Yippee ki-yay …
October 26, 2016 § 37 Comments
So called ‘gold standard’ currency is a scrambled mess of confused and opaque financial nonsense, a toxic mix of securities and commodities which poisons 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 about sovereign finance, and can’t tell the difference between a financial security and the media upon which it is printed; so they disagree.
Sometimes folks relate better to concrete stories than to dry and abstract explanation of financial concepts. So in this post we’ll consider a hypothetical situation which will hopefully help the still-perplexed understand why fiat currency is more honest and financially transparent than ‘gold standard’ currency.
Suppose we are on a gold standard currency. The government issues official gold notes and for each gold note there is 1/40 gram of gold stored in the vault at Nakatomi Tower. Each gold note notionally entitles the bearer to 1/40 gram of gold, though in practice almost nobody ever actually turns in the notes in exchange for actual gold. The government accepts the gold notes it issues – and only those gold notes – for payment of taxes.
Hans Gruber and his merry band of faux-terrorists carry out a sophisticated paramilitary assault on Nakatomi Tower. Despite John McClane’s best efforts they escape with all of the gold and McClane’s selfish chunky feminist wife, whose constant whining causes half of the exceptional thieves to commit suicide. McClane reclaims his stolen children and lives happily for a while as a NYC cop, until he is killed in a Black Lives Matter terrorist attack on police orchestrated by the Clinton Foundation in conspiracy with a Saudi Arabian donor — a terrorist attack which gets blamed on Donald Trump, who at the time was innocently visiting Playboy Mansion but just for the articles.
Back in front of your iPad in suburbia, you have plenty of government issued gold notes and a tax bill that is coming due.
Should the government accept the gold notes that it issued from you, even though the gold is gone; or are you out of luck because your gold is in a non-extradition country earning 20%? Now that all of the gold has been spirited away, is everyone holding government gold notes a tax evader with literally no available legal means to pay their taxes?
If the government should accept the gold notes that it issued to settle your tax bill – even though the gold is gone, the top of the skyscraper exploded along with the heads of numerous Austrian economists, and the Johnsons and their helicopters are no more – doesn’t that tell you that the presence or absence of the gold doesn’t really have much of anything to do with the value of the “gold notes” as a financial security issued by the government?
Zippy Catholic 
Most gold-standard people are trying to use it as a tool to enact a policy they want, that they feel they can’t enact directly. It’s the same kind of thing as banning “low-income” people from an area because it’s illegal to ban blacks.
It’s even more silly considering that every currency that was on a gold standard went off it, so clearly going off a standard is possible, and being on one doesn’t prevent that.
Tom:
It is even worse than that. They are trying to use it to enact a policy that they want but do not understand, like children who want to go swimming with alligators or something equally ludicrous.
selfish chunky feminist wife, whose constant whining causes half of the exceptional thieves to commit suicide.
I don’t recall the chunkiness, but the rest of this sentence made me LOL.
Aethelfrith:
De gustibus non est disputandum, and where I wrote ‘chunky’ others may have written ‘well endowed’.
I only ever thought a gold standard was a good idea because I thought it would prevent inflation. I don’t know if it matters whether a loaf of bread is two cents or two dollars, though. But wouldn’t it prevent a loaf of bread ever selling for a wheelbarrowful of dollars?
Food for thought in the form of Die Hard The Remake
I’ll say that you got McClane’s Wife spot on except that she was fit and decently attractive in the original. It was 1986 after all.
Patrick:
Historically, gold standards last only as long as conditions remain reasonably healthy and the gold standard can be more or less ignored by most people (“go ahead and starve because Hans took the gold” is not a compelling argument). That makes them a combination of toxic perversity in a healthy economy and not even a tiny bit of protection from an economy having the financial equivalent of an aneurism.
[…] Source: Zippy Catholic […]
Gold standard currencies have suffered inflation, by the (rare, to be fair) importation of lots of gold. Spain and the New World, for example.
The “replies” link is busted, but I got here by clicking the link title.
Zippy’s views on female pulchritude require a follow up post. I wonder if he’s like a guy I went to college with who would only date 10’s. His mantra was “the opposite of beautiful is ugly. So if you’re not beautiful…”
I know Die Hard is a traditional Christmas movie (right up there with It’s a Wonderful Life, about which the less said the better probably); but I haven’t seen it in some time. Maybe my lasting impression was more about her attitude than visual: she had fattitude, the entitled fat feminist careerist whiny why-can’t-you-support-my-career 80’s about-to-be-single-mom attitude.
No measure of good looks can make that attractive.
I think I hate ex-Mrs. McClane more than any Die Hard villain.
Owning stock is owning a portion of a corporation. If the value of a corporation increases so much that trading individual shares is not granular enough, the stock can be split. If instead of splitting the stock, the dishonest managers of the corporation decide to issue new shares of stock and assign them to someone (say a bank) without compensating the other shareholders, they have stolen from the shareholders.
Fiat currency entitles the bearer to buy from the sovereign’s market. A person’s buying power is proportional to the amount of goods in the market divided by the percentage of currency held by that person. If the amount of goods in the market increases, causing deflation, the proper way to handle it is to make smaller denominations available. When people pay their taxes to the nearest cent, the government would spend money to the nearest 10th of a cent. This would have the same effect as splitting the stock of a corporation. When governments inflate their currency, they are doing the same thing as the dishonest managers of the corporation.
anon:
It seems to me that your thoughts about the trading price of currency are backwards.
It is true that when the sovereign spends capital on something wasteful he has violated fiduciary duty — which in the case of the sovereign is a duty toward the common good. See here:
But he doesn’t set the relative price of sovereign securities versus other goods. That is set – like all prices – by market negotiation.
What’s your problem with It’s a Wonderful Life? I watched that movie with my folks every Christmas as a kid, love that film.
Don’t tell me you’re one of those A Christmas Story fanatics…
Damn it.
It just dawned on me that Bailey Building and Loan is (almost certainly) a usurious lending institution.
Which makes George Bailey a usurer.
Way to go, Zippy. Had to go ahead and ruin my childhood like that, didn’t you.
donnie:
I think we are best off just not looking too closely. That’s why the less said the better.
Zippy,
I’m with donnie. Booooooooo.
😉
You guys should listen to me when I say “the less said the better” 😉
It’s interesting to me that it *seems* as if fiat currency is a relatively modern way for the sovereign to handle his marketplaces. That is most likely way off and an example I don’t understand fiat currency and am confusing fiat currency with widespread availability of paper – and I would welcome the correction. The easy answer is that it’s related to modern technology and what not, but I’m skeptical whenever that consideration becomes a primary – again not in any way putting forward that this has been suggested. Just myself working through these things. At any rate I wonder if fiat currency is comparable to the Church’s suggestions of mercy. Very likely should be the default position – and always has been regardless the historical contingencies – even if we don’t always know where the fine lines of abuse and prudence begin and end. And modern examples of inability to delineate those fine lines morphing into rallying cries for supposed progressives and traditionalists just prove the point. I even want to say gold-backed currency is as getting-it-backwards as a sacramental-backed-sacrament (oh, how I’ve been guilty of this), but I’m not expressing this well.
At any rate, growing up on the back-40 in the Deep South I haven’t seen any of those movies y’all are referencing. We were more of the National Lampoons sort.
If the Govt has no gold to redeem its notes, then it means that the Govt has defaulted. How it makes people tax evaders, I can’t imagine.
Under Zippy’s ‘Govt fianaces are necessarily opaque” ,it is difficult to see why Govt would even tax people. Indeed, the taxation is merely a Govt habit from gold standard times. Now, they use it to nudge people along certain directions. Govt does not need to tax since it can print all the money it wants.
vishmehr24:
You haven’t answered the question asked by the OP.
If all of the gold in the government’s vaults is stolen, should the government still accept the notes that it issued to settle your tax bill?
The government owes gold to the note holder and the note holder owes taxes in gold to the government. The mutual debt should cancel out through returning the note to the government.
anon:
Presumably note holders can still exchange notes with each other, and the notes remain legal tender for settling tax bills. You could buy an equivalent quantity of gold with them in the marketplace, if you so desired.
If the total loss of all the gold made no financial difference to anyone, then what was the point of hoarding it as an unproductive asset in a vault in the first place?
IOW if one dollar note still settles tax liability worth 1/40 gram of gold, the note is still worth 1/40 gram of gold. Whether the gold in the vault does or does not even exist is financially irrelevant.
I think a lot of the attachment to things like the gold standard is a reaction against the idea that currency is literally valuable because “fiat,” that money has value simply because everybody agrees it does. They know that can’t be true, but they can’t see what DOES give money it’s value (I don’t think I’ve heard the tax voucher idea anywhere outside of this blog, though I don’t delve into economics much), so they figure fiat currency is part of the black magic going on in modern finance and fall back on things like the gold standard.
This has the added effect of providing the witches with a distraction: most folks seem to be aware on some instinctive level that there’s SOMETHING wrong with modern finance, but don’t grasp what it actually is, and blame things like fiat currency or fractional reserve banking while allowing usury and other dark arts to continue unabated.
Hrodgar:
Agreed. All I’m trying to do here is help folks understand; but the first step to understanding is to unlearn the false mythologies that stand in the way.
It is not at all original with me. It is a common observation among theorists in what is called Modern Monetary Theory, for example, that the value of a dollar arises from demand for dollars and the sovereign creates demand for dollars through tax law. It is one of the few things that they got right (-ish): as I’ve said many times now all modern economic theories are insane and metaphysically anti-realist. There are nevertheless all sorts of interesting things to learn by reading modern theories.
But reading modern economic theory is like going to sub saharan Africa: there is a lot to experience, but don’t go there without getting all of your immunizations first.
Influenced by the Austrians I thought the main advantage of gold against the fiat currency is it cannot be easily multiplied. The same idea which is behind cryptocurrency, kind of natural limitation to someone with power to issue currency.
Zippy’s comparison to Google issuing new shares (elsewhere) a his posts about gold helped to destroy this view.
Btw. my wife could not believe the funny thing I am reading is about gold and government finance.
“If all of the gold in the government’s vaults is stolen, should the government still accept the notes that it issued to settle your tax bill?”
I can’t see why not?
Govt notes have the promise written that they are redeemable for gold. If Govt can’t fulfil its promise, it has defaulted, How does it make the tax-payers to be dafaulters, I can’t imagine.
“the sovereign creates demand for dollars through tax law”
Is the sovereign necessarily obliged to tax?
vishmehr24:
Your central point seems to be that you don’t see and can’t imagine, and on that we are in agreement.
This point is also made by proponents of the Fiscal Theory of the Price Level. For those interested, John Cochrane’s “Money as Stock” in the Journal of Monetary Economics is a fairly easy introduction to the theory.
There is also notable carpenter and economist Jesus of Nazareth, of “Give unto Caesar” fame.
Vishmehr24:
I don’t know if this is of much help, but here is how I understand this:
Let’s consider the sovereign as the highest temporal authority over his own land. Whether the sovereign is a person, a group or even a system isn’t important right now (I will treat him as a person though, to make the text easier to read), nor is it important to consider other sovereign and their relations. In other words, let’s keep it simple.
Well, the sovereign has authority over the people who live in his land, as well as over the land itself. Whenever a person builds a house, a farm, a road or a power plant, it must be done under his authority and he has the power to veto or order something to be done in some other way. If a town in the land wants to build a hydroelectric power plant, for instance, the sovereign has the authority to deny it, or to demand alterations to the plans, maybe because it would flood an area the sovereign deems as important.
However, the sovereign isn’t the source of his own authority. He doesn’t “own” the people under him. Rather, his authority comes from God, who allowed him to be made a sovereign. Thus, he is more akin to a steward; his subjects and lands aren’t under his command to be used at his own will, but rather to the tasks that God has entrusted to him (in this case, I think, it would be the sanctification of the souls in his domain).
To that end, the subjects are given some measure of autonomy, freedom and authority themselves, above and beyond the least that would be required by natural law. That might not be strictly necessary, maybe in some cases it would make sense to have part of the population lose that autonomy (like having prisoners doing hard labour), but I don’t know for sure and this isn’t really important for the example. What is important is that, while people are more or less “free” to do as they choose within the law, they still owe the sovereign some kind of service. This is necessary because otherwise the sovereign wouldn’t have any kind of means to accomplish his responsibilities.
Now, in this example, the sovereign has many responsibilities. In order to feed the people in his land, he wants a good and well maintained network of roads, he wants there to be hospitals with free or at least cheaper service for the poor people, he wants there to be a good education system, a police force that is capable of preventing crime, a judiciary system that punishes fairly, etc. The sovereign wants all these things because, as he sees them, they are conductive to his ultimate goal.
To accomplish these, then, the sovereign needs some kind of tax, that is, a way to harness part of the labour of the population to his own ends. This might, for instance, be done by instituting some kind of work tax, for instance, by having every citizen work five days a year for the sovereign. However, the sovereign might be a little more malleable. He might instead require that people give him, at the end of the year, 5 tokens (let’s call the dollars for the example). People will get 1 dollar for every day of work they give the sovereign. However, if someone worked 7 days during a certain year, he would be free to exchange his 2 extra dollars with other people for other services, and these people then would be able to provide less days of work to the country, or even avoid it entirely.
In a similar way, the sovereign could tax corporations. A windmill might need to set aside 5 days of its production to mill the sovereign’s wheat. However, instead of being given a single dollar per day, it would be more fair to give it and tax it a number of tokens proportional to the value of what it can produce in five days. Otherwise, it could easily get the five dollars it need for its taxes in possibly less than half a day of work.
From this, it seems to me it makes sense to have the money derive its value from the taxation, and it makes sense to have a taxation in first place. It also makes sense that each person and corporation is taxed proportionally to the worth of what they produce. It would also make sense to tax profits rather than production, as this helps conserve the well-being of the subjects under the sovereign, both persons and corporations.
Anyway, I hope this is somehow helpful. Sorry if I was verbose or unclear.
Alex,
Your exposition is very clear but lacking in historical veracity. There is an alternative story that focuses on individuals trading with each other and thereby developing usage of metal –copper, silver, gold-to store value.
Also, is a sovereign really responsible to feed the population? Free hospitals? This is again not what history says. Even the courts of justice could be run from user fees.
European kings used to have sovereign domains that were used to maintain the sovereigns.
This sentance is strange and obscure:
“the subjects are given some measure of autonomy, freedom and authority themselves, above and beyond the least that would be required by natural law.”
I think that the single-point political philosophy –“Obey authority” — is not capable of adequate treatment of the reality of political life. The measure of freedom, autonomy is absolutely required by the notion of subsidarity.
This is also called “political freedom”
Here is a little historical veracity:
“18 But Jesus knowing their wickedness, said: Why do you tempt me, ye hypocrites? 19 Shew me the coin of the tribute. And they offered him a penny. 20 And Jesus saith to them: Whose image and inscription is this? 21 They say to him: Caesar’s. Then he saith to them: Render therefore to Caesar the things that are Caesar’s; and to God, the things that are God’s.”
vishmehr24:
No surprise there. People often feel that their strawmen are made of straw.
Also pertinent: