A dollar is a real thing: a store of value and a medium of exchange. These are extraordinary valuable uses. Indeed, the need is so great that if currency is restricted or unavailable, people do not simply revert to barter; they turn something into a currency.
John Kenneth Galbraith amusingly recounts what happened in the American sector of occupied Germany, where the money supply was deliberately kept very tight by the economic planners. People immediately turned to cigarettes, which were valuable to the Americans for smoking, but to the Germans both for smoking and for substitute currency. The result was that the Germans scrounged even tiny cigarette butts, which were the equivalent of spare change. Hence, when some Army sanitation engineer posted a sign in the men's room saying "Please do not throw your cigarette ends in the urinals", some wag scrawled underneath it, "it makes them soggy and hard to smoke."
Cigarettes, are, of course, also the traditional currency of prison. However, in 2004, the Federal prison system banned smoking--as an aside, I ask if anyone knows whether this was officious health-nannying, or equally offensive gratuitous cruelty, or some combination of both (my guess). At any rate, something had to emerge as a substitute. I give you: the mackeral economy.
There's been a mackerel economy in federal prisons since about 2004, former inmates and some prison consultants say. That's when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard.
Prisoners need a proxy for the dollar because they're not allowed to possess cash. Money they get from prison jobs (which pay a maximum of 40 cents an hour, according to the Federal Bureau of Prisons) or family members goes into commissary accounts that let them buy things such as food and toiletries. After the smokes disappeared, inmates turned to other items on the commissary menu to use as currency...in much of the federal prison system mackerel has become the currency of choice.
What's fascinating is that it has apparently become the standard currency precisely because it has no intrinsic use, and therefore functions very well as a store of value:
The only weirder currency I can think of offhand is the Yap, who used as currency stones so large that they couldn't really be moved; only ownership was transferred. Indeed, when one was dropped into the sea while transporting it between islands, the Yap continued to recognize it as valid currency, and the family that owned it was viewed as having significant wealth on the basis of this thoroughly inaccessible stone....Mr. Muntz says he sold more than $1 million of mackerel for federal prison commissaries last year. It accounted for about half his commissary sales, he says, outstripping the canned tuna, crab, chicken and oysters he offers.
Unlike those more expensive delicacies, former prisoners say, the mack is a good stand-in for the greenback because each can (or pouch) costs about $1 and few -- other than weight-lifters craving protein -- want to eat it.
(Hat tip Alex Tabarrok)
"However, in 2004, the Federal prison system banned smoking--as an aside, I ask if anyone knows whether this was officious health-nannying, or equally offensive gratuitous cruelty, or some combination of both (my guess)."
My guess about the official reason, if not the actual one, is that the government has to care for the health of prisoners and so has a financial interest in lowering their risk in any number of ways -- but you asked if anyone knows, and I don't for sure.
Why is banning smokes any worse than not banning them? Either you harm smokers or non-smokers (it would sure suck to have a cellmate who smoked if you did not); this doesn't seem that onerous, especially considering the health care issue mentioned by Benjamin. I could respect a libertarian arguing against a ban in restaurants or something (waiters certainly don't have to work in smoking-friendly restaurants) but obviously such an argument doesn't apply to prisons.
Oh, dearie me.
And all this time I thought the primary unit of exchange and store of value within the penal system was the "prison bitch."
MEGAN: You may look down on "hard money types" (although goldbugs have had a *fantastic* four years) but please try to get their arguments right.
"Hard money types" do not look down on dollars because they are not "real", they look down upon them because they are a fiat currency that can get diluted to oblivion whenever the Government feels like it.
In fact, dilution to oblivion has been the fate of every fiat currency ever floated, and one day, the dollar will go the same way (although that day may not be for centuries)
-winterspeak
I seem to recall something about courts finding it cruel and unusual to subject non-smoking prisoners to a smoke filled environment.
No joke.
Here it is:
"Over the past 10 years, prisons and jails have moved toward banning tobacco products out of concerns about the health hazard of secondhand smoke. In addition, a string of court opinions, including a 1993 Supreme Court ruling, have supported inmate claims that being held in a smoke-filled prison may constitute cruel and unusual punishment."
http://www.usatoday.com/news/nation/2004-07-21-prison-smoking-usat_x.htm
Posted by Jason Van Steenwyk | October 2, 2008 9:41 AM
What a difference a day makes.
I'm not sure why you think seeing our Queen deepthroating an African cock to show the problems that agricultural tariffs can impose is Sullying her?
This and your attacks on Andrew make me think you may be a closet case.
