Golden geese laying scrambled rotten eggs
October 21, 2016 § 38 Comments
A fiat dollar is a security issued by the sovereign. Like every other financial security issued by an institution, fiat dollars grant the owner of the security an economic claim backed by the institution’s balance sheet. Like every other financial security issued by an institution[1], it is possible to trade fiat dollars for other property in the marketplace. It is also possible to exercise the specific rights granted by the security instead of trading it: in the case of fiat dollars, to turn it in to the sovereign who issued it for the satisfaction of a particular tax obligation.
The worth of a fiat dollar derives from the financial rights that it grants. Its price in marketplace exchanges represents what other people are willing to pay, in terms of different kinds of property, in exchange for the financial rights granted by the fiat dollar.
A ‘gold standard’ dollar is the same kind of thing. It is a financial claim against the balance sheet of the sovereign; the financial rights conferred are the satisfaction of debts owed 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 — an otherwise not very noteworthy kind of property, property which while fairly durable sits unproductively in a vault where it destroys economic value in the demands that it places on its defense and maintenance against the universal tide of entropy.
Advocacy of gold standard dollars is like advocacy of gold standard capital stock: in essence, it requires than any securities which an institution issues must be printed on gold or must come along with some ratio of gold stored away in addition to the rights granted by the security. Advocacy of gold standard dollars assumes that gold is the only valid kind of wealth, when in fact almost all of the wealth in the world is constituted by property other than gold. A gold standard involves making a wildly irrational assumption about sovereign finance that we would never make about private finance. It is as if the stock price of corporations were required to be indexed to the amount of gold that the corporation has stored away in a vault, even though the gold is entirely useless in the company’s business operations and its storage and provision for security constitute a senseless and perpetual drain of resources.
Gold standard dollars are no more rational than requiring by statute that eggs be sold in golden egg cartons, or bundled with certificates entitling the bearer to a gram of gold per egg. Gold standards are literally crazy, a scrambling together of entirely unlike property into a toxic mix. Folks who simply hate government per se advocate for them precisely because they understand on some level that the gold standard is irrational, debilitating poison. If you can’t drown the balance sheet of the government you hate by weighing it down with lead, at least maybe you can weigh it down with gold.
But you won’t see them – at least not the more rational ones – advocate for a ‘gold standard’ in the securities that make up their retirement portfolios, or in the goods they buy in the grocery store. An investor with an equity portfolio doesn’t want to require the companies whose stock he owns to carry large quantities of inert and unproductive gold on their balance sheets. For these folks, the gold standard is an unprincipled exception intended to apply only to government precisely because it is financial poison for the institution which they despise.
The crazier wing of the gold standard crowd isn’t even sophisticated enough to grasp that a gold standard is financial poison. They like the gold standard because GOLD. Their attachment is pure unreasoning emotion. A gold standard is, objectively, a requirement to literally add useless dead weight to unrelated kinds of property.
But better to let the scrambled eggs rot than to give up our irrational attachment to gold.
[1] Absent contractual terms or other legal restrictions to the contrary.
[2] T-bills are just fiat dollars once removed, as stock options are just shares of capital stock once removed: they are not debt, and the sooner you banish the idea that they are debt from your mind the better you will understand them.
Zippy Catholic 
Of course the gold standard is crazy! Everyone knows that the true standard should be eggs!
About four and one-half centuries ago ( I think it was on Mark Shea’s Blog) you steered me right when I was pushing for a gold standard at a time when I was a conservative and was echoing all of their rhetoric.
I was so bad that whenever I drove my family from Maine back to where I was born in Vermont, we would pass Bretton Woods and I would deliver a mini-lecture on the bastid who took us off the gold standard and which move was the cause of so much ruin.
Well, I got better thanks to you and I want to thank you for continuing to complete my catechesis with great posts like this one.
Zippy:
I don’t take a position on the Austrian theory of the business cycle, but I don’t think those who believe in it are crazy or stupid for advocating commondity standards because of their concerns about credit bubbles. They certainly don’t think that gold “is the only valid kind of wealth.”
I am very much a layman in this area and don’t know a whole lot. However, I suspect that you aren’t being entirely fair in your characterizations of other’s positions.
PB:
There is a difference between what people think their ideas entail and what their ideas actually entail. Whether gold or something else, anti-fiat-dollar commodity-currency advocates think that scrambling sovereign securities with commodity property or third party securities is somehow a good thing, rather than insane.
More generally it would be hard to overstate the flaws in Austrian economics, which fails to launch at all because of its anti-realist commitments.
So are you asserting that any standard that would limit how much fiat currency may be issued is a faulty standard?
Because my understanding of the reasoning behind the gold standard was that it was meant to keep down the number of dollars issued by the federal government so as to retain the value of the current number of dollars in circulation.
