What should currency be based on?

[plotthickens]

Have yet heard a 100% good answer, am hoping to find it here.

[Scatterbrane]

Lawful contracts of any kind.

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Lawful contracts of any kind.

How would that work?

[Valiyn]

I don't think anything leads to a stable currency in a free market. There will always be more demand for supply and when there is not it's very bad inflation of whatever the currency is based on. So an abstract concept, flat money, would be ideal I think. It's not the only kind of currency out there (i.e. direct trade of one good for another still exsist), it's just accepted everywhere as a common medium. Using a non-abstract concept, like gold, means people will seek out the material for it's currency value, meaning the supply of the material cannot be controlled. You have to remember, the basic government for a society using flat money as legal tender is essentially a bank. If they can't control the supply to meet the demand you have a controlled demand variable. Basically, the material is hunted down until it's not around or is worthless. This seems to hold true for abstract legal tender as well and is a prime way to keep counterfeit money from being brought into the picture easily.

[Locke03]

IANAE, but I've kept this issue in the back of my mind for some time and have pretty much came to the same conclusion Valiya outlined. Outside of barter economics (only feasible on a very small scale), I'm not sure a material-based currency is even possible anymore (why, other than the fact that it can be traded for money, is gold valuable? I don't think its industrial uses would have its value as high as it is), much less a good idea. I can't say I care for the idea of global currency markets being regulated based upon some independent organizations ideas of economic stability (fiat currency in essence), but thats the idea I keep coming back to as the one that would be most stable in the long run (if and only if it were well managed).

[BlackOp]

Size of military....;)

[SirJac]

Unfortunately I don't think we have the option to use anything but fiat currency anymore. Gold would be great since it doesn't have much productive value and historically has been very stable in maintaining true value. However, there isn't enough gold on earth to use it as universal currency anymore. Gold just isn't up to the task of meeting current demand for currency nor can it meet increasing demand for currency.

Every real commodity will also fail to meet the needs of a currency. Either the amount available is too little and cannot meet the needs of a growing world economy, or it has too much productive value already attached to it and thus doesn't have the market stabability needed. When the total world economy was smaller, real commodities worked because the amount available wasn't out of proportion with the total value of the world economy.

Conceptual basis of valuing currency doesn't work well either since it is usually impossible to measure with enough precision and accuracy. Also other conceptual basis are dependent on the currency as part of how they are defined, such as GNP, and so cannot be used to value the currency.

Perhaps someone will come up with an idea for a stable currency that can meet the demands required of it, but so far I think we're stuck with fiat currency.

[Angel1]

The need for efficiency means that I must concur with many people above that a fiat currency is the only viable option. Fiat currency has money because people will recognize that the money is the symbolic representation of wealth created. Basically, an acre of land has some value and thus the land is in a way money, but you can't easily find someone that has something you want to trade your land for. Thus you and the person that really wants to buy your land will make a different exchange. You will give your land which is $10,000 for $10,000 cash which is $10,000 worth of work that the buyer has performed elsewhere. It's all about efficiency. How do you most efficiently goods from people that want to sell them to people that want to use them? Fiat currencies are intermediaries from one good to other goods.

[ClydeB]

I am a personal fan of money coming directly from the government. Not the federal reserve. Something along the lines of basic unit of currency = one hour of basic labor. Not the current prestidigitation money as dept system.

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[hubcap]

I'm convinced that precious metals such as gold have significant shortcomings as a base for currency. Fiat currency is probably as good as anything but in order to avoid robbing the citizenry of their wealth it is necessary to restrain the government from using the printing press to increase the money supply.

[saberu]

a labor based currency is the obvious choice IMO

Its really just the rules that surround its use for example...

Limiting every organization or person to borrow a specific fraction of their potential ability to pay it back
( simliar to fractional reserve banking with gold)

Not charging interest on the money

[True Rune]

How about water? xD It's almost as important to us as life is. :P

[Mogura]

A basket of precious metals: gold, platinum and palladium...

Edit: Really, currency could be based on anything that has perceived value, including used kitty litter. That's not the point. The point is self-restraint, fiscal responsibility, and accountability. That's what is needed...

[nacht]

Why did you fail to include the way it is valued now?

[Googamanga]

What happed to

"Should currency be based on something?"
&
"Should Currency be stable?"

[plotthickens]

Why did you fail to include the way it is valued now?

I thought this was, essentially, it: Reputation of the issuing country

[freeeekyyy]

Currency should be based on whatever people want it to be. Gold is a natural choice because it's durable and maintains value, but if something else could better fulfill those characteristics, there should be nothing stopping people from using it.

[AnnoyingPony]

Gold is a unique currency because it's totally useless and rare, but it looks pretty so we use it for coins and stuff.

Silver actually has more of a use than gold does (photography film, anyone?) but that will soon be out of fashion.

Water cannot be owned, period. It's a natural resource that people need to survive. It's sad enough that water is even a branded consumer product now.

Hours of work? What about people who can't work due to disabilities? Are they basically broke? That doesn't work at all.