"However, in 2004, the Federal prison system banned smoking"
Are you sure that Cheney and Rumsfeld weren't behind that as part of the domestic torture program?
winterspeak says, "In fact, dilution to oblivion has been the fate of every fiat currency ever floated, and one day, the dollar will go the same way (although that day may not be for centuries)"
....and where will you be at that time?
Tell you what, dude. I'll buy you a beer with whatever the currency of record is on that day....
Peter Berstein mentions the Yap in his gold book. He then goes on to talk about the vaults of gold buried beneath Manhattan at the Federal Reserve, and how countries trade little slips of paper about who owns the gold that no-one ever sees. Not much difference, in the end.
This and your attacks on Andrew make me think you may be a closet case.
Dream on, loser.
Got to take issue with this:
"What's fascinating is that it has apparently become the standard currency precisely because it has no intrinsic use, and therefore functions very well as a store of value."
That's precisely wrong. It's a store of value because its supply is restricted, just like the yap, the US dollar in times of low inflation, and gold. If i were able to smuggle lots of mackerel into prison, the mack would inflate.
Take the example of cowry shells, once widely used as a meduim of exchange on pacific islands and one that held stable for centuries because it was tought to add to the supply of shells.
On a number of occasions, once contact with modern trading societies was made, either traders or missionaries brought in cowries from places of greater abundance, skinning the natives blind for a while until the currency collapsed, in a number of cases leading to massive social upheaval.
Jason,
I was dreaming of Megan in thigh boots, masturbating furiously while she debunks Keynes general theory of money.
You seem to be dreaming of Sarah Palin's vagina on your own blog - which made me wonder why you found Megan's so offensive.
Do you think it has teeth?
Just because you're a 'top' doesn't mean you're straight. Nor does putting on a wig on on that "panty-wearing buggerer of boys" you mentioned on your own blog.
http://iraqnow.blogspot.com/2008/09/rumor-has-it.html
But you come across as very butch. I'm sure you remain butch even when someone cums across you, or indeed, even inside you.
Did Andrew never call you after?
Any chance the comments policy is going to get enforced?
I'm perfectly fine with appealing to prurient interest--being a fan of both DOND and Dancing with the Scantily Clad, or whatever that show is called--but I am not inclined to think that such appeals are worthwhile in this particular context.
Mackerel is high in omega 3 fatty acids. I have opened 1 can, such an oily fish. I still recall with amazement seeing a black workman approach a checkout counter of a grocery store with 1 can of mackerel and a vegetable. Yes he had decided these ingredients optimized his choice of taste and perhaps economy. I don't recall the recipe.
Now imagine if you had seen Megan McArdle with Mackerel in her Knickers, playing the maracas.
The vegetable could go anywhere; well, one of three.
Picture is worth a thousand words.
Rob,
Would Ambinder and Douthat going full pelt at it entice you? Fat, ugly and beard fetishes covered there.
How about some interacial generation gap homoeroticism with Coates as the adopted son and Fallows as the kindly uncle.
How about Goldberg and Crook? Jeffrey's Jewish, and Clive's an idiot.
Something for everybody at the Atlantic.
"In fact, dilution to oblivion has been the fate of every fiat currency ever floated, and one day, the dollar will go the same way (although that day may not be for centuries)"
But, you can always dig more gold, especially if it is the medium of exchange. How about putting money it real estate? They aren't making any more of that.
I seem to remember that whatever colonial power controlled the islands these villagers lived on found the people hard to control. To get what they needed, they sent an agent around who arbitrarily marked stones with big black X's. Immediately the villagers did what the government required of them and the government removed their X's.
I also agree. Take out the worthless comments (with the exception of mine)
libfree,
Jason won't be happy if you cut all his comments.
When he gets both hands free, I'm sure he'll be livid.
I don't see how a comment invoking a goddess with a mackerel similar to this
http://www.hopstudios.com/nep/unvarnished/five/4135/
Is a worthless comment. It's such a beautiful image. Can vegans have sex with fish, so long as they don't eat them?
I echo Winterspeak's sentiments, but will make a different point. Yes, it's important to expand the money supply to accommodate growth and demand for cash holdings. But it doesn't have to be inflationary, which is exactly how it's run now.
If the central bank accumulates assets equal in value to the new dollars it issues, then increasing the money supply doesn't cause inflation. But when the Fed buys bonds with its newly-issued dollars, it turns over the interest to the government, thus decreasing its holdings relative to the number of dollars in circulation and thus causing inflation.
And contrary to the constant chant of "low inflation is good", you of all people should be realizing now exactly why that's wrong. Wherever there's inflation, people *must* put their money in interest-bearing accounts to counteract the loss they suffer from inflation. Often, it doesn't even make that up. And then how does this money generate this interest? Well, it has to be lent out on the short-term money markets, where you create tons and tons and tons of coupling between various entities, allowing the latent counterparty risks to blow up to everyone with cash holdings.
