More Thoughts on the Value of Money

When I wrote the first post on this topic a few days ago, I thought I had written something pretty good. But upon re-reading it, I was disappointed. I don't think it turned out that well.

Part of this is a simple matter of having thought about the question a bit too much.  Once you've gone into a topic a certain ways, you realize that what you have is 1) a concrete situation, and 2) many ways to think about it, most of which will have at least some merit, or else nobody would bother to think about it that way at all.  They will all have some things in common, and some things about which they disagree, but they will all be using the same words but sometimes meaning different things by them.  It is also always difficult to get your words to mean what you want them to mean, not to mention getting your own thoughts straightened out sufficiently to have anything worth saying.

But there is also the problem of not thinking things through, and I didn't do that either, which was apparent when I went back and re-read things.  I didn't even mention the most important thing about the topic -- gold -- and how it started the confusion.

Actually, of course everybody wants a stable money -- they just all disagree on what that means.  For the monetarists -- the basic position I was describing last time as being opposed to the Austrian position -- this means a fluctuating money supply to counteract fluctuations in valuation.  They have conceived of  a sort of objective economic value-unit which money should represent and should be kept constant.  This will be reflected by a stable price level, usually 'measured' through the use of price indices.  The Austrian position is that this is an impossibility, and totally wrongheaded to boot.

The Austrians say that money should be a fixed quantity of a commodity -- usually gold or silver -- and that this condition should come about through the mechanisms of the free-market.  This is what I meant by 'integrity and constitution' last time.  Monetarists take this 'fixing' to be an attempt at the same idea that they have -- a fixed value.  That is wrong.  Austrians know that there are no fixed or truly objective valuations.  There is only subjective valuation, and market mechanisms for arriving at concrete prices.

Monetarists object to a fixed 'exchange rate,' i.e. price, between 'dollars' and units of gold -- the legal manifestation of a 'gold standard.'  They will assert that the Austrians are being somewhat hypocritical in trying to 'fix' the price of gold, when they say that they believe in free markets.  'Why should the price of anything be fixed?' they ask.  Everything should be valued freely in a free market, and the monetarist concludes that, at least on this point, he is more free-market than the Austrian.

This misunderstands, well, everything.  Unfortunately, there is enough of the monetarist instinct in most Austrians to fall into this trap.  Under a gold standard, the 'price' of gold in dollars is not a price at all.  It is the statement of a definition.  The problem is that pretty much all people today have come to think of dollars and gold as separate things.  This is why we can even conceive of them as 'floating' against one another.

Under a gold standard, they are not separate things.  This would be more clear if instead of using the name 'dollars' to call our money, we used something like 'grams of gold.'  Then it would be obvious that 'a gram of gold' could not float against 'grams of gold' any more than a pound might be a different weight or mean something different from one day to the next, as this would be totally nonsensical and useless.  But a dollar conceivably might, if we have forgotten what a dollar meant, or have started to take it to mean something it once didn't, i.e. a completely different and separate entity from gold.

Neither does 'fixing' the dollar against gold provide a fixed value to the dollar, whether or not gold and dollars are one-and-the-same.  It only provides a fixed exchange rate in terms of one other commodity.  The value itself may be whatever it may be -- as reflected by fluctuating prices of everything else in terms of money/gold.  Gold/dollars may be fluctuating in value all over the place.  Just because their price in terms of one another isn't changing, doesn't mean their valuation isn't changing.  The fact is, in economics, there are no fixed values, no matter what, period.

Secondly, in terms of 'providing value,' the relationship is almost exactly the other way around from what it is commonly conceived.  Under a gold standard, the gold is not providing the value to the money, the gold is deriving almost all of its value from its use as a money.  We normally think of it the first way only because we are not used to thinking of gold as money.  The fact that it is the second way can be amply demonstrated by thinking what a $100 dollar bill would be worth if it were only a piece of paper and not something recognized as money.  Likewise, gold as only a bit of metal is a very different thing from gold as a recognized medium of exchange.  A bit of gold may certainly be more valuable than a piece of paper independent of the use of either as a medium of exchange, but it should be obvious that the dominant value-conferring parameter here is the status of either as money.  If gold were instantly remonetized today, it would be far and away more valuable than it presently is precisely because it had achieved the status of money.

The problem here is that you have two completely different abstractions being formed about the same concrete situation, and the two are assuming they are similar and talking right past one another.  But it should be clear who has the more coherent position.  When you have an 'economic emergency,' like a recession, it is important for valuations to come into equilibrium with one another in order for people to work out solutions to the problem.  Trying to hold money at a constant value by pushing against equilibrium interferes with this process, whether through inflation or deflation of its supply.  It is no different from trying to hold wages and prices constant as all sorts of economic morons past and present propose on a regular basis.  Actually, it might be even worse, as money is more central to the economy than any particular product or profession.  Austrians should be against this, whether it is being done 'intelligently' by some planning board like a central bank, or 'impersonally/objectively' through 'supply and demand.'