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6 O’Clock BS: The Purpose of Money

On the drive back from Omaha, Nebraska I was listening to the Skeptically Speaking podcast episode #163 “Newton and the Counterfeiter“. The discussion turned at one point toward the purpose and meaning of money, and what money is supposed to do for us and for a society. I came up with a thought. Okay, a couple of thoughts. I’m not sure that I agree with them, but I had ‘em:

The purpose of money is to keep human greed in check –>

Humans often seem to want more than what we have (exceptions: those who eschew money – vows of poverty, e.g.). Money is a way to balance what we want with what we can have.

If everybody wants everything but there’s nothing to create at least an illusion of fairness about who gets what, we have problems.

I will define fairness in this case as meaning that people get things proportional to what they earn. I will go further to suggest that one can only earn fairly if the contributions somehow – however indirectly – benefit the larger society.

I swear upon Sagan that I wasn’t high or drunk when I was thinking about this.

It’s probably obvious that I haven’t studied economics or financial systems; I have a feeling the questions I’m toying with are very basic concepts. And I understand that because I’m a prosocial person, that colors my thoughts about ideas of fairness, equality and equity.

So I thought I’d ask you folks if you’ve given this topic of the purpose of money any thought. Let’s hash it out, puzzle out how greed, money, motivation all fits together, and then get our asses off this rock and out amongst the stars.* Which reminds me – how did they do away with money in Star Trek? What drives innovation and motivation in that universe?

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*Or you could leave me babbling to myself in the corner here. That happens sometimes. Don’t pity me. I’m awesome. You don’t know me!

Comments

  1. Zinc Avenger (Sarcasm Tags 3.0 Compliant) says

    While I can’t speak for real-world economics, the Federation in Star Trek is at least nominally supposed to be a post-Scarcity society. Anyone can have anything, without depriving anyone of anything – within reason.

    And the reason people work… Well, because that’s what they want to do. I’m sure there are billions of slobs we never get to see, but the people that want to build starships build starships because building the best damned starships in the Galaxy is what gets them out of bed in the morning.

    I’ve always kinda thought of the shiny-eyed people in Starfleet as being maladjusted throwbacks who need the primate-style hierarchy of rank and the thrill of danger to feel valued, which just happens to fit well with a quasi-military organization. At least they’re socially useful maladjusted throwbacks.

  2. Reese M says

    The purpose of money is to exchange goods and serivces. In a pre-monetary society, people would trade items or to get what they wanted. If someone wanted 80 bushels of wheat, they might trade a head of cattle for it. In ancient times cattle represented a sort of proto-money; they were valuable because they worked fields and provided meat and milk. Often times when people wanted goods, they would simply trade “ownership” of cattle in exchange for that good without going through the process of moving them from one place to another. Eventually, this process was facilitated by representing cattle by symbolic objects, which became the first currency.

    Money facilitated the trading process by providing a universally accepted unit of trade as a substitute for trading actual goods or labor.It also allowed people to specialize their labor so instead of having to produce a little of everything to ensure one had trade goods on hand, they could produce one crop or specialty good and trade it in kind for a set amount of money. This money they could then trade with others who produced the goods they wanted. When you use money today, you are simply using a tool that allows you to trade one good, such as your labor, for another, such as a cup of coffee, even if the coffee shop has no direct use for your labor.

    Like the evolution of life, money developed because it was very efficient and effective, not with some higher “purpose” or “meaning” in mind. At least that’s my two cents.

    • Andrew G. says

      That description has very little to do with the actual history of money; it’s the description you’d get from an economist, not from a historian or an anthropologist.

      There are any number of cultures that exist or have existed that do not use money, or which only use it in limited ways. Even in cultures that are often reported as using some form of money (shells or whatever), it’s often used only for social purposes (e.g. brideprice, blood money) or for specific kinds of goods (not regular necessities like food or everyday clothing). Straight barter is almost always reserved for dealing with people outside your normal circle of acquaintances; within a village or tribe or other group there may be common property, or a chief whose job is to give things away to others, or more-or-less informal gift/debt exchanges, or any of dozens of other systems.

