I used to look down on the gold standard. Conventional economic wisdom, as Banks discussed here, holds that Gold was more a liability than an asset; most countries didn't exit the great depression until they ditched the gold standard.
Still, its amazing that humans decided to peg their currencies, essentially informational mechanisms, against gold atoms, the “waste” product of prehistoric supernovae.
Of course, gold was chosen because of its rarity; unlike many elements that course be fused in stellar furnases, gold had to wait for rare supernovae events.
Gold also is fairly inert. It doesn't rust or corrode, making it a permanent store of value.
In this new, debt-laden, inflationary world, it might be time to revisit the gold standard, our at least the idea of pegging currency to something scarce.
Perhaps the 21st century equivalent would be bitcoin; the encoded output of energy consumption.
> Gold also is fairly inert. It doesn't rust or corrode, making it a permanent store of value.
Why should the latter follow from the former? Why shouldn't it be that a worn and corroded metal be more valuable than a less worn one (like a nice patina's copper)?
A very useful article. The gold standard was terrible, but no one has come up with a replacement mechanism to restrain the political urge to do everything.
Permanent familial bonds can be terrible too, so we've largely done away with them without coming up with a replacement mechanism for raising children. Irrelevant to the discussion, I was just reminded.
I've been loosely following this series and haven't yet seen you engage seriously with the credit theory of money. Maybe you have and I missed it?
Here's why it matters. You say, "'gold' or other precious metals have acted as the de facto currency in most of Eurasia" but that's pretty underspecified. What was the difference between the gold stamped with the emperor's face, and an unformed piece of gold that weighed the same amount? The former and not the latter could be used to pay tax debts!
Which helps us understand why this claim is also false, "Thus the pound was not a thing with value in itself but a claim to a specific weight of gold." -- no, the value in a pound isn't just its weight in gold, b/c those values often came apart. The value was that the sovereign currency is the only way of fulfilling your tax debts — the failure of which to fulfill could land you in jail.
Currencies are, and have always been, debt/credit instruments to avoid subjugation to legitimate state violence. When you change the medium of exchange, nothing changes. What's doing the normative work justifying the value of the credit token is the credibilty of the state to exert its legitimate violence over you in the form of taxation. The higher the taxes, the more demand there is for the currency.
"Fiat" sometimes gives the misleading impression that sovereign paper gets its value ex nihilio — from pure faith. But that's not it. It gets its value from the tip of the taxman's sword. States have an interest in price stability b/c part of the implicit promise in sovereign currencies is that they won't depreciate the value of this stuff so much that it acts as an effective tax increase. Gold standards functioned as a kind of central bank before they could set their own rates.
So to your closing and opening remark that the trust relies on solvency, that's not quite right. You all have already admitted in this series that sovereigns can't go bankrupt in their own currencies. The question of trust is about (i) the sovereign's ability to extract taxes, and (ii) their ability to maintain price stability of their tax redemption tokens (currency).
So if you disagree, perhaps you could give us your account of tally sticks and their economic function?
Also the credit theory of money still concedes that money just being considered credit/debt has a precondition of money not backed by a commodity in the first place
Tax-receivability is a real source of demand for a sovereign's currency while chartalism is a theory of why people hold the unit of account. But it's a theory of demand for the token, not of the token's purchasing power, and the second is what this essay is about. The taxman's sword guarantees you'll need francs but it says nothing about what a franc buys. The assignat was tax-receivable, backed by confiscated church lands, enforced by a state that was guillotining its enemies, a state that collapsed anyway. Weimar had a tax system and so did Venezuela. Coercive capacity at the front end doesn't stabilize the price level at the back end. Only the fiscal position does.
On the closing thesis, look at your own criteria. "Ability to extract taxes" is just fiscal capacity, or solvency in other words
Appreciate the response, hope we can go through this in detail.
> But it's a theory of demand for the token, not of the token's purchasing power, and the second is what this essay is about.
As I read it, the essay seems to be about why we have fiat money, which would be a story about historical origins and causal role. The credit theory gives an account of both of those. I totally agree that it doesn't give a _unique_ account of inflation, but it's fully compatible with the standard account predicted by changes in the price level P = (MV / Y) across time. Monetarists will say the key variable there is changes in the money supply. Most contemporary credit theorists like MMT folks will say the key variable is the output gap (actual v. potential GDP). As long as potential exceeds actual, increases in money supply that exceed the rate of GDP growth won't be inflationary (ceteris paribus on the other variables).
