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Trying To Make Sense From Dollars

| 05.11.2017 |

In terms of economics, nothing is more fundamental than currency, and a strong currency policy ensures that trade is fair and efficient. However, currency manipulation has always been the primary means for nations to declare economic war on each other, and there are few solutions that leave everyone happy.


The essential problem is that there can never be an ideal standard for currency. Even silver and gold, with their cult following, have values that are ultimately arbitrary. French economist and proto-capitalist Turgot explored this essential problem in his Reflections on the Formation and Distribution of Wealth.


Turgot begins, "Gold and silver are two species of merchandize, like others, and less valuable than many of them, because they are of no use for the real wants of life. To explain how these two metals are become the representative pledges of every species of riches; how they influence the commercial markets, and how they enter into the composition of fortunes, it is necessary to go back again and return to our first principles."


The origin of trade is based on wants, and wants are always subjective and arbitrary even if they have a common source: "Reciprocal wants first introduced exchanges of what we possessed, for what we stood in need of one species of provision was bartered for another, or for labour. In exchanging, it is necessary that each party is convinced of the quality and quantity of every thing exchanged. In this agreement it is natural that every one should desire to receive as much as he can, and to give as little; and both being equally masters of what they have to barter, it is in a man's own breast to balance the attachment he has to the thing he gives, with the desire he feels to possess that which he is willing to receive, and consequently to fix the quantity of each of the exchanged things."


He continues, "In a word, so long as we consider each exchange independent of any other, the value of each thing exchanged has no other measure than the wants or desires of one party weighed with those of the other, and is fixed only by their agreement."


Once supply and demand enters into consideration, the wants of the individual change based on the opportunities to either obtain items for a lower price or to sell his wares for a higher price: "No one resolves to part with his property, before he has compared the different offers which are made to him, of the commodity he stands in need of, and then he accepts of the best offer. The value of the wine and corn is not fixed by the two proprietors with respect to their own wants and reciprocal abilities, but by a general balance of the wants of all the sellers of corn, with those of all the sellers of wine."


However, if the system of trade is operating to a great extent then a common value of items can be obtained by looking at the whole picture: "It follows from hence, that in a country where the commerce is very brisk, where there are many productions and much consumption, where there are great supplies and a great demand for all sorts of commodities, every sort will have a current price, having relation to every other species; that is to say, that a certain quantity of one will be of equal value to a certain quantity of any others."


Eventually, the barter system results in the inability for items to serve as both a trade item and an item that satisfies wants: "But although all merchandize has essentially this property of representing any other, is able to serve as a common measure, to express its value, and to become a universal pledge to procure any of them by way of exchange, yet all cannot be employed with the same degree of facility for these two uses. The more susceptible any merchandize is to change its value by an alteration in its quality, the more difficult it is to make it a scale of reference for the value of others."


Additionally, the mutability of the quality of a type of product also affects the ability of a common value to be established for a barter system: "The variation in the quality of merchandize, and in the different prices in proportion to that quality, which renders them more or less proper than others to serve as a common measure, is also more or less an impediment to their being a representative pledge of every other merchandize of equal value."


These essential limitations force the move from a system of barter-based exchanging of goods to one that relies on currency to facilitate transactions, and precious metals are often chosen to serve as currency: "We are now arrived at the introduction of the precious metals into trade. All metals, as they have been discovered, have been admitted into exchange, on account of their real utility. Their splendor has caused them to be sought for, to serve as ornaments; their ductility and their solidity have rendered them proper for utensils, more durable and lighter than those of clay. But these substances cannot be brought into commerce without becoming almost immediately a universal money."


Precious metals, however, have many similarities to bartered goods because they are still desirable to individuals, but their essential nature allows them to overcome many of the flaws: "Here then is gold and silver constituted money, and universal money, and that without any arbitrary agreement among men, without the intervention of any law, but only by the nature of things. They are not, as many people imagine, signs of value; they have an intrinsic value in themselves, if they are capable of being the measure and the token of other values. This property they have in common with all other commodities which have a value in commerce. They only differ in being at the same time more divisible, more unchangeable, and of more easy conveyance than other merchandize, by which they are more commodiously employed to measure and represent the value of others."


But precious metals are also subjected to the rise and fall in value related to popular opinion. They have no fixed value, and even their worth compared to each other is in constant flux: "Silver and gold not only vary in price, compared with all other commodities, but they vary also with each other, in proportion as they are more or less abundant. It is notorious, that we now give in Europe from fourteen to fifteen ounces of silver for one ounce of gold; and that in former times we gave only ten or eleven ounces."


Although precious metals have essential problems in terms of value, Turgot believes that they allow for an economic evolution in the way we perceive trade: "In proportion as mankind became familiarized to the custom of valuing all things in silver, of exchanging all their superfluous commodities for silver, and of not parting with that money but for things which are useful or agreeable to them at the moment, they become accustomed to consider the exchanges of commerce in a different point of view. They have made a distinction of two persons, the buyer and the seller: the seller is him who gives commodities for money; and the buyer is him who gives money for commodities."


This is a level of efficiency. In a barter-based system, your transactions would not be simply what you want for what you have because the opportunity for that specific trade might never appear. Instead, you would often speculate on what you could possibly barter for to later obtain what you want. It is a guessing game, with people swapping goods simply out of hope.


Currency allows you to sell to all people without having to obtain specifically what they, in turn, produce. Instead of goods changing directly, the potential to obtain goods is constantly moved from one person to the other as each individual realizes the fulfillment of his wants. The faster currency changes hands, the more plentiful the economic gains for all, which allows for a higher production of goods and, ultimately, a higher overall consumption of goods.


Turgot explains, "It is this continued advance and return which constitutes what ought to be called the circulation of money: this useful and fruitful circulation, which animates all the labour of society, which supports all the motion, and is the life of the body politic, and which is with great reason compared to the circulation of the blood in the human body."


However, any action that causes individuals to no longer want to purchase goods then affects all of the society: "For, if by any disorder in the course of the expenses of the different orders of society, the undertakers cease to draw back their advances with such profit as they have a right to expect; it is evident they will be obliged to reduce their undertakings; that the total of the labour, of the consumption of the fruits of the earth, of the productions and of the revenue would be equally diminished; that poverty will succeed to riches, and that the common workman, ceasing to find employ, will fall into the deepest misery."


There are two types of problems that can affect the circulation of money: the value of the currency and the value of the goods. Of the second type, trade wars, regulations, and taxes all affect the price of goods, and they all have the natural tendency to diminish commerce. Any increase in these areas limits the natural desire to purchase goods because the cost to purchase specific items has increased without the profit to the individual increasing.


The first type is more insidious. While it is proper to move from gold and silver based currency due to the arbitrary value of these items and their limited liquid nature, it can only be proper to have a currency that does not succumb to the same problems. Quantitative easing schemes are no different from the currency debasement schemes of the past, and printing more bills is just as evil as replacing silver with lesser metals.


Currency must have a fixed standard to ensure that a commonly agreed upon value exists. The natural tendency towards inflation, while problematic, is slow and predictable, and businesses and individuals are increasing their wealth at the same rate as prices increase. However, secretive currency manipulation schemes create an unknown inflation with ramifications that cannot be predicted or accommodated.


Economic systems are ultimately built on trust, and trust requires a level of openness and honesty. Those who push for a return to a gold or silver standard are looking at the wrong problem; while having something tangible in their hands can provide a sense of security, it is a false security. Instead, we need to have transparency in our currency policies, and we should also demand it from others who want to be equal partners. Otherwise, there is no value in it.


Jeffrey Peters is an Annapolis, Md.-based writer and political consultant.