Hey guys, I have a question regarding sound money. I'm having an argument with someone who says that sound money would inhibit investment. Here's what the guy has to say:
"A strong gold-backed currency, high interest rates and so on would make money so expensive that investment just wouldn't really happen."
I know all about the detrimental effects of fiat money and inflation and the Fed's manipulation of interest rates, but I don't know the argument against his assertion that sound money would have it's own weaknesses.
Thanks for the help!
Jason
Money is the medium of exchange. Its most important role is to facilitate indirect exchange. The amount of money in existence is relatively unimportant so long as it is useful to those who need to exchange things.
Let's consider the "there's not enough gold in the world" argument, for instance. Well, if gold is being used as money, then as it becomes more scarce, the profitability of mining gold increases and gold that previously could not be mined at a profit will become profitable. If, even after the increased value of gold boosts gold mining, gold is still too scarce, then an alternative money may pick up the slack. Gold atnd silver have historically co-circulated (I'm not suggesting that this is because gold was "too scarce", I'm just pointing out that two co-circulating monies was not a problem for our supposedly less-sophisticated pre-modern ancestors.... only in the modern era did co-circulating monies suddenly become a problem.)
The interest rate is what governs investment. The interest rate only weakly interacts with the money supply. Mises and Rothbard have proven that, in a fiat money system, there is no interaction between the pure rate of interest and the money supply at all! The poor Federal Reserve... if only they knew.
Hulsmann has shown that, in a natural money economy, the interaction between the interest rate and the money supply occurs as capital is diverted from production of non-monetary goods to production of monetary goods... in other words, as demand for money increases, the interest rate will tend to rise as increased investment into money production (e.g. gold mining) bids away capital from other industries. As with all prices, this is a negative feedback mechanism... as the interest rises, the costs of money production themselves rise and, at some point, any further increases in money production will be unprofitable.
Furthermore, as money production increases, the original increase in demand for money is satiated and the profitability of money production further declines, causing a flight of capital out of money production and into other industries. Hence, money production in a natural money economy is regulated by the same harmonious economic laws as any other line of production with the added advantage that the government and the financial sector cannot surreptitiously siphon away a fifth of the national income or blow the economy up in inflationary busts and crack-up booms.
Clayton -
Hmmm.. it is becoming interesting...
Well, in regards to scarcity of gold, who said it should be gold.. or gold only? It could be several metals, gold, silver, platinum.... (anything else?)
I can imagine several weight units of every metal (1 gm, 5 gm, 10 gm,... etc.) and free evaluation of each metal in respect to the other.
For example you can exchange 10 gm of gold today for 100 gm of silver, tomorrow it might be 10 to 95.
This might lead us to think:
Given the "miserable" current situation worldwide, should we think of converting our savings to gold, silver, or platinum bullions?
P.S: I'm taking into cosideration devaluations, inflation and interest rates, and even future business cycles.
Any ideas?
No need to pretend we know what a free market in money would lead to. The gold standard is just an educated guess. If Friedman's monetarism is right, and Mises is wrong, than inflating money will outplace sounder ones. Its that simple, really.
Merlin,
This is Gresham's Law, and is only true if there is a government-enforced currency (that is, the exchange value is guaranteed by government). In a free market, sound money is preffered over bad money, because the purchasing power of bad money is not guaranteed by government fiat.
Merlin, This is Gresham's Law, and is only true if there is a government-enforced currency (that is, the exchange value is guaranteed by government). In a free market, sound money is preffered over bad money, because the purchasing power of bad money is not guaranteed by government fiat.
Sure, that’s theory. Our theory, to be correct. But what if Hayek is right, and a strictly ‘sound’ currency fails the market test while a currency of constant value is seen as optimal? Gresham or inverse Gresham, what the customers want, they get. If they’ll want constant value in their money, than a less sound money will displace sounder money, whatever we might think now.
Trying to predict, by praxeological means, what kind of money (and of 'monetary policy') will win the struggle, would be like trying to predict whether planes in the future will get bigger or smaller.
So again, this is all an educated guess by our part.
SG875:"A strong gold-backed currency, high interest rates and so on would make money so expensive that investment just wouldn't really happen."
I agree that its correct to mention that we are for competing currency's but it is false to argue that a gold standard would not encourage economic growth.
IE, if an economy's productive sectors slows it's only because individual actors have shown a preference that they are not interested in expansion in those particular areas. That may change in a year or two. Why would we want to force a factory to produce 1000 widgets, when the market only demands 200? Therebye wasting scarce resources and driving up costs of other goods.
The fallacy here is the same exact fallacy that is believed which justifies central bank interest rate manipulation, and the same exact fallacy which justifies man made booms and busts.
Sure, that’s theory. Our theory, to be correct.
No, it's mainstream theory.
