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The Monetary Economics of Thurston Howell III
DLWormwood writes "In what has to be the Strangest... Essay... Ever... The libertarian Ludwig von Mises Institute website has posted an essay which goes way too in-depth over the topic of why the castaways of Gilligan's Island used Thurston Howell III's 'worthless paper' instead of gold or seashells."
It is actually an essay on economics, and makes some very good points. It uses the Gilligan's Island as an example, because it's very obvious to many, and all the economic factors are known to all the readers.
The essay then goes on to discuss Swiss Dinara and Saddam Dinars which are both very much real, and quite comparable to money on the TV show.
I think the headline does a real disservice to the author of the essay.
********* sig: If you don't like the law, get filthy stinking rich, and buy a better one.
Using Gilligan's Island as an example is a "hook" to draw the reader in, just as the mods conflate opinions into their descriptions of a story. The real story is about how people react to new monies being introduced, especially when one regime is replaced by another. The article cites, for example, the practice of US soldiers distributing $20 bills into Iraq in place of the existing Dinars, but people not only kept using the familiar currency but the Dinar doubled in value as compared to the dollar in spite of it no longer being an official currency. Except in the case of truly "breathrough" innovations, the tried and true usually wins out over the new (and presumably intersting) until there's a critical mass using it. Research shows that the point at which a new innovation takes over is around 25% of the available market (which is why the iPod has begun to pop up so widely; people who aren't early-adopter techie types are seeing enough of their friends using them to get over the inertia of not being the first to use something.) So, this is an article about people using familiar currency over new currency; it juat happens they chose a TV show for their hypothetical example rather than making one up out of whole cloth.
that if Gilligan's Isle was real that money really wouldn't be that wortwhile and the group would very quickly revert to a barter system. And I think we all know what services Ginger and Mary Ann would provide in return for a coconut radio or firewood...
Or maybe it's not so odd...MMORPGs are the most likely exposure /.ers have to widespread currency exchange, I guess.
He decided to just watch the government, and kind of scale it down to size, and run his life that way. --Laurie Anderson
Returning to the gold standard is ideologically appealing to a certain type of person, but it's tatlly impractical. There's just not enough gold, and new gold isn't being mined fast enough to keep up with the creation of other types of wealth. There are three possible outcomes I can think of if we tried to put the dollar back on a gold standard
1: Rapid increase in the price of gold - probably the least harmful possibilite, this would "only" cripple certain industries that need gold for it's chemical or electrical properties. Sure, the price of computers and electronics would quadruple, but hey, it's a small price to pay for a currency that's got real backing.
2: Using several commodities to back the dollar - the problem is that would put the government in the postion of having to fix a ratio between how many dollars can be backed by an ounce of gold versus how many can be backed by a cow. In effect, that means government is setting the price of cows by fiat. Nobody who distrusts government so much that they want a gold-backed currency would find this acceptable!
3: Massive deflation - There's not enough gold to back all the dollars, so we take most of the dollars out of circulation. Bad bad bad news. If the value of a dollar suddenly went back up to 30 times it's present value, no borrowers would be able to pay off debts they carry now. Virtually every loan would be defaulted. Sayonara, banking industry.
Now if you combine any of those with a ban on fractional-reserve banking, you have a recipe for economic depression on a scale that hasn't been seen since the plague wiped out a quarter of europe's population.
Money, per Mises, is the most marketable commodity. If you know you can trade seashells for what you want, you will sell your goods for seashells. If enough people do that, seashells become money. (and past a certain point, a form of money is essentially inevitable, because of the network effect.) The network effect is powerful, and it would be likely to shore up a commodity that somehow lost some of its value, but if it lost enough value, then a new form of money would arise. Belief alone is probably not enough to hold money together.
Fiat money is a hijacking of that natural process to give the government a great deal more control over the economy and a nearly-infinite ability to tax, without approval or even KNOWLEDGE of the people being taxed. Past a certain point, this will destroy an economy, of course, and cause the failure of the government. And last I checked, central planning of an economy was not a very good idea; the more control goes into the hands of a few people, the less well things tend to run.
Money needs to be both a store of value and a medium of exhange. We're doing fine on the exchange part, but we're failing dismally on the store-of-value front. See my signature.
The answer is, IMO, you get both #1 and #3 occurring. There aren't, as you point out, enough ounces of gold in the world to cover the dollars in circulation, nevermind all the other currencies out there. The result is that in order to cover all those dollars, the dollar-denominated price of gold shoots through the roof. All the people who currently own gold suddenly get very, very rich - whoopee for them, but not so good for the rest of us. Of course, you could avoid this by instituting a fractional reserve system, but if you talk to the goldbugs for a very long, you'll soon discover that fractional reserve is a close second on their list of monetary evils, right behind "fiat" paper money, mainly because it doesn't give you that magic immunity from governmental policy that gold is supposed to bring - at the very least, the state can diddle with the reserve requirements and dictate monetary value that way.
The reason it's bad news for the rest of us is because, contrary to the goldbugs absurd claims that gold is somehow immune to inflationary pressures, gold simply doesn't track consumer prices - i.e., there's no magic inflation-fighting power inherent in a gold currency. You can see this quite easily by comparing consumer prices to the price of gold. Since 1971, when the US finally abandoned the partial gold-standard for good, the dollar-denominated price of an ounce of gold has risen tenfold. The problem is that, if you look at the CPI for the same period, consumer prices have risen only about four-and-a-half-fold since 1971. In other words, the price of gold has far outstripped the price of consumer goods since 1971 - a dollar today will buy you 1/4'th as much "consumer goods" now as it did in 1971, but a dollar today will only buy you one tenth of the gold it bought in 1971.
What's the result of this failure to track consumer prices, where the value of the currency outstrips the value of the stuff you want to buy with it? Deflation. Massive, sustained deflation, which, for those of you who've forgotten your intro microeconomics, is very very bad. In a hyperinflationary environment, people can't buy stuff because until their wages catch up with prices, they can't afford it. In a sustained deflationary environment, people can't buy stuff because they largely don't have jobs any more - spending gets awfully rare once people realize that, no matter what they want to buy, they're better off not spending it because whatever it is they want to buy, it's going to be cheaper in real terms tomorrow. You're better off just hanging on to your money than you are in trying to use it to, say, build stuff. That's bad, because everyone who has a job here is relying on someone else to part with their money, which gets less and less frequent as deflation mounts. Borrowers, like me with my college loans - heh - are especially screwed, because they borrowed cheap dollars yesterday, but get to pay back their loans with expensive dollars tomorrow. Wheee - sign me up, you betcha. And as a result, anyone with half a brain simply refuses to pay back their loans as deflation gets more and more severe. Fuckem, is the thinking - you're better off in bankruptcy than you are trying to pay off absurdly expensive loans. On the other hand, you might get to see the amusing (!) phenomenon of negative interest rates if deflation becomes bad enough, where your credit card company offers to pay you if you spend money, so as to cut their own losses over time ;)
No, a gold standard is a recipe for disaster, as you rightly note, and that's just the economics of it - the political end is just as bad. Most of the gold being produced comes from places like Australia and South Africa and Russia. All fince places, full of lovely people, I'm sure, but as an American, I'm not exactly keen on a monetary system that gives the South Africans a say
ABSURDITY, n.: A statement or belief manifestly inconsistent with one's own opinion.