Economics Discussions

Have you ever thought that you are rather aware how the world turns? (Hint: It involves money.) Do you feel like you have some brilliant economic ideas? Or perhaps you're bored and itching for some friendly discussions on the subject (I'm in the last one.) Well, then look no further, because this thread is the tread for you! You can post here now for 100% off, just for the course of the next 4 years!

All kidding aside, I am making this thread mostly so BC and I can start talking about economics. However, you may feel free to comment here with your personal views. Nobody will judge you.

First off, I'd like to debase the video that BC had posted earlier. The one which stated that gold is the best 'currency' due to it's retained value. On this, I'd like to base the first post of the threat, and continue it on from there.

Gold may be a stable unit, but that is where it ends. It is not a stable currency. It never was. The video previously stated that gold had the following values: "It's a medium of exchange. It's a unit of account. It's portable. Durable. Divisible. Fungible. Stores value." Well, although it might be a medium of exchange, it's exchange was only propagated by those who owned the mine. Without the promise of further currency, nobody in their right mind would use the currency. It's like buying a dying horse. Even now, the actual exchangeable value of the currency is held within the hands of those who own the source or the destination. That is, the government/Company with the mine, and the various goldsmiths that we have, although that's not really a high amount.

What does this mean? Well, if tomorrow 5 goldsmiths all decided that gold no longer has it's value as an aesthetic item, the value will drop. Not by a lot, but it will drop. This means that it no longer has the value it promised. The notion that gold is some kind of portable currency is as much true as a barrel of oil is currency. The only problem is, unlike with oil, we can't personally use our gold if there weren't anyone else to make use of it. Oil can be used to fuel whatever, but I don't think we keep a mint in our garage.

Now, a unit of account would imply that there's a number on it, as it quite literally stated. This would in turn imply that all the people desiring gold would pay the exact same amount for it. This is frothing bull. The reason there are gold-merchants like him is purely because it is false. Gold is not currency. Gold is not stable. There is a reason the Dutch started printing Europe's first paper currency many years ago. This is because gold was flowing in from various countries that held no value for the god-forsaken item. They saw no reason to have it, and exchanged it in the buckets for things we found normal for our age. Our merchants then came back with more gold than is good for us, and our economy got inflated. Yes, a gold based economy got inflated. We had to print money and start a new currency just to moderate the financing in the city. Other story. Currently, we would value White Gold rather highly. It's a pretty interesting metal with some good properties. You'd think this would be the same for the many years we had been a civilized. False. The King of Portugal actually dumped crates of white gold into the sea because he believed it was Tin, after plundering an important trade line. Many units were permanently lost. It also brings up the question of durability. Gold is as durable as any other currency. It might not wear as much, but it sure as hell gets 'lost' as easily.

Also, portability is questionable. Gold is heavy. But this would only have repercussions on the older times, so it's irrelevant. Divisibility is true. Fungible is also true. The only thing I really fear is that he 'claims' that it stores value. He's trying to bash in representational currency.

Little known fact: The reason we have representational currency is because a currency based of the real value of an item is too flexible. Yes, I could print more money, and this would be dangerous. But any currency based off the value of an item purely off the fact that the item itself is valuable is no currency. Let's go back to the Renaissance. I like those times. Gold had it's value because of the icons minted on them. Did you know that a coin from Florence was worth many time more than a coin from Spain? This is not because the gold percentage shifted. (But it did, more on that later.) This is because there was more trust in Florence and their banking system than the Spanish banking system. Being a trade republic brings that benefit, I guess. Gold was a representational currency. What would have happened if gold was valued on it's actual value? I'd imagine that you'd get the Mayan and Aztec situations. Gold used in buildings and decorations with extreme waste, simply putting it everywhere because it looks nice. -That- is the real value of Gold there. If we all did that, we wouldn't have a piece of gold to 'trade' now to begin with. The only reason gold isn't used for what it's worth, is because it's worth more not used. Makes sense?

Which brings me to my final statement: Gold is an representational currency. He is simply lying to himself. The only difference between Gold and other currencies is that you don't have to ponder about conversion rates anymore. Why do I say anymore? Well, a city that is doing well tend to put more gold in their coins. This way, the average value of the coin goes up, and merchants already in possession of the currency was valued higher. This in turn increases their trade power in other nations. The reverse is also possible: When they have debts, they devalue their own currency so that the gold held by others are worth less, allowing themselves to recover. Not that the current day is so much different.

