Gold backed currency: fiat dollars in a house of mirrors

October 28, 2015 § 37 Comments

In the previous post I gave a basic explanation of fiat dollars.  In this post I will argue that gold backed currency (or other sovereign-issued commodity-backed currencies) are actually less transparent than fiat dollars as a medium of marketplace exchange. Gold-backed dollars, in other words, simply are fiat dollars; but a perverse and distorted form of them.

Gold became a medium for barter, particularly over extended distances and time, because it had characteristics which made it particularly suitable.  A valuable quantity of it takes up very little space compared to alternatives, so it can be easily transported and defended; and it is very durable, so it doesn’t lose its intrinsic value quickly the way food and other perishables do.

Every useful application of a thing affects the market value of that thing, so the use of gold as a medium for barter (that is, as a currency) affects its market value.  If 90% of the time gold is used as a currency and only 10% of the time it is used for other applications, then its use as a currency will dramatically affect its market value.

When Caesar puts his face on gold coins and pledges to accept his minted coins for payment of taxes, those gold coins become a fiat currency – tax vouchers issued by Caesar – printed on gold.  So now the market value of each coin, and the corresponding value of equivalent weights of gold, are further altered from the value of gold apart from its application as a marketplace currency and tax voucher.  What has happened is that what used to be an advantage in a case of pure barter – how much a small volume of gold is valued in itself for applications other than currency or tax voucher – has become a distorting and obfuscating factor.

What we have at that point is still a fiat currency: it is just a fiat currency viewed through a house of mirrors.

§ 37 Responses to Gold backed currency: fiat dollars in a house of mirrors

  • Andrew E. says:

    Yes I agree with this. Gold is wealth by nature and currency is fiat by nature. Don’t mix the two.

    Btw, if the world agrees on a single item to represent wealth in its purest form and all currencies are allowed to float against this item then I believe it becomes possible to do the kind of financial accounting at the nation state level that you have said is so problematic.

  • Andrew E. says:

    Excepting possibly human capital. Not sure how you’d measure that.

  • Zippy says:

    Andrew E:

    if the world agrees on a single item to represent wealth in its purest form …

    There is no such thing though. Gold is not homes, are not farms, are not brands, etc. To attempt to ‘purify’ wealth into a single absolute measure is to abstract it out of existence.

  • Andrew E. says:

    I think of wealth as ownership. If I have unequivocal ownership of something, then that something is wealth.

    Gold, homes, farms, brands — all wealth. But homes and farms are mostly unique and cannot be moved. Gold is the same everywhere and valued as wealth everywhere. So I say it’s a purer form of wealth.

  • Zippy says:

    One problem with the idea of gold as “pure wealth” is that most people have no use for it other than “ooh, shiny!” It is at best useful in some industrial processes; at worst is pure luxury in the realm of shiny glass beads traded to Indians for actually useful things like land and food.

    But beyond that I think the whole notion of “pure wealth” is malformed. Wealth by its nature is actual and particular, and cannot be abstracted into something ‘pure’.

  • Andrew E. says:

    On contrary, virtually all gold ever mined has never been consumed (in industry) and is sitting, refined, in a vault somewhere. It very much is valued as wealth, especially by those with great means (who know something about productive enterprise).

    The fact that it’s not useful for very much (and doesn’t decay or tarnish) is exactly why it makes (and has always been used as) an objective scorekeeper. It’s lack of use in anything separates it from the economy so it’s price can go arbitrarily high or low without negatively affecting commerce (unlike oil for example).

    Anyway, I’ve said my piece. I’ll move on.

  • Zippy says:

    So gold is ‘pure wealth’ and an ‘objective scorekeeper’ because as an objective matter it is almost entirely useless and just sits in big dragon hoards? It is ‘pure wealth’ because its market price is almost entirely disconnected from its actual usefulness for any purpose, is a product of the pure subjective fantasy projection of men onto it, almost entirely disconnected from any objective usefulness, even just the usefulness of looking pretty on a woman? It is ‘pure wealth’ because it is the first thing people unload when they are hungry, sick, exposed to the elements, or even just bored and looking for entertainment?

    This is where modern anti-realist economic thought leads.

  • Andrew E. says:

    I haven’t heard a reason why all this gold is kept in vaults under heavy guard instead of dumped into the ocean.

  • Zippy says:

    Andrew E:

    Whatever the reason happens to be that a small number of human beings hoard gold like dragons, it by your own account is a subjective human reason disconnected from the objective reality of any actual usefulness.

