Wednesday, August 29, 2018

Does Money Measure Value and Store Value?

Does Money Measure Value and Store Value?
Thomas Allen

    In Money (1878), Francis Walker discusses his concept of money. He identifies what he considers the basic functions of money: a medium of exchange (it facilitates exchanges), a common denominator (this function should not be confused with money as a measure of value), and a standard for deferred payments (it is a standard of value for paying debt). Walker rejects two functions of money that most economists hold: money as a measure of value and money as a store of value. At least before the demise of money’s connection to gold in 1971, most economists disagree with Walker on these two functions.

Measure of Value
    Under the gold standard, when an economist claims that gold is a measure of value, he means that the value of goods and services are compared with the value of a specific weight and fineness of gold. This comparison results in the price of the good or service. For example, between 1837 and 1934, the US dollar was defined as 23.22 grains of fine (pure) gold or 25.80 grains of standard gold, which was 90 percent pure. Thus, a theater ticket that cost $10 had the same value as 232.2 grains of gold.
    According to Walker, when most economists are describing money as a measure of value, they are really describing it as a common denominator. Although some use the two terms interchangeably, they are really two different things. Moreover, “they have no necessary relation to each other.”
    Walker defines the value of money the way that adherents of inconvertible paper money define the value of money. That is, the value of a gold coin is the value of what it can purchase. According to Walker, the value of a gold coin is determined by its use as a medium of exchange and is independent of its gold content. (Presumably, if the gold content of a gold coin were doubled or halved, its purchasing power would not change. Even Walker and the opponents of gold know that this is absurd.) To most adherents of the gold standard, the value of a gold coin is the value of the material of which it is made, although some of them argued against this notion by claiming that the quantity of gold coins was the primary determinant their value. Others, such as George Weston, argue that the value of the gold coin determines the value of its metal content, and the value of the gold coin is determined by the supply of metallic and paper money. To illustrate the difference between the two, today, the value of the dollar is the value of a dollar’s worth of goods. Between 1837 and 1934, the value of a dollar was the value of 23.22 grains of gold. The latter definition is superior to the former because it defines the value of the dollar independently of itself. The former defines the value of the dollar in terms of itself.
    Walker argues that when values are measured, they may be expressed relatively to each other as a scale of numbers. Perceiving money as providing a scale of value instead of a measure of value, was not original with Walker. Dugald Stewart had earlier argued this notion. Like Stewart, Walker seems to believe that gold is the best form or type of money. Yet, if his argument that money does not measure value, but merely provides a scale for relative values is correct, then the material of which the money is made is irrelevant. Like Stewart, Walker does not consider money as capital but as an aid in enumeration and arithmetic. Many economists, especially today, and even in the nineteenth century, concur with Walker and Stewart. Thus, for example, if item A has a value of 1 and item B, of 5, then item B is worth 5 times more than A.
    He notes that advocates of Ideal Money, which is inconvertible paper money, maintain that money merely provides a common denominator by which the relative values of various goods can be compared. Advocates of Real Money, which is full-weight metallic coin either gold or silver, maintain that money provides a common measure of value to which various goods are compared and measured. (Ironically, while supporting the adherents of Ideal Money on money being merely a numeric that compares but measures nothing, he abhors inconvertible paper money.)
    Instead of money measuring value, Walker argues that money merely provides a common denominator. If money is merely a numeric, as today’s money essentially is, although it does measure value, albeit poorly, what purpose do such apparent units of measure as the dollar, pound, franc, mark, or peso, serve? Walker does not say. If money merely provides a common denominator, then the coin or paper note would only need a number stamped on it. Adding “dollar,” “pound,” “franc,” “mark,” or “peso” is superfluous and can be confusing (misleading one to believe that value is being measured). Why make a $10 gold coin twice the size of a $5 gold coin and a $20 gold coin twice the size of a $10 gold coin, if the coin does not measure value? Why not just use paper money with numbers and no units printed on them? Yet Walker abhors inconvertible paper money.
