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
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.
Here are additional references to gold money in the literature of Objectivism:
... "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.
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]:
"Those pieces of paper, which should have been gold, are a token of honor...."
"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."
"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." [...]
[Dagny:] "Sell me that package [of cigarettes], will you?"
[Sanders:] "... your plane. It can be fixed. But it will be an expensive job."
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.
"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.
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.
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.