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I don't really understand how money in circulation increases as the economy grows. Also, should the government determine the standard of exchange (the dollar)? This question is about the ideal objectivist society.

asked Mar 02 '14 at 18:29

Collin1's gravatar image

Collin1
22312477

In capitalism, money in circulation increases as the economy grows pretty much the same way as the amount of any other commodity - supply and demand.

One difference is that with money there are two ways to increase the value of money in circulation. One way is to increase the number of units of money in circulation (and/or create new types of money altogether). The other way is that the value of a single unit might go up (deflation).

A characteristic of good money is that it is highly divisible, so if the value of one unit goes up to where transactions are hindered, you use fractional units.

(Mar 05 '14 at 16:55) anthony anthony's gravatar image

The Objectivist answer to this question can be summed up in one word: gold -- literally, gold coins circulating in the economy, being used as money to buy goods and services, with the coins minted by private banks and/or mints. There might also be paper certificates representing actual gold coins or bars, 100% gold backed and redeemable for gold on demand, issued by private banks. Other metals, such as silver and copper, could be used, as well, to represent fractions of a gold coin.

Many people today have been conditioned over the decades to regard gold-based money as unfair or impractical somehow, although they may not be entirely sure why that might be so. One possible objection to gold is that it would limit the "flexibility" of government to expand the money supply arbitrarily when allegedly needed to "stimulate" the economy and fuel government spending. But limiting the government is exactly what an objective money supply is supposed to do. It is supposed to serve not only as a medium of exchange, but also as a store of wealth. The excerpts in the topic of "Gold Standard" in The Ayn Rand Lexicon explain, in part:

Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold . . . .

Here are additional references to gold money in the literature of Objectivism:

  • "Gold and Economic Freedom," published in CUI, Chap. 6. (Although this article was not written by Ayn Rand, it was published by her under her editorial direction and endorsement.) This article is the source of the Lexicon excerpts in the topic of "Gold Standard."

  • "Common Fallacies about Capitalism," subsection titled, "Depressions," in CUI, Chap. 5. (Another article endorsed by Ayn Rand but not written by her.) See especially pp. 78-79 and p. 82.

  • "Egalitarianism and Inflation," published in PWNI Chap. 12, p. 172: "Money is the tool of men who have reached a high level of productivity...." This paragraph provides an excellent summation of the essential principles underlying a gold standard. Also p. 180:

... "deficit financing" ... is made possible by the fact that the government cuts the connection between goods and money. It issues paper money, which is used as a claim check on actually existing goods—but that money is not backed by any goods, it is not backed by gold, it is backed by nothing. It is a promissory note issued to you in exchange for your goods, to be paid by you (in the form of taxes) out of your future production.
  • OPAR p. 402:
Money itself must be a freely chosen material value, a commodity such as gold, which is an objective equivalent of wealth. Under capitalism, money is not worthless paper arbitrarily decreed to be legal tender by men in positions of political power.

There are also numerous references in Atlas Shrugged [page references below are from an edition in which Parts I and II begin on pages 11 and 317, respectively, and Part 3 spans pp. 647-1075]:

  • p. 383 (Francisco's money speech):
"Those pieces of paper, which should have been gold, are a token of honor...."
  • pp. 385-386, Francisco speaking:
"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims."
  • p. 531: Ragnar hands Rearden a bar of gold, as a small initial payment on a debt owed to Rearden by the looters who robbed him of it. All the major heroes had "accounts," denominated in gold. The payment to Rearden was prompted by the seizure of Rearden Metal from him.

  • p. 537, Ragnar speaking to Rearden:

"I deposit the gold in a bank—in a gold-standard bank, Mr. Rearden—to the account of men who are its rightful owners. They are the men of superlative ability who made their fortunes by personal effort, in free trade, using no compulsion, no help from the government. They are the great victims who have contributed the most and suffered the worst injustice in return. Their names are written in my book of restitution. Every load of gold which I bring back is divided among them and deposited to their accounts." [...]

[Ragnar:] "Do you remember Midas Mulligan of Chicago?"
[Rearden:] "Yes, of course."
[Ragnar]: "All my accounts are deposited at the Mulligan Bank."
  • [p. 617] Dagny awakens from sleep on a stalled train whose crew has just deserted. [p. 621] Dagny sees Owen Kellogg on the train. [p. 631:]
[Dagny:] "Sell me that package [of cigarettes], will you?"
[Kellogg:] "I don't think you'll be able to afford it, Miss Taggart, but—all right, if you wish."
"How much is it?"
"Five cents."
"Five cents?" she repeated, bewildered.
"Five cents—" he said, and added, "in gold."
She stopped, staring at him. "In gold?"
"Yes, Miss Taggart."
"Well, what's your rate of exchange? How much is it in our normal money?"
"There is no rate of exchange, Miss Taggart. No amount of physical—or spiritual—currency, whose sole standard of value is the decree of Mr. Wesley Mouch, will buy these cigarettes."
  • p. 651: a 3 ft. tall dollar sign hung in the air over the entrance to the Valley, made of solid gold.