So ordinary people just trying to keep their money are exposed to an enormous, unnecessary risk -- the risk you now reference when you justify the the bailout. If people could just hold on to their money and be assured it would keep up with prices, we would never have been in this position.
You claim that having to loan your money out all the time is a "good thing" because it "puts the money to work". Yeah right! Those extra loanable funds accomplish nothing but make up for the additional borrowing that has to occur because of the inflation! So there's no net gain in "investment", just punishment of that rare breed of necessary human: the saver.
There's a reason people don't save, Megan: because there's not much point to it anymore.
In two lucky people, Milton and Rose Friedman tell the story of being in Europe shortly after V-E Day. They bought a carton of cigarettes in Paris for one dollar, and later sold it in Germany for four dollars worth of gasoline. He later used the example on an exam question: Where did the money go?
Just a few years ago, you could get Jason Van Steenwyk for a pack of cigarettes.
Happy days.
Did you know his name translates to Jason the Steelcocked?
How lucky to have a name you live up to.
TFP,
I'm both flattered and disgusted.
The mackerel would need to be tofu before it got near my nether regions.
You would need to be a billionaire.
I second Dan M's comments (7:02); Megan's idea that something becomes "the standard currency precisely because it has no intrinsic use, and therefore functions very well as a store of value" is as Dan puts it "precisely wrong."
Key criteria for a good currency are:
- easily divisible, or in small enough units that you don't have to buy unreasonably large quantities of whatever you're buying
- recognizable as the real thing / tough to counterfeit
- having some underlying value to enough people in the economy that everyone is happy to barter with it because they know that they can use it or easily transfer it to someone who will
Our dollar used to meet all three criteria, back when is was backed by gold and silver certificates. The reason that dollars are no longer asset-backed is not they have been transformed into a superior currency, but that it was convenient for the individuals running our inflationary govt.
Fiat dollars are very much NOT libertarian...
I rather like smoked mackerel.
Gold bugs are annoying not only because they tend to be Paulians, but because they refuse to accept the lessons of economic history as well as ignoring the fact that gold is just as much a fiat currency as anything.
Low, regular inflation provides us with the ability to handle negative changes in the balance of trade,increases the resiliency of the economy to shocks, and (amongst so many other benefits) ensures that the money supply's stability isn't reliant on technological stagnation. Roman economic history demonstrates 2 problems of "hard" currency (governments find a way to devalue anyways, and prices that are too sticky destroy growth). Colonial Spain demonstrates the problems of a supply shock to a country (and a continent) where the economy assumes a very low increase in the money supply.
But gold bugs just want to scream about the horrendousness of fiat money. The problem is that all forms of money are scams, because their only value is the ability to be converted into something else. Money increases the velocity of trade (since you don't need to execute 400 trades to convert your symbol manipulaton into italian leather and english gin), and all we need is to agree on something. You get crises in confidence occasionally, but fiat money is superior to all other BS agreements about what "money" is. We're seeing one of the problems of fiat money now, just as we're seeing the problems of banking. Every system has problems, but these are the best systems that we've found, despite what Winterspeak claims. You can have much lower growth, deflationary crises, and shorter, less healthy lives, or you can have fiat money, fractional banking, and the occasional confidence problem.
Far better to have the tech and property bubbles than to have bubbles in the South Sea Company or in tulips. America was built on speculative bubbles and has done very well out of it - canal systems and railroads in the 1800s, manufacturing of various stripes in the 1900s, fibre optics and free email in the last 20 years. Living in Jane Austen's England where 10,000 pounds/a is an unimaginable sum and hardly anyone has any cash is acutely terrible, no matter how fetching it may look in period drama.
I don't think Marx thought money had to have a fixed value; it was things he thought could have a real value determined by the labor value that went into them. With money, if I recall right, there's a passage in the "Grundrisse" I think where he just trips out in Carl Sagan-like awe in the face of its ability to transform anything into anything else, including its opposite.
But the point remains a good one -- it is a similar instinct.
The first time I saw mackerel used as currency was when I was a Peace Corps volunteer in Samoa. A case (12 cans) cost about 35 Samoan Tala (~2.5ST = 1 USD). It makes sense because it is a food source that can keep for quite a while. If you're caught doing something wrong in the village? You get fined in cases of makerel. Going to a wedding? Bring some makerel. I think one of the reasons it's also important is that quantity is more important there than quality. So if I give someone 200ST it's not nearly as impressive as it would be if I gave the 6 cases of fish :)
Mackerel cans seem useful also because there will be a moderate inflation rate as new cans are brought into the system through the commissaries, which will keep the prison economy moving. If you used a can of something which people actually liked to eat, you might wind up with a shrinking money supply and hence deflation. Then you'd have people waiting until next month, when it would be cheaper, to buy oral sex or put out a contract on sticking a shiv in their neighbor's ribs. The whole prison economy would grind to a halt.
