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The Monetary Economics of Thurston Howell III

Posted by michael on from the she-sells-seashells dept.

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."

10 of 455 comments (clear)

  1. Not bad by Hanzie · · Score: 5, Insightful

    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.
  2. Re:I liked it, but... by Nick+of+NSTime · · Score: 5, Informative
    Within the science of economics, fiat means "having no intrinsic value." So fiat money is paper currency that has no intrinsic value because it is simply representative of something of value. The paper itself has no value. Contrast that with gold coins, which have an intrinsic value outside of the currency (its value in gold).

    The word fiat, IIRC, comes from the Italian word for "in faith." You're taking it on faith that the $20 bill you slap into a stripper's t-back, for example, is actually worth $20, even though you will never see the gold that backs up that $20 bill.

  3. Mises Institute rails against fiat abuses by Ars-Fartsica · · Score: 5, Interesting
    I am an avid reader of most of what comes out of the Mises institute, which is often listed at SafeHaven.com, a bearish commentary site.

    Their point is that fiat currencies are subject to abuse as they are not secured to a physical entity which limits its growth.

    Note that for for one hundred years prior to the existance of The Fed, the purchasing value of a dollar was virtually unchanged!

    Post Fed, post gold standard, post secured currency, the value of the dollar's purchasing power has dropped 97%. With Greenspan's current uber-loose credit scheme and our fractioanl reserve (aka fractional safety) banking system, this has vastly increased the amount of money circulating even in the last decade, secured now mostly by residential real estate.

    1. Re:Mises Institute rails against fiat abuses by Anonymous Coward · · Score: 5, Insightful

      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.

    2. Re:Mises Institute rails against fiat abuses by general_re · · Score: 5, Insightful
      Well, you're the most insightful AC I've come across in a while, but since I have no mod points, I'll play along with you ;)

      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.
  4. Re:I liked it, but... by Anonymous Coward · · Score: 5, Informative

    Acutally, fiat is straight from Latin, where it means "let it be." Fiat money is used as money because of governmental decree (or fiat), as opposed to commodity money (e.g. gold) which arises from the market.

  5. Money in MMORPGs by Colazar · · Score: 5, Insightful
    Oddly enough, that made me think of MMORPG economies. The fiat currency of the MMORPG company (gold pieces) is usually horribly inflationary, since more is constantly being added. (Even ignoring duping.) Stable values are invariably found in worthless items that are no longer being created.

    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
  6. Re:Gilligan's Island is a "hook", not the contents by JohnDeHope3 · · Score: 5, Insightful

    "The real story is about how people react to new monies..." No. The real story is about how people react to non-inflationary monies. The old Iraqi currency didn't remain popular because it was old, it was popular because it was not being printed in mass quantities. Recall that if the supply of something rises, the price must fall. This is just as true for currency as it is for anything else that has cost associated with it.

  7. Re:I tried to RTFA... by Tackhead · · Score: 5, Funny
    > ...but after a few paragraphs I couldn't stop thinking about the most important Gilligan's Island question: Ginger or Mary Ann?

    If I had a million coconuts, I'll tell you what I'd do. Ginger and Mary Ann.

  8. Re:Gilligan's Island is a "hook", not the contents by ahdeoz · · Score: 5, Informative

    The whole point of government backed "fiat" money (which was completely missed in the article) is that the supply of money is regulated. Current dollars represent an amount of previous dollars, which represented an amount of gold, which represented an amount of coconuts, which were bartered for fish for cream pies once upon a time. The "fiat" is there to primarily to prevent counterfitting to make sure that the supply remains fairly constant (though gradually increasing over time as more wealth is "created.) The money exchange market (and the market in general, i.e., the price of goods and services, and especially loan interest rates) act as checks that the declared value does not exceed the actual value in previous commodities. Dinars doubled in value because there was a fixed amount (as long as counterfitting did not occur -- which is why it could only continue for a short time) and the quantity of dollars in circulation was rapidly increasing. The "post-fiat" dinars were still directly tied to the dollar (gold) standard but there was a massive influx of gold (greenbacks) at the time, resulting in inflation.