    Following the lead of Prof. Rogers, Walker compares measuring value to measuring distances. If the distance between A and B is 1 and the distance between B and C is 10, then the distance between B and C is ten times greater than the distance between A and B. However, one does not know if the distance is in zeptometers (an extremely short distance) or in zettameters (an extremely long distance). Without a unit of measure, one does not know whether the distances are short or long. Moreover, a unit of measure is needed to ensure that the relative values are understood correctly. Thus, the distance between A and B compared with B and C is much greater than it appears if the distance between A and B is in zeptometers and B and C is in zettameters. Instead of the relative distance between B and C being ten times greater than A and B, it is 10 to the 43rd power greater (an enormous number). (Another example of the inadequacy of relative comparisons occurs with corporate profits. Corporation X has a 100 percent increase in profit compared with the previous year, while corporation Y has only a 1 percent increase in profit. In relative terms, corporation X appears to have a greater profit. However, when absolute profits are considered, a different story is revealed. Corporation X had a profit of $1 the previous year and $2 this year; thus, it had an increase in profit of 100 percent. Corporation Y had a profit of $1 billion last year and $1.01 billion this year, which is an increase in profit of 1 percent. Of the two which did the best?)
    When comparing values, a measure of value, that is a unit of value, is also needed. For example, the US dollar had a value of 23.22 grains of gold and the British pound had a value of 113 grains of gold. Thus, the value of the British pound was about 4.86 times greater than the value of the US dollar. One needs to know whether prices are being compared in dollars or pounds or both. The relative values may be the same, but the absolute values may not be. For example, if item X costs £2 and item Y costs £1, then item X costs twice as much as item Y. If item A costs $2 and item B costs $1, then item A costs twice as much as item B. Although both X and A have twice the value of Y and B respectively, X is worth 4.86 times A and 9.72 times B. Thus, more than a common denominator is needed to estimate value or even to measure relative differences. A unit of measure, i.e., a unit of value, is also needed. Furthermore, that unit of value must have value in and of itself.
    As shown above, when distance or value is being compared, more than a numeric value is needed. Moreover, that unit of measure must possess what is being measured.
    Walker does admit that to measure value, a value must be used. Nevertheless, that value can be relative and expressed as a pure number without reference to any common value. He states, “Value is a relation. Relations may be expressed, but not measured.” He illustrates this with distance by claiming that the relationship between a furlong and a mile cannot be measured but can only be expressed as 8 to 1. (By definition, a mile equals eight furlongs. However, as discussed above, if no units of measure are attached to the relative numbers, one has no clue about the distances being expressed.)
    Furthermore, Walker uses seigniorage as an argument that money does not measure value. Because of seigniorage, the monetary value stamped on the coin exceeds the value of its metal content. This is true. Seigniorage may cause the coin to be overvalued domestically, but not necessarily so. If the seigniorage is too high, coins will exchange based on the value of their metal content and not based on the monetary value stamped on them — even if such exchanges are illegal. Nevertheless, the seigniorage premium disappears once the coin leaves the country of issue. Outside the country of issue, its purchasing power is that of its metal content and not that which is stamped on it.
    Unlike Walker, most economists argue that to measure and compare values of various items, these items have to be compared with a common item, which under the gold standard is a specific weight and fineness of gold. Moreover, this standard to which items are compared has to have value in and of itself, which is often called “intrinsic value.” Walker argues that money cannot measure value because unlike the yardstick or meterstick, its value is not fixed, even for a gold coin. (Even the definition of the meter has changed several times since it was first invented. Therefore, the measure of distance has changed over time, although minutely.) It varies with time, place, and circumstances. This is true. Being subjective, value is not constant — not even for money regardless of the material of which it is made. Moreover, relative values vary with time, place, and circumstances. Yet nothing cannot measure something as Walker seems to argue. If it could, unitless numbers on paper could serve as money as well as full-weight gold coin. Moreover, paper money would be much cheaper to manufacture. However, Walker presents a convincing argument that inconvertible paper money is vastly inferior to gold coin. (Nevertheless, he uses inconvertible paper money to argue against the notion that money can measure value and has to have value in and of itself to do so.)