Land is a commodity that you buy and sell with money. It is not a form of money itself. What if you were paying the clerk at the grocery store and you said, "Okay, I'll pay you with the space in the backyard that I buried my dead dog in." No... just... no.

Eggs wouldn't work for the same reason that cod wouldn't work. It goes bad and spoils.

Reputation of the issuing country works well... as long as the country in question has a good reputation. This is why the U.S. dollar is basically worthless right now on the international market - people don't think that the government is trustworthy, so they don't think that the paper money they issue out is trustworthy either.

Gross National Product - elaborate, please.

Gross National Happiness - what the fudge is this?

I think that gold would be a good system to base our money system off of, but it must not be run by the Federal Reserve. The Federal Reserve is about as related to the federal government as the Federal Post Service is, and it all too often abuses its power when printing paper money. It's the reason why America's in a recession right now.

[Locke03]

Currency should be based on whatever people want it to be. Gold is a natural choice because it's durable and maintains value, but if something else could better fulfill those characteristics, there should be nothing stopping people from using it.

Why does it maintain its value though? It's durable, but so is a lot of other things. It's rare, but not really all that rare, and I would argue that it's moderately common. It's useful, but not useful enough to warrant its current price.

Historically, I agree with the use or precious metals (or gemstones, or rare seashells, or any other form of currency that has been used) as a means of providing a compact, transportable form of value, but I don't see it as being necessary, efficient, or sustainable in our current society. Economies, both global and regional in developed nations, are to large and complex for chunks of yellow metal to mean anything other than raw material for a good conductor or piece of jewelry. Use of a finite material as the basis of wealth will cause either the eventual stop of economic growth or skyrocketing value of an arbitrary material.

[Mader]

I have no answer for this question, but I wonder, why has gold always been the ideal currency? Why have most cultures valued gold above all? Just because it is pretty?

[Mogura]

I have no answer for this question, but I wonder, why has gold always been the ideal currency? Why have most cultures valued gold above all? Just because it is pretty?

Perceived value and herd mindset.

Gold in itself is pretty useless. But since everybody believes it has value (it's rarity is probably the reason here), it becomes a self-fulfilling prophecy.

Back in the day, salt was the ideal currency...

[Thinker]

I voted for an average hour of work....but I realise it is not realistic.:)

This is from an Australian perspective, where our currency is the most traded in international forex markets (behind the USD).

I get really pissed when I see US backpackers able to afford 5 star hotels in Australia, simply because some freakin hedge fund has just sideswiped the AUD. I also get pissed when I see (lower middle class) immigrants from the UK or Europe purchase million dollar waterfront properties in Australia.
Don't get me started on Americans buying key riverfront NZ property and reducing access to fly fishing territory.

There...got that off my chest:)

The AUD is extraordinarily volatile.
One of the primary reasons is that it can be manipulated through highly geared financial contracts. The trade in the AUD does not match the demand and supply curve for our currency (being based on trade of goods and services). It is all about hedge funds moving money around the globe to chase quick profits.

Many of the sophisticated financial instruments, that are used by hedge funds, were designed as a means to reduce risk (and held by people who hold physical inventory). All they have done is increased risk...risk in a financial sense being increased volatility. Hedge funds rely on volatility to make profit....buy low...sell high.

I know it is much more complicated than this, but the reality is that we now have highly geared investment products which are divorced from "real" investment activity.

When you are betting that something will go up (or down) in value...it is just gambling.
It may be sophisticated in the sense that there is some guy high on adrenaline watching a screen, and graphing trends etc....but it is just gambling. There are no physical goods, services or "real" investment activities being undertaken.

[Causa Mortis]

I have no answer for this question, but I wonder, why has gold always been the ideal currency? Why have most cultures valued gold above all? Just because it is pretty?

Because virtually everyone would accept gold as payment. A form of money emerges in most societies once they move out of hunting/gathering because it becomes a pain in the ass to find double incidence of wants without a currency. So I make bread, I want a night with a prostitute. But the prostitute makes her own bread, and wants payment in lollipops instead. So I have to go to the lollipop maker and hope he wants bread, and then walk all the way back to the prostitute. You get the picture.

Whatever emerges as the most widely accepted (cigs, gold, diamonds, even nyloans) commodity eventually emerges as "money" as people naturally try to minimize their time and resources they must spend on transaction costs.

Barter Economy (Major problems with this) -> trading metals, sea shells, or cigarrettes (gets inconvenient to lug around) -> storing in banks, trading the claim on the storage (People eventually stop redeeming in considerable amounts, as the claim and the metal are largely indistinguashable) -> fractional reserve commodity money as redemptions become increasingly rare -> do away with commodity claim entirely, have fiat currency.

Every one of these progressions lowers either resource costs or transaction costs by a considerable margin. All of these will occur with or without government intervention, with perhaps the exception of the move from redeemable currency to fiat (and even looney government interventionists like FA Hayek think that fiat would still have eventually arisen, and if you get fiat then you get an incentive for whoever is making the money to inflate)

---------- Post added 02-08-2010 at 10:26 PM ----------


One of the primary reasons is that it can be manipulated through highly geared financial contracts. The trade in the AUD does not match the demand and supply curve for our currency (being based on trade of goods and services).