The Gold Standard - where your money supply is controlled by prospectors and fashion trends!!!
learn more about federal prison at www.Doingfederal time
I fear we are on the verge of finding out the true cost of our debt-based money. Even if one were to grant the benefits the present system (and I don't see the present system benefitting anyone not high up on the receiving end of new money), a collapse of our present currencies will engender the collapse of the division of labor, and since few of us farm, or even know how to, a great number of us will simply starve to death.
The problem is this- all of our monies are someone else's liabilities. Watch as the banks worldwide are merged together or collapse- as this happens the financial assets they hold will disappear as unpayed debts of insolvent counterparties, or through annihilation as asset holders merge with the corresponding counterparties. However, these merged banks will still owe the liabilities to their combined depositor base. There is no escape in the merger of insolvent banks with still solvent ones.
The true value of gold is that it is no other party's corresponding liability, and it is for this reason that it should be the asset undergirding a truly, fundamentally sound banking system, and it certainly would be the major player if not for the governments all over the world preventing it by force of violence.
Incidentally, my favorite modern poem is about a display of mackerel:
http://rpo.library.utoronto.ca/poem/698.html
The true value of gold is that it is no other party's corresponding liability, and it is for this reason that it should be the asset undergirding a truly, fundamentally sound banking system - Yancey
Yeah, but can you eat it?
This is why I think the asset undergirding a truly, fundamentally sound banking system should be mackerel.
I know a crazy Swiss guy with some kind of economics degree who thinks the whole monetary system should be backed by land. Governments would issue money as certificates redeemable in land, since that's a finite asset they actually exclusively control. He was a big Ron Paul supporter, too.
I don't know, is the underwater Yap stone any weirder than the bytes of data stored on some bank hard drive indicating my ownership in, um, the right to move other bytes around? At least the Yap stone in principle could be posessed.
If mackerel were used as ersatz currency of the reason of having few practical uses beyond being used for bartering -- why did it become the preferred currency only after cigarettes were burned?
After all, cigarettes are a currency with a strong real world utility, which does indeed consume the underlying physical good. That is, exactly the opposite of mackerel.
Interesting as the mackerel and stone anecdotes may be, I don't think the theory they're being used to support here holds much water.
Indeed, as has been noted before in the discussion, SCARCITY - or rather predictable and controlled money supply - is the main driver of currency value. The available money supply (however you like to measure it) represents the value of all the goods and services within a currency zone. If the supply of money grows faster than the underlying economy (i.e. the value of the aggregate goods and services), the value of each currency unit decreases (i.e. inflation).
What gold, cigarettes, mackerel and large stones have in common is that their supply is limited. Producing more gold is slow and tedious, as is hewing stones. And the mackerel and cigarret supplies are tightly controlled by prison regulations. That's why all of them can be reasonably thought of holding value that is to some extent stable.
The stability of a fiat currency, on the other hand, depends on sound monetary policy, i.e. an independent central bank that keeps money supply in a tight corridor around inflation and growth targets.
From Brooksfoe:
I know you think you are being clever, but the system you describe above is fundamentally more sound than the one we have, and for the exact same reason that gold money is fundamentally more sound- land is no one else's liability.
Cans of mackerel could also potentially serve as a free-market commodity money, but the future supply is not easily discernible, and for this reason, most people would not freely choose to use it as such. The same applies to a wide variety of other commodities, including paper, photons, and electrons. Gold just happens to be the commodity with the maximal number of qualities people look for in the most exchangeable of commodities.
I am no advocate for forcing everyone onto a gold standard, I am only an advocate for allowing people to use whatever money they wish with no coercion. History conclusively shows us what types of money will claim the highest market shares in the absence of police and prisons backing them up.
The stability of a fiat currency, on the other hand, depends on sound monetary policy, i.e. an independent central bank that keeps money supply in a tight corridor around inflation and growth targets.
That's the key. It's the institutions that you create to regulate the fiat money supply, and not fiat money itself, that can be problematic. In our case, the Federal Reserve is sufficiently independent and sufficiently powerful and generally does a good job. Our problems come in the way we set up our regulations of the banking sector, not in our management of the money supply.
Also, I have to really compliment Megan on her handling of the inappropriate comments above. While she could have just deleted the comments, her way of throwing it back on the commenter is a wonderful example of a feminist approach to sexuality as well as a brilliant way of shutting those comments down.