  • p. 662:

[Sanders:] "... your plane. It can be fixed. But it will be an expensive job."
[Dagny:] "How much?"
"Two hundred dollars."
"Two hundred dollars?" she repeated incredulously; the price seemed much too low.
"In gold, Miss Taggart."
"Oh … ! Well, where can I buy the gold?"
"You can't," said Galt.
She jerked her head to face him defiantly. "No?"
"No. Not where you come from. Your laws forbid it."
"Yours don't?"
"No."
  • pp. 671-672:
A small brick structure came next, bearing the sign: Mulligan Mint. "A mint?" she asked. "What's Mulligan doing with a mint?" Galt reached into his pocket and dropped two small coins into the palm of her hand. They were miniature disks of shining gold, smaller than pennies, the kind that had not been in circulation since the days of Nat Taggart; they bore the head of the Statue of Liberty on one side, the words "United States of America—One Dollar" on the other, but the dates stamped upon them were of the past two years.
"That's the money we use here," he said. "It's minted by Midas Mulligan."
"But … on whose authority?"
"That's stated on the coin—on both sides of it."
"What do you use for small change?"
"Mulligan mints that, too, in silver. We don't accept any other currency in this valley. We accept nothing but objective values."
  • p. 702, Galt to Dagny:
"I shall be the first man in this valley to hire a servant." He got up, reached into his pocket and threw a five-dollar gold piece down on the table. "As advance on your wages," he said.
  • p. 751:
He reached into his pocket and extended to her a small, shining disk which she could not distinguish at first. He dropped it on the palm of her hand: it was a five-dollar gold piece.
"The last of your wages for the month," he said.

To sum up: There is no practical or logistical barrier to using gold as money. The only barrier is our government and the underlying ethical outlook that drives it, namely, altruism versus the morality of individualism.

Update: Implementation Details

Some of the comments seem to suggest that a laissez-faire gold standard would be too chaotic, implying that there might be no alternative to a central government authority controlling it. But laissez-faire fundamentally is a system of freedom, not central control. If a buyer and seller mutually agree to use gold (or any other substance) as a medium of exchange, why should they be stopped by law from doing so? Why shouldn't buyers and sellers be allowed to decide for themselves what form of money they want to use in their financial transactions? If one accepts the efficacy of reason, why wouldn't buyers and sellers be able to identify for themselves what form of money would be best for their needs? Over time, a laissez-faire system probably would lead to the development of privately owned standards for potential units of money such as gold coins and possibly gold certificates, specifying how the coins and/or certificates are to be constructed and marked, perhaps with some kind of insignia indicating compliance with the standard, which other non-complying providers would be forbidden by law from copying without authorization from the owners of the standard (by the property rights of the owners). If private individuals and enterprises want to come together and devise such standards for the voluntary compliance of others, why should they be stopped by law from doing so?

This is basically just an implementation issue. The fundamental barriers to a laissez-faire gold standard are not implementation issues at all, but the issues of mysticism (supernatural or collective-social) versus the efficacy of reason, and altruism versus the morality of individualism -- issues that have torn civilization apart for two and a half thousand years.

Update: Money Based on Gold

Additional comments have clarified the commenter's support for economic and political freedom, including the freedom to choose the form of money to be used in financial transactions. I still maintain, however, that a number of laws would need to be repealed to make such freedom fully real in the U.S., starting with the provision in the U.S. Constitution that gives Congress the power (interpreted as exclusive) "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures...." (Article I, Section 8.) Over the years, our government has repeatedly shown its vigilance in suppressing the use of gold as money (1933 is one example, during the Presidential term of Franklin Roosevelt). As the CUI article on "Gold and Economic Freedom" mentions (near the end of the article):

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

That article also addresses concerns about the homogeneity and divisibility of the monetary standard, and the advantages of using a "luxury good" such as gold -- i.e., scarcity, high unit value, and ease of transporting a given value compared to the far greater bulk and weight of more plentiful non-luxury goods. For smaller transactions, the article explains:

If all goods and services were to be paid for in gold, large payments would be difficult to execute, and this would tend to limit the extent of a society's division of labor and specialization. Thus, a logical extension of the creation of a medium of exchange, is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

The paragraph immediately prior to this observes the actual history of a gold standard:

[Gold] is durable, portable, homogeneous, divisible, and, therefore, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange.

The article discusses other possible monetary standards, too, and explains why, historically, each of them has gradually been displaced by the advantages of gold.

Update: Legality of Gold

A comment asserts:

The ban on private ownership of gold and use of gold in contracts was repealed in the 1970s.

