer “values” from the present into the future. Menger defines this aspect of store of value on page 279 of Principles of Economics.

But this would mean that money is a future good, much like capital goods are, and stocks, bonds etc. and that people might choose to save in the form of money. Austrians are adamant that money is a present good. “Money is clearly the present good par excellence.” – Rothbard, ME&S. And Hoppe, Block, and Hulsmann point out in Against Fiduciary Media that “money is demonstrably not a future good.”

Therefore, money in the Austrian system can only be a store of value if this function is subordinate to its means of exchange function. In that way, money is always prevented from being a future good and stays a present good.

By hording being an Austrian no-no, I meant people accumulating money due to its store of value function ie. saving it, storing it as capital. Austrians don’t accept this can happen, but Keynesians do. Austrians only accept hording as long as it is done so for the sole purpose of accumulating more of the medium of exchange. No?

David Hillary: “You are the first person other than myself I’ve heard say such a thing. Do you mean to say that an increasing stock of metallic money results in a lower marginal rate of return on that as a form of capital and hence a lower interest rate?”

Hmm. Don’t the Keynesians and Larry White/George Selgin come close to that?

All I’m saying is that how the economist chooses to define money influences the framework they will eventually develop. From your question it seems you are willing to look at money as a store of value, ie. a future good. ie. capital. It would make sense to me that given your view of money, an increasing stock of metallic money would result in a lower marginal rate of return. That way of thinking is new to me though, I’m used to thinking of interest as time preference driven.

David Hillary September 7, 2008 at 4:09 am

JP: Money is an asset to its owner, and a store of wealth, but not a store of value, because value is subjective and cannot be stored.

Both coined money and issued money are assets, however issued money is the liability of the issuing bank, but coined money is a produced good, like merchandise.

Coined monetary metal is a form of non-financial asset and a factor of production. It produces a return in the form of a contribution to profits on trading operations, for example by providing liquidity and reducing transaction costs of banking and non-banking businesses.

Issued money in the form of bank notes or cheque account balances with a bank are forms of financial asset to the note bearer and bank customer respectively, and a financial liability of the issuing bank. They can contribute to asset portfolio returns through reduced transaction costs and interest paid on cheque account balances, and can contribute to financing the bank’s assets.

For the market for money to be in equilibrium, two conditions must be satisfied:

1. Issued money must have a market value the same as its face, nominal or par value in coin, i.e. no unsatisfied demand for redemption or issue must exist. This condition can be assumed to hold since the supply of issued money is perfectly elastic at par, by the legal design of the instruments, i.e. issued money is legally payable at par in coin on demand, and by the structure of the market, i.e. competing banks stand ready to issue as much money as people are willing to hold. (Assume that if a bank fails its issued money is no longer marketable and ceases to function as money.)

2. The marginal rate of return from holding coined money and from holding issued money must be the same, since one can be converted to the other in all agents’ asset portfolios.

It is this second condition that makes the relationship between the interest rate on money and the stock of coined money evident: according to conventional economic theory, factors of production, including forms of non-financial capital, are subject to diminishing marginal returns. The marginal return from holding coined money must be equated to the market cash interest rate, since the cash interest rate can be obtained on cheque account balances with banks, and coined money is convertible to cheque account balances. The negative relationship between the stock of coined money and the cash interest rate on money follows from the diminishing marginal return on coined money stock as a form of capital.

White appears to imply the above analysis, with his bank of issue profit maximisation analysis and banking market analysis in a small open economy on a specie standard, but then seems to endorse Selgin who appears to hold some version of the quantity theory for the case of a closed economy. He also appears to assume that if cheque accounts and bank notes were available in all denominations according to market demand that coined money could be relegated to a reference delivery standard, and that the stock of coined money could reach (or approximate) zero (since no one is held to be bothered to redeem account balances or notes in coin, banks need not hold coin reserves), with the purchasing power of money anchored at the equilibrium for the gold market, and without any deficit or surplus in the gold market occurring. However, my analysis, developed further from the above, indicates that the stock of coined money would not be optimised at or near zero, even under free banking, and that the stock of coined money serves a significant economic function, i.e. regulating the interest rate on money, and that specific dynamics in relation to the coin stock, interest rate and purchasing power of money would be expected in response to random shocks and/or shifts in production-supply, consumption-demand functions etc.

JP, I’d be interested to correspond with you directly about the above matters, kindly email me to david dot hillary at gmail dot com.

Regarding ‘present good’ vs. ‘future good’ in relation to money, it is not helpful. Nevertheless the fact that presently irredeemable paper is used for indirect exchange today seems to suggest an asset consisting of a security with a only hypothetical and possible future redemption as a basis for its value can indeed function as money. What could be a more ‘future’ good than that?