I am no advocate for forcing everyone onto a gold standard, I am only an advocate for allowing people to use whatever money they wish with no coercion.
By the way, it bears repeating (it has been said a million times) that people are already allowed to use whatever money they wish with no coercion. They can contract for payment in gold and make those contracts specifically enforceable. They can also contract for payment in the amount of cash that buys a particular amount of gold at any time. They can barter gold as well.
The only restriction is that when dealing with the government, you have to contract with dollars. But everything else can be in gold.
The problem is that the goldbugs have been unable to convince their fellow citizens of the superiority of gold as a medium of exchange. You could contract in gold, but good luck finding anyone who wants to do it with you when they can use dollars instead. In other words, the American people have decided, in their wisdom, that fiat currency serves their needs better. Bear in mind, this choice is NOT dictated by the government-- if the dollar really collapsed, you suddenly WOULD see a lot of contracting in gold.
So, if you want people to start using gold, the only way to get there is by government coercion to force people who would rather accept dollars to accept gold instead.
They can contract for payment in gold and make those contracts specifically enforceable.
It's doubtful that the courts would enforce a contract to pay in a certain amount of gold. More likely they would order payment in dollars, hopefully pegged in some way to the value of gold on the date of the order. The problem being that given how slow the judicial process is, both parties would be exposed to considerable exchange-rate risk.
Specific performance with the gold would be preferable in some ways, but I wouldn't count on it.
It's doubtful that the courts would enforce a contract to pay in a certain amount of gold. More likely they would order payment in dollars, hopefully pegged in some way to the value of gold on the date of the order. The problem being that given how slow the judicial process is, both parties would be exposed to considerable exchange-rate risk. Specific performance with the gold would be preferable in some ways, but I wouldn't count on it.
1. Specific performance is available when the consideration is unique and important to the parties. Any good transactional lawyer could probably draft a contract that met this requirement.
2. Even if you are awarded the amount of dollars pegged to the price of gold, that's the same thing as contracting in gold because you can buy gold with those dollars and you aren't hurt except for the small transaction cost of the gold purchase (which can also be included in the price or liquidated damages in the contract).
3. Of course the parties would be exposed to exchange rate risks. THAT'S THE POINT OF CONTRACTING IN GOLD. You have two parties who think gold is a better medium of exchange, i.e., they think the exchange rate risk is worth taking because they feel more secure with those "real" gold bars than they do with "monopoly money" paper dollars.
4. The judical process only comes into play if there's a breach. Just like any contract, at least 95 percent of the time the party is going to pay in gold and everyone is going to be happy.
5. The broader point still stands-- you can contract in this way if you want. Nobody's stopping you. The problem is, your fellow Americans don't want to exchange gold with you-- they want to exchange dollars with you. The only way you can change that is by having the government come in and force you to exchange gold instead of dollars.
Sheeesh. Re-reading my above comment makes me feel just a bit embarrassed. Believe it or not, I'm really not a dyslexic dolt. Probably just too enthusiastic about morning coffee.
What I was trying to say: The stability of a gold currency comes for free, because there is only so much gold to come around. The stability of a fiat currency depends on the institution guarding the money supply. But this is also the great advantage of a fiat currency: The Fed can adjust money supply to the economic needs of the times.
With a gold currency, economic growth potential would effectively be limited by supply of one commodity. If the first outpaced the latter, there would be deflation, leading to less investment and less consumption, in turn leading to less growth. Economic growth potential would effectively defined by commodity supply, not market economics.
Dilan,
Gold transactions are disadvantaged by the tax consequences arising from the the floating exchange rate between dollars and gold. You are liable for capital gains taxes whenever your gold rises in dollar value from the time you acquired it and when you disposed of it. All I ask for is an even playing field.
Gold transactions are disadvantaged by the tax consequences arising from the the floating exchange rate between dollars and gold. You are liable for capital gains taxes whenever your gold rises in dollar value from the time you acquired it and when you disposed of it. All I ask for is an even playing field.
You also get to deduct any capital losses whenever your gold falls in dollar value from the time you acquired it and when you disposed of it. So the tax consequences of gold transactions are neutral.
Specific performance is available when the consideration is unique and important to the parties.
Unless you're being paid in numismatically valuable coins, gold it not unique because one ounce of it is pretty much like any other. All the fancy drafting in the world won't change that.
And my point about exchange-rate risk applies after the court's order, not before. The court can say: you shall pay $X, which X corresponding to the amount necessary to buy the proper amount of gold on the day of the order. But it won't be paid that day; there will be an appeal that will take a year or two, the paying party will drag its feet a bit, and you'll find that 3 years later, when the time comes for actual payment, the price of gold has shifted and one party or another has to petition the court to modify the order.