      On the other hand you have the early great civilizations (Egypt, Sumer, etc.), where (at least from ~3500 BC onwards) there was extensive use of written records of debt, contract, etc. Craft specialization also existed around this time, but not based on money as such; temple complexes or palace complexes could extract taxation-in-kind from farmers, and use that to provide a food ration to other workmen. Money in the sense of “unit of account” begins here; the mina and shekel (1/60th of a mina) are originally Sumerian measurement units.

      It’s nearly 3000 more years before coined money turns up (in Greece and Asia Minor from ~700 BC). Notice that there is no reason why the Sumerians or their successors couldn’t have made coins if they wanted to; the most likely explanation is simply that they didn’t need to.

      • Reese M says

        Andrew, G.

        Thank you for exposing my ignorance on the matter of the development of money. I had assumed it was a sort of hierarchical system, when it obviously is not. Perhaps some day money will be obsolete when we have the technology to create a post scarcity society.

        What I do not think, however, is that money was “created” either exploit greed or keep it in check. I think it evolved over time as human beings created new technologies and thought of new ways to conduct trade. The purpose of money has always been to facilitate the trade of goods and services. Like all technologies, it can be exploited, but I don’t think it is more inherently moral or immoral than a computer or car or bicycle or anything else.

  3. Tim says

    Not sure if its the same in the US, but in the UK all our money has the phrase “I promise to pay the bearer on demand the sum of…”

    Meaning all money in Britain is actually an IOU. Funny thing when you think about it…

    • SundogA says

      The US started out the same – government money (and yes, there was privately printed money as well) was a certificate for a stated quantity of Gold and/or Silver. Today, of course, nobody uses precious metal standards any more.

  4. Andrew G. says

    Studying economics is more likely to mislead you about the nature of money than inform you.

    Which is kind of a problem in the current situation. The political scene is so completely dominated – not just in the US but many other places too – by the insistence that the government deficit must be reduced or at least prevented from increasing; that spending must be reduced, taxation increased, or both; and by complete ignorance of the difference between sovereign-currency countries (such as the US and UK) and Eurozone countries.

    There is an important connection here with your thoughts on greed and fairness: people (naïvely) associate personal debt with greed, thus treating debt as morally bad; and then transferring that moral judgement from personal debt to government debt, assigning happy-making feelings to ‘balanced budgets’ or ‘deficit reduction’ and feelings of immorality to ‘deficit spending’. This produces undesirable results because government debt is the exact opposite of personal debt; private-sector surpluses equate to government deficits and vice-versa.

    So the induced political paralysis prevents governments from doing the right thing (which is to spend more money and reduce taxes, ideally both in ways that benefit the 99.99% rather than the 0.01%), instead we have insane “austerity measures” that have real long-term costs (especially in the education sector; education is the ultimate in long-term investments for government).

    • Joe says

      I’m afraid I have to take issue with your reasoning here. The most well constructed studies I have seen have produced data that clearly shows that austerity measures do far more to help an economic recovery than deficit spending (stimulus). High levels of government debt are also seriously detrimental to an economy. The term ‘austerity’ has been abused lately but when I use it I mean spending cuts possibly along with tax cuts. The media today uses it to mean tax increases and a reduction in projected spending increases which certainly will not work as they are finding out in the UK. Here is a link that can get you on your way:
      http://washingtonexaminer.com/two-kinds-of-austerity/article/596441
      It mentions a 2009 paper, I recommend reading if you really want to understand the issue.