Is seems to me what you are suggesting is that the government my issue one dollar or one hundred quadrillion dollars and it will have no effect on the value of each individual unit of fiat currency.
I’m not saying I disagree with your proposition, I am just trying to understand your position.
Thanks.
Roman Lance:
Does the fact that Google has, at least formally, a plenary right to issue as many shares as it wants of capital stock or other securities which impair its balance sheet, for whatever purposes it wants to issue them, mean that it can do so without affecting its share price or the financial health of its balance sheet?
Also:
Would forcing Google to keep vast warehouses of goose eggs on its balance sheet make its finances more transparent, or less?
“Does the fact that Google has, at least formally, a plenary right to issue as many shares as it wants of capital stock or other securities which impair its balance sheet, for whatever purposes it wants to issue them, mean that it can do so without affecting its share price or the financial health of its balance sheet?”
I’m gonna pick…No.
But I guess I didn’t make my understanding as clear as I intended.
What I was trying to say was do you think that limiting the number of fiat dollars by making it limited to the value of stored gold deposit is a bad thing?
I realized as I wrote the above that, by my understanding, as the value of gold fluctuates so too would the amount of dollars allowed to be in circulation. Which would seem to pose a problem of having to constantly adjust the number of dollars in circulation based on gold valued according to said currency. This would seem to pose the additional problem of spending money to retrieve or issue currency to keep the standard in check.
So basically…never mind. I think I understand better what you mean.
Roman Lance:
It isn’t just the poison involved in trying to maintain an arbitrary ratio. That is certainly a problem, or, if you hate government and want to destroy its balance sheet, an effective poison. But it could be achieved by statutory means as opposed to requiring possession of actual gold.
Basically though, limits on spending capital are limits on spending capital. Sure there should be some rational ones, but pegging it to goose eggs in a vault isn’t a rational one.
At the same time though, in addition, with a gold standard, the sovereign has to carry, store, and defend this vast inventory of useless raw material which is obviously financially material for no good reason whatsoever.
So arbitrary irrational limits plus a large lump of balance sheet dead weight equals fiscal poison.
We have no way of knowing, since we don’t even have a workable theory of sovereign finance. But it would not surprise me in the least to discover that the magnitude of destruction of the public wealth trust from re-adopting the gold standard would far exceed the fiscal wastefulness of the leftist gimmedat welfare state.
I am not convinced that for all of human history gold has itself been the gold-standard of wealth, but now we know better. If someone were to invent some substance for use as money, that substance would be gold.
Is there any other substance which has undergone this transformation from Previously Universal Reality to No Big Deal, and that was a good thing? (Previous Universal Reality should not be confused with Best Thing Ever or even Most Valuable Thing.)
Cane Caldo:
Your feeling of being unconvinced is noted.
Note that ‘wealth does not require gold’ does not mean ‘gold is not wealth’, if that helps.
Or, if you are looking for older wisdom:
[…] Source: Zippy Catholic […]
Ezekiel is a book worthy of study, but the passage you picked is out of context, and not relevant to my question. I would prefer an answer to:
Is there any other substance which has undergone this transformation from Previously Universal Reality to No Big Deal, and that was a good thing? (Previous Universal Reality should not be confused with Best Thing Ever or even Most Valuable Thing.)
Cane Caldo:
You are exaggerating the putative universal importance of gold — not that some supposed ‘verdict of history’ could alter what is true in any case. Sane human beings have always understood that you can’t eat it, grow it on trees, build homes from it with available quantities, etc.
And more importantly, the OP isn’t even about the question of whether gold is or is not valuable. Shame on me for letting you get away with throwing that distraction in the way, even after I explicitly told you that the issue isn’t whether gold is wealth but whether wealth requires gold.
Believe what you want about gold, or any other kind of property. The OP is about the insanity of deliberately conflating vaults filled with commodities and sovereign-issued securities.
Answer this question: Is it possible to have a large store of wealth which does not consist of any gold whatsoever?
If you answer yes, you’ve conceded the point.
If you answer no, then you are too crazy to take seriously.
Ah, but some will say that by gold they mean wealth, so your question becomes: Is it possible to have a large store of wealth which does not consist of any wealth whatsoever?
And then we have an actual begged question!
How does this apply to the Eurozone? Who’s the sovereign? Or rather whose balance sheet is the Euro’s one?
A Portuguese man:
The pertinent financial sovereignty includes the authority to issue currency and levy taxes in particular sovereign markets. So the balance sheet in question is the confederate/combined balance sheets of the NCB national governments and the ECB, or something like that. I suppose it is similar to the (also nonexistant) USG balance sheet, as a union of somewhat fiscally distinct states.
But since we can’t at this point characterize a fairly simple sovereign balance sheet case like Britain with much more than qualitative platitudes the best answer is probably “who knows?” We know these property/economic states of States exist, and we know that governments issue securities against them. But again, we have no way of accounting for this in a concrete, specific, accurate way which reflects reality.
