Stable Money

“Just a Citizen” or JAC for short is an old netizen friend from “Stand Up For America’s” blog” (see my Favorite’s list under “My Second Home”) and occasionally on “Electric City” as well.

We’ve been discussing Money – and the monopolization of money by central banks and government.

I’ll pick up the dialogue after a quick background.

The discussion began about money, how much should “be made available” in an economy and who should control it.
The Austrian economist holds that money is simply “the most desired good in an economy”.

It is acted upon by the exact same laws of economics that acts upon all other goods and services in an economy.

However, because it is the most desired, the actors in an economy will trade their goods for it with the greatest ease because when holding this good, they can then trade it now or in the future to other people for other goods they really need or want with no discount or extra fee. There is no (or little) barrier to trade when this good is used as money.

The question of “what good becomes money” is answered “what ever people desire the most”.

Gold has traditionally been desired the most – for many reasons that we don’t have to go through – but so has salt, pearls, sticks with notches in them  and still today in parts of the world, huge unmovable rocks.

This theory of money really sets apart Austrians from Monetarists and Keynesians.

The latter two theories have a very difficult time or can’t  at all with any coherency explain why large rocks is ‘money’ in some cultures. Only the Austrians hold a robust and complete theory of money that naturally includes these cultural phenomenons.

This good, now defined as money, is central to the economy. Though there is no force behind it to do so, almost all other goods in the economy become measured in a price relative to it. “This costs two and a half notches on a stick”.

Pricing of goods is central to an economy. It allows consumers a way to measure their value of goods and producers a way to price their goods.

With no surprise, government and central authority see that controlling the extent, creation and interactions with money is the easiest way to control the economy and the lives of their subjects.

I advocate that money does not need to be ‘created’ by a central authority, nor managed by it nor controlled by it.

Since money is an economic good, the laws of economics and the free market will manage this good with the same optimum efficiency and effectiveness as these laws of economics manage all other goods and services.

No stirring required.

In fact, if a central authority begins ‘stirring’ the money, its actually begins to destroy money.

Because money is central to the economy (as everything else is priced relative to it), in a complex economy where billions of items are interlinked in the pricing and hence supply and demand, the destruction of the money in a complex economy will destroy the economy and likely society and civilization.

JAC raises some alternative thoughts, so I’ll quote his own words.

I have given some hard thought on what I believe is your concept, namely the local folks figure it out on their own, but see some problems.

While the concept works locally it would be very difficult to work our across a large are such as the USA where our commerce is so rapid.  Would we not all fall victim to EXCHANGE efficiencies and demand issues?

Observationally, we see already a wide, long and varied list of goods that constitutes money all over the world.  But that doesn’t stop trade.

Money traders flourish everywhere. And with free market money, they would flourish in that economy too.

Going back to the theory of money – it is just another good.

So efficiency of exchange between goods is really nothing more than negotiation of price. Money as a good is no different. It is merely negotiation of price.

Demand issues is vitally important and required. It is precisely this component that creates the stability in money!

If there is a large demand for a particular good,  while supplies are static, the price for that good goes up.

Conversely, if there is a decrease demand with static supply the price goes down.

If that good is ‘money’, a sudden demand for that money-good means that good is in high demand. What does that mean in the context of money? What makes money “more valuable”?  Well, it’s exhibiting better fundamentals for why it was money in the first place!

And those that are trading their money for some other different money are demonstrating that theirs exhibit lower fundamentals of money.

So the money supply itself is subject to laws of economics. Its increase or decrease in value by individuals in the economy is a measure of that value – just like all other goods are measured.

Montana needs NY dollars to trade with S.D. for example.

JAC, you may have accidentally embedded a different premise then what we started this conversation with – “Montana” creating different money instead of people creating their own money.

However, just taking this comment at face value, what this simply says is “S.D.” values the “New York” money more than it values “Montana” money.

Seems like a massive complication with huge potential for corruption.
So, let’s take this up one more conceptual notch.

Because it is unnatural for 95% of the people reading this blog, they may have a hard time seeing money as just another other good/service following the laws of economics, so let’s move to more typical goods for this discussion.

What about the condition where Montana has a lot of wheat to trade and wants  for South Dakota beef? Do you expect S. D. – already awash in its own wheat – would see much value in Montana wheat?

So what is corrupt and complicated to say the S.D. doesn’t see value in Montana wheat, but see lots of value in New York shirts and ties?

Montana trades its wheat to New York for ties, and then the ties to S.D. for the beef.

Now, it appears to be complicated in my example, because by their physical nature, wheat, ties, shirts and beef are difficult commodities to transport, store, and divide – which will tend to reduce their desire to be money.

They would have discounts and commission on the exchange because of these difficulties – they have huge storage costs, for example, like refrigeration and humidity issues.

So really, using these items as money is unlikely, since there would be discounts for loss and expenses – thus, would be easily displaced as money by another good that would not suffer as severely these costs and losses.

But the example still holds – it is merely one good of Montana not valued in S.D. where as S.D. sees large value in the goods from New York.

Probably to facilitate such a cow/grain/clothes system, a speculator would appear – willing to handle all the problems with Montana wheat delivery and New York tie deliveries, pricing and money conversions – for a small fee from all the players.

So how would he handle commodity exchange today between ties, cows, and grain? Commodities exchanges! And with no surprise, we have them – today – in currency as well.

With hundreds upon hundreds of currencies and commodities – and thousands of companies and their shares  already exchanged in today’s market – why would a few more ‘currencies’ or other money make it more complicated or corrupt?

I know we have that at the international level but it creates issues there as well.

What issues? The issues on international currency trade are almost wholly around uncertainty due to government manipulation – artificially increasing or decreasing costs of money (interest rate) or producing money out of thin air via debt.

Where money is freely chosen by the People, this naturally prevents such manipulation – since if such manipulation existed “somewhere”, people would abandon that commodity as money, the prices of that commodity would fall, its worth would fall, and the value of that manipulation would decrease

These would be moved to the local level.

Eventually, all delivery of goods and services is individual. If this works for apples, cars and TV’s why not for “money”?

But then I was wondering if your money proposition requires the negation of “national” boundaries.

No.

Gold has traditionally been viewed as ‘money’ historically. Its use today is to transcend national boundaries as nation’s central banks transfer the metal between themselves internationally to meet obligations.

Now, this is done inside a building in New York – where bars are moved from one bin into another, but the effect is international transfer of obligations and payments.

Many nations use the US$ inside their country adjacent to their own currency.  I myself often traveled with three or four different currencies at the same time, and used all sort of different currencies within countries as convenience arose. (Local currency, US$, EUR, and currencies from neighboring countries all accepted at the same till)

If that were the case then regional currencies would probably develop.

Perhaps. Or one of the local currencies bubbles up as the most desired commodity. Or some other currency in use far, far away becomes the most desired – (like the US$ in middle of Asia, etc.)

There is no planning or predicting – there is good guesses, but the point is ….

…it doesn’t matter.

Whatever is used as money, is – money.

It is a trade good – the most traded and the most desired.  It is desired because it is so easily traded and it is traded because everyone desires it.

“We”, – you and I -, do not need to ‘design’ it.

We do not need to design how it will be traded.

We do not need to design how it will be carried, transferred, stored, measured, etc.

The free market will – as it does will all its goods and services – do that naturally through the aggregate solutions of the desires and needs of all the people in the economy. What will be, will be. No stirring nor extra spices required.

Then that got me to thinking about MONEY SUPPLY again.  I have said I think supply should grow slightly to allow for availability.  The idea of course could stabilize money effect on price.  Your concept as I understand is to keep supply fixed.

No, not at all.

Again, let’s move away from money and into another good/service.

Would you say:

“Let’s manage our apple supply centrally through a committee.

We don’t want a sudden rush of purchasers to buy up all our good apples in one day – because that would mean some of you would go and plant more trees to supply those highly demanded apples – but some of us are happy with the number of apples we are already growing and don’t want to work any harder than we do.

We will force all apple growers to grow only a specific number of apples – a quota – so we can manage the supply.

Of course, that means we can’t allow any new growers of apples. That would upset the apple cart! So, we must license apples growers.

Of course, that also means we can’t allow any apple growers in the next county either – if we manage our supply – they could cut in on our plan. We’ll have to organize raiding parties to burn them down. True, that may mean they organize raiding parties to burn ours down, too – but that’s the risk we have to accept if we want to manage apple supplies.”

You can see where I am going. Kind sounds like our current system.

I am neither saying we ‘need’ to stabilize the money in free market system – nor am I saying that if the money goes up in value (prices fall) is bad – nor am I saying that if the money goes down in value (prices rise) is bad.

Money in a free market is merely a commodity. Its value is in the eye of the beholder and it moves up and down with supply and demand.

As long as the commodity is free from manipulation of those that would use violence to enforce their will upon money, money will, all by itself, take care of itself.

This would create deflationary pressure over time.

Back to some reality; apples won’t be money very soon because of many limitations – it rots and they are easy to make grow with few barriers.

Gold has been used as money because it has some of the fewest limitations.

It can’t be made out of thin air, it doesn’t rot, it is divisible, it is desired, etc.

So, let’s resume our economics with gold instead of apple – while keeping in mind that 100% of the laws of economics still apply to gold as they did with apples.

As a prosperous economy grows, it has the potential of outgrowing the increase in supply of gold.

Yes, this is deflationary. There are more items in the economy wanting to be traded for gold. This creates a higher demand for gold, raising its price in relation to all the other goods.

But since gold is the measure of price, the higher demand of gold will be seen as a drop in prices of all other goods. Simply, it takes more goods to buy the same amount of gold – therefore, the unit price of those goods must go down.

1 gold= $1= 2 goods= $0.50 per good.

More valuable gold takes more goods to buy:
1 gold=$1=4 goods=$0.25 per good.

The price of the goods falls when money is more valuable.

But…. so what? Eventually the price of gold gets too high – no one will trade 5 goods for 1 gold. Gold price then drops to the level the market place will bear.