      This brings us on to the issue of debt not being a problem. This, I think, is fairly obviously not true. We do have to pay interest on that debt after all. Interest rates are at historically low (almost impossibly low) levels now so our interest payments are not as high as they might be but the inevitable one or two percent rise in interest rates will mean hundreds of billions more in government spending on debt payments alone. Permanently keeping the interest rate extremely low I’d say is going to cause more problems than it will solve and you can look to Japan for evidence of that. Japan was once threatening to dominate the world economically until their market crash in the early 90′s. Their solution was massive debt and very low interest rates and stimulus spending (basically the same things we did after the housing bubble burst), the results have been that Japan has steadily fallen behind other countries with a horribly low growth rate of around 1% per year the last twenty some years and they are still deeply in debt.

      • Andrew G. says

        What you have to understand about government deficits is that they’re not primarily controlled by the government; the actions of the private sector are much more significant.

        Here’s why: the public sector deficit in any given period is equal to the private sector surplus plus the current account (external sector) deficit. This is a matter of accountancy rather than economic theory; it’s no more possible for this not to be true than for a properly constructed balance sheet to not balance.

        Assuming for simplicity no change in balance of trade, if the private sector surplus increases, meaning that households and firms are saving more and/or borrowing less (or paying down existing debt), then the public sector deficit will inevitably increase; money that would otherwise have been taking part in taxable transactions (and thus going into tax revenue) is now vanishing as paid-off debt or sitting in bank accounts or government bonds. (Bank lending (non-interbank) doesn’t increase as a result of larger balances, because bank lending is primarily driven by the availability of qualified borrowers rather than bank reserves.)

        Under these conditions (which describes the post-bubble situation both in Japan as you refer to, and in the US currently) the government has to spend more to offset the reduction in private sector investment, or face serious economic collapse. But in both cases the same mistakes were made: firstly, only spending enough to avoid disaster, not enough to actually improve matters; secondly, propping up the financial sector rather than concentrating on the real economy. Giving money to banks doesn’t help the economy, other than by letting bank execs make out like bandits.

        There are enough confounding variables that trying to analyze the effects of government policy by comparing across wildly different countries is foolish. That’s especially true when comparing Eurozone vs. sovereign-currency countries.

        As for government debt being a problem: it’s only for historical (and now mostly nonsensical) reasons that sovereign-currency governments actually issue it at all; they don’t need to. Even leaving that aside, with negative real interest rates for US 10-year bonds simple arithmetic says that the US government should be taking as much of that as it can and investing it in the (real) economy, rather than trying to find ways to turn down the free money.

        • Joe says

          Um, I think there is a lot wrong with what you are saying here. If the government decides to spend a trillion dollars more next year fighting a new war that money goes into the debt regardless of any ‘private surplus level’. To some extent it is the private economy that is buying the government debt but the government does have absolute control over how much debt it issues. If the private economy in this country doesn’t have the surplus to buy up that debt the interest rate should go up to entice more people to buy, however what has been done more recently is our government sells the debt to foreign countries because there is not enough private money to buy it all up at the currently extremely low interest rates even though much of the stimulus money sent to the banks was just used to buy government debt which as you rightly point out does not help the economy but does help the banks.

          You also make the mistake of thinking the amount that gets loaned out depends on the number of qualified borrowers. If this were true then there would never be any such thing as a sub prime mortgage. In 2004 we again had extremely low interest rates (which was a reaction to the .com bubble bursting and the fed’s efforts to float the economy) but to take advantage of that low rate banks had to further encourage lending beyond the qualified borrowers so we got easier lending standards and bad bets were just insured by someone like AIG.

          When you say we don’t even need to issue debt because we are a sovereign currency nation I would just point to all those sovereign currency nations that utterly destroyed their economies by pretending they could print their way out of debt with Zimbabwe being the most recent example. They absolutely MUST issue the debt to control the devaluation of the currency.