Zippy,
Why did nearly everyone everywhere believe the gold standard was a good idea until recently?
The goods an economy produces is much more important than the type of material the government mints as coinage to exchange for said goods. At this point, we have created bubble economies in health care and education that don’t produce goods at all. At best, they are secondary economies that cater to the more primary industry that is disappearing from the landscape. But, then, I’m not an economist of any stripe, just a first principles kind of thinker. The first principle, of course, is the human need for shelter, food, water, etc. Industry springs from that first principle. Government coinage/currency and exchange rates can only spring from an industrious nation that has a way of protecting its goods from being robbed. If the goods can’t be protected, the currency is useless, no matter what it’s printed or minted on.
“Folks who simply hate government per se advocate for them precisely because they understand on some level that the gold standard is irrational, debilitating poison.” <—This statement reminds me of Isaac Newton, who essentially drove silver out of circulation and put Britain on the gold standard. He also poisoned himself for years as an alchemist, trying to change base metals into gold. He was a little mad about gold and more than a little misanthropic.
@Zippy
A bit off topic, but have you heard of Dr. Jordan Peterson? He’s been in the news a lot, primarily for his anti-political correctness videos (the first one: https://www.youtube.com/watch?v=fvPgjg201w0).
The “why did so many people think X was a good idea?” question is a strange one. It asks me to make psychological speculations about vast numbers of people or whole societies.
Why do so many people think liberalism is a good idea? Why do so many people believe in Islam? Why do so many people vote for Democrats?
The question presupposes that people have a mass tendency to be right about politically and religiously charged subjects, despite all contrary evidence.
Jill:
Precisely, just as the products and services a company produces and provides are vastly more important than the paper upon which it prints its stock certificates.
[…] are always asking me to speculate about why gold or silver was the printing medium of choice for bearer securities (in particular sovereign currency) for much of premodern history. Whatever else may be the case, […]
As G.K.Chesterton once observed, if you don’t know the reason for a practice, then you can’t judge whether or not it was a good reason.
Is fiat dollar really a security issued against balance sheet of the issuer? I do not dispute your primary characteristic of the dollar as a medium of exchange on sovereign marketplaces and a token with which marketplaces’ fees are settled (i.e., taxes) – I’m just leaning towards treatment of tokens as a separate category, distinct from commodities or securities.
Tokens, generally, can be a security – this is the case of e.g. the casinos. I guess this applies also to a non-sovereign currency issuer (Eurozone countries). But financial sovereign’s tokens do not represent claims to any assets on the sovereign balance sheet (the structure of which is, as you claim, currently unknowable). Could you explain more about how the dollar represents claims to the balance sheet of the sovereign?
ignacy:
I explained that here:
ignacy:
It may be possible for an institution to issue ‘off balance sheet’ tokens which nevertheless represent a financial commitment on the part of the institution. But if so that just tells us that there is a leak in the accounting system: ideally the balance sheet will accurately represent all of the institution’s property and financial commitments. If the ‘leak’ is material then the balance sheet materially misrepresents the financial state of the institution.
Substantively, what you call “tokens” are bearer securities.
Zippy:
Thanks, yes I see that we have here a misunderstanding (from my side) of what you referred to as balance sheet. Now we are in full agreement here.
Another view of why the gold bugs are mainly kooks and the charlatans(like Glenn Beck) who profit from them is here:
http://johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/60940227-disadvantages-of-gold-as-an-inflation-hedge
There is no simple formula for the revaluation of your currency when its devaluation was caused by a lack of social trust and due diligence. A loss of abstract values must be met by a gain in the same abstract values, otherwise your new currency will be haunted by the specter of its predecessor.
“Advocacy of gold standard dollars assumes that gold is the only valid kind of wealth, ‘
Really!. Such a obvious straw-manning.
The difference is very simple. The fiat dollar gets its value from the say-so of the Govt. The gold dollar gets its value from the price of gold that is set by the market and not by the Govt.
Folks who think that is a straw man simply fail to grasp the point. Requiring useless (literally unused for any productive purpose) gold to be held on the balance sheet to back an institution’s securities tacitly assumes that, absent that gold, the property on the balance sheet is worthless.
[…] called ‘gold standard’ currency is a scrambled mess of confused and opaque financial nonsense, a toxic mix of securities and commodities […]
[…] once a patent is granted, what the patent holder actually receives – the patent itself – is a security entitling the holder of the patent rights to enforceable commercial exclusivity within the […]
I just recently came across a mention that getting off the gold standard did an awful lot to destabilize the value of gold. The possibility that fiat dollars were lending stability to gold, not just the reverse, struck me as potentially interesting, if true. Does anybody know whether there’s anything to it?