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>So what does this process of elemental elimination tell us about what makes a good currency? First off, it doesn't have to have any intrinsic value. A currency

by jere 13y ago

>So what does this process of elemental elimination tell us about what makes a good currency? First off, it doesn't have to have any intrinsic value. A currency only has value because we, as a society, decide that it does. As we've seen, it also needs to be stable, portable and non-toxic. And it needs to be fairly rare - you might be surprised just how little gold there is in the world. >The demand for gold can vary wildly - and with a fixed supply, that can lead to equally wild swings in its price. Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently. That is hardly the behaviour of a stable store of value. Basically describes what are and are not the problems with Bitcoin.

eli_gottlieb 13y ago
Actually, that pricing behavior sounds a lot like bitcoin. The evidence is adding up that deflationary crypto-currency can behave a lot like bullion currency, and perhaps help us usher in a new sort of Bretton-Woods system to finally get the financial sector back under control.
- judk 13y ago
  What evidence is that?
  - eli_gottlieb 13y ago
    Mostly the consistent long-term rise in value punctuated by periodic panics that send prices crashing. As I understand, it was characteristic of bullion economies to behave that way.
thetwiceler 13y ago
> A currency only has value because we, as a society, decide that it does. For some reason, many people believe that this is true. I believe that it is not. Technically, yes, if people all decide the currency has value, then it will have value. But this is a ridiculous argument! How much is this currency supposed to be worth? According to this argument, any number is potentially valid! This means that there is absolutely nothing that should hold the value of the currency fixed, and with a few "no free lunch" arguments (anyone can claim any random thing has value and try to trade with it), we see that things with no intrinsic value should NOT have value. So why does the US Dollar have value? It's just paper (cotton), right? Not true! If the exchange rate of the dollar decreases, you'll see the Federal Reserve will start trading some of its goodies from Fort Knox (gold, etc.) for US Dollars, in order to maintain the dollar's exchange rate/value. So in reality, the US Dollar is backed by holdings that have intrinsic value. EDIT: As pointed out, I should mention that another important backing of the USD is taxation. Also, what I said about the Federal Reserve isn't technically true. What's important is that they have a mission to moderate the rate of inflation of the USD (i.e., maintain its value), and their asset holdings are critical in allowing them to do this.
- JoeAltmaier 13y ago
  There is no gold in Ft Knox, right? Our currency hasn't been back in 40 years. Currency has a value because the goods we trade it for have value. Inertia?
  - nhaehnle 13y ago
    Taxation is a non-circular source for demand for fiat currency. The value of fiat currency is backed by taxation.
  - fennecfoxen 13y ago
    Money is money because people believe it is money. Right now, you can turn in a $20 for food and booze and whatever. I'll believe that's money. And if people don't have a reason to stop believing, it'll continue to be money.
    - bradleyland 13y ago
      The whole "money has value because people believe in it" thing isn't exactly correct. Money has value because somewhere along the line, someone accepted US dollars for something valueable to them. If you're hungry, you value food. When you produce food and allow someone to pay you in US dollars, you've injected value in to the US dollar. The dollars you hold are an abstract representation of the value you provided that you can then exchange for something else of value in the future. The US dollar is a means of accounting. The term "has value" is used loosely when it comes to currency. It's true that the currency itself is valueless outside the context of trade, but most modern economic theory is predicated on the axiom that this is OK. Think of it in math terms. Arabic numerals are a means of specifying quantity. * * * * * How many asterisks are there? There are 5. The numeral 5 describes the quantity. The number 5 is not literally five asterisks. It only describes the quantity. The same is true of modern currency. $3.50 is not literally a gallon of milk, it merely represents the economic quantity of milk. If I agree to sell you milk for dollars, I'm adding value to the dollar. When viewed in this way, something else becomes clear. One of the basic values of currency is trust, not "intrinsic value" (which is a euphemism for intrinsic utility). When I add value to the dollar by exchaning valuable goods or services for dollars, I trust that everyone will play by the rules. Specifically, I'm trusting that the value of my trade will be preserved over the term that I hold the dollars.
hengheng 13y ago
Purely for the sake of stability, I think it's a lot more useful to look at the classical economic indicators like the Consumer Price Index. Curiously enough, there is no gold found in any of the standard market baskets ... and since we are only looking at stability on a scale of 20-30 years, maybe there are some products that just happen to have a near-constant production effort. Cue the "cheapest possible child labor T-Shirt" global price index with derived currency.
MRSallee 13y ago
> Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently. That is hardly the behaviour of a stable store of value. Is it gold, or the dollar that's exhibiting that behavior?
- jbooth 13y ago
  Gold. The dollar's been mostly at 1-2% inflation through that time period, reaching a high of 5-6% (I think? from memory here) for a year or two during the peak of the housing bubble. Gold had a huge ramp-up in value after the housing bubble burst, due to people panicking that the dollar would lose value. There were a lot of people with a vested interest in hyping the idea to sell gold, as well. The dollar's been very stable compared to other currencies or compared to baskets of dollar-denominated goods other than gold.

