On Sat, Jan 18, 2014 at 4:30 PM, Michael Torrie <torr...@gmail.com> wrote:
> On 01/18/2014 01:33 PM, Richard Esplin wrote:
>> This was how money worked in the United states until the end of the 19th
>> century. No clear market winner emerged. It was a mess.
>
> I assume you were referring to the situation where banks issued bank
> notes and many banks crashed in the early 1840s, including the Kirtland
> Saftey Society. We might want to distinguish between currency (the US
> dollar) and the bank notes. The bank notes weren't currency. My
> understanding is that they were promisary notes that the bank would pay
> real USD to someone who wanted to cash them in. Banks issued far more
> bank notes than they had assets to cover, and when people demanded their
> money, the banks collapsed. It's true the bank notes were used as
> money, but my understanding is they weren't currencies. They were all
> USD for one. Also their value didn't fluctuate as a commodity compared
> to the USD, though I'm sure in communities where bank notes were used
> that prices of goods went up and down depending on the perception of a
> particular bank's position and whether or not they'd make good on their
> promises.
I don't believe there's a single definition of 'currency' or 'money'
that allows an unambiguous distinction in this case. Some legitimate
definitions would call those bank notes a currency. Our paper dollars
are, after all, bank notes issued by the Federal Reserve banks. They
are a promise that the Federal Reserve banks hold a dollar's worth of
assets on their balance sheets (or at least will be able to produce
such on demand) corresponding to that dollar. This is exactly what
the bank notes issued by other banks promised; their value then
followed the trust of people that the bank would indeed redeem the
note for an asset worth its face value. Thus, it forms a token of
exchange that stands in place of some asset that might be traded at
its face value. It is therefore a currency when it's accepted as such
in a trade.
Part of the problem with this ongoing discussion is that the
definitions of the things in question haven't been unambiguously
stated, so it's quite likely that we're all arguing past each other on
some points.
While it's true that many forms of money have an aspect that is
essentially a commodity and thus can be subject to market analysis,
there are other (and I believe more fundamental) aspects to money with
relation to markets in which treatment of it as a good is nonsensical.
It is instead an abstract measure of the value of goods. The closer a
currency is to this abstract ideal (and the farther from being a
normal commodity) the better it performs in the essential role of
denominating the value of goods in a market. I believe that this,
rather than stories about market collusion and abuse by cartels, is a
more likely story for why the world has moved towards currencies that
are the way they are. I certainly don't deny that abuse and collusion
exist, but I think we continue on with what we've got *in spite* of
them rather than *because* of them.
To argue that competing currencies would be better than standardized
currencies is essentially to argue that the power of the cartels and
government abuse has been sufficient to completely overwhelm the
natural evolution of markets towards more efficient states. That
there is some sort of hidden demand for alternate currencies that's
been so blotted out by conspiracy that most people, including
economists who study such things, are unaware of it. While I accept
that this is not completely outside the realm of possibility, it seems
to be inventing more things to explain the current state of things
than is necessary. Thus, the burden of demonstrating this as the
cause of the current currency situation seems to be on those who
believe it.
--Levi
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