          I’m not sure if you intended to or not but I got the impression that you were making another mistake in that as long as the government throws out enough money (just not to the banks) then things would be alright for the economy. This has actually never proven to be the case. Government spending exploded around 1929 after the crash that was said to have started the great depression and government spending continued on an unprecedented and extremely rapid pace and yet we were stuck in recession for seventeen years whereas all other recessions, including the equally bad one in 1920, that did not have enormous amounts of government spending lasted less than two years. The only possible example in history that could back up this hypothesis is that WWII got us out of the recession because of government spending and sending 20% of our workforce out of the country to fight a war (it should be obvious that sending away a fifth of your workforce is not actually good for the economy). This again is wrong and when you look at the private economy isolated from the government spending you will see it at levels as low as the pit of the great depression and it was not until the government cut it’s spending by 2/3rds after the war that the economy recovered and then took off.

          I think the best definition of what economics is would be “The study of the use of scarce resources that have alternative uses” so the concept that any spending is good spending is economically vacuous and totally ignores that as with any limited resource there are better and worse ways to put it to use. Simply dumping in enormous amounts of money to be spent only encourages bad investment and bad allocation of resources, this is why the great depression was so great and why our current recession has lasted so long (and actually why it happened in the first place since it was the low interest rates of 2004 that inflated the housing bubble).

          • Andrew G. says

            If the government decides to spend a trillion dollars more next year fighting a new war that money goes into the debt regardless of any ‘private surplus level’.

            The money doesn’t just disappear when the government spends it; it becomes someone’s income. That person can then do one of three things with it: they can spend it, they can save it, or they can use it to pay taxes.

            If they spend it, it just becomes someone else’s income again, and that person then spends it, saves it, or pays taxes with it.

            Ultimately, either it circulates in the economy until the government gets it all back in taxes, or it ends up in savings (or equivalently, retiring debts). (I’m leaving out the external sector for now, but it’s obvious what happens there.)

            If the private sector isn’t inclined to save more money, and the external balance doesn’t change, then every dollar of that spending ends up going back to the government in taxes, and the debt stays the same as it was. Only if people end up sitting on more money than before does the debt end up increasing.

            The problem with that scenario isn’t that the government spent more money, it’s what the government spent it on. Fighting a war is very inefficient use of real resources, which are expended for negative benefit. Better for the government to spend the $1tn on education, research, infrastructure, and other things that have long-term real benefits.

            If you google for “most important graph of the year”, you should be able to find a copy of a graph, originally from a reporter’s blog at the FT (now paywalled), which gives the US sectoral balances 1960-2010. If you look back at the financial press coverage for, say, the end of the 90s (the “Clinton surplus” years, which you’ll see clearly on the graph are the result of public sector deficit), you’ll find discussion of the fact that consumer savings levels are way down, and both consumer and corporate borrowing are high. It’s that sharp increase in borrowing that resulted in the surplus, not the other way round (this is pretty clear on the graph).

            To see how private sector borrowing reduces government debt, imagine that I borrow $1000 from my bank in order to, say, hire someone to do something for me. That $1000 doesn’t cost the bank anything or cause them to pay less in tax, but it’s income to the guy I pay it to, so part of it goes in his taxes and he spends the rest, which eventually dissipates it in tax payments. The government therefore got $1000 in tax income without having to spend anything, so the debt went down by that much; and it stays that way until I retire the debt by paying back $1000 to the bank, which counts as savings and therefore increases the government debt again.

            If the private economy in this country doesn’t have the surplus to buy up that debt the interest rate should go up

            No. A sovereign-currency government (i.e. the US, UK, etc. but NOT the Eurozone countries) can, if it chooses, set its own interest rate; it does not have to pander to the markets. There are several ways it can do this: the one currently in use is to hide the manipulations as “open-market operations” performed by the central bank. If the private sector isn’t demanding enough bonds to maintain a desired interest rate, then the bank just buys bonds on the open market to increase the demand, and vice-versa.

            A simpler approach would be for the government to not bother issuing debt at all, and just fix the interest rate by setting a support rate and a penalty rate on reserve balances.

            The government also does not “decide” who to sell the debt to, so I don’t know where you’re getting that fantasy from. Government debt is currently sold by auction, so if foreign investors want some, they just put in their bids like anyone else.

            Debunking all the rest of the crap is going to take an unreasonable length, so I’ll just hit some high spots:

            You also make the mistake of thinking the amount that gets loaned out depends on the number of qualified borrowers. If this were true then there would never be any such thing as a sub prime mortgage.

            “Qualified” in this sense means nothing more than “the banks are prepared to approve a loan to”. The mortgage bubble happened because there was so much demand for mortgage-backed securities that the mortgage lenders were prepared to reduce their threshold for “qualified” down to essentially nothing.

            The important part is that the amount that the bank lends out is not constrained by the bank’s reserve balances. It makes the loans first, based on its assessment of whether the loan will be profitable, and only later on does it assess any fractional-reserve regulatory limits. This means that you can’t increase bank lending just by dumping money into bank reserves.

            I would just point to all those sovereign currency nations that utterly destroyed their economies by pretending they could print their way out of debt

            Cause and effect reversed; the destruction of the economies came BEFORE the hyperinflation. Zimbabwe crippled its own food production sector (its major export sector), THEN went into hyperinflation. Government spending can’t create food; when you’ve replaced efficiently-run farms by inefficiently-run farms, the only way to recover is to restore efficiency, increase the number of farms, or find a new export. (Note that it’s quite possible that the only alternative to serious inflation would have been widespread starvation; but throw in all the political corruption and other confounding factors and it’ll probably never be certain whether any other approach would have worked.)

            Similar arguments apply to Weimar Germany (crippled by war reparations and occupation), post-WW2 Hungary (occupied by Soviets), and so on. In all cases the economic breakdown (in the REAL economy, not the financial one) caused the hyperinflation rather than the reverse.

            1929

            The US was still on a gold standard at the time, therefore not currency-sovereign.

            One thing you do have right is that just dumping money into the economy doesn’t work; for best results in the real economy it has to be spent on worthwhile public goods such as education, research or infrastructure.

  5. Joe says

    Imagine for a moment attempting to purchase something without money. Say you went to McDonalds (no, make it Chic-Fil-A) and asked for a coke and fries. They say ok, what do you have to trade? You think they would accept a lecture on biology? or maybe you happened to have a watch to trade them but they already have twenty of those so you have to ask what they would accept and start calling around all your friends to see if they would trade a lecture from you for whatever the restaurant wanted and make it snappy because you are thirsty.

    It should be obvious that greed prevention has nothing at all to do with why we use money, it wildly simplifies trade and that’s it and you can’t have society without trade. If anything it made it much easier to be greedy which is actually a good thing for numerous reasons I won’t go into now.

    If you had a more specific question in mind like why do we use paper dollars a similar answer can be given (though it’s a lot of reading and you might just want to stop here). It’s just simpler than using gold or sliver. If gold were still our currency it would be worth somewhere around eight grand per ounce so you’d have to have a mighty small coin to buy that soda and fries. Even in the past when a gold coin was useful what happened was people would take their gold and silver to a bank and the bank would issue a note to you which was basically a paper dollar. Not a perfect solution, some banks would cheat and make more dollars than they had in gold but generally the market was harsh with such cheaters and it never amounted to a very significant problem until our government got involved and made that sort of cheating legal as long as the government was the one cheating (this is why money was being hoarded, the government tried to manipulate the value of it’s currency and people realized this opened up opportunity to game the system). Right or wrong (but it’s definitely wrong) though, what they did was eventually take us off the gold standard so they could simply use the notes as if they held some sort of value. Basically they claimed that the intent was to simplify trade and stabilize the economy but it also happened to give a great deal of power to the government to dictate the value of the currency which was a known danger even when the U.S. was founded which is why it says in the constitution that our money must be based on something like gold or silver.

    Anyway money must be rare to be valuable so gold was a good thing to use though many things were used in the past (like salt, which is where we get the term salary from when the Roman army was paid in salt). It is also a good thing if it is durable, so gold is again better than something like a banana because you can’t save up your bananas for very long or they will become worthless (though salt had another actual value for seasoning and preserving your food). Gold had an absolute lowest value because it took (takes) work to produce it while paper money can easily be printed off for like two pennies per hundred dollar bill. So at this point we must trust that the government does not simply over produce dollars and eliminate their value or that they are too difficult for anybody else to mass produce (which would then be called counterfeiting). The question ‘why do we use those dollars?’ is simply one of legality now, it is illegal to use other forms of currency (though barter is still basically legal).

    So in the history of currency there has never been a government that didn’t screw up it’s currency by trying to manipulate it in some way or just by being foolish when coining the money. Hence the gold standard which was presumed to be much more difficult to manipulate when it was in private hands though government currency monopolies still managed it. This is where the author on the radio show shows a sort of stunning ignorance of how currency works in an economy. He seems to be under the impression that having a gold standard means no economic growth which sort of ignores the first hundred fifty years of extremely rapid economic growth of the United States which was on a mainly privately run gold standard. Then when FDR took us off the gold standard (there was two phases of getting us off the gold standard, the second one came in 1971) that resulted in over a decade of stagnant economic growth. A little bit of a more complex economic notion is that you don’t actually need a lot of money to operate an economy, you could do it with one ounce of gold as long as it was traded around fast enough (velocity of money is a primary economic factor. You can have a lot of money in the economy but if nobody is trading – no velocity – then you have a bad economy) so the limited amount of gold does not necessarily hold back the economy. As he mentioned, cheating and manipulation of the system is what made the gold standard ‘fail’. This was done to some extent when banks were all issuing their own notes but as I said the market rapidly took care of those problems. Some banks would carefully collect the notes of other banks and then go cash them in all at once, if the bank was cheating it didn’t have enough gold on hand and it went bankrupt. Nobody can stop a government when it decides to make that sort of cheating legal. The most obvious reason the author is wildly mistaken in his thinking about the gold standard is that simply changing from gold to paper doesn’t solve the problem of government manipulating the money. We can see the effects of this manipulation through inflation, if you take a silver dime minted in the 60′s it has enough silver in it to buy you a gallon of gas today, give or take, but if all you had was our current fiat money then you need around 40 dimes to buy that gallon, back in the days of the gold standard money had a tendency to become more valuable rather than less. This inflation has the effect of stealing value from your savings, which are an extremely important part of a well functioning economy.

    This ease of manipulating the currency is the biggest reason for having a fiat money system. The government couldn’t afford to go to war without being able to print off a few billion dollars whenever it needed to and couldn’t afford to bribe voters with their own money if they couldn’t print off billions and trillions and offset the cost to the next generation. So it’s good for government power and a welfare/warfare state but it’s bad if you expect the money you earn today to be worth anything when you are older. The destruction of savings actually slows the economy down much more quickly than a limited money supply would (they try to compensate by creating massive debt). This can also be seen through our fairly anemic growth rate these last forty years or so (right around three percent) as compared with our growth prior to the federal reserve. Most telling of all is how the guy just makes this statement that nobody would like it if we went back to such a restrictive money and just says “trust me on this”. I think generally not a widely accepted way to prove your point among skeptics is by saying ‘trust me’. Back to your point about greed high rates of inflation seriously favor the wealthy as can be seen recently in Zimbabwe and probably any country while it was afflicted with a hyper inflationary government. The wealthy generally walk out of such situations fairly well off.

    I’m spinning off into tangent land now but you should seriously consider studying up on economics, it’s an extremely important topic. I’ll recommend ‘Economics in One Lesson’ by Hazlett as a fairly short read that should wet your appetite.

    • Andrew G. says

      which was a known danger even when the U.S. was founded which is why it says in the constitution that our money must be based on something like gold or silver.