  • vishmehr24 says:

    Gold protects little people against Big Govts. thus, it has been and still is popular-far from “small number of human beings”-you have almost entire populations of India, China, Middle East–all place that live under fiat currency manipulating Govts.

    Gold was also hoarded by Jews oppressed by Nazi Govt–it may have saved a few thousand.

  • Zippy says:

    vishmehr24:

    Gold protects little people against Big Govts.

    I know, it is magical by its very existence. If you say the right words it animates into tin soldiers to protect the oppressed.

  • King Richard says:

    Have you ever heard the very old army joke about a new junior officer? The new officer is sent out to lead a squad from point A too point B through rough terrain. The squad is planned to arrive in 4 hours, but they keep going back and forth with the men growing more tired and the officer growing more frustrated. Finally after 9 hours the corporal asks the officer what the problem is. The officer replies,
    “The map says there is a hill here I am not leaving until I find it!”
    Gold is not wealth, it is merely valuable. Many people will exchange a home for gold, but gold cannot be used to build a home. Many will accept gold in exchange for food, but gold cannot be eaten nor can it grow drops.
    The Technocracy movement of the early 20th Century (not to be confused with the term Technocracy in general) had as part of its platform a switch to a unit of energy as currency. The kilowatt-hour as the commodity used for exchange joins a list of other commodity monies like gold, silver, peppercorns, barley, copper, salts, etc.
    In each case what is going on is *not* ‘salt IS wealth’ but rather ‘in this time and place the value of X is broadly accepted to such a degree that it can be used to simplify economic transactions’.
    Is gold very broadly accepted? Yes. So is silver, so are gems, etc.
    Gold isn’t wealth; it is a commodity used to ease economic transactions.

  • Zippy says:

    KR:

    Gold is not wealth, it is merely valuable.

    I would say that gold is not objectively very valuable; but many people irrationally and subjectively value it, so it is often exchanged for things which are objectively valuable. The fact that it is not objectively very valuable is shown by its lack of objectively useful qualities/applications (relative to its perceived value) and by the fact that it is the first thing to be sold when people are hungry or trying to escape the Nazis.

    Economic anti-realists see the fact that gold is not objectively very valuable as making it more ‘pure’ wealth, precisely because of their metaphysical anti-realism: ‘wealth’ is man’s pure subjective projection onto objects and ‘ideally’ (in their view) has no dependence on the actual qualities of real things. And the fact that many people are ignorant and irrational (there is a shock), and value gold despite its general lack of useful objective qualities, is taken as proof of the quiddity of their economic models.

  • Zippy says:

    Economic metaphysical realism will see a distinction between the objective value of a thing and the value of that thing as subjectively perceived or projected upon that thing by some group of people (market). To economic metaphysical anti-realism, the value of a thing just is the subjective perception of some group of people.

  • Andrew E. says:

    Metaphysical anti-realist here. Gold has objective qualities that make it the most tradeable wealth (for 6000 years). More tradeable over all that time than silver, peppercorn, salt, barley, copper, and kilowatt-hours (how’s that one going btw?). The more wealth that exists the more valuable gold is. Day-to-day life isn’t lived hand-to-mouth for everyone all the time.

    Zippy says there are only a few dragon hoards representing few people (not true, virtually every central bank/treasury hoards the stuff which represents the interests of entire nations of peoples) and then he says many people irrationally value it? Which is it? Many or few?

    If many, and for 6000 years, maybe Zippy’s actually wrong about it.

  • […] the fact that markets – groups of people – perceive gold as valuable and act on that perception is taken as proof that gold actually is valuable. And the fact that this value arises almost […]

  • […] entitle the owner to on-demand access to fiat currency, backed by the balance sheet of the bank. Gold-backed sovereign currency entitles the bearer to settlement of tax liabilities and, at least notionally, a quantity of gold. […]

  • Hon. says:

    Gold has many properties which make it preferable than any other commodity when used as money. In a sense, gold is money but it is not “wealth” per se.

  • vishmehr24 says:

    “it is the first thing to be sold when people are hungry or trying to escape the Nazis.”
    Precisely why gold is valuable.

  • Zippy says:

    vishmehr24:

    Precisely why gold is valuable.

    Gold is objectively valuable because it is the first thing people get rid of when they actually need something objectively valuable?

