Last Wednesday (2011 August 31) Steven Davidoff published an essay for Dealbook in the Business section of the New York Times on the real vs apparent value of gold.
He discusses gold and how its price has been driven to dizzying heights. One very memorable sentence: “But like paper money, gold is worth only what people believe it is worth, and because of this, it is sometimes referred to as the barbarous relic.”
Gold and new silver are pretty, but even tarnish resistant gold seems to be losing its importance in the electronics industry.
Davidoff makes the good point that run-up in gold price is a classical bubble, visible right now, while it is occurring.
There is continual, almost theological haranguing to return to the Gold Standard. The internet is full of it. We discussed the gold standard before. Gold’s price does not correspond to any constant-valued commodity and it is vulnerable to manipulation. To make gold the monetary standard, we would need at least two perfect economic invariants so we can compare one to the other to test the chosen standard’s true invariance. Anything else is asking monopolists to step in.
Tulips and their bulbs
There have been lots of bubbles in history, not just our recent housing price bubble. Maybe the most famous is the Dutch tulip bulb balloon of the 7 month period of 1636-1637 when bulbs reached values of 10 times the annual wage of a highly skilled worker. The mania died a sudden death, apparently along with the wealth of some big families.
Suppose the Netherlands had adopted the tulip standard for its currency? Makes you think. Gold is a collectable, and why value it above other collectables?
I used to collect stamps because my father did and his collection went back many decades before I was born.
I gave this up as our family’s Standard Value when the US started printing gobs and gobs of new-release stamps, just to get speculator money. So, stamps are out as a potential monetary denominator.
But, what about other collectables?
Sea shells are quite fun and would be in high demand at inland locations, if they were to reach big-time collectable status.
What about beer cans? Lots of people collect them, and if they denominated currency, the simple act of accumulating of wealth (by our CEOs, of course) would generate wealth by increasing the demand for more of the product. Wow, why aren’t the far-right politicians all behind the Beer Can Standard?
I think the very best discussion of collectable passion and its bubble was published in as a story by Damon Knight in Galaxy Science Fiction. It was titled “The Big Pat Boom” which sounds like a pun, rather than a treatise on economic theory.
High value single swirl cowpat
Knight says (see p32 of this book) he wrote it in the early 1960’s, maybe so. I read it the 7th Galaxy Reader, Frederik Pohl, ed., copyrighted in 4 dates between 1959 through 1964. Get the story here. The Galaxy Reader might be available in a used book store, somewhere.
Connie Willis (important and excellent current Sci-Fi writer) says it is her favorite short story.
Yup, the idea was that space aliens found huge value in cow pats and rated them on their swirls. As you could imaging, the economy went nuts.
Squirrels love tulip bulbs
Now this just plain makes sense, and I wish Rand Paul or maybe Quitter Palin would learn of it. Cow pats to pay libertarian or Tea Party for their efforts. Yesss!
The idea does have problems.
For example, if you base your monetary policy on something that can have its market cornered, or if vast supplies can be hoarded, what would keep someone from eating up your monetary reserves?
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Charles J. Armentrout, Ann Arbor
2011 Sep 4
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The Last Tech Age 
EconTalk, http://www.econtalk.org/, had a program discussing the idea of going back to the gold standard and whether it may have been the trigger of the Great Depression. They pointed out China was sheltered since it was on a silver standard at the time. Though, the biggest issue they focused on was that there are very few countries on the planet that control the supply and thus they can control the rate of inflation. This would be similar to using a diamond standard and letting African nations determine, as they already do, the value of diamonds by only slowly slipping them into the marketplace.
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Good point. A diamond standard would be really disastrous since currency could be controlled by a country or two, with no attachment with the countries that would base their currency on this collectable. There have been stories for years that diamonds had to have a highly controlled release schedule, or it would become a cheap commodity. Gold, of course, can be controlled by individuals as silver was in the early ’80s. What a pleasant thought.
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They also commented that even gold can be controlled since there are again a handful of nations that control the supply. The power of being able to control the rate of inflation could be quite devastating.
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