But what does that mean in the market? Again, replace money with…cows.

So, cows – being rare vs. apples – has a new price in apples. Is this a problem? Why does a change in the price of cows per apple (or the other way around) make an economy good or bad? All that is changing is the price of goods. – not the goods themselves.

Price helps the economy supply and consume resources that exist to solve the problems of people. That is all that changes – the existance and purpose of the economy doesn’t change at all.

As I recall there were in fact money shortages in colonial, early American times due to rapid growth and a fixed supply.

And this is a problem…. why? Money is a commodity. A shortage naturally will bring in more supply.

And this is exactly what you want!

So I’m a pioneer out in the old West. I dig up my ground, plow my field and make grain. But, grain isn’t money. The town 100 miles away that has jam that I like isn’t interested in my grain – they are awash in it themselves.

So I sell my grain where there is no grain for money that the town wants. I export my grain (where there is demand for it and less for money) and import money back here where there is demand for money and less for grain!

Because I do a lot of work to deliver that grain to somewhere – the money I bring back is really, really valuable – so I can buy a lot of jam, bed sheets, axe, better plow – out here in the wild West than I could have bought in New York.

It makes me want to export my goods and import money. Over time, the money becomes less rare here – but, because of the money, there is a lot more civilization (ie: goods for sale) in the West too. I don’t have to go as far to find a buyer for my wheat or a seller of jam.

The world goes around pretty nicely all by itself.

Maybe my memory is off but I still see potential problems.

There are always problems. That is why we must work every day to feed ourselves. The Universe doesn’t drop our wants and needs already answered at our feet.

The question really is: What problem do you want?

If you replace the problem of ‘shortages of money’ with ‘wholesale creation of money’ to try to fix the shortage problem – you create a new set of problems – ‘making the money to be worthless’ problem.

The natural order of the free market system creates the optimum solutions to the problems that the free market created when it solved other problems.

They might be limited to geographic regions but still a problem.  For example, Idaho may be short of dollars causing huge deflation in Idaho not matched elsewhere, making trade outside the are difficult.

A huge shortage of money in Idaho means there are far, far too many more goods for sale in Idaho then anywhere else. Utah doesn’t have that problem (let’s say) – it has too few goods and too much money.

At some price, the abundance of money (and shortage of goods) Utah would stagger over to Idaho and trade their (abundant Utah)  money  for the abundant (Idaho) goods.  Idaho goods supply goes down, money supply goes up – prices change. Utah money supply goes down, goods supply goes up – prices change.

Perhaps, Idaho will introduce another unit for money. Why not? Just as there is an infinite number of goods and services in an economy, why not money too?

So its not just gold, but silver too – maybe platinum or maybe Madonna’s used underwear…. who knows?

But the solution would bubble up – naturally from the people themselves – to solve the money supply problem.

I am also concerned with rapid deflation.  While your views on the large scale effects of price and thus consumer buying power are true, it ignores the impact to individual business operations.  If I am inventory dependent, deflation means I am paying more today for inventory than I can get in return tomorrow.

In a free market money, rapid inflation and deflation almost can never occur, and when if it does, it removes the distortion as fast as it came.

This is fundamental.

Austrian economic theory demonstrates that bubbles\crash economics occurs when money is artificially manipulated – it is the Keynesian economics that creates bubbles\crash business cycles.

Any rapid change in money supply inside a wholly free market would suddenly be corrected with the same speed.

It is a natural law – the speed at which the system is disturbed away away from equilibrium will have an equal negative feed back force to move it back to equilibrium.  This is in biology, physics, chemistry … and economics. The faster the disruption of the system, the quicker and harder the feedback, the slower the disruption of the system, the longer and more slower the feedback.

So, in a free market, a gold asteroid gently lands on earth. Gold is not that rare any more. The prices of goods suddenly changes to the amount of gold – mass inflation – people quickly move out of gold and into some other alternative form of money.  They would start to reprice their goods in services in reference to another commodity – Madonna’s underwear. This would happen over night.

Certainly there would be some disruption for those that stored gold. But so what?

There exists no such thing in the Austrian economics that says there exists a ‘store of wealth’. It really can’t exist.

Since all wealth is merely a perception of value, and value is subjective to men, what you may believe is wealth today maybe nothing worth dirt tomorrow. Some things appear to carry value for a long time, but that is not to be confused to mean something will always be valuable.

All of  this gentle feedback loops do not happen today in our economy because  it is prohibited by law!

Thus, we are forced into the Keynesian bubble/crash because there is no escape by avoiding Keynesian fiat money. The best we can do is move into another fiat or gold temporarily. At some point, though we are forced back into fiat money by government decree – it is the only ‘legal’ tender.

I could well be bankrupt before the whole thing stabilized and I could recover the average cost.  I know on the macro scale this all balances out.  But on the micro scale I have limited demand once price drops low enough.  Marginal utility after all.

You could go bankrupt for a million other reasons too. That is not a measure for either a good or bad choice – freely made – for money.

As I stated above, there are always problems. Which one do you want to face?