 

Well, I shall cite a few sources. First off is the eternally loyal Wikipedia:

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In Renaissance Europe, the currency of small states—such as Genoa, Hamburg, Venice, and Nuremberg—consisted in large part of the currencies of neighboring nations. The foreign money, clipped and worn, lowered the value of a country's currency. A country's own freshly minted money, therefore, bore an agio, being worth more than its stock currency. Furthermore, it was melted as soon as it was released, its metallic content being worth more than its nominal value. In order to remedy this situation, a bank was founded in 1609 under the protection of the city of Amsterdam. This bank at first received both foreign and local coinage at their real, intrinsic value, deducted a small coinage and management fee, and credited clients in its book for the remainder. This credit was known as bank money. Being always in accord with mint standards, and always of the same value, bank money was worth more than real coinage. At the same time a new regulation was introduced; according to which all bills drawn at Amsterdam worth more than 600 guilders must be paid in bank money. This both removed all uncertainty from these bills and compelled all merchants to keep an account with the bank, which in turn occasioned a certain demand for bank money. Bank money had several distinct advantages over other forms of money. It was secure from fire, robbery and other accidents; was backed by the city of Amsterdam; and could be paid or received by a simple transfer, avoiding both the costs of counting and the risks of conveyance. Furthermore, it was of a known, superior quality. Because of the above it bore an agio, being worth more than its nominal value. Consequentially, it was not often that clients asked for their money to be extracted from the bank. A shilling freshly minted would buy no more than a clipped and worn one. It was better for clients to sell the debt the bank owed them—their credit—at the market, earning a premium, which is the expression of the aforementioned agio.

And Encyclopedia Britannica:

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Modern banking institutions developed to meet the needs of the vastly expanding trade. Amsterdam’s “exchange bank” was instituted in 1609 to provide monetary exchange at established rates, but it soon became a deposit bank for the safe settling of accounts. Unlike the Bank of England, established almost a century later, it neither managed the national currency nor acted as a lending institution (except to the government in emergencies).

And another one from the New Netherlands Institute of Dutch Heritage Restoration:

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The Wisselbank was created to provide stability and to facilitate payments in Amsterdam’s rapidly growing foreign trade. After the siege and fall of Antwerp in 1585 in the Eighty Years’ War, more trade was handled by Amsterdam. In the early 17th century the Amsterdam municipal authorities, aware that commercial activity there was being hindered by the uncertainties created by the circulation of various currencies of differing quality, decided to take action. In 1609 the Wisselbank was established as a corrective action, the idea being to insulate foreign merchants from the degradation of domestic coins. Foreign merchants suffered when commercial credits were repaid with debased coins, and when foreign trade suffered, Amsterdam suffered. The Wisselbank protected foreign creditors by settling debts through the bank and offering depositors its own coins that were not debased. It was required to uphold a high level of stability by maintaining its reserves of coins and precious metals at close to 100 percent of its deposits. The bank did not make loans to the public but mostly operated a s a service to merchants who were trading in different currencies. Its main contribution to banking innovation was a system of transfers by checks and direct debits similar to how it works now.

Now, why are the above of any importance? Well, it's because the governments keep gold as a standard of their currency. Yes, I know currency is based of gold reserves, and therefore keeping the gold is deemed rather important since it's seen as a stable store of value. I'd love to smash that in later, but back to the actual quotes. What is posed here is the actual problem of the coins having different intrinsic values. That is the entire reason for the Dutch Wisselbank of Amsterdam to exist anyhow. Yes, it never really picked up steam and got where it was supposed to go to, being a currency that is. It must probably be the reason why you didn't actually find a lot on the subject. The main problem with gold as any means of exchange is the fact that if it wasn't guaranteed, it would fluctuate in value. Heck, there had been entire civilizations who rejected the gold currencies of other nations due to the fact that the government behind it was failing (Byzantine empire) which resulted in silver currency. This is because gold was perceived as a vanity item: It's rare because people are fascinated by it. I'm pretty certain that there are plenty of other metals in the ground just as rare but less sought after. Then why do we actually keep to gold? Good question. The real answer is: Because it's the easiest way to fool people.
Gold is and remains an item with value. Yes I agree. But the value is highly dependent on the fact that we say it's valuable. If gold was worth 10 bucks a kilo, would you want a ring of it for your wedding? Not really. Gold would lose it's position as an aesthetic item. In fear of this, government actually buys up the majority of the gold in order to keep telling you that gold is worth something. 'I hold this huge reserve of gold, and say that it's worth 50 bucks a piece, so the little bits of gold/representatives I send out will also be worth 50 bucks a piece'. However, what happens to a government that has a gold reserve but fails to keep it's economy rolling? It sells its reserve. Imagine the US selling the gold reserve. People would start to question whether or not gold actually has value. This will drop the gold value.

The share of gold used in Electronics is estimated at 8% at the lowest, and 15% at the highest. Let's assume it's 1/8th for the heck of it. (12.5%) The share of gold in Jewelry and other Aesthetic items is 50%. The share of gold held as a guarantee by government or individual is the remaining amount, one might assume. This is a rather precarious balance, since the store of value in aesthetics and store of value through storing if rather similar in share amount. If enough of one side falls, the other side will suffer. If the government feels the need to stop keeping gold in store because the other alternative is the fall of it's economy, they will sell. Their currency will fail, and foreign currency will take over. However, when other nations are equally as troubled, there will be no other government who wishes to buy up the gold for storage. If individuals were to buy all these up, the amount of gold held as a store of currency drops. Seems logical right? Well, then the governments will probably invest in bringing around another metal (or maybe some alloy) from the ground to base their currency off. See it like this: Those who hold the gold wouldn't start a currency. They simply don't have the trust and means. Those who need the gold to keep currency can't promise the exchange of something worth just as much, since whatever currency or goods they give in return has no guaranteed value. This means that people would have stores of gold, but no real use of gold. If gold is deemed less valuable, people would use it less for aesthetics. Conclusion: Only 1/8th of the gold would pertain value. Now, this is a worst case scenario, and there are probably plenty of moments where people will stop this from happening, even at the cost of present monetary loss. But it doesn't mean that the value of gold has it's stability that it claims. Many people tried to hold up the currency, but in the end, since humans grow exponentially as you have stated, either the value of gold has to grow with it, or the amount. A limited currency sounds great, but it isn't currency. Five rocks is enough currency with 2 people, but gets hard with 5. It will drive some people to the point where they have no money at 10.