Correct. But the currnecy market does about 1t in church per day, which means that in a month, they've basically churned more in portfolio demand than will be churned for demand for goods and services.

[Thinker]

Correct. But the currnecy market does about 1t in church per day, which means that in a month, they've basically churned more in portfolio demand than will be churned for demand for goods and services.

Perhaps I didn't express myself well...but that is exactly what I meant.
The trade in currency pairs through forex markets do not represent the trade in physical goods and services.
The AUD market is an extreme example of this.

[Drie Konings]

Ive had this question bugging me for about an year now, and with all the sleepless night i still cant find an answer that's good enough for my standards . but the question of why do we need a currency system came often.

[Causa Mortis]

Perhaps I didn't express myself well...but that is exactly what I meant.
The trade in currency pairs through forex markets do not represent the trade in physical goods and services.
The AUD market is an extreme example of this.

Correct, and you're suggesting that this is a "bad" thing? Money often changes hands in many markets without direct demand for goods and services.

[Locke03]

... but the question of why do we need a currency system came often.

My guess would be because no one has yet to think of anything that works better and if someone did it would be so disruptive to the status quo that people with interest in maintaining the status quo (pretty much everyone in any position of power to some degree) would be very unhappy with it.

[Aronnax]

Ive had this question bugging me for about an year now, and with all the sleepless night i still cant find an answer that's good enough for my standards . but the question of why do we need a currency system came often.

We don't "need" a currency system, we use a currency system because "free" societies aren't popular and barter is a pain in the ass.

[Scatterbrane]

How would that work?
I thought this was, essentially, it: Reputation of the issuing country

Fiat currencies aren't based on reputation of issuer, that would be like claiming that gold currency is based on the stability of gold's acquisition. That's a definition I suppose, but let's at least be consistent please.

... on second thought that definition seems to work nicely, I can think of analogies between acquisition of material currency and production of fiat currency that appear to be very useful abstractions.

I like fiat currency. If personal stability is desired, diversify thy portfolio. Material based currencies are also subject to becoming capricious, but if you spot a particular one that appears to be long-term stable you can put your money where your mouth is.

[Thinker]

Correct, and you're suggesting that this is a "bad" thing? Money often changes hands in many markets without direct demand for goods and services.

It is a bad thing when it directly affects my standard of living...for no "real" reason.
See my first post in this thread where I vented about the inequality of standard of living ...purely because the AUD is a speculative currency with significant volatility.

Think how you would like having your international standard of living halved over a few very short months for absolutely no reason other than there was a belief that Australian interest rates would trend down.

I have been in the unenviable position of booking an overseas trip with the AUD @ $0.95USD, only to have it down to $0.60 two weeks later landing in the US. You do the maths...accommodation, food etc etc becomes very expensive in AUD terms.

Remember speculation is not productive...it is no longer arbitrage (which has a role)...it is purely moving wealth from one person to another without any tangible goods changing hands.
It is changing my relative standard of living.

The "bad thing" is rapid upwards or downwards currency movements which are not tied into real economic events.

[freeeekyyy]

I have no answer for this question, but I wonder, why has gold always been the ideal currency? Why have most cultures valued gold above all? Just because it is pretty?
It doesn't corrode. It's hard and doesn't deform easily. And yes, people think it's pretty. If people didn't like gold, there wouldn't be much point. But they do, and have for many, many years. And if gold did lose that status, then ideally there would be nothing stopping people from trading in some other good. Obviously, for taxing purposes, a government needs a single currency. As it is at present, in the US you are legally required to pay employees in dollars. The reason being that if you could pay them in other forms, inflation by the federal reserve could be avoided and the government would lose its ability to manipulate the market. That alone is reason enough for me to prefer an alternate currency, something that a central bank cannot create out of thin air.

[Kisai]

I'll go with reputation, for countries not to default on their loans seems most important to me in keeping their currency valuable.

[rahdam]

Fiat currency is legitimate if the source of decree is responsible.
Increasing fiscal irresponsibility corrodes the entire basis for fiat currency.
I strongly suggest that you all investigate this week's Newsweek magazine, it has a number of articles by some of its strongest writers about the increasing fiscal irresponsibility of America. Suffice it to say, the public is largely to blame, demanding at once that government fix large problems while remaining small. The politicians, eager for election, pander to these incoherent demands.

[nacht]

I thought this was, essentially, it: Reputation of the issuing country

Only as so much as "reputation of the company" is responsible for the valuation of stocks. It plays a component, but that is not how it is measured.

[plotthickens]

Only as so much as "reputation of the company" is responsible for the valuation of stocks. It plays a component, but that is not how it is measured.

Oh, good, something for me to learn. Do you have a link for me? Even better would be a synopsis from you, but I'm sure I can RTFM. ;)