Thursday, June 2, 2011

Cold Cash and Hard Coin

Utah has passed a law intended to encourage residents to use gold or silver coins made by the Mint as cash, but with their value based on the weight of the precious metals in them, not the face value — if, that is, they can find a merchant willing to accept the coins on that basis.
To pay with cash today is to pull a few bills out of our wallets. We’re sometimes obliged to accept a few coins in return. Its good to have a little loose change on hand, preferably exact change, because if we don’t they won’t let us on that bus. Mass transit excepted, coins today are just a pain in the back pocket.

But in antiquity, all currency was hard and all cash was cold: it was universally metal. Gold was Europe’s original common currency. It is portable (a ratio of weight to value), durable (with a shelf life upwards of several billion years), and has weight, substance, and value: all made it a perfect proxy for “money.”

In Room 9, Floor 2 of the Richelieu Wing at the Louvre is a depiction of early 16th-century Antwerp (and presumably of early 21st-century Utah): Quentin Metsys’s The Moneylender and his Wife. The dealer weighs the coins while the viewer, reflected in the scene (look closely), waits for payment.

In 1541, bills of exchange and promissory notes were in use but banknotes had yet to appear. When they did, they were often mistrusted. In American Colonial times Franklin’s call for more circulating paper money was resisted by the wealthy who feared depreciation “to the prejudice of all creditors.” The scheme worked, though, “increasing the trade, employment, and number of inhabitants in the province,” although Franklin conceded limits to paper “beyond which the quantity may be hurtful” [HC01.065].

The circulating paper of a “hard” currency requires stable, responsible governments with stable, responsible neighbors (like Greece) and global standards of exchange. One was the gold standard, ended only in 1971 but which evokes nostalgia among those who would have gold back up paper—or plastic:
Craig Franco, a coin dealer south of Salt Lake City, said he was finishing an arrangement with a bank to create a depository through which people will be able to spend their gold and silver indirectly, by using a Visa credit card that makes charges against the value of their holdings. 
Unsustainable development
Conceptually, a prepaid Visa Gold Card is no different from a promissory note dated 1541—just beware of the gold price. If you've pledged your doubloons on credit and the price of gold reverts to its thirty year average, well, too bad, Craig: your Visa debt just tripled. Proxies for money have changed since Metsys’s day, but debt is a cosmological constant. So is ignorance:
[S]upporters…say the law’s most important feature may be that it eliminates state capital gains taxes on the sale of gold and silver… [b]ut federal capital gains taxes would still apply.
“I would hope the federal government would simply concede: ‘O.K., you’re right, it’s money, so we can’t tax it,’ ” said Larry Hilton, a lawyer and insurance broker who first took the idea to lawmakers.
Gold is not Money. Gold is Bacon. Adam Smith [HC10] would agree. So while you’re at it, Larry, please ask them to revoke the capital-gains tax on my growing drift of swine.
“This is an incremental step in the right direction,” said Lowell Nelson, the interim coordinator for the Campaign for Liberty in Utah, a libertarian group rooted in Ron Paul’s presidential campaign. “If the federal government isn’t going to do it, then we here in Utah ought to be able to establish a monetary system that would survive a crash if and when that happens.”
There’s a technical name for Lowell’s post-apocalyptic monetary system. It harks back to an older, simpler age—the Stone Age—when money was money, when five flints got you a quern-stone, three pigs went for a cow, and a cord of wood scored a nugget of yellow metal. It’s called “barter.” 

Just remember to carry exact change. 

Monday, May 30, 2011

Don’t Believe the Hype (Amy Chua Revisited)

"Never, never disgrace me like that again."
-- Mr Chua to his daughter Amy, when she didn't win first prize in the eighth grade. 
Amy Chua's adopting this line with a vengeance, and then sharing her experience with the world, reminded me of Franklin’s observation that family honor should not descend from parent to child as among the nobility of Europe, but ascend as it does in China, where he success of the child is a credit to the parent. On this basis, Dr Chua sounds like a true narcissist. That still doesn't make her wrong.

Like many I hadn't read the book, only the reviews: lots about leaving kids out in the cold, calling them “garbage,” burning their stuffed animals. Chua insists that by pushing the kids she imbued them with the self-worth and confidence that led to their success. As a parent with two little girls, this book was required reading. [Thank you, reader #6, for lending your copy to Mrs Eliot.]

So what’s the bottom line? Chua has exactly the right idea, just a lousy sense of proportion. Her purpose is dead-on but her method is questionable, at least what she describes of it here.

Firstly and in response to the critics: in context, the threats and name-calling episodes were admissions of Chua’s mistakes; by the end of the book the author has begun to doubt herself. Surely the publisher cherrypicked the shockers for interviews and such. They say even bad publicity is good.

Interestingly, Chua's daughters respond to her relentlessness with strength and resilience, but Chua’s narrative doesn't bring this into the full relief it might have done. The dramatic pretension of the book revolves around her second daughter, Lulu. Bullied into violin virtuosity, she finally rebels and refuses to continue. At length, Chua relents. “I know you hate it,” she tells her daughter—but she is wrong. Lulu loves the violin; she hates the hectoring. This is not a “how-to” parent’s guide, it’s a cautionary tale. It's not about the girls, it's about Chua.

Yet we who have ambitions for our children are left with questions: how does one get a kid to want to be a virtuoso? Surely it depends on the kid. When, against her mother's wishes, Lulu begins tennis in earnest, she improves so rapidly that Chua’s tiger instincts are stirred: she begins judging, correcting, browbeating. How does an ambitious parent differentiate encouragement from pressure, and pressure from abuse? Lulu’s response was telling: “Don't ruin tennis for me like you ruined the violin!” Should we, in Chua's place, back down merely to avoid a conflict? In Lulu's case, probably yestiger grandmother said as muchif only because Lulu doesn't need us anymore.

Tiger pressure eventually becomes redundant. Lulu quickly improved her tennis quite on her own. Her sister Sophia’s writing is already more eloquent than their mother’s. Tiger kids begin to make choices and pursue them independently, confidently, successfully. Suppose these two choose to abandon the violin, piano, and tennis forever...what will they have left? Drive, tenacity, and self-reliance.

Not bad skills for a kid to have, I think.

Sunday, May 15, 2011

Post One, Post-Paris

"Must...get blog..."
To my five six severalloyal readers:

Sorry you've had nothing (to read, here, lately). Early 2011 opened the floodgates on two years' pent-up  demand for real estate. Good for income, lousy for blogging.

Also, Dr. and Mrs. Eliot spent any late-winter free time planning their recent trip to Paris:  guidebooks, itineraries, language — enough anyway to order a kir — which made two weeks twice as fun, twice as interesting, twice as edifying. Ultimately though francomode is not an option for us... our grrls start moyenne section at the  local lyc√©e this September so if we're gonna help them with their homework we have to get our merde together.

Upcoming: the literal weight of money; Adam Smith and immigration; de Tocqueville vs Burke; Amy Chua revisited. Hope to see you here.

Dr Eliot
* Happy to report I got some flak for this.

Monday, January 31, 2011

Gold is not Money

This is not money either

Not even at $1,335.65/oz. It never was. Silver is not money either. Neither is the paper in your wallet.

The “mercantilist” governments of the eighteenth century thought otherwise about gold. Yellow metal in the coffers, they thought, let them project military power, expand their dominion, and increase their wealth. “Bounties” encouraged exports and tariffs discouraged imports. Gold exporters paid heavy duties*. This was thought the surest way to national wealth and regional dominance. Mercantilism was a zero-sum game: gain wealth by impoverishing your neighbors.

Colonial trade was restricted to the mother country. North America was deliberately kept agrarian by the British to prevent competition and maintain a captive market for British manufactures. All colonial shipping had to pass through British ports where merchants charged their commission and the Crown its duties. It seemed a lucrative monopoly—certainly if you were a London merchant or the tax authority—and a prime reason the British were not particularly anxious to cut their colonies loose.

Mercantilism was first surpassed by the theories of the French “physiocrats” (later “√©conomistes”), who Franklin met during his first visit to Paris in 1767. “Opinions which had hitherto moved separately through [Franklin’s] mind were precipitated in to order,” wrote Van Doren, and “he came to be dramatically aware of the differences between Britain and America.” (BF.372)

Physiocrats held the wealth of a nation was measured by work, especially agricultural work; artisans, merchants, bankers, and others being mere accessories to real production, that being farming: the only activity in which “something is made from nothing.”

So the arguments went, but both the mercantilists and physiocrats had it wrong.

The year 1776 produced more than one revolution in thought. Adam Smith published the “Wealth of Nations” (HC10.009) where among other things he eviscerated the ideas that gold and arable land were the measures—and limits—of national wealth. His book is Harvard Classics volume number ten and the subject of the next few posts.

But what then is gold? Simply a commodity. Gold has no more nor less inherent value than wheat grain or pork bellies, which is to say that the owner of 23** pork futures contracts “can put into motion a greater quantity of industry, and give revenue, maintenance, and employment, to a greater number of people” than the owner of a 20 kilos (46 pounds) of gold (HC10.380).

Rushing to gold in times of crisis is not much better, and may be worse, than buying wheat. The price of wheat depends on the weather, but that of gold depends on human fickleness—and you can’t eat gold. Of course neither can you trade a bucket of lard for a new suit if the tailor is not especially hungry. Gold is more portable, more durable, and is easily exchanged (as it has been for millennia) which leads to its confusion with money. But neither gold nor bacon is money.

I'd gladly pay you Tuesday
for 42,444.31 pounds of bacon in February
So what is money? Money is, literally, the ultimate confidence game. The value of a “Benjamin” (pictured at top) is agreed upon by society at large. Like gold, the bill is easily portable, a universal reference, exchangeable at equal value with intimate friends or perfect strangers, but is not money—like gold (and pigs), it only represents money. Each note is “…legal tender for all debts, public and private” whether a kid’s allowance or a kidnapper’s ransom. Money is a convention, abstract yet precise to the penny, by which we convert what we have individually produced to what we individually desire—the desired thing being the production of another.

The wealth of a nation is a measure of its collective production. “Money” is the measuring-stick. In other words one hundred dollars is what we collectively decide it to be, and nothing more.

Money is a state of mind.

* The real price of exported gold was increased by either the government levy (50% in the case of Spain in Smith's time), or the risk premium charged by smugglers.
** Prices as of 31 January 2011. Gold = spot; Pork Bellies = Feb 11 delivery.