Confusion All the Way Down


As you may have heard, Virginia is trying to pass a bill that would legalize the recognition of state-minted gold and silver coins as legal tender. They seem to think they have found a loophole in Federal law that allows this, but I doubt it. My prediction is that if something like this would come to pass, it would flounder on the fringes, unnoticed by the Feds (as in Utah). If this were to pick up steam, I have no doubt in my mind that it would be quickly snuffed with impunity.

But I want to make it perfectly clear from the get-go: I am not against the idea of the use of multiple currencies. Indeed, I believe that the future will depend on it. While I can’t get on board with the sort of bimetallic fetishism that has produced this (and other) legislation, I fully support ending monopoly on the creation of money.

Now on to one of my biggest pet peeves when talking to be people about money, from the Washington Post:

Although the law hasn’t changed what’s in most residents’ wallets, the measure became the poster child for those calling for a return to the days when money derived its value from gold. Today, money is backed by the authority of the U.S. government.

Do you see the error there? It is a common one, and it is surprising that is persists given the fact that it so confuses the debate — how could it not be corrected in popular lore? The error of course is the notion that under a commodity-backed standard (gold standard in this case) money derives its value from the commodity backing it. This is completely untrue, but curiously a slip of verbiage that no one notices. Under a (for instance) gold standard, money derives it’s price from a standardized unit of the commodity gold. Money derives its value from mutual understanding — the understanding that I can exchange dollars from my pocket for goods (or services) on your shelf. This fact doesn’t change when you move from commodity money to fiat money. The fact that you could trade a dollar for gold at a fixed exchange rate in the past is not what made money valuable. The convenient coordination of expectations that gold was money (enshrined in law) and that dollars represented claim on gold (and everyone believed this) is what made gold valuable.

You may protest that I’m nit picking here, but using words in this way creates false dichotomy that underlies the entire debate: Money that is backed is valuable, money that is not backed is worthless. This little mental sanfu ensures that the public is perpetually confused about what it means to live in a fiat money regime.

Getting more meta, the article itself is confusing. The quote Bernard Lieater* seeming at random:

Economist Bernard Lietaer, author of “Rethinking Money,” pointed out that a host of informal currencies have proved widely popular in the United States. For example, he said, there are 50 trillion airline frequent-flier miles in circulation, far surpassing the number of dollar bills.

The benefit of a single currency “has been drilled into our heads for about 300 years,” Lietaer said. “I’m still looking for a book of economics that drops this assumption.”

It’s like they had some perishable food that was nearly past expiration date, so they hurried up and ate it. Lietaer is a proponent of complementary currencies (as am I). He often uses the example of airline miles being used in various places as money, and the 50 trillion reference above is, indeed relevant to bring some concepts to life, like “moneyness”…but it is completely irrelevant to the topic of this article.

I don’t think that the US should share one currency on OCA grounds, and on more squishy sociological grounds…but there is relatively little merit in the proposal coming from Virginia. It is based on confusing the concepts of price and value, probably levels and rates, and the role of money in a society.

h/t Daniel Kuehn

Full Disclosure: I have had the pleasure of corresponding with Dr. Lietaer on quite a few occasions, and he was one of my early mentors. Although he is an advocate of chartalism (and possibly Modern Monetary Theory), which I am not.

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2 thoughts on “Confusion All the Way Down

  1. Well…okay, I know this is nutty, but…

    Say a state minted up some silver or gold coins, but assigned to them a very high value, relative to content. Like a $100 coin that had $10 of silver (market value) in it. That is Constitutional.

    Okay, the state then says it will accept these coins as payment for taxes. So now the coins have value. The state pays its employees and vendors in the coins. Oh maybe the state issues paper money backed 100 percent by the coins, just to make transactions easier.

    Why? The Fed is way too damned tight and ossified, that is why. The last six of eight CPI readings have been negative and we are not yet out of the worst recession since WWII, and still FOMC members are natter gin about inflation.

    The economy is asphyxiating from tight money, and people say oh, no, we can’t really do anything about it. Sure, some states should take things into their own hands. The Fed is failing us.

    There is more: The ECB has a one-size-fits-all monetary policy for a continent with various economies. The Greeks should be printing drachmas tot the moon. They can’t. It is a disaster for Greece. Spain too.

    And the Fed? Is the Fed too tight for some states and too loose for others? Well, that has to be true, even if we assume the Fed is right on for the average. It is way, wary too tight for California, for example, while maybe okay for North Dakota. It is a one-size-fits-all monetary policy.

    No, state monetary policies will probably never happen. It is interesting to think, however, that if California were an independent nation, would it have this tight of a monetary policy?

    1. Here is an interesting observation: as transaction costs in currency conversion have nearly been eliminated (fractions of a cent to do the conversions electronically), currencies have become much more consolidated.

      It’s a striking dichotomy of trends. The exact opposite of what you would expect.

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