In other words, it is the very nature of the judicial process as it exists today to destroy the value of contracting in gold.
And while it's true that most contracts are completed without judicial involvement, most contracts are written with an eye to judicial enforcement. So unless the courts really do start enforcing payment in gold, the problems that arise from enforcing payment in dollars will lead prudent drafters to stick to dollars rather than gold.
So my broader point is that the government creates real obstacles to contracting in gold even if it doesn't actually put people in jail for doing so.
Further, I might add that treating gold as different from any other investment would be a very bad thing. Why, in a free market, should we privilege gold as a medium of exchange with a zero capital gains rate but not silver, or mackerel, or stock in Microsoft, or anything else that might be used as a medium of exchange.
The current system says you can use anything as a medium of exchange and it has the exact same tax consequences. (Indeed, using dollars has the same tax consequences, because unless you plan to hide them in your mattress, your investment of those dollars is subject to capital gains and/or interest and dividend taxation after you receive them for performance of a contract. This subtle point is missed by just about everyone who advocates for a gold or commodities-backed currency.)
Dilan,
No, historically, they are not neutral. The increase in the amount of fiat always outstrips the increase in gold over the long haul (and that long haul is rarely far in the future). The fact of managed inflation is the basic justification for using fiat in the first place.
Unless you're being paid in numismatically valuable coins, gold it not unique because one ounce of it is pretty much like any other. All the fancy drafting in the world won't change that.
Gold is still "unique" if it is important to the parties to be paid in it rather than dollars.
A nice example-- a tract home is not unique, in that it is exactly the same as thousands of other homes. But it is "unique" enough for specific performance.
And my point about exchange-rate risk applies after the court's order, not before. The court can say: you shall pay $X, which X corresponding to the amount necessary to buy the proper amount of gold on the day of the order. But it won't be paid that day; there will be an appeal that will take a year or two, the paying party will drag its feet a bit, and you'll find that 3 years later, when the time comes for actual payment, the price of gold has shifted and one party or another has to petition the court to modify the order.
That may be true in a narrow sense, but it will only apply in the 1/10th of 1 percent of cases where you have a breach AND an appeal after judgment. And while nobody's tried it (because nobody except a few kooks is interested in contracting in gold), you could possibly write a clause a la an attorney's fees clause that would allow for compensation for loss of value due to the exchange rate during an appeal.
And while it's true that most contracts are completed without judicial involvement, most contracts are written with an eye to judicial enforcement. So unless the courts really do start enforcing payment in gold, the problems that arise from enforcing payment in dollars will lead prudent drafters to stick to dollars rather than gold.
Again, if a client walks into my office and says I want a contract that denominates payment in gold, I would have to notify him or her about the risks involved, but I could write a contract that would give him or her at least a 95 percent chance of being paid in gold or the dollar equivalent at the time of performance.
Your problem is that NOBODY wants to contract in gold. We don't want your gold. Get over it and pay us in dollars, until the rest of the world says otherwise.
No, historically, they are not neutral. The increase in the amount of fiat always outstrips the increase in gold over the long haul (and that long haul is rarely far in the future). The fact of managed inflation is the basic justification for using fiat in the first place.
They are neutral because whether you gain or lose money, you get the same tax treatment. And if you contract in gold, you won't have to dollarize your gold holdings very often anyway, which is the only time you would pay the tax.
Again, this stuff wouldn't deter a rational actor from contracting in gold. The problem is that it's IRRATIONAL TO CONTRACT IN GOLD WHEN THE REST OF US DON'T WANT YOUR GOLD AND DO WANT YOUR DOLLARS.
A nice example-- a tract home is not unique, in that it is exactly the same as thousands of other homes. But it is "unique" enough for specific performance.
Real estate is considered unique by definition. If you're a lawyer, you know that. But commodities are--again by definition--not unique. If you can't force specific performance for a contract exchanging dollars for, say, lumber (and you can't; the lumberyard will be ordered to compensate you in dollars, not lumber), there's no reason you should expect to do any better with a contract involving gold.
Indeed, (as in the case of lumber or any other commodity) you might be expected to cover, so that instead of getting payment in gold on the agreed-upon date, you're expected to front your own cash for the gold and hope that you can get the cash back (with statutory interest) in litigation.
What you're arguing here is that gold is somehow different from other commodities; I don't think that's the case.
Your problem is that NOBODY wants to contract in gold.
I'm not here to argue for commodity currency. I'm here to point out that you're wrong about the relative costs and risks of choosing to contract in commodities.