But what if Hayek is right, and a strictly ‘sound’ currency fails the market test while a currency of constant value is seen as optimal?
I'm not sure why a currency of "constant value" wouldn't be "sound currency". It sounds like sound currency to me.
Gresham or inverse Gresham, what the customers want, they get.
Only if it's possible to produce for them. We can't make the impossible happen, even if some people might want flying cars.
This is not really true.
"
This is not really true."
Expain why it is not really true
My Blog: http://www.anarchico.net/
Production is 'anarchistic' - Ludwig von Mises
Economic calculation does not require monetary stability in the sense in which this term is used by the champions of the stabilization movement. The fact that rigidity in the monetary unit's purchasing power is unthinkable and unrealizable does not impair the methods of economic calculation. What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference. The endeavors to expand the quantity of money in circulation either in order to increase the government's capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation. The first aim of monetary policy must be to prevent governments from embarking upon inflation and from creating conditions which encourage credit expansion on the part of banks. But this program is very different from the confused and self-contradictory program of stabilizing purchasing power.
For the sake of economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money. Gold and, up to the middle of the nineteenth century, silver served very well all the purposes of economic calculation. Changes in the relation between the supply of and the demand for the precious metals and the resulting alterations in purchasing power went on so slowly that the entrepreneur's economic calculation could disregard them without going too far afield. Precision is unattainable in economic calculation quite apart from the shortcomings emanating from not paying due consideration to monetary changes.6 The planning businessman cannot help employing data concerning the unknown future; he deals with future prices and future costs of production. Accounting and bookkeeping in their endeavors to establish the result of past action are in the same position as far as they rely upon the estimation of fixed equipment, inventories, and receivables. In spite of all these uncertainties economic calculation can achieve its tasks. For these uncertainties do not stem from deficiencies of the system of calculation. They are inherent in the essence of acting that always deals with the uncertain future.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
What I have in mind is the distinction between a currency of strictly stable supply, and a currency which’s purchasing power does not vary too much, and this would imply increasing supply.
Granted, but assuming some commodity money, it is not difficult to see that an increase in its purchasing power, brought about by increased demand or increased production in the economy, will induce production of said money, until the profits to be had as money producers would be roughly equal to those that can be earned elsewhere. In rough terms, that would imply that the purchasing power of said commodity will be kept relatively stable by market forces.
Whether or not customers would keep this commodity, or dump it in favor of some currency of strictly limited supply, that is a mater of preferences and remains to be seen. But I can see no major problem in producing both ‘flavors’ of money in a free market.
Economic calculation does not require...
...neither does it rule out...
...monetary stability in the sense in which this term is used by the champions of the stabilization movement. The fact that rigidity in the monetary unit's purchasing power is unthinkable and unrealizable does not impair the methods of economic calculation. What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference...
Hayek most of all agrees...
The endeavors to expand the quantity of money in circulation either in order to increase the government's capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation. The first aim of monetary policy must be to prevent governments from embarking upon inflation and from creating conditions which encourage credit expansion on the part of banks. But this program is very different from the confused and self-contradictory program of stabilizing purchasing power...
Why would be self-contradictory to excpect profits in monetary production, absent government interference, to not vary too much compared to profits to be had in other fields? That is what 'stable purchasing power' implies.
I don't think Hayek is right and here's why from an article by Bill Bonner:
... sooner or later, a new money system is bound to emerge. Most likely, it will have gold at its base. Why? Because in thousands of years of human experience, nothing better has ever been found. Not that we completely discount the possibility of a better system; humans can be clever. But money is the sort of activity where you don't want cleverness. You want dumb, honest solidity…you want something that cleverness can't undermine or circumvent. You want money that smart people can't fiddle…and that is gold.
I've consider Keynes' idea of a bancor note which is backed by a basket of commodities to reduce volatility. I think it's safe to speculate that such experimental monies would be tried in a free market of money but I think such monies will not prevail for the simple reason that it's solving the wrong problem. Sure, there's some risk entailed in holding a single monetary commodity. The mother-lode of all mother-lodes could be located tomorrow. Or perhaps consumers might rapidly shift their preferred medium of exchange to a different commodity, leaving you the poorer. But there's risk in everything... and even in nothing. There could be a major earthquake tomorrow. You could have a heart attack. And so on. I don't know how to insure against all these risks and perhaps diversification in monetary commodities is part of the solution to the problem of volatility in the commodity value of the monetary metal.
However, all these concerns ignore the primary importance of a commodity money... and that is security. Sure, there is risk in everything, but gold isn't going to evaporate and that is security. Securing wealth is very hard to do and I believe one of the primary reasons that gold has been the king of monies throughout history is the difficulty of counterfeiting it, in other words, its security against debasement. When the king starts watering down the gold, it's visible, you can easily see the difference between a copper-gold, silver-gold and pure gold coin.