Store of Value
    Most economists who support the gold standard assert that one of the important functions of money is to serve as a store of value. Some even claim that this is the most important function of money.
    Contrary to the assertion of these economists, Walker argues that money does not serve as a store of value. About this function of money, or more correctly, lack of it, he agrees with the proponents of inconvertible paper money.
    The store of value is closely related to the measure of value. If money does not and cannot measure value, it need not store value. However, if money is the measure of value, then it needs to be able to store value so that it can measure value. That is, money has to have value in and of itself to measure value. Value can only be measured against value and with value.
    Walker identifies money serving as the standard for deferred payments as an important function of money; that is, money serves as the payment for debt. Why would anyone give up something of value, whatever is lent, in exchange for payments of no value? To function as payment for debt, money has to be able to transfer value through time and often through space. Even inconvertible paper money transfers value through time to a highly limited degree.
    Furthermore, money functioning as a medium of exchange implies that money is a store of value. It must store value so that it can carry value from its receipt to its expenditure so that little or no value is lost. Also, why would anyone sell his goods or labor in exchange for that which has no value? Evidently, Walker believes that people are willing to make such exchanges. Contrary to Walker’s belief, money’s function as a medium of exchange cannot be separated from its function as a store of value. This is true not only for full-weight metallic coin but also for inconvertible paper money. (Generally, losing value over time at various rates, inconvertible paper money stores value poorly and becomes a poor medium of exchange.)
    Moreover, Walker states, “When a commodity comes to serve as a store of value, it ceases to be money.” Gold in hoards, treasures, plate, and ornamentation is not money. (At the other extreme is Murray Rothbard, who claims that gold is money whatever its form.) Walker is unclear whether gold coins held in reserves by banks for payment of their notes and checkable deposits are money. Based on his argument, bank reserves should not be considered money.
    On the other hand, being a good economist, he asserts that gold’s ability to be used as a store of value is an important attribute that qualifies it as money. Is this not confusing? Gold stores value, but once it is coined and used to buy something or pay a debt, it ceases to store value. However, if the recipient puts the coin in his pocket and does not spend it for a year, i.e., hoards it, it ceases being money and becomes a store of value. (This is akin to the gold-is-sterile argument against the gold standard.)
    To add to the confusion of gold being either money or ornamentation, i.e., a store of value, Walker describes the use of gold as jewelry, such as ring-money worn as rings or necklaces, being used as money. Presumably, when the owner was wearing the ring-money on his finger, it was a store of value, but not money. However, when he took the ring off and bought an item with it, the gold ring ceased storing value and became money. (How long does a gold coin have to remain in one’s purse before it ceases being money and becomes a store of value? Walker does not say.)
    In summary, Walker argues that money does not measure value; it merely serves a common denominator by which the values of various goods and services are compared. Furthermore, money does not and cannot store value, although the material of which it is made can often store value. On these two points, most economists who support the gold standard disagree. However, most economists who support inconvertible paper money agree with Walker.

Copyright © 2017 by Thomas Coley Allen.

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Tuesday, August 21, 2018

Mencken on Utopia

Mencken on Utopia
Thomas Allen

    In 1926, H. L. Mencken (1880-1956) wrote Notes on Democracy in which he expressed his views on democracy and related issues. He was a journalist, satirist, and critic and a libertarian and one of the leaders of the Old Right. In his book, he describes utopia, pages 115-124. Below is an overview of his discussion of utopia; my comments are in brackets.
    Mencken notes that in the United States, “every office-holder, when he takes oath to support the Constitution, must swear on his honour that, summoned to the death-bed of his grandmother, he will not take the old lady a bottle of wine. He may say so and do it, which makes him a liar, or he may say so and not do it, which makes him a pig.” [When Mencken wrote, the Constitution contained an amendment that prohibited the sale of alcohol — the Prohibition amendment. Much of Mencken’s hostility toward democracy and, to a slightly lesser degree, toward religion, seems to result from Prohibition. At least, Prohibition is often his prime example of democracy run amuck.]
    In spite of this dilemma, “idealists, chiefly professional Liberals, . . . argue that it is the duty of a gentleman to go into politics.” To which, Mencken replies that this remedy “is quite as absurd as all the other sure cures that Liberals advocate. When they argue for it, they simply argue . . . that the remedy for prostitution is to fill the bawdy-houses with virgins. . . . [This] device would accomplish very little: either the virgins would leap out of the windows, or they would cease to be virgins.” Then he adds, “The same alternatives confront the political aspirant who is what is regarded in America as a gentleman — that is, one who is not susceptible to open bribery in cash. The moment his leg goes over the political fence he finds the mob confronting him, and if he would stay within he must adapt himself to its tastes and prejudices. In other words, he must learn all the tricks of the regular mountebanks.” That is, he must either respond to the mob and serve it or lose his job.
    Mencken supports his argument with some examples. He notes, “It is an axiom of practical politics, indeed, that the worst enemies of political decency are the tired reformers — and the worst of the worst are those whose primary thirst to make the corruptible put on incorruption was accompanied by a somewhat sniffish class consciousness.” One example is Theodore Roosevelt entering “politics as a sword drawn against demagogy.” Yet he became a “violent and shameless demagogue.” [We may be seeing the same happening with Donald Trump. He entered the political arena as an outsider who was going to “drain the swamp,” end American foreign entanglements and wars, rebuild America, and control and limit immigration. Yet he has expanded America’s wars and filled his administration with swamp monsters. Most of the real outsiders that he appointed, he has since removed. He continues America’s Israeli-first foreign policy instead of adopting an America-first foreign policy. He is beginning to soften on immigration and give into the establishment on that issue and others. He is acting ever more like the typical establishment politician.]
    Mencken admits that a gentleman may enter politics under democracy. However, “it is almost impossible for him to stay there and remain a gentleman.” He continues, “The haughty amateur, at the start, may actually make what seems to be a brilliant success, for he is commonly full of indignation, and so strikes out valiantly, and the mob crowds up because it likes a brutal show. . . . If he retains his rectitude he loses his office, and if he retains his office he has to dilute his rectitude with the cologne spirits of the trade.” [Much of what Mencken is describing can be written about Donald Trump, a gentleman by Mencken’s definition and an amateur politician. Will he remain a gentleman or will he become another sleazy politician catering to the mob, or, more correctly, the minority that manipulates the mob? This minority resides in the old news media, the leadership of the Democratic and Republican parties, the military-industrial complex, most big businesses and big banks, the globalists, and a host of their demagogues.]
    In a democracy, “the man of native integrity is either barred from the public service altogether or subjected to almost irresistible temptations after he gets in. The competition of less honourable men is more than he can bear. He must stand against them before the mob, and the sempiternal prejudices of the mob run their way.”
    Democracy in the United States is worse than it is in Great Britain because the United States have no aristocracy to check the mob. For the most part, American Presidents were not intellectuals, and most avoid intelligent men. Likewise, has been the average American governor.
    Moreover, “[t]he judiciary, under the American system, sinks quite as low.” The U.S. Supreme Court “carries on its dull and preposterous duties quite outside the stream of civilized thought, and even outside the stream of enlightened juridical thought.” Furthermore, “few American judges ever contribute anything of value to legal theory. . . . The Constitution apparently has no more meaning to them than it has to a Prohibition agent. They have acquiesced almost unanimously in the destruction of the First, Second, Fourth, Fifth and Sixth Amendments, and supinely connived at the invasion of the Fourteenth and Fifteenth.” [What would Mencken think about what the Supreme Court has done to the Bill of Rights in recent decades with the War on Drugs and the War or Terrorism?] America’s mediocre judiciary results from the average judge being a trailer instead of a leader when he was a practicing lawyer. [When the judiciary does lead with its activist judges, the results are usually worse than when it restricts itself to being a follower.] “The judicial office is not attractive, as a rule, to the better sort of lawyers.” Moreover, “judges are so often chosen for purely political reasons, even for the Supreme Court of the United States, that the lawyer of professional dignity and self-respect hesitates to enter into the competition. Thus the bench tends to be filled with duffers, and many of them are also scoundrels, as the frequent complaints against their extortions and tyrannies testify.” [An example of such a Supreme Court judge was Earl Warren, whom President Eisenhower appointed to pay Warren for delivering California's convention delegation to Eisenhower. Warren’s court was notorious for tyrannical, despotic rulings that are still destroying the country.] Mencken notes, “In the States, where judges are commonly elected by popular vote, the shyster has every advantage over the reputable lawyer, including that of yearning for the judicial salary with a vast and undivided passion. And when it comes to the Federal courts, once so honourable, he has every advantage again, including the formidable one of knowing how to crook his knee gracefully to the local dispenser of Federal patronage (in the South often a worthless Negro) and to the Methodist wowsers of the Anti-Saloon League.” [America’s judiciary, especially the federal courts, has deteriorated even more since Mencken wrote.]
    Mencken admits that the shyster does not always prevail. “[A] man of unquestionable integrity and ability occasionally gets to the bench, even of the State courts.” [Today, many State courts, especially the higher courts, have a larger percentage of competent judges of integrity than the federal courts.]

Copyright © 2017 by Thomas Coley Allen.

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