  • […] lunatic missives against fiat currency and fractional reserve banking, murmuring about the virtues of hoards of gold and how greed is good. They too, witting or unwitting, are just servants of Mordor, creatures […]

  • […] and moral considerations though; and now that we have conceptually separated fiat currency from goldbug ravings and ignorant ‘hard currency’ rants and the like, it is possible to coherently discuss […]

  • AureliusMoner says:

    Zippy, I’ll try an approach that may appeal to Catholic piety.

    If Gold and Silver are only reckoned as valuable by an irrational assessment, why are the Scriptures so full of references to the purity and value of gold and silver? Why do they compare redemption, grace, virtue, the words and commandments of God, etc., to precious metals and stones? Why does the Holy Tradition insist upon using these precious metals for the chalice and paten, and warmly recommend their usage for the fabrication and ornamentation of other sacred vessels, Gospel covers, etc.?

    It seems to me that this reflects an higher judgment than the merely human. Can you really not concede that there is something precious about gold and silver, given the divine endorsement (even commandment) that man use them in connection with the sacred? Does your stance not ultimately oppose the savor of Holy Tradition?

  • Zippy says:

    AureliusMoner:

    It is certainly possible that gold is, objectively as a matter rooted in its nature, more valuable than I perceive it to be, for some reason or other intrinsic to the nature of gold. The fact that beautiful things can be made from it, that it is durable and relatively easy to keep beautiful and clean, that it makes a great electrical conductor, etc are objective attributes of gold and it is in fact valuable for those reasons.

    Indeed that is very much the point: that economic value is rooted in objective reality and is not merely the projection of the preferences of human beings onto things. The reverse is also true: what people prefer can often be disordered but is rooted in the nature of what it is to be a human being. In sum, things are not valuable because they are desired, as modern anti-realist economic theories would have it; rather, it is often the case that things are desired because they are valuable.

    However, human desires can be and often are disordered. Human desire is a (limited and subject to distortion) sometimes perception of economic value, not the principle of economic value.

    Also, as I understand it (though someone who cares more about gold than I do can feel free to chime in with data) the great majority of actual gold is not, these days, used to make beautiful and durable things or effective electrical conductors. It is hoarded as a putative reserve of economic value. Its use qua ‘currency’ (for values of ‘currency’) dominates its use in general. Therefore its perceived value is wildly distorted by subjective human factors which have nothing much to do with the intrinsic nature of gold itself.

  • semioticanimal says:

    The nature of economic value strikes me to be similar to that of the nature of time. It is fundamentally extra-mental, time as proceeding from motion and value as proceeding from usefulness, but formally and actually mental, time as motion considered as a whole by a man or measurer and value considered as useful to me in my ends. In both cases, modern thought is unable to stand between the two.

  • […] why fiat dollars are (counterintuitively) more transparent and honest than gold backed dollars here. I explain why currency debasement is immoral here. I explain that banks only ‘create […]

  • […] No. Usury and the creation of faux-wealth through usurious contracts is a pervasive problem in modern economies, and the nature of currency has not changed. […]

  • […] Generally speaking intellectual property has similarities to cash — once we have an adequate grasp of what cash actually is and is not. […]

  • Cane Caldo says:

    Do you know if there have been any societies which both had access to gold, and did not value it as wealth?

  • Zippy says:

    Cane:
    I can’t see how the question is pertinent to the subject of the OP. It would be pertinent if “gold has no value” were an important premise in some argument or other which pertains to the subject; but it isn’t.

  • Cane Caldo says:

    Yes, it’s off-topic. It was just a question I had while thinking about something else. This seemed like a reasonable place to ask it.

  • Zippy says:

    Cane:

    No idea, but googling produced this: http://www.pravdareport.com/society/stories/17-06-2015/131001-gold-0/

    That might be a starting place for digging into the question.

  • […] basic suggestion is that ‘currencies’ in general (understood ambiguously), and therefore bitcoins in particular, represent a promise.  But this raises the question of who […]

  • […] the market price of gold, the market price of bitcoin is radically distorted when measured against its objective […]

  • […] to the sovereign, in particular tax liabilities[2].  The difference is that the gold standard irrationally presupposes that a substantial portion of the sovereign balance sheet must or should be made up of gold […]

  • […] the finances of governments and the minds of economists. I’ve explained why fiat currency is more transparent and honest than gold standard currency any number of times. But of course many folks know all sorts of things that aren’t true […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

What’s this?

You are currently reading Gold backed currency: fiat dollars in a house of mirrors at Zippy Catholic.

meta

%d bloggers like this: