I was hoping to go straight to Part Two of my essay on capitalism. It will be about the actors of capitalism. An alert reader, Jim N, stopped me dead in my tracks by questioning what I said about the gold standard. I had only mentioned this topic in connection with the single main constraint on capitalism today, the fact that government agencies get to decide how much money flows into the economy. So, here we go, here is a digression on money made necessary by an attentive reader. He uses the word “currency” in his comment. I will use the more familiar word “money” because I think it means exactly the same thing for our superficial purposes
Money is anything that can be used to store value. Suppose you bring a chicken to the local market to sell it. In a non-money economy, if there is nothing at the market that day that tempts you, you will have to miss the sale. The chicken might die tomorrow or a fox might steal it. If you are in an economy that uses money -any kind of money – you have the option to sell the chicken for money. You can then use the money to buy something you want, a duck, for example, on another market, on the other side of your island. Or, you may just put the money away until you find something you want on any market place. And, of course, and by the way, you can try to put the chicken money to work.
Over the centuries, people have used as money such varied items as cattle, iron ingots and salt. (A “soldier” is someone who receives salt payments from the government. There is a wonderful book on this.) These three items can be arranged along a continuum of perishability. Cattle sickens and dies ( although it reproduces spontaneously under favorable conditions). Iron oxidizes in most climates although the process can be slowed down. Salt is basically non-perishable if you refrain from storing it in water. (And even then, it can still often be restored to a usable form.) By this standard, gold is the best kind of money. There isn’t much that affects it.
In his comment, Jim refers to money “by fiat.” It’s important to know what this isn’t before talking about what it is – or not. Cattle, iron, salt and gold are not (NOT) fiat moneys. Wherever these items are used , there is widespread agreement that they are valuable because they can serve other purposes: give milk, be made into swowds, preserve meat. This acceptance just happens. There is no superior authority that tells anyone to consider these items valuable, or how much they are worth. If cattle become less valuable for whatever reason it quickly ceases to be money. The extreme case on this underlying dimension is this: You can’t make your payments with ordinary sand you can pick up, or anyone can be pick just outside the house. Money has to possess a dimension of scarcity. Keep this in mind, please.
Reading Jim’s mind and I think, the minds of many libertarians, I would think that he disapproves of the US dollar because its value is based entirely on government action or inaction. When you hold a ten dollar bill in your hands, you are holding a piece of intricately printed paper. This intricacy is not the basis of the acceptability of a ten dollar bill. It rests instead on something much more strange: Your belief that this ten dollar bill will buy just about the same mount of the same goods tomorrow. You buy this even though you are completely sure (from experience) that the bill will surely not buy the same amount of the same goods in ten years. This trust is only a bad habit according to Jim. (I am still reading his mind.) It flows only from a governmental decision (“fiat) that the ten dollar bill is actually worth ….ten dollars.
There are both moral and practical implications to this scenario. For any government agency to have such vast control about the economy without incurring the sanction of frequent popular vote is, in itself, a form of tyranny, soft tyranny if you will, so far, so far in this country, t least. The chairman of the Fed has it within his/ her power to lower or raise the value of retirees’ savings, for example: Lower interest rates on savings in bonds may stop working, earning their keep by paying next to nothing to those who own them. This is pretty much the current situation in the US today (2014).
The practical implication of such much government power is even more staggering: If many people stop believing that the ten dollar bill is worth ten dollars, they will try to put their money in something that has lasting value and that runs around the dollar. This could be for example irrational investment in real estate , or anything abroad not denominated in dollars, Swiss francs, for example. For Americans, the most common flight from the dollar is investment in gold. This flight has long-term consequences for the economy because most gold hardly does any work at all; it’s no much more useful than is money under your mattress. Whatever is in gold ingots is not put to work in a research enterprise in Silicon Valley where real new value is created, for example. Note than I said earlier, “If many people…” In fact, such fears tend to be contagious and self aggravating. We know from dramatic examples in other countries that flights from a given currency (money) are often self-accelerating: “My brother-in-law just bought gold because he does not believe the peso is safe; I am going to do some of the same.”
Now, having given what I think is a fair – if rudimentary – representation of objections to fiat currencies (fiat money) I wish to undermine the very concept of a fiat currency. I think the words “fiat currency” themselves constitute a caricature of reality, or a serious exaggeration. A historical visit to Africa is needed.
For several centuries, people from a vast swath of West Africa used two kinds of money side by side: gold for big payments, mostly by the elite, something else to pay for chickens, for example. That something else was small cowrie shells (Look them up in an illustrated encyclopedia. You will find them familiar although you did not know their name until I told you.) The shells thus used are smaller than the tip of a man’s thumb. They are easy to transport in a small bag even in fairly large quantities. Besides a chicken, you could probably buy a goat or two paying with cowrie shells. You probably couldn’t buy a horse or a house. Big item items such as these required payment in gold.
One important feature of cowrie shells is that they don’t occur in any abundance anywhere near western Africa. For all the time they were used as money in that part of the world, they were imported from faraway, from the Maldive islands, close to India. The point here is that for the people of western Africa, cowries were not like sand you can gather at your doorstep, they were relatively scarce, like gold, but less so.
By far the most important feature of cowries shells for this discussion is that, unlike gold, they have almost no intrinsic value. They cannot be used for anything besides money except for incidental decoration. (Carved objects from that area of the world are often embellished with cowrie shells. It seems obvious that they are added to these objects because they are fairly valuable, and not the reverse.) So, in this one well-documented case an alien object of no or little intrinsic value was widely accepted as money. This was true across many political boundaries and in the complete absence of a government authority telling economic actors what had value and what value. There was no conceivable fiat involved in the acceptance of cowrie shells.
It seems to me that something similar has happened to the US dollar: After the US abandoned the gold standard, people everywhere gained confidence in the US dollar and it was found to be still a practical mode of payment. You will notice that I didn’t say that “Americans gained confidence”. I mean people everywhere and also many organizations. The US dollar is so widely accepted that many citizens of foreign nations keep their wealth parked in dollars and so do many non-American business organizations. Governments worldwide do the same. Even governments that are considered enemies of the US government do. (Want to bet that the North Korean murderous kleptocratic elite keeps dollar accounts?)
All this amounts to a massive global vote of confidence in the US economy and in US institutions of all kinds. Economic actors are making the bet every day that the US economy will prosper and that the relevant American authorities will insure that the US dollar does not suddenly lose its value and that they, the authorities will have the means to do so. The world is voting pro-American dollar every day.
All this does not resemble fiat, “decision.” The US government may have decreed at some point what the dollar was worth; it could not have maintained that stance by itself. I believe that the US dollar is not a currency, money, by fiat but money by a consensus of trust that arose spontaneously.
In this context a return to the gold standard is not attractive. If memory serves, most new gold originates in only a handful of countries that include South Africa and Russia. If this is correct, the political elites of this unstable country and of that gangsterish country have it within their power to lower the value of gold simply by encouraging production; and vice-versa. A gold-linked money ‘s value would vary with the global price of gold as influenced by the likes of vengeful Mr Putin. Personally, I would much rather continue to try my luck with the well-tested, democratically supported, comparatively transparent American institutions. I believe most of the world would go with the same preference. That’s one of the reasons why the common call for a return to the gold standard has so little traction, I think.
Ps I have not covered the new Internet money such as bitcoin because I don’t know enough to do so. I am not sure anyone does. This is is neither an endorsement nor a condemnation. I don’t know means “I don’t know.”