Wednesday, December 15, 2010

Nothing About Intrinsic Value

Adam Smith, The Wealth of Nations, Book 1, chapter 4

On the Origin and Use of Money

In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity. Metals can not only be kept with as little loss as any other commodity, scarce anything being less perishable than they are, but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be reunited again; a quality which no other equally durable commodity possesses, and which more than any other quality renders them fit to be the instruments of commerce and circulation.


Numbers can not only be kept with as little loss as any commodity, as they are not at all perishable, but they can likewise, without any loss, be divided into any number of parts, as by simple addition those parts can easily be reunited again; a quality which no commodity possesses, and which more than any other quality renders them fit to be the instruments of commerce and circulation.

The use of metals in this rude state was attended with two very considerable inconveniences; first, with the trouble of weighing; and, secondly, with that of assaying them...

...we should find it excessively troublesome, if every time a poor man had occasion either to buy or sell a farthing's worth of goods, he was obliged to weigh the farthing.


Numbers have no such inconveniences.

3 comments:

Tschäff said...

Numbers can be produced or destroyed according to social desire, where the production of metal rests on profitability and can not be rapidly adjusted to easily avoid crisis say after 9/11 or Y2K.

The Arthurian said...

So are you telling me that I finally understand what Mosler was saying: "Where does the stadium get the points" ?? :)

I was thinkin' about your "vertical" arrangement, with the supplier of currency at a different level than currency-users. S'pose we go back to the time of the gold standard, when any miner who found gold could bring it to the mint.

In those days, do we see a similar "vertical" arrangement between the gold-mining industry and the rest of the economy? I'm not sure what to look for. But finding it would validate the "vertical" concept.

Tschäff said...

Instead of my usual response size of two maximum comment allotment, I'll try to keep this brief by only painting with broad brush strokes.

In a word yes.

In more words:

There is a persistant bad idea that the essence of money can be embodied in a commodity. This is a bad idea because it totally ignores the underlying credits and debts.

During the US gold standard there was a fixed exchange rate between gold and the dollar. Just like now the national treasury spent by giving (pure token/balance sheet entries or green paper bills) acknowledgments of indebtedness. But back then those papers were "backed up" by gold reserves, thus there was a concept of gross national savings.

‘National savings’ falls when the federal deficit rises and those funds thus created are held by non residents. On a gold standard that represented a gold outflow, as non residents were holding US currency that was convertible into gold on demand. And the gold supply was the national savings.

Often in the 19th and 20th centuries governments would abandon the peg when it was necessary/politically desirable, and eventually abandoned the experiment all together.