Real estate is considered unique by definition. If you're a lawyer, you know that. But commodities are--again by definition--not unique. If you can't force specific performance for a contract exchanging dollars for, say, lumber (and you can't; the lumberyard will be ordered to compensate you in dollars, not lumber), there's no reason you should expect to do any better with a contract involving gold.
It isn't that simple. Uniqueness depends on the expectations of the parties. If the parties were both libertarian goldbugs who were convinced of the valuelessness of dollars and wrote that into their contract as a liquidated damages clause, I would suspect that the courts would enforce it.
I'm not here to argue for commodity currency. I'm here to point out that you're wrong about the relative costs and risks of choosing to contract in commodities.
So far, you have at best called into question that a court might specifically enforce a gold contract, and established that there's an 0.1 percent likelihood that a contract might lose (or gain) value during the time when it is up on appeal after judgment.
Neither of those are significant costs. Certainly the nation's goldbugs who hate their fiat money would consider them minor in the scheme of things given the huge advantages of contracting in gold. And yet they don't. What does that tell you?
I am taxed on the inflated dollar gains in gold even if I have not invested my gold, but have instead buried it in the back yard. It is this tax treatment that disadvantages transactions in gold. To be treated equally as currencies, you have to remove the capital gains tax on gold exchanges for dollars. If I have to pay taxes at any level in dollars, then I have no choice but to convert gold to dollars and pay this inflation tax. It is for this very reason that governments don't treat equally the currencies competing with its own- they don't want people escaping the inflation tax.
Give people a tax neutral currency that avoids dollar inflation, and some number will use it regardless of the inconvenience of being in a minority.
I am taxed on the inflated dollar gains in gold even if I have not invested my gold, but have instead buried it in the back yard. It is this tax treatment that disadvantages transactions in gold.
1. Only if you sell it. As long as that gold is buried, you pay no tax at all.
2. You also get a tax deduction every time you sell that gold when it has gone down in value (as it did for many years in the 1980's and 1990's).
To be treated equally as currencies, you have to remove the capital gains tax on gold exchanges for dollars.
But why should gold get favored treatment? Silver, mackerel, and other media of exchange are subject to the capital gains tax. Further, dollars are as well, because you aren't going to bury your dollars in the backyard either-- you are going to invest them and pay a capital gains tax.
Certainly the nation's goldbugs who hate their fiat money would consider them minor in the scheme of things given the huge advantages of contracting in gold.
The nation's libertarian goldbugs probably pay for things in cash up front most of the time.
The nation's libertarian goldbugs probably pay for things in cash up front most of the time.
With the internet, one would think that there would be a thriving market for transactions in gold. Heck, you could even create a PayPal using gold-backed securities. It's all so much easier now.
Except that (pardon the pun) goldbugs don't put their money where their mouth is. In reality, there's no demand for gold transactions because rational economic actors see dollar transactions as reasonably secure.
Again, I am not saying that there can't be situations where it would be rational to transact business in gold. There specifically can be such situations and in a big-time currency panic, I think it would be quite likely that such transactions might become more common. But as long as the dollar holds its value reasonably well in the short term, such transactions are not rational, because fiat money is serving its purpose.
(I should add that even before modern technology, there was a great fear among fiat money boosters during the Depression that gold could become a medium of exchange, and FDR took drastic steps to ensure that didn't happen. With the internet, I doubt that even the steps that FDR took could stop this from happening if there really were a currency crisis.)
At bottom, I think a lot of this comes down to an aesthetic preference. Certain people don't like that the currency has no intrinsic value. It's pretty easy to hedge against that risk (by buying gold, or gold-backed securities, or for that matter, a wide-variety of other inflation-resistant investments), but while it is quite easy to place yourself in a position where you are not at much risk if the currency plummets, that doesn't get rid of the outrage that a goldbug feels every time they have to pay for something or be paid for something with what they see as worthless pieces of paper.
The problem is that this aesthetic objection isn't a good reason to upturn decades of monetary policy.
The problem is that this aesthetic objection isn't a good reason to upturn decades of monetary policy.
That's fortunate. I find the Euro to be rather ugly and I'm offended by the notion of a currency that doesn't depict national monuments or heroes.
And BTW, there is some guy selling certificates he claims are backed by silver. I absolutely love his sales pitch: send me your worthless FRNs and I'll send you REAL MONEY.
I's awfully nice of him to be so generous, trading money worth nothing for real hard currency.