Coined money, as it is, is not presently able to be consumed, it is really a possible intermediate good in the production of ornamental jewelery or some kinds of industrial equipment. Nevertheless it maintains a market value and its marketability in order to serve as money. Its value is anchored in the long term from the market production-supply and consumption-demand schedules for the monetary metal, in terms of its purchasing power.

David Hillary September 7, 2008 at 4:56 am

JP: further comment re interest rate and ‘time preference’. As with ‘store of value’ the term ‘time preference’ is a misnomer. Agents cannot transact time, time is not a good or type of merchandise or an asset in a portfolio. The interest rate is the interest rate on MONEY, i.e. loans of money. Thus the market interest rate is a the nominal interest rate.

Social capital savings can be invested in either a) the coin stock or b) other forms of inventories, buildings, plant equipment etc. For simplicity I’ll refer to b) as ‘buildings’ since buildings are the principal form of such investments.

The viability of constructing a new building depends on the cost of construction vs. the discounted future expected building rents over the life of the building. Thus the interest rate regulates the flow of social capital savings into new buildings, since the discount rate is the term interest rate on money plus the building risk premium.

The flow of social capital savings into the coin stock is in the form of a surplus in the market for the monetary metal, which in turn depends on the exchange rate or purchasing power of the monetary metal and thereby of money. Investment of social capital savings into the coin stock will reduce the interest rate on money, as explained previously.

Equilibrium in the capital market is such that the marginal rate of return between the two forms of capital is the same.

The equilibrium interest rate depends on factors such as the ability of the economy to put additional capital to profitable use, which I believe is also subject to diminishing marginal returns. Thus I would hold that, other things being equal, including agent’s desires to save vs. spend income, the equilibrium interest rate could be higher or lower depending on the existing stock of capital. I.e. in the same way the nominal interest rate could be higher as a result of a present allocation of the capital stock between less coin and more buildings, the equilibrium interest rate could be higher as a result of lower total capital stock, other things being equal.

Yancey Ward September 7, 2008 at 11:28 am

Michael Clem,

Yikes! Even though I, too, knew it was only a matter of time, Sproul commenting just after you was freaky!

fundamentalist September 7, 2008 at 12:30 pm

Jp: “But this would mean that money is a future good…”

I think you’re getting definitions tangled up. Future goods are nothing but the goods that people want to have in the future so they save (give up consuming) today in order to buy them in the future. I guess people could save in order to buy money in the future, but that seems a little silly. In addition, when people buy the future goods, they are no longer future goods but present goods. Money is a present good because people hold money primarily to pay bills and purchase things they need in the short run. Any extra money they might have they invest. In the future, they will sell those investments for money to purchase goods, but both money and those goods will be present goods at that time.

Jp: “By hording being an Austrian no-no, I meant people accumulating money due to its store of value function ie. saving it, storing it as capital. Austrians don’t accept this can happen, but Keynesians do. Austrians only accept hording as long as it is done so for the sole purpose of accumulating more of the medium of exchange. No?”

No. Austrians accept it can and will happen. When confidence in banks and businesses fall to an extreme low, as in the Great Depression, hoarding is the only smart thing to do. Austrians usually refers to this as rebuilding cash balances instead of hoarding. In times of great uncertainty, people will naturally hold much higher cash balances.

Jp: “Agents cannot transact time, time is not a good or type of merchandise or an asset in a portfolio. The interest rate is the interest rate on MONEY, i.e. loans of money. Thus the market interest rate is a the nominal interest rate.”

No one is suggesting that anyone can buy or sell time. The term “time preference” means nothing more than the fact that people prefer things now as opposed to in the future. It has pretty much the same idea as impatience. In order to persuade people to wait, we have to pay them. That payment is part of the market interest rate. Another part is the productivity of capital. Then there is the risk component and the inflation component.

magnus September 7, 2008 at 2:13 pm

If gold is intrinsically worth so much more than dollars then why are there so many companies on talk radio who want to give me their gold in exchange for my dollars?

Because of governmental mandates like legal tender laws, that provide that all creditors must accept government paper in satisfaction of debts and obligations.

And because of the age-old “coin of the realm” law, which requires that the government’s thefts (i.e., taxes) must be paid in dollars.

These arbitrary laws are what make governmental paper money valuable. Nothing more.

I don’t know how many times you have asked this question, but the world would be a better place if you would stop.

David Hillary September 7, 2008 at 2:33 pm

Fundamentalist: So what is the measure of ‘time preference’ if it is not the interest rate? And what is the measure of the interest rate if not the nominal rate in the cash (demand deposit) or very short term (e.g. overnight or 1 month or less) financial instrument rate?