But I am drifting off. I'd like to invite you to read this article real quick if you wish, for some other info.
Now, on the subject of your video: Yes, the system exists, and I am aware of it. The government is bound to collapse on itself. But why would investing in gold help it any bit? You do realize that the moment the system collapses, your gold is as valuable as your toothbrush: It'll bring up as much as anyone is willing to trade for it, and with everyone selling, it'll be worth rather little. Now, naturally, whatever scraps of a government remains would in a perfect world decide to buy up your gold in exchange for currency, which in turn is guaranteed by the gold they just bought up. The government would turn into one big bank. The biggest problem of this is the fact that guaranteed gold holds no value.


What do I mean with that? Well, let us go back to the medieval era. Golden currency wasn't perfect yet, but people tried to handle these currencies the best they could. Only problem is that the amount of people who both had the resources and knowledge to use the gold were limited. Hence, there wasn't really any reason to stock up and distribute all that gold: It didn't have any collateral. At which point the people who ruled the mines and people stated: My gold unit is worth the same as 5 bags of grain. This is the real history behind the many rises of the gold as a unit of value: They attached a certain amount of one object to that piece of gold. Gold now had trade value because it represented those 5 bags of grain.


However, what happens when there is a shortage of grain, or a shortage of gold? The king could easily decree that all transits of monetary funds towards the kingdom goes in gold, gather it all, and then proclaim it to be worth more or less than what it was originally worth. If the piece of gold is worth 2 bags of grain, you will need to adjust. This happens especially by a food shortage: If your piece of gold buys less grain than the piece of gold represents, the kingdom would have to lower the representational value just to make sure that people won't exchange it for what it represents with the king, driving him to ruin. Instead, the gold is valued lower by the king the very moment the market fluctuates, and inflation happens. However, when there are still the same amount of golden coins going around with inflation on the rise, some people will fall into poverty. Logically, because the food it represents simply isn't there.


Now, how does this relate to the current day and age? Well, if at any point gold is no longer capable of representing a unit of items, for whatever reason you might imagine, (Think: Demilitarization of governments decreases representational power of it's currencies and with it the gold; Gold stops being needed in electronics; The bankruptcy of the governments resulting in the end of a government-monitored supply chain of the nation, which in turn stops the gold being held in store from representing a certain amount of any unit.) you would end up with a metal that might have any value you might possibly imagine purely from how that singular place you are bartering at will be able to do with the gold.


I'll continue my rant on the next post, since I seem to have reached 15000 characters.

 

Not much to continue on, but here goes:

Think of it like the server is. If I am heading a server and I started an economy on that server, where the only thing I stated was 'The currency are Redstone Blocks, and you can't craft it anymore. I have injected 1000 units into the economy. Enjoy.', you would probably come up with your own transit rates. But a person with many of the blocks would want to see it be worth more, and people with less would want it to be seen worth less. In the end, the ones with power decide, and the people with less would probably pick up their own currency just so they aren't dependent. If instead, I were to say 'Redstone Blocks can be exchanged for 5 iron.' and Redstone blocks would suddenly have an intrinsic value. That is, it would have the usage value of 5 iron. Someone who mines 5 iron would want to see the value of that redstone block to be equal to the value of his work at the very least. He can't make his iron worth more gold, because then the customers would exchange the gold instead of buying up iron. They also can not make it worth less, because that would be counter-effective. In the end, you get a steady rate for the gold held up by the power invested in the person who maintains the exchange of iron for gold. Those who need the iron would buy it up with the gold gained from their goods or services services granted to either the governing body or the person who provide iron. However, any other server might decide on any other value for their gold. If the map had no iron what so ever, they would value the currency that provides iron higher than their own currency that provides coal. In the end, the two similar coins has two completely different values.


Now, I can imagine that I am off somewhere. After all, I haven't really studies the values of gold in modern society. But I'm curious how you would respond to my statements. Lastly, on the subject of Babylonia:

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The Babylonians and their city state neighbors developed the earliest system of economics using a metric of various commodities, that was fixed in a legal code. In commerce, payment in kind was still common, though contracts usually stipulated cash, naming the currency expected—that of Babylon, Larsa, Assyria, Carchemish, etc. The shekel was an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC. and referred to a specific mass of barley which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency and a unit of weight.

What I want to say with the previous statement is that the Babylonians attached a unit of gold to a unit of barley, and called that a value. This is the only reason gold currency worked in the past: They were trading golden representations of barley.