This comment was not accompanied by any references, but I have now found some that appear to confirm it. Philosophically, of course, one wonders how long Congress would wait to ban the monetary use of gold once again if it started to become popular and widespread again in the U.S., especially under a new Presidential administration in the tradition of FDR.

answered Mar 05 '14 at 00:51

Ideas%20for%20Life's gravatar image

Ideas for Life ♦
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edited Mar 09 '14 at 15:07

There is no practical or logistical barrier to using gold as money.

Hard to divide into reasonably sized units, hard to transport, hard to verify as non-counterfeit. Gold makes no sense in the digital age.

Silver is a little bit easier to divide into reasonably sized units, though even a silver dime is worth too much to be used in most vending machines. But it's even harder to verify as non-counterfeit, and the value of silver is not as stable.

(That's not, of course, to say that we should use Federal Reserve Notes.)

(Mar 05 '14 at 12:46) anthony anthony's gravatar image

There might also be paper certificates representing actual gold coins or bars, 100% gold backed and redeemable for gold on demand, issued by private banks.

The biggest problem with that is fungibility. One ounce of gold at Washington Mutual won't be worth the same as one ounce of gold at Bank of America which won't be worth the same as one ounce of gold at Chase. (Unless, of course, the government creates a single centralized banking system, in which case we're back where started.)

(Mar 05 '14 at 13:09) anthony anthony's gravatar image

"One ounce of gold at Washington Mutual won't be worth the same as one ounce of gold at Bank of America which won't be worth the same as one ounce of gold at Chase."

Why not?

(Mar 06 '14 at 18:53) Humbug Humbug's gravatar image

Because the chances that the gold will be stolen/destroyed at each is not equal.

(They also probably won't have equal withdrawal fees/policies.)

When a rumor goes around that Wamu gold has been embezzled/stolen, and there's a run on Wamu, and Wamu has to break up its gold bars into all kinds of nonstandard denominations (melt it and create coins?), Wamu gold certificates are going to be worth significantly less than other gold certificates, even if the rumors aren't true (but especially if they are).

(Mar 07 '14 at 07:55) anthony anthony's gravatar image

Additionally, even physical gold isn't really completely fungible. A 1/10th ounce gold round (which itself is far too valuable to be used for daily transactions) generally sells at a significant premium compared to a 400 oz gold bar in terms of cost per ounce.

And unless you want to go through the complicated (and not free) process of validating the gold content of the round, you probably want something stamped by a mint. But different mints will have different trustworthiness, and hence different values.

(Mar 07 '14 at 08:13) anthony anthony's gravatar image

Some of the comments seem to suggest that a laissez-faire gold standard would be too chaotic, implying that there might be no alternative to a central government authority controlling it.

That's just plain false. What I said was that, in today's digital age, gold doesn't make good money, and the only other comment was "Why not?"

(Mar 07 '14 at 17:47) anthony anthony's gravatar image

If a buyer and seller mutually agree to use gold (or any other substance) as a medium of exchange, why should they be stopped by law from doing so?

They shouldn't be, and at least in the United States, they aren't.

If one accepts the efficacy of reason, why wouldn't buyers and sellers be able to identify for themselves what form of money would be best for their needs?

They should, and to a large extent can, and virtually no one chooses gold.

(Mar 07 '14 at 17:51) anthony anthony's gravatar image

anthony- thanks for a really enlightening set of points. Really got me thinking. There's a lot more than meets the eye with gold. I wondered what happens to the world economy in gold if, say nuclear fusion became cheap enough for us to create gold from nearby more abundant elements ? Also what happens if someone just discovers a huge mine of previously unknown gold (maybe on an asteroid) -- does he become the richest man in the world ? How would his value compare to those of inventors and entrepreneurs who actually invent stuff with their minds versus find stuff?

(Mar 08 '14 at 09:52) Danneskjold_repo Danneskjold_repo's gravatar image

Gold and Economic Freedom was written in 1966. Like gold as a medium of exchange, it's obsolete.

The ban on private ownership of gold and use of gold in contracts was repealed in the 1970s.

Are there other laws which should be changed? Absolutely. Importantly, we need to repeal all the money transmitter laws. These laws aren't specific to gold, but have been used to, for instance, take down E-gold.

(Mar 08 '14 at 11:42) anthony anthony's gravatar image

As far as what would happen if someone undeservedly comes across all (or almost all) the money in the world, I think there was a Twilight Zone episode where that happened.

Might be a problem if we have a government-imposed gold standard, but under laissez-faire capitalism, the value of gold would simply plummet.

(Mar 08 '14 at 11:48) anthony anthony's gravatar image
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Asked: Mar 02 '14 at 18:29

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Last updated: Mar 09 '14 at 15:07