Robert Blumen September 7, 2008 at 3:18 pm

Time preference is hard to measure but the various indicators are the interest rate in the bond market at all maturities and the rate of corporate profit among all corporations. The problem with the short term debt market is that it is more heavily distorted by the price-fixing of central banks on their own debt.

David Hillary September 7, 2008 at 3:47 pm

Robert: So basically you’re saying that the rate of time preference is the rate of return on capital in general, and not money in particular, or, to use my previous terminology, the rate of return on buildings rather than the coin stock.

Is it the ex ante or ex post rate of return? real or nominal?

Robert Blumen September 7, 2008 at 4:01 pm

The Austrian view is that time preference is a type of consumer choice that everyone makes between present and future consumption, and that the pricing structure in capital markets adjusts itself to time preference. So it is true that they are equal, but it’s important to keep the cause and the effect in the right order. This view is outlined in Rothbard’s Man Economy and State if you want more detail.

Robert Blumen September 7, 2008 at 4:08 pm

“If gold is intrinsically worth so much more than dollars then why are there so many companies on talk radio who want to give me their gold in exchange for my dollars?”

Assets are not “intrinsically” worth more or less than each other as a class. Units of assets are worth more or less than units of other assets.

As long as gold and dollars have some value, there will be prices on both sides of the market for people who wish to exchange one for the other.

And, while gold will always be worth something, I could see a point where the dollar would not.

fundamentalist September 7, 2008 at 5:56 pm

This quote from Hayek’s “Pure Theory of Capital” might help:

And thirdly, time preference is a subordinate factor compared with the productivity of investment in determining the rate of interest, since it operates only by way of determining the rate of saving and the rate of capital accumulation, and hence the
productivity of investment. In the short run, it merely adapts itself to the given marginal productivity of investment.

David Hillary September 7, 2008 at 6:25 pm

Fundamentalist: so basically the interest and the interest rate is held to be a real not a monetary phenomena, with the interest rate on cash money in a free market being arrived at by translation and adjustment for such things as risk premium, term structure/yield curve, and perhaps expected or secular inflation rate?

I’d come at things from the other end: interest is a monetary phenomena, being a market price of demand deposits or short term low risk securities, being equated to the marginal productivity of coin, and then with adjustments along the yield curve and for investment risk, thereby determining the market price or value of buildings.

fundamentalist September 8, 2008 at 9:34 am

David: “I’d come at things from the other end: interest is a monetary phenomena…”

Austrian econ shows that interest isn’t just a monetary phenomenon, although it is important. Hayek has a good explanation of how the demand and supply of loans reach equilibrium in the last chapter of “Pure Theory.” Austrians start out by exploring why interest exists in a non-monetary economy. It starts with the preference for goods now instead of later, which determines the level of savings (reduced consumption) and essentially the supply of loanable consumer goods (used in a non-monetary economy to sustain workers until the increased production of consumer goods becomes available). Risk also is a factor. Demand for loanable consumer goods comes from profit expectations, which are based on marginal productivity. The interest rate and marginal productivity are essentially the same thing in equilibrium.

When the analysis switches to a monetary economy, time preference and marginal productivity still play the major roles in determining interest rates but you add changes in the money supply (or the inflation rate) to the equation.

David; “…the marginal productivity of coin…”

I’m not sure what you mean by that.

Michael A. Clem September 8, 2008 at 11:54 am

If gold is intrinsically worth so much more than dollars then why are there so many companies on talk radio who want to give me their gold in exchange for my dollars?
I won’t try to tackle “intrinsic worth” here, but other than that, you’re missing an important point: they are NOT offering you gold for dollars, but a specific amount of gold for a certain nominal dollar amount. The relative value of gold to dollars should be obvious, though–gold hasn’t been $32/ounce in a long, long time.

David Hillary September 8, 2008 at 10:50 pm

Fundamentalist: ‘David; “…the marginal productivity of coin…”

I’m not sure what you mean by that.’

I’m wondering if you’ve tried and if so how hard you’ve tried.

Just think, why would anyone have a demand to hold any part of the coin stock? What benefit comes from holding coin? What is the social function or benefit of coin?

It seems that we have a lot of agreement here actually, both of us view returns on buildings and return on coins in a common way.

Rent on houses or other buildings is made up of ground rent and building rent. Building rent is the return on building capital.

Interest foregone is the opportunity cost of holding coin, and coin is not willingly held unless it brings a profit sufficient to recompense its holder on the foregone interest.

Thus interest would appear to be a monetary phenomena, the profit on coin, whereas rent would appear to be a building phenomena, but both are capital the return on which is one form of profit or the other.

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