Comments: A Complete History of Money

Ahh monetary policy . . . it makes me long for those halcyon days when we added the phrase "NATALEE HOLLOWAY PICTURES" as SEO (Search Engine Optimization) to rise in the rankings of boring monetary policy debate.

The finest description of money I've encountered is in Homer Economicus:

"The Functions of Money In the "Trilogy of Error," caught with illegal fireworks by Chief Wiggum, Milhouse exclaims, "I can't go to juvey! They use guys like me as currency!" Could Milhouse actually become money in the juvenile hall? To answer this question we first have to know what functions Milhouse would have to serve to legitimately be called money. Second, we have to know what properties (or characteristics) Milhouse would have to possess to serve those functions.

"Let's start with functions. For something--call it an asset--to be considered money, it typically must function as three things:
-- A medium of exchange
-- A unit of account
-- A store of value

"These functions are not mutually exclusive. The extent to which an asset serves one function largely determines to what extent it serves the other two functions."


My first, #1 with a bullet, choice would be competing currencies. Why not let my gold bug friends trade in Liberty Dollars, my hippie friends in Bitcoin, and Nelson's pals in shares of Milhous? It is one place I'm an anarchist: let people choose what they wish to use and what to accept. (The pizza joint near my first house in Aurora used to accept US Dollars or Mexican Pesos).

But. The cottage industry of attacking fiat US Dollars is a bit overwrought. The medium of exchange function requires an adequate supply. My Austrian friends howl, but deflationary shocks are real and if I might lapse into jargon, suck really bad.

Of course, if the supply of money is grown foolishly, it threatens the store of value function. I do not believe that an orderly, expected 2% inflation rate is that destructive. No, you cannot leave a large part of your worth in cash, long-term.

Ergo, my third choice is the third-best system we have. An FOMC effectively presiding over a 2$ inflation target. Not sexy, not infused with the fires of liberty. But stodgily, Hamiltonianly stable.

(Second choice is an nGDP targeting, rules-based Fed)

Posted by jk at August 8, 2017 12:05 PM

If I stipulate, for the sake of argument, that deflation is so terrible as to be avoided at any reasonable cost, would you concede that central bankers confiscating 166% of the economy's increased productivity through innovation and efficiency is an unreasonable cost?

And then there's the elimination of currency, requiring every transaction to be conducted through their banking system. At that point we will revert to other physical currencies, I predict.

Posted by johngalt at August 8, 2017 3:18 PM

Nossir. (But I'm enjoying picturing my blog brother typing about the evil bankers in his Guy Fawkes mask.)

"Would I buy life insurance if it was $300,000 dollars a year for $250,000 coverage?" No, but I do buy life insurance at a premium and payout that satisfy my risk preference.

I lived through the Arthur Burns years; I know the ravages of inflation. The Bernanke "revolution" was that 2% is a good trade. If you're holding cash, you have to make plans to avoid it. The "loss" accrues to debtors -- a well represented constituency.

Posted by jk at August 8, 2017 4:55 PM
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