Skepticism and Money

Since there’s something of a call for skeptics to discuss politics and economics, I thought I’d bring up one relatively abstract issue: Money itself. I’ve got a textbook list of properties buried in my memory from way back in my high school economics class, with my recall aided by Wikipedia.

  • Medium of exchange: Money is good for anything, negating the need for a chain of deals.
  • Unit of account: You have to be able to know you’re making it or losing it.
  • Store of value: It has to remain valuable when you dig it out from under your mattress.
  • Rarity: It has to be rare enough to be practical to transport, but common enough for everyone to use it.

There’s probably some parts I’m forgetting, so feel free to put those in comments. Another important aspect of money is the form it takes:

  • Commodity money: It’s made of something valuable. This includes precious metals. A videogame instance that comes to mind is King of Dragon Pass, where cows are the commodity money, and everything has its value measured in cows, including favors.
  • Representative money: The US started with this. The paper in your wallet was a representation of some amount of precious metals in the bank or federal reserve.
  • Fiat money: What the US has now. The money has value because the government says it does as well as the fact that we all generally agree.

One of the big things I hear in the woo world is a collection of assertions that essentially say fiat money is “fake” and thus not really worth anything, while gold has “real” value, as if it were a metaphysical certitude. I guess they missed the children’s cartoons that depict the financial reality of what happens when someone gets the Midas Touch.

Typically it comes with predictions that the Illuminati is going to order the mass printing of money to inflate its value out of existence for some diabolical purpose. One such conspiracy nut I met in meatspace mixed this with the assertion that they were making it illegal to own gold… which kind of undermines the ability of the Illuminati to spend that gold if they can’t exchange it with anyone. Doubly so, since the world would just move onto different forms of money that actually circulate. Gold has some useful physical properties and it has proven its value as a material for commodity money, but I can see the world moving along just fine (after a period of confusion) if most of the gold was taken out of circulation.

That said, I have heard one argument for going back to a precious metal standard that does sound like a reasonable complaint: Fiat money’s weakness is in its store of value. If I put a wad of bills and a gold bar under my mattress for a few decades, inflation is going to decrease the buying power of the bills while the gold bar will retain a fairly stable exchange value. Gold’s value isn’t perfectly consistent, though, since like any other commodity, its value will vary with supply and demand.

One argument in favor of fiat money I stumbled on while poking around Wikipedia is the issue of replacement. In the days of gold as a commodity money, if your ship full of Spanish doubloons sinks in the middle of the Atlantic, that gold was simply out of circulation until someone could bring it back up. If a ship full of paper fiat cash goes down, the mints can just print and circulate replacements while the originals rot at the bottom of the sea.

It occurs to me that benefit of fiat money can also have an effect on hoarding. Under a gold standard, I suspect private entities could affect the money supply if they hoard gold, which is parallel to the government’s ability to affect the money supply by controlling the printing of fiat money. If a private entity started hoarding fiat money to a significant degree, the government could print money to maintain the amount in circulation, though there’d be an issue with inflation when the hoard reenters circulation.

In a way, I’m starting to see this as a corporate versus government thing, with fiat being pro-government control and the precious metal standard as potentially pro-corporate control, since corporations would be the most likely entities to have the resources to pull off hoarding schemes. I’m pretty new at the topic in general, so this might be old news, I might be missing some key information that sinks my lines of thought, or whatever. I’m expanding my skeptical horizon, so drop informative comments.

6 responses to “Skepticism and Money

  1. Okay, the part about the possibility the government forbidding the ownership of gold isn’t completely woowoo. It’s been done in the past, so I can see how someone might believe it would happen again in the future.

    BTW, I think Pterry did a pretty spot on critique of the idea that gold has intrinsic value in Making Money. I have no doubt that that particular has been made by other people previously, but he does a pretty good job of laying it out.

    The thing about woos and gold vs. fiat money is that AFAICT they’re treating money as a thing in itself instead of a useful abstraction (or as one of my comp sci professors put it, “Money is a logical fiction, but as long as it’s a logical fiction that my bank accepts, I don’t care.” ) Of course, the queen of reifying money was Ayn Rand. Want evidence? Just try slogging through John Galt’s speech in Atlas Shrugged and y0u’ll find all the evidence you need. The woman wasn’t exactly subtle.

  2. Fiat money has another impact on hoarding that you bump into but didn’t connect: Inflation will erode any attempt to hoard money, which acts as a deterrent to hoarding.

    In fact, there is actually an economic advantage to having a small amount of inflation in that it encourages people to spend money today rather than tomorrow. This is why many central banks set inflation targets in the 1-3% range rather than trying for 0%.

  3. IIRC, The Bank of Canada issued money until the ’70s thereafter only printing it and borrowing from the banksters because low interest rates caused high inflation which doesn’t seem to be the case today

    Casinos seem to be better regulated than finance which has no free hand. Some discuss the markets like they’re the weather but there are far too many wee grubby fingers in the system.

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