Gold, air power, and blimps on a computer screen

by John MacBeath Watkins

Ron Paul's website has a post about his views on the money supply, and it contains one of the most wonderful images I've seen in a polemic in some time.

"What, then, is fiat money? It’s exactly what we just talked about: money that can be inflated or increased at the push of a button at the say-so of a powerful person or organization. Nowadays most dollars are just blimps on a computer screen and it’s extremely easy for the Federal Reserve to create money out of thin air whenever they want to."

There you go, blimps on a computer screen.  Spend them however you like.

(The text has been changed to "blips on a computer screen" on Ron Paul's website, which demonstrates why you can't trust electronic media to say the same thing every time you read it. You see, it lacks the permanence of octopus ink.)

Actually, while it's not entirely clear who wrote that post, Ron Paul is an advocate of the gold standard, or even the use of gold and silver as a medium of payment.  He regards "fiat currency" as unreliable and prone to rust, just like the cars were back in the 1970s.

But the interesting thing, to me, is the confusion about what money is.  With Federal Reserve notes, the dollar bill is (in linguistic terms) a signifier, signing that a dollar in value belongs to the bearer.  We can think of money as a favor owed to the person who owns it.  If you have a lot of dollars, the world owes you a lot of favors.

The thing is, gold and silver mean the same thing when used as currency.  They also have a use value, for electronics, jewelry, and fancy dining utensils.  Those dual roles actually interfere with them serving either role well. Why should the gold used in electronics cost more because confidence in the banks is shaky?  Why should the money supply increase when a miner hits the mother lode, or decrease when a treasure ship sinks?

Those problems help explain why France was so helpless in the Second World War.  Japan, then Britain, then Germany, then America, then France dropped the gold standard during the Great Depression.  Here are the economic results, in terms of industrial production:

That's from here:

The result was that France, which had fought Germany to a standstill in World War I, was poorly equipped for WW II.  Most of the French aces in their brief resistance to the German forces flew the Curtis P-36 Hawk.  You probably haven't heard of it, because it was generally considered obsolete at the beginning of the war, but Curtis could deliver then on time, with spares, in the quantity ordered, so they were the most advanced aircraft widely available to the French at the time of the invasion.  There were better French designs, but their industrial base had eroded to the point that they could not be produced in sufficient quantity, in time, and in good operating order.  In WW I, the British had difficulty equaling the French aircraft industry, and the Americans were barely in the game, but ill-advised monetary policy eliminated that advantage, and no doubt this was reflected in all areas of industry, leaving the French nearly helpless against the German juggernaut.

If you understand value as a favor owed, notes on a piece of paper make a lot of sense for keeping track of them.  If you're confused about what money is, and think only things with a use value, such as gold or silver, have real value, you are adopting the failed policy of the French prior to WW II.  So why isn't the gold standard the Freedom Fries of monetary policy?


  1. If money represent a favor owed, why are the most valuable roles (teachers, mothers, caregivers of all kinds, wait persons) the least paid? Why are farmers--who produce our FOOD for heaven's sake--traditionally deeply in hock and working two jobs to keep the farm? Why do we pay less for the most important things, while non-essentials, luxuries, men's toys, most expensive?

    I think money is how our culture keeps score, and THAT is it's purpose. The most powerful people have the most money; their apparent financial wealth signifies their status, makes people pay attention to them.

    Maybe money first represented a favor owed, but I think it has morphed into something other a long time ago.

  2. I actually tried to address that in this post:

    One problem is that not all of our values are commercial, and most of our expression of values is not in the commercial sphere. Voting, for example, is a way democracies express values. We worry about democracy being contaminated by money precisely because it is an expression of commercial value in a sphere where democratic values are supposed to be expressed.

    Another problem is that markets can be poorly designed, so that they reward the wrong activity. Much of economics is concerned with that -- problems with agency, externalities, monopolies and monopsonies are all things that can produce market failures. My objection is to people who want to regard markets as natural, and their outcomes as inevitably just, when they are human institutions designed to express human values.

    The link I posted in this comment is to a post I wrote after reading the article you linked to, and I'm sure it's a clearer response.

  3. True, gold and silver mean the same thing when used as currency. They use value, for electronics, jewelry, and fancy dining utensils. Money and precious metals have the same value.


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