no third solution

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What’s Better Than Mild Inflation?

May 14th, 2009

In response to A Belated Reply on Fractional Reserve Banking, Neverfox asked,

If everyone agrees to trust the third-party (bank) and “subscribe” to the token system (“I’ll accept tokens from you as a wage if you agree to sell me stuff with those tokens later”), where is the fraud and where is the need for a commodity money?

It begs the question to assume that money must be commodity money to be a legitimate medium (consequentialist considerations aside).

Does it really beg the question?  Surely, we should be able to point to historical examples of monetary evolution culminating in irredeemable token substitutes. For starters, this argument assumes money as the intentional product of human design, which suffice to say, is contradicted by the facts of history.

The very notion of token substitutes presumes that they are a substitute for something else, in the same manner that a check, deposit-slip, or warehouse receipt are substitutes for, not replacements for, physical goods. Instead what we see in the history of the world is that, except where governments have been able to intervene, commodity money of some form or another has been pretty much standard.

As to the token-money hypothetical put forth above, what do they say?  If ifs and buts were candy and nuts…  Of course we can frame a hypothetical in such a manner as to preclude the possibility that fraud might occur: “I’m going to define a situation where fraud is inconceivable, and then ask you, ‘where is the fraud?'”, but I’d be tilting at straw men.

My father used to say, “You can ‘what if?’ yourself to death.”  Dealing with “what ifs” is stupid, because the other guy can always pull a “27 Ninjas” on you.  No matter what you say, they can always come up with some fantastic “what if” statement that apparently validates their position.  But what the heck, I suppose I’ll play along for a moment.

Considering that in such a scenario, someone has contributed real, economic-value-added work, in exchange for tokens under an implicit assumption that he would be able to redeem those worthless tokens for something else of real, economic value, sometime in the future, even this cleverly constructed straw-man raises some interesting questions:

  1. What happens when the person who agreed to sell you stuff in exchange for those tokens decides he’s no longer interested in tokens?
  2. What happens when the person who created those tokens mints a Trillion more of them, overnight?
  3. Haven’t you been definitely injured?
  4. Would you have agreed to play the game if you knew the other party could change the rules on a lark?

Under a commodity standard, money is the product of human action but not of human design.

  1. Accordingly, no promises as to future value are made express, or implied.  No matter what happens to the subjective value of the monetary commodity, your banknotes are always redeemable for a fixed quantity.  The token system is a shell game.
  2. With fake money, you get totally screwed.  With commodity money, it’s impossible to mint a trillion dollars overnight to bail out special interests or to pay for imperialism, etc.
  3. Production buys production — and although from time to time a new product will emerge, reducing the market value of some of your assets or skills, it is terribly unlikely to happen with money in the first place, and furthermore can onlyhappen as the result of an actual increase in the total amount of wealth in the world.
  4. The rules are the rules, they can’t be changed, and they can only be circumvented by fraud, counterfeit, or theft — all properly condemnable behaviors.

Whether it takes the form of “debasement” or “coin-clipping” or “seignorage” or “inflation” is beside the point. If you condemn inflation when the government does it, why stand on your head to defend “private” inflation, if for any other reason than to argue that it will be less bad?

News flash: you know what’s even less bad than mild inflation?

No fucking inflation. Period.

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