Dilan,
You have claimed in various places that dollars are also taxed for capital gains. This belief betrays a fundamental misunderstanding of my original argument. Dollars are the unit of exchange- any capital gains that are taxed are the gains in the item purchased, whether it be a bond, a stock, gold, or mackerel. Dollars themselves are never taxed for gains of any kind. To show this is true, I will demonstrate using a fairly unusual hypothetical- unusual for fiat currencies, that is:
If I bury $100 in the back yard for ten years, and deflation occurs over this time period, of, let us say 50%, I have incurred no tax liability of any kind, even though my money's purchasing power has increased by a factor of 2. And it does not matter what the cause of the deflation was. It is here that federal reserve notes have their tax advantage since any other currency would incur a tax liability if its purchasing power increased- and, again, it does not matter why they increased in value.
It would be enough if all capital gains were adjusted for inflation of the dollar. This by itself would remove much of the tax advantage enjoyed by the government money. We even do this for income taxes, but not for exchanges of property, and the reason is quite clear- to do so would allow more people to escape the inflation tax by using competing currencies.
It isn't that simple. Uniqueness depends on the expectations of the parties.
It occurs to me upon reflection that if I sign a contract to buy lumber, it's because it matters very much to me that I receive lumber. Presumably I do not intend to build a house out of mackerel tins or vacuum-packed coffee bricks, or even a big pile of $100 bills. Yet despite that expectation (and the fact that I would never have signed the contract without it), I cannot reasonably expect specific performance unless the lumber is identifiable and unique, such as, say, the beams of a 19th century barn. I cannot see why the courts would treat a contract involving gold differently than one involving lumber, or oil, or corn syrup, or whatever commodity you care to name.
As for a gold-based PayPal, it seems you are largely right about that; I can see little obstacle to such a system given that you'd never litigate such a thing anyway, so what courts would do doesn't matter.
If I bury $100 in the back yard for ten years, and deflation occurs over this time period, of, let us say 50%, I have incurred no tax liability of any kind, even though my money's purchasing power has increased by a factor of 2. And it does not matter what the cause of the deflation was. It is here that federal reserve notes have their tax advantage since any other currency would incur a tax liability if its purchasing power increased- and, again, it does not matter why they increased in value.
That is ONLY true, however, if you bury your money in the backyard. Since 99.999999999999 percent of people will invest any more than trivial sums of savings, that's not a relevant example. In a functioning economy where nobody is stuffing the mattress with money, everyone is taxed on their savings, no matter what it is invested in.
It would be enough if all capital gains were adjusted for inflation of the dollar. This by itself would remove much of the tax advantage enjoyed by the government money. We even do this for income taxes, but not for exchanges of property, and the reason is quite clear- to do so would allow more people to escape the inflation tax by using competing currencies.
Again, though, I don't see the problem with a capital gains tax when the folks doing business in dollars pay it too (because they aren't burying their money in the backyard). Everyone pays it, whether they are paid in gold or not. We could totally eliminate capital gains taxes and you still wouldn't find anyone who wanted to do business with you in gold.
It occurs to me upon reflection that if I sign a contract to buy lumber, it's because it matters very much to me that I receive lumber. Presumably I do not intend to build a house out of mackerel tins or vacuum-packed coffee bricks, or even a big pile of $100 bills. Yet despite that expectation (and the fact that I would never have signed the contract without it), I cannot reasonably expect specific performance unless the lumber is identifiable and unique, such as, say, the beams of a 19th century barn.
But again, that assumes a contract that doesn't provide any sort of a compelling reason why you must be paid in lumber rather than dollars.
A contract that contains such language is much more likely to be specifically enforced.
Can somebody answer the question for me: why gold?
We've got an equally rich history of silver mining in this country--why not use that? Or use copper or steel. What the hell is special about Au? I mean, I could see why it was done before, since gold was commonly used to make coins and everbody else was already on the gold standard. In other words, path dependency. But now, nobody is using gold-backed currency so there's no network effect.
Maybe we should pick another backing if we're going to do this--platinum or rhodium are both much more valuable. Since the amount of dollars in circulation has increased drastically since the country went off the gold standard, maybe it'd be easier to make the switch to something that costs $3,300 per ounce (Rh), since it'd take less metal to back the currency in circulation.
When I was in Federal Prison a few years ago, cigarettes were still legal and sold at the comissary, but the common medium of exchange was Postage Stamps ( discounted to a value of $.25 per first class mail unit) which have some real world value. Everything from gambling stakes, food purloined from the kitchen, extra fancy haircuts, laundry services, porno mags (some dating from the 70s) to cocaine and heroin could be purchased for stamps.
Those with good contacts on the outside mailed stamps out and got cash(checks and money orders) in return. Others had to stand outside of the comissary and make deals with shoppers to turn the stamps into consumables. It made for a lively market environment. As a rule Bank Robbers and Drug Dealers are advocates of free markets with the bare minimum regulatory oversight.