The Monetary System

[gtc]

besides coin collectors or people who want to burn it in their furnace, nobody subjectively values money. People want it because other people want it, nobody in the chain actually values it.

Everybody values money every time they make a transaction.

'Is that bottle of water worth $1.75?'

 

[CaptainManacles]

Everybody values money every time they make a transaction.

'Is that bottle of water worth $1.75?'

They think it's worth 1.75, but do you really think it's impossible to be wrong about what something's worth?

 

[Francesca R]

Seems to be a very semantic argument. Something can only be valued relative to something else.

Can you value something without being able to measure that value? If so, what?

 

[OneShotKi11]

I feel gold holds more weight then paper money because i can show up anywhere in the world with it and people right away will recognize its value.

I guess you can say the same for paper money as well.

 

[Kerberos]

I feel gold holds more weight then paper money because i can show up anywhere in the world with it and people right away will recognize its value.

I guess you can say the same for paper money as well.

I suggest an expriment for you the next time you go abroad. Take with you some gold and some dollars (you're American right?). Then see which one is easiest to use. I'll bet dollars to doughnuts that the dollars are far more likely to be accepted.

So the real question isn't so much which is better, but which is better for a given country. If I was in Zimbabwe, I'd love to have a commodity-backed currency. But I live in the US. And while I don't trust my government absolutely, I don't distrust them too deeply either. The track record of fiat currency in the US is pretty good, and direct manipulation of that currency by elected officials is quite difficult. Except for the crackpots, it's pretty clear to most people that fiat currency works here, and works better than the gold standard did.

I good point, though you left out a third possibility, namely using a foreign fiat currency such as dollars, which is in fact what most commonly happens.

 

[Francesca R]

I good point, though you left out a third possibility, namely using a foreign fiat currency such as dollars, which is in fact what most commonly happens.

What do you mean by "most commonly happens"? A currency board (I think this is what you refer to) cedes control of monetary policy to a foreign country and fixes terms of trade with that country. It is rather hard to sustain because the same political authorities that gave up this control (to strengthen credibility) can end up trying to take it back when the arrangement doesn't suit them, or their domestic economy (EG Argentina)

 

[Kerberos]

What do you mean by "most commonly happens"? A currency board (I think this is what you refer to) cedes control of monetary policy to a foreign country and fixes terms of trade with that country. It is rather hard to sustain because the same political authorities that gave up this control (to strengthen credibility) can end up trying to take it back when the arrangement doesn't suit them, or their domestic economy (EG Argentina)

I mean most commonly happens in that foreign countries using dollars (or other non-native currencies) is known to happen, and using commodity currencies is not. As for the credibility problem there are several factors to be considered. First of all the practise of using a foreign currency doesn't have to be instituted by the government, it can be something that the population just chooses to do because they trust the foreign currency and not their own. Even if it is a government move, retracting it is a very overt move and therefore it can carry a high political cost, unless the government simultaneously strengthens the credibility of the local currency. Also they could totally remove the local currency and thereby complicating any move back to the local currency. Finally going back to the local currency doesn't necessarily erode the value of the foreign currency being used, so this currency can confidently be used while the arrangement lasts, unlike the hyperinflationary local currency.

 

[timhau]

I feel gold holds more weight then paper money because i can show up anywhere in the world with it and people right away will recognize its value.

Umm... yeah. Kind of.

I live in Finland. Something like 15 years ago, I helped a Japanese guy at work to change a small gold bar into local currency. Getting a fair price for it was an enormous hassle.

So while people might recognize that it's valuable, that doesn't automatically translate into them being willing to change it for commodities and services.

 

[gtc]

They think it's worth 1.75, but do you really think it's impossible to be wrong about what something's worth?

You didn't mention incorrect valuations.

My point was that when I am thirsty and want to buy a bottle of water, I effectively ask myself this:

'Is the $1.75 in my pocket worth more to me than the bottle of water on that shelf?'

If the answer is no, then I buy the bottle of water.

Naturally, I think it is possible to feel that one has incorrectly valued something.