> "Ability to extract taxes" is just fiscal capacity, or solvency in other words
Agree that it's fiscal capacity, but still not sure why that has anything to do with solvency? I literally do not know what solvency even means as you use it for a country operating under a sovereign currency regime. I suspect you really mean something about inflation. But if you do, we're back to the old debates about whether changes in the money supply or changes in the output gap are more important to predicting changes in the price level.
> the credit theory of money still concedes that money just being considered credit/debt has a precondition of money not backed by a commodity in the first place
Not sure what you're saying here — are you saying that the credit theory assumes something kind of non-credit money must precede it in order to bootstrap its value? That would be an odd concession for the theory. The credit theory ultimately grounds debt/credit systems for money as continuous with our more general social credit/debt systems (I owe you for helping me fix the tractor; she is in my debt for saving her son; etc.)
You skipped over thr best part! The establishment of the bretton woods system, Keynes' Bancor and White nixing that infringement on sovereignty, and then White's system was completely unable to handle the level of liquidity needed for global trade.
Fiat currency is not just for "emergencies." A specie standard maked it impossible got a central bank to target the (lowest) inflation rate that maintains full employment of resources when prices are hetrogeneously sticky downeward (the normal case, I think) With a specie standrd inflation is tied to the microeconomics of gold supply and demand and the demand for money. Ther is no reason to think that would maintain full employment of resources.
The essay concedes more of the economics you're talking about here than the framing may have suggested. Footnote 1 says outright that gold's vaunted discipline was "a matter of geology" as prices fell while growth outran the mines, then Witwatersrand and the cyanide process tipped the same system into inflation. A price level set by mining shocks is a poor nominal anchor when prices are heterogeneously sticky downward.
The stabilization case for managed money was articulated by Keynes and the people who heard it went back on gold at the old parity anyway in 1925. What changed was he solvency, it changed the system's preconditions and (to reiterate) the reserve issuer over-issued past its gold.
Also worth considering here is that the comparison has to run against central banks as they actually behave, not as the optimal-control model assumes.
Hard to argue the binding constraint isn't always the same: the fiscal position behind the promise.
Great work!
I used to look down on the gold standard. Conventional economic wisdom, as Banks discussed here, holds that Gold was more a liability than an asset; most countries didn't exit the great depression until they ditched the gold standard.
Still, its amazing that humans decided to peg their currencies, essentially informational mechanisms, against gold atoms, the “waste” product of prehistoric supernovae.
Of course, gold was chosen because of its rarity; unlike many elements that course be fused in stellar furnases, gold had to wait for rare supernovae events.
Gold also is fairly inert. It doesn't rust or corrode, making it a permanent store of value.
In this new, debt-laden, inflationary world, it might be time to revisit the gold standard, our at least the idea of pegging currency to something scarce.
Perhaps the 21st century equivalent would be bitcoin; the encoded output of energy consumption.
> Gold also is fairly inert. It doesn't rust or corrode, making it a permanent store of value.
Why should the latter follow from the former? Why shouldn't it be that a worn and corroded metal be more valuable than a less worn one (like a nice patina's copper)?
A very useful article. The gold standard was terrible, but no one has come up with a replacement mechanism to restrain the political urge to do everything.
Permanent familial bonds can be terrible too, so we've largely done away with them without coming up with a replacement mechanism for raising children. Irrelevant to the discussion, I was just reminded.
I've been loosely following this series and haven't yet seen you engage seriously with the credit theory of money. Maybe you have and I missed it?
Here's why it matters. You say, "'gold' or other precious metals have acted as the de facto currency in most of Eurasia" but that's pretty underspecified. What was the difference between the gold stamped with the emperor's face, and an unformed piece of gold that weighed the same amount? The former and not the latter could be used to pay tax debts!
Which helps us understand why this claim is also false, "Thus the pound was not a thing with value in itself but a claim to a specific weight of gold." -- no, the value in a pound isn't just its weight in gold, b/c those values often came apart. The value was that the sovereign currency is the only way of fulfilling your tax debts — the failure of which to fulfill could land you in jail.
Currencies are, and have always been, debt/credit instruments to avoid subjugation to legitimate state violence. When you change the medium of exchange, nothing changes. What's doing the normative work justifying the value of the credit token is the credibilty of the state to exert its legitimate violence over you in the form of taxation. The higher the taxes, the more demand there is for the currency.
"Fiat" sometimes gives the misleading impression that sovereign paper gets its value ex nihilio — from pure faith. But that's not it. It gets its value from the tip of the taxman's sword. States have an interest in price stability b/c part of the implicit promise in sovereign currencies is that they won't depreciate the value of this stuff so much that it acts as an effective tax increase. Gold standards functioned as a kind of central bank before they could set their own rates.
So to your closing and opening remark that the trust relies on solvency, that's not quite right. You all have already admitted in this series that sovereigns can't go bankrupt in their own currencies. The question of trust is about (i) the sovereign's ability to extract taxes, and (ii) their ability to maintain price stability of their tax redemption tokens (currency).
So if you disagree, perhaps you could give us your account of tally sticks and their economic function?
Also the credit theory of money still concedes that money just being considered credit/debt has a precondition of money not backed by a commodity in the first place
Tax-receivability is a real source of demand for a sovereign's currency while chartalism is a theory of why people hold the unit of account. But it's a theory of demand for the token, not of the token's purchasing power, and the second is what this essay is about. The taxman's sword guarantees you'll need francs but it says nothing about what a franc buys. The assignat was tax-receivable, backed by confiscated church lands, enforced by a state that was guillotining its enemies, a state that collapsed anyway. Weimar had a tax system and so did Venezuela. Coercive capacity at the front end doesn't stabilize the price level at the back end. Only the fiscal position does.
On the closing thesis, look at your own criteria. "Ability to extract taxes" is just fiscal capacity, or solvency in other words
Appreciate the response, hope we can go through this in detail.
> But it's a theory of demand for the token, not of the token's purchasing power, and the second is what this essay is about.
As I read it, the essay seems to be about why we have fiat money, which would be a story about historical origins and causal role. The credit theory gives an account of both of those. I totally agree that it doesn't give a _unique_ account of inflation, but it's fully compatible with the standard account predicted by changes in the price level P = (MV / Y) across time. Monetarists will say the key variable there is changes in the money supply. Most contemporary credit theorists like MMT folks will say the key variable is the output gap (actual v. potential GDP). As long as potential exceeds actual, increases in money supply that exceed the rate of GDP growth won't be inflationary (ceteris paribus on the other variables).
> "Ability to extract taxes" is just fiscal capacity, or solvency in other words
Agree that it's fiscal capacity, but still not sure why that has anything to do with solvency? I literally do not know what solvency even means as you use it for a country operating under a sovereign currency regime. I suspect you really mean something about inflation. But if you do, we're back to the old debates about whether changes in the money supply or changes in the output gap are more important to predicting changes in the price level.
> the credit theory of money still concedes that money just being considered credit/debt has a precondition of money not backed by a commodity in the first place
Not sure what you're saying here — are you saying that the credit theory assumes something kind of non-credit money must precede it in order to bootstrap its value? That would be an odd concession for the theory. The credit theory ultimately grounds debt/credit systems for money as continuous with our more general social credit/debt systems (I owe you for helping me fix the tractor; she is in my debt for saving her son; etc.)
I'm so confused by the graph. A 1971 dollar = 13c today? Don't you mean the other way around?
You skipped over thr best part! The establishment of the bretton woods system, Keynes' Bancor and White nixing that infringement on sovereignty, and then White's system was completely unable to handle the level of liquidity needed for global trade.
Fiat currency is not just for "emergencies." A specie standard maked it impossible got a central bank to target the (lowest) inflation rate that maintains full employment of resources when prices are hetrogeneously sticky downeward (the normal case, I think) With a specie standrd inflation is tied to the microeconomics of gold supply and demand and the demand for money. Ther is no reason to think that would maintain full employment of resources.
The essay concedes more of the economics you're talking about here than the framing may have suggested. Footnote 1 says outright that gold's vaunted discipline was "a matter of geology" as prices fell while growth outran the mines, then Witwatersrand and the cyanide process tipped the same system into inflation. A price level set by mining shocks is a poor nominal anchor when prices are heterogeneously sticky downward.
The stabilization case for managed money was articulated by Keynes and the people who heard it went back on gold at the old parity anyway in 1925. What changed was he solvency, it changed the system's preconditions and (to reiterate) the reserve issuer over-issued past its gold.
Also worth considering here is that the comparison has to run against central banks as they actually behave, not as the optimal-control model assumes.
Hard to argue the binding constraint isn't always the same: the fiscal position behind the promise.
I agree. One might conclude that a suboptimal specie standard is not as bad as the expected central bank behavior.