by jere 13y ago

eli_gottlieb 13y ago

Actually, that pricing behavior sounds a lot like bitcoin. The evidence is adding up that deflationary crypto-currency can behave a lot like bullion currency, and perhaps help us usher in a new sort of Bretton-Woods system to finally get the financial sector back under control.

judk 13y ago
What evidence is that?
- eli_gottlieb 13y ago
  Mostly the consistent long-term rise in value punctuated by periodic panics that send prices crashing. As I understand, it was characteristic of bullion economies to behave that way.

thetwiceler 13y ago

> A currency only has value because we, as a society, decide that it does. For some reason, many people believe that this is true. I believe that it is not. Technically, yes, if people all decide the currency has value, then it will have value. But this is a ridiculous argument! How much is this currency supposed to be worth? According to this argument, any number is potentially valid! This means that there is absolutely nothing that should hold the value of the currency fixed, and with a few "no free lunch" arguments (anyone can claim any random thing has value and try to trade with it), we see that things with no intrinsic value should NOT have value. So why does the US Dollar have value? It's just paper (cotton), right? Not true! If the exchange rate of the dollar decreases, you'll see the Federal Reserve will start trading some of its goodies from Fort Knox (gold, etc.) for US Dollars, in order to maintain the dollar's exchange rate/value. So in reality, the US Dollar is backed by holdings that have intrinsic value. EDIT: As pointed out, I should mention that another important backing of the USD is taxation. Also, what I said about the Federal Reserve isn't technically true. What's important is that they have a mission to moderate the rate of inflation of the USD (i.e., maintain its value), and their asset holdings are critical in allowing them to do this.

JoeAltmaier 13y ago
There is no gold in Ft Knox, right? Our currency hasn't been back in 40 years. Currency has a value because the goods we trade it for have value. Inertia?
- nhaehnle 13y ago
  Taxation is a non-circular source for demand for fiat currency. The value of fiat currency is backed by taxation.
- fennecfoxen 13y ago
  Money is money because people believe it is money. Right now, you can turn in a $20 for food and booze and whatever. I'll believe that's money. And if people don't have a reason to stop believing, it'll continue to be money.
  - bradleyland 13y ago
    The whole "money has value because people believe in it" thing isn't exactly correct. Money has value because somewhere along the line, someone accepted US dollars for something valueable to them. If you're hungry, you value food. When you produce food and allow someone to pay you in US dollars, you've injected value in to the US dollar. The dollars you hold are an abstract representation of the value you provided that you can then exchange for something else of value in the future. The US dollar is a means of accounting. The term "has value" is used loosely when it comes to currency. It's true that the currency itself is valueless outside the context of trade, but most modern economic theory is predicated on the axiom that this is OK. Think of it in math terms. Arabic numerals are a means of specifying quantity. * * * * * How many asterisks are there? There are 5. The numeral 5 describes the quantity. The number 5 is not literally five asterisks. It only describes the quantity. The same is true of modern currency. $3.50 is not literally a gallon of milk, it merely represents the economic quantity of milk. If I agree to sell you milk for dollars, I'm adding value to the dollar. When viewed in this way, something else becomes clear. One of the basic values of currency is trust, not "intrinsic value" (which is a euphemism for intrinsic utility). When I add value to the dollar by exchaning valuable goods or services for dollars, I trust that everyone will play by the rules. Specifically, I'm trusting that the value of my trade will be preserved over the term that I hold the dollars.

hengheng 13y ago

Purely for the sake of stability, I think it's a lot more useful to look at the classical economic indicators like the Consumer Price Index. Curiously enough, there is no gold found in any of the standard market baskets ... and since we are only looking at stability on a scale of 20-30 years, maybe there are some products that just happen to have a near-constant production effort. Cue the "cheapest possible child labor T-Shirt" global price index with derived currency.

MRSallee 13y ago

> Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently. That is hardly the behaviour of a stable store of value. Is it gold, or the dollar that's exhibiting that behavior?

jbooth 13y ago
Gold. The dollar's been mostly at 1-2% inflation through that time period, reaching a high of 5-6% (I think? from memory here) for a year or two during the peak of the housing bubble. Gold had a huge ramp-up in value after the housing bubble burst, due to people panicking that the dollar would lose value. There were a lot of people with a vested interest in hyping the idea to sell gold, as well. The dollar's been very stable compared to other currencies or compared to baskets of dollar-denominated goods other than gold.