Lets say I buy a bottle of water for $2.20, unaware that around the the corner there is a bigger bottle on sale for $1.75. Or alternatively I pass up the $1.75 water because I think there is a cheaper bottle around the corner; only to discover that there is not.

In both those cases, new information would make me regret the decisions I had made.

 

[69dodge]

Something can only be valued relative to something else.

I guess. But isn't it useful to talk about the reason why I want something, not only how strongly I want it?

I want my stereo system, for example, because I can listen to it. I have no idea what anyone else would give me in exchange for it, but I don't care, either. It wouldn't bother me a bit if no one were willing to give me anything at all for it, because I have no desire to exchange it for something else. I want it because I want it.

I want money, on the other hand, only because other people are willing to give me things in exchange for it. I care very much about what I can get in exchange for it, because the only reason I want it is to exchange it for other things -- things that I really want. Things like stereos.

Isn't this an important distinction?

 

[69dodge]

My point was that when I am thirsty and want to buy a bottle of water, I effectively ask myself this:

'Is the $1.75 in my pocket worth more to me than the bottle of water on that shelf?'

Not really. You ask yourself whether other things you could buy with that money are worth more to you than the bottle of water. The money itself is just bits of paper and metal. If you couldn't buy anything with it, would you still want it? Of course not. But if you were thirsty, you'd want water even if you couldn't trade it for anything else.

 

[Francesca R]

I guess. But isn't it useful to talk about the reason why I want something, not only how strongly I want it?

The monetary system can be thought of as a method of reaching the highest state of equilibrium in the realm of "wants" at any time (and facilitating an adjustment to a new equilibrium), and as such it need only be concerned with the strength of those wants and not the reason for them.

I want my stereo system, for example, because I can listen to it. [ . . . ] I want it because I want it.

As you show, the second statement can be taken rather further.

I have no idea what anyone else would give me in exchange for it, but I don't care, either. It wouldn't bother me a bit if no one were willing to give me anything at all for it, because I have no desire to exchange it for something else.

You're saying that—for now at least—there is no preferable steady-state in which you do not own a stereo. That could be tested if you were presented with an alternative, and it would be possible to find out how much you valued the stereo (relative to alternatives). Using money allows the valuation to be standardised.

I want money, on the other hand, only because other people are willing to give me things in exchange for it. I care very much about what I can get in exchange for it, because the only reason I want it is to exchange it for other things -- things that I really want. Things like stereos.

But not right now. Unless you have spent all your money, you reside in a situation in which currently you would rather have the money over anything that could be bought with it. Otherwise you'd have spent it.

 

[Jaggy Bunnet]

Not really. You ask yourself whether other things you could buy with that money are worth more to you than the bottle of water. The money itself is just bits of paper and metal. If you couldn't buy anything with it, would you still want it? Of course not. But if you were thirsty, you'd want water even if you couldn't trade it for anything else.

If your stereo no longer served the function for which you had it (i.e. listening to it) would you still want it?

That is essentially the question you are asking in relation to money - if it no longer had the function for which you want it, would you want it?

 

[CaptainManacles]

You didn't mention incorrect valuations.

I did, perhaps not in that particular post, but it's the crux of the arguement. The question is, how does money have any value. If you're saying it's value is simply set by people deciding that it's valuable, that implies that it would be impossible to be in error about it's value. Even if bought a bottle of water for $2, and there was another bottle for $1 around the corner, $2 is worth a bottle of water, because I just set it's value. This contridicts the clear reality that it is possible to be wrong about something, which you pointed out. What I'm saying is that money is fundementally different from bottles of water. Bottles of water may be fundementally valuable to you, money is only valuable to you based on assumptions that must continue to hold true. The assumption is that other people value it, but they don't. They only value it because you value it, you only value it because they value it. The whole value of the dollar is based entirely on perception of value, it has no real value to anyone.

 

[Francesca R]

I did, perhaps not in that particular post, but it's the crux of the arguement. The question is, how does money have any value. If you're saying it's value is simply set by people deciding that it's valuable, that implies that it would be impossible to be in error about it's value. Even if bought a bottle of water for $2, and there was another bottle for $1 around the corner, $2 is worth a bottle of water, because I just set it's value. This contridicts the clear reality that it is possible to be wrong about something, which you pointed out. What I'm saying is that money is fundementally different from bottles of water. Bottles of water may be fundementally valuable to you, money is only valuable to you based on assumptions that must continue to hold true. The assumption is that other people value it, but they don't. They only value it because you value it, you only value it because they value it. The whole value of the dollar is based entirely on perception of value, it has no real value to anyone.

I come back to prior points:

1. The value of money exists due to confidence in future reciprocity of it being awarded value (or more simply—confidence in future purchasing power)

2. These things that you say have "real value". You can't say how valuable unless you express it relative to something else.

And value is not fixed or static. Just because a bottle of water is priced at £2 does not mean everybody thinks it is worth £2. If you buy a bottle for £2, that doesn't mean that a second or a third bottle is also worth £2 to you. If they were, you'd buy all the bottles you could until you had run out of money.

 

[69dodge]

If your stereo no longer served the function for which you had it (i.e. listening to it) would you still want it?

That is essentially the question you are asking in relation to money - if it no longer had the function for which you want it, would you want it?

That formulation seems too general to have any real meaning.

Is the function "able to be given away so that I can get something else instead" truly comparable to any other function an object can serve?

More stereos in the world would, on the whole, be a good thing. More money in the world would, on the whole, be pointless.

There's a reason central banks regulate the money supply but not the stereo supply. If they do a good job, everyone else can go about their business pretending that money and stereos are basically the same sort of stuff. But they aren't really.

 

[Francesca R]

More stereos in the world would, on the whole, be a good thing. More money in the world would, on the whole, be pointless.

More stereos in the world would reduce the value of stereos. More money in the world would reduce the value of money.

What's the difference there?

There's a reason central banks regulate the money supply but not the stereo supply. If they do a good job, everyone else can go about their business pretending that money and stereos are basically the same sort of stuff. But they aren't really.

If stereos were legal tender to buy and sell other things with/for, then the government would have an interest in regulating the stereo supply. But since stereos are a rather unuseful medium of exchange there is no pressing need to.

Of course stereos and money are not the same sort of stuff. But the idea that money "has no real value" and stereos do is dotty.

 

[69dodge]

More stereos in the world would reduce the value of stereos. More money in the world would reduce the value of money.

What's the difference there?

More stereos in the world would reduce the value of stereos relative to other things. More money in the world would reduce the value of money relative to other things. But in the stereo case, there would be more things in the world, while in the money case there wouldn't be. (I'm not counting the extra money as a "thing", because money is useless except as a medium of exchange, and the existence of more of it doesn't make it any better for that purpose.)

If there were more stereos in the world, more people who want to listen to one would be able to. The enjoyment I get from listening to mine wouldn't be reduced, just because some other people became able to listen to a stereo of their own who couldn't before, just because stereos became "less valuable" using the supply-and-demand sort of definition of "value".

 

[Francesca R]

More stereos in the world would reduce the value of stereos relative to other things. More money in the world would reduce the value of money relative to other things. But in the stereo case, there would be more things in the world, while in the money case there wouldn't be. (I'm not counting the extra money as a "thing", because money is useless except as a medium of exchange, and the existence of more of it doesn't make it any better for that purpose.)

True. Manufature of a stereo adds wealth equal to the market value of the stereo (even if it falls a bit to shift it from the shop) less the market cost of the inputs. Creation of more money does not add wealth; it re-distributes it.

 

[Jaggy Bunnet]

But in the stereo case, there would be more things in the world,

Not the whole story - if raw materials and labour are used to make more stereos then they are not used making other things (or less raw materials remain to make future things). Making more stereos may mean there are fewer phones, fewer computers or fewer light up, sing-alonga, santas.

So the enjoyment that other people get from having their stereo is traded for your reduced enjoyment as you can't afford to buy a light up, sing-alonga santa because the price increases due to reduced supply.

You seem to be basing your "more stereos would be a good thing" position on the grounds that this can be achieved with no cost. I don't think that is correct.