      The US constitution says nothing of the kind – it forbids the states from creating any form of legal tender not based on gold or silver, but it gives the federal legislature unlimited powers over currency.

      And a good thing too; precious-metal standards for currency are completely unsustainable because the change in money supply due to mining almost never matches up with real economic growth. The only way to avoid that would be to maintain a high fiduciary value (i.e. the coin’s face value is much higher than the metal cost) in which case there’s no point in using a precious metal in the first place.

      Of course there are periods of history where precious-metal standards have worked because sufficient metal happened to be available. But it’s much more common, historically speaking, for that not to be the case.

      The tendency you mention for hard money to become more valuable is called “deflation”, and it’s economically disastrous because most businesses have to rely on spending money before earning it (whether for capital investment or raw materials). Deflation favours savers at the expense of borrowers, but from the point of view of the whole economy, saving is bad while borrowing is good.

      Most of the rest of your comment is so divorced from reality that it’s not worth even attempting to answer.

      • Joe says

        Again, you are mistaken on this. The constitution did not say the states could print their own money, it said they could not use any money not backed by gold. It’s a little complicated and difficult to explain because the language usage has drifted but you must take the constitution to mean what they took it to mean when they created it so I’ll make the attempt here to explain.

        First recall the 10th amendment which states: The powers not delegated to the United States (the federal government) by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

        So the states can do anything unless the constitution forbids it and what it forbade was this: No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

        This clearly says no state shall coin money. No state shall make any thing but gold and silver coin a tender in payment of debts.

        This does not mean states could print money if it was gold or silver, it means the exact opposite, the states can not coin money. Sort of a separation of state and money. It also means a state can not use any money to pay for anything unless that money is gold or silver. So yes, the congress has the authority to print money (as was done by Lincoln to pay for the Civil War) but that does not mean it is then “legal tender” as far as how the government (the states) can use it.

        Also the constitution doesn’t give unlimited powers to anything. What it does is set specific and very limited powers and says they can’t do anything other than what is written. Article 1 section 8 states : The Congress shall have Power To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.

        Now this is where today’s language comes into play. Back then “regulate” meant ‘to make regular’. There was no federal register consisting of thousands of pages of “regulations” which is a more modern distortion of the word “regulate”. Nowhere in anybody’s mind at that time did “regulate” mean they could do anything they wanted.

        We can argue here about whether it is valid to change the meaning of words after they are written down and whether that then makes our current ways of doing things valid or not but my point was about the original intent. Much was written of the original intent and great concern was given over manipulation of the currency and they certainly did not want that to happen especially with their very recent experience with hyperinflation during the war of independence.

        As for the change in the supply of gold/silver not matching up with economic growth, I believe I addressed that in my post. The amount of gold/silver is irrelevant, if there is not enough of it then the value of it goes up, it can then purchase more per ounce (as I said if we were using it today it would probably be around 8 grand per ounce). If there is too much gold/silver the value of it goes down and you can purchase less stuff with it. This doesn’t affect the face value of the coin, it will still say a dollar on it or whatever, but you will be able to buy more or less with that dollar.

        Inflation and deflation naturally occur in any economy and it is a commonly held economic fallacy that deflation is somehow more destructive than inflation. This has gone to the point of history books teaching that times were really bad back when we had a gold standard and there was deflation going on. However if you look at the lifestyles of the people during those times there was no such suffering and no drop in standard of living which should clearly demonstrate that much of the hype about deflation is misleading. There was one time in our history where deflation caused a bad thing and that again was during the onset of the great depression. However this deflation was caused by manipulation of the currency by the federal reserve in combination with foreign countries manipulating their currencies and was not a result of a more free market monetary system like we had prior to 1913. Even then the deflation only proved so disastrous because it was such an enormous change. A similar disaster would have happened if that much inflation had occurred so rapidly. It is always bad to very rapidly change the value of the currency and always less bad to do it slowly. The impossible ideal of course is to keep it steady. Steady and slow deflation is no worse for businesses than steady and slow inflation. Businesses all act individually and prepare for the future as best as they can, they can do this for both circumstances.

        Hopefully some of this serves to help clear up your misconceptions about reality. If you’d like sources I can refer you to any number of books on these topics so if you’d like to read up just let me know what you’d like to learn. I have been guilty here of extreme simplification of some fairly complex issues but that can’t really be helped so from here on we can agree to disagree or you can provide evidence that I am wrong and request my sources as well.

        • Andrew G. says

          Inflation and deflation are not equivalent problems because nominal interest rates do not go negative (since that would make it more beneficial just to store cash). They’re also not equivalent because most businesses have to spend money first, on materials and labor, before they can receive income.

          Suppose right now I can sell widgets for $10. I spend $800 on raw materials, labor, etc., and make 100 widgets; but this takes me 6 months.

          If there’s no inflation or deflation, I get $1000 from sales and pocket $200.

          If there’s 5% annual inflation, then I get $1025 from sales and pocket $225, which is equivalent to $219 in real adjusted dollars. My real profit is higher by almost 10%.

          If there’s 5% annual deflation, then I only get $975 from sales, and pocket $175, which is worth $179 in real adjusted dollars. My real profit has gone down by more than 10%.

          • Joe says

            Inflation and deflation can both be dealt with by reasonable investors and entrepreneurs. I never claimed they were equivalent problems, only that both situations can be reasonably dealt with if they come in moderation. Just the same way that they can deal with very high or very low rates of interest on the loans they take out. You might find your widgets are not a profitable allocation of resources during deflation, this just means that those resources go to someone else with a more profitable way to use them. If too much savings builds up then the interest rates fall, this is basic supply and demand. Of course if you are manipulating interest rates the market can not properly receive those signals and can not adjust accordingly which leads to problems of malinvestment (tada, housing bubble). This is the whole reason we study economics, to find the best ways to allocate limited resources. Rapidly expanding credit and debt beyond what the market is willing to bear through interest rate manipulation only means that resources will more likely be used for less efficient purposes. This equates to a weaker economy in general and if pushed too far it leads to things like the housing bubble, which as I’ve said was a direct consequence of the very low interest rates, while you seem to be under the impression that for no other reason than pure happenstance suddenly mortgage backed securities became all the rage. Obviously (at least if you’ve studied the issue at more than a cursory level) that was only a consequence of the low interest rates.

            Though you are perhaps correct in pointing out that an inflationary policy does benefit businesses (in the short term) while it harms individuals (in the long term) you just don’t seem to grasp the vast difference between investment of savings and investment by expanding the currency base. When the government expands the currency base this causes inflation, it doesn’t add value to the economy though it will push up the GDP number. What it does is take away value from all the money already out there. Again as can be seen in Zimbabwe, high levels of inflation are not detrimental to the very wealthy who maintained their earnings above the level of inflation. It is the rest who suffer by loosing all the value of what they had earned. It obviously didn’t help them overcome their economic problems, one of which was of course the destruction of the farming industry, it just made a bad situation worse.

            Your previous response demonstrates you are not really understanding the points I’m attempting to make. You have not clarified why you think the private sector rather than the government controls the level of government debt despite my clear example of how they create debt as they see fit regardless of any private sector action. Your response to what I said about Zimbabwe did not contradict what I said about government manipulation of the currency and debt being generally a bad idea. Whether or not they caused other problems does not deny that the hyperinflation was indeed one of those problems. Then when you point out we were still on a gold standard in 1929 seems to demonstrate that you are not even reading what I’ve posted because my first post I talked about when we left the gold standard. This obviously does not have any impact on my statement that the federal reserve at that time was manipulating the currency and made some extremely bad decisions. Nor did it contradict that enormous amounts of government spending utterly failed to get us out of the depression both before and after we left the gold standard.

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