Money and Abstraction

Over at Tacitus, "Yertle" has a post on he global monetary system entitled "That Shared Hallucination".

While he is right that there is danger in our current monetary system, I think he misplaces the idea as to where it is.

Essentially, his argument is that commodity money (gold, silver) is an abstraction taking us away from barter, and that paper money, initially representing a quantity of gold or silver, is another level of abstraction, and checks, banm accounts, and bonds, another, etc. As our monetary gets more and more abstract, so the argument goes, we must rely more and more on faith to keep the system going. Therefore, the system gets more and more fragile, and thus things that reduce people's faith in the system become more and more likely to lead to its collapse.

In short, a fiat money system, particularly one with sop many different means of investing and dividing ownership requires a lot of psychological conditioning to keep it going, and so is unstable.

The problem with this theory is that using money instead of barter is not the original abstraction. Nor is barter.

The original abstraction is the idea of ownership, of property.

The concept that certain objects belonged to certain people, that there was a connection allowing only one person or one family (or those who were approved by that person or family) to use a particular piece of land or object is the true first abstraction.

Not the idea of possession; that a person has objects or land that he won't allow other people to use; you find that in animals. But rather the idea that there was a moral principle at stake; that you didn't trespass because it was wrong, not just because of fear of retaliation. The idea that society as a whole would enforce ownership, and that people would protect others' property and possessions and that everyone would recognize the right to property are the true first abstraction.

And everything else from that is not, in my opinion, terribly more abstract; complicated, yes, but not that much more abstract. Money is simply a general claim on a certain amount of property that has not yet been applied.

The real danger in a fiat money system comes from the fact that commodity-based money tends to be more stable because there is less that can be done with the money supply. When the free-market determines what is used for money, it is almost always a precious metal in any economy of any advancement, because it has a more stable supply and its value cannot as easily be manipulated by outside forces.

Paper money, on the other hand, is cheap enough to print that there is little cost in increasing the money supply, which amounts to a tax on those with cash holdings. It is more easily manipulated, and that is the source of instability.

There is somewhat greater abstraction with fiat money in that its value is dependent on an authority declaring it money; whereas gold has independent value, that is, people value the metal itslef independently of any legal authority's claims about it.

But the major problem with fiat money, in the end, is its manipulability.

Some people have claimed that fiat money is irrelevant; as long as the U.S. maintains enough productive capacity, has good economic policy, and does not interfere with business, so they say, people will accept its money and trust that its money is good regardless of whether or not it is backed up with gold. This ignores the central fact that the existence of fiat money alters economic policy, alters incentives and thus has an effect on productive capacity, and in and of itself intereferes with business.

Think of fiat money as an analgesic. If you have severe pain in your leg, it may indicate a problem. With a sufficiently strong pain reliever, you may be able to use the leg normally. But if you use the analgesic in lieu of going to a doctor to see what is wrong, he analgesic may allow you to use the leg at a time when you really shouldn't be using it. The pain was there for a reason. Likewise, fiat money may allow the government to manipulate the currency in order to deal with financial problems. However, in general any fixing of problems via currency manipulation simply puts off dealing with the underlying problems, this making them worse when the day of reckoning finally arrives.

Like most government actions, the problem with fiat money is, in essence, not its abstraction or its lack of "real value" per se as much as it is the fact that it represents an interference with the free market.

That is all.