Title: 1
Author: John F. Nash, Jr.
Company: Nashville Associates, S.A.

Ideal Money

    The special commodity or medium that we call money 
has a long and interesting history. And since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about 
it and fail to be able to reason about it like about 
a technology, such as radio, to be used more or less efficiently.
    So I wish to present the argument that various interests and groups, notably including "Keynesian"  economists, have sold to the public a "quasi-doctrine"  which teaches, in effect, that "less is more" or that 
(in other words) "bad money is better than good money". Here we can remember the classic ancient economics saying called "Gresham's law" which was "The bad money drives out the good". The saying of Gresham's is mostly of interest here because it illustrates the "old" or "classical" concept of "bad money" which concept is not according 
to the thinking of this variety of economists.

           Money, Utility, and Game Theory

    In the sort of game theory that is studied and applied by economists the concept of "utility" is very fundamental and essential. Von Neumann and Morgenstern give a notably good and thorough treatment of utility in their book 
(on game theory and economic behavior). The concept of 
utility (mathematical) does indeed predate the book of 
Von Neumann and Morgenstern. And for example, as a concept, mathematical utility can be traced back to a paper published in 1886 in Pisa by G. B. Antonelli.
    When one studies what are called "cooperative games", which in economic terms include mergers and acquisitions 
or cartel formation, it is found to be appropriate and is standard to form two basic classifications:

        (1): Games with transferable utility.
  (and)
        (2): Games without transferable utility
                (or "NTU" games).

    In the world of practical realities it is money which typically causes the existence of a game of type (1) rather than of type (2); money is the lubrication"  which enables the efficient "transfer of utility". And generally if games can be transformed from type (2) to type (1) there is a gain, on average, to all the players in terms of whatever might be expected to be the outcome.
     But this function of money in generally facilitating the transfer of utility would seem to be as well performed by the currency of Thailand as by that of Switzerland. 
Or the question can be asked "How do 'good money' and 
'bad money' differ, if at all, for the valuable function 
of facilitating utility transfer?".  But if we consider contracts having a relatively long time axis then the difference can be seen clearly.
    Consider a society where the money in use is subject to a rapid and unpredictable rate of inflation so that money worth 100 now might be worth from 50 to 10 by a year from now. Who would want to lend money for the term of a year?
    In this context we can see how the "quality" of a 
money standard can strongly influence areas of the economy involving financing with longer-term credits.

                    "Keynesians"

    The thinking of J. M. Keynes was actually multi-dimensional and consequently there are quite different varieties of persons at the present time who follow, 
in one way or another, some of the thinking of Keynes.  
And of course SOME of his thinking was scientifically accurate and thus not disputable. For example, an early book written by Keynes was the mathematical text "A Treatise on Probability".
    The label "Keynesian" is convenient, but to be safe we should have a defined meaning for this as a party that can be criticized and contrasted with other parties.
    So let us define "Keynesian" to be descriptive 
of a "school of thought" that originated at the time of the devaluations of the pound and the dollar in the early 30's of the 20th century. Then, more specifically, a "Keynesian" would favor the existence of a "manipulative" state establishment of central bank and treasury which would continuously seek to achieve "economic welfare" objectives with comparatively little regard for the long term reputation of the national currency and the associated effects of that on the reputation of financial enterprises domestic to the state.
    And indeed a very famous saying of Keynes was 
"... in the long run we will all be dead ...".

                Historical Observations

     {Originally, these remarks were mostly made with the aid of a blackboard (or some sort of a board for writing display).}

    The history of the "gold standard" is rather interesting. It can be traced back to 1717 when Isaac Newton, as "Master of the Mint" in London, set a standard quantum of gold to correspond to the currency called the "'pound' sterling". And in 1931 this standard finally failed to be supported any longer, and that was at a 
time when the London government had shifted to the left politically and a time also of global economic stresses.
    The US dollar had itself been imitatively put on a fixed relation to gold, like various other currencies at various times. That relation was not supported after 1933, similarly to the case of the British pound. And another similarly linked currency was the Swiss franc. In its case the original standard relation to gold was discontinued in 1936.
    And in later times, viewed retrospectively, it could 
be said that there were times and places where it perhaps SEEMED as if there were a "gold standard" but that there really wasn't that. In 1971 there came, under the presidency of Nixon in Washington, the final complete disavowal of the concept of a linkage between the US dollar and gold. This was naturally also the beginning of a period of strong inflation in terms 
of dollar prices.

        Central Banks as "Pardoners" and 
             as Printers of Money

    A debt-pardoner is an agency or authority that can pardon the "sins" of the over-indebted or of those who otherwise would go bankrupt. Banks can thus sometimes be saved from failing. The government, of a country where it issues the locally accepted currency, also thus pardons its own "sins".
    If the "euro" currency becomes established then Rome and Paris will no longer be able to play the 
same ro^les as "pardoners" as they have in the past. National "pardoners" will become ineffective, within the area of the "euro", unless they secede from the eurocurrency bloc. Instead pardoning will depend on the actions of a sort of "Holy Roman Emperor" in Frankfurt, which would be able to pardon ensemble 
all the debt-sinners of the euromoney bloc.

            The British and the "Euro"

    The inhabitants of the UK, having in the past had the best and most dominant of all currencies, as well as the biggest colonial "empire", may feel so much reluctant to accept the "come down" that agreeing 
to the rule of a (collective) Holy Roman Emperor in Frankfurt would entail that they will decline to accept membership in the euromoney bloc.
     Technically, it would be possible for them to arrange to have a money of their own that would be of quality not less than that of the "euro". (Presumably this would be the Swiss strategy.)

                   Ideal Money

    So the euro-money prospect opens up many interesting potentialities of games of alignment. 
In general, membership in a "social club" is desirable only if there are non-members. A good alliance can 
be reduced to an absurdity by becoming too broadly inclusive. But a global money standard could have a value similar to that of standard measures such as those of the "metric system".
     There is a tremendous value in simply having prices quoted conveniently. With an euro-money standard a manufacturer in Spain can give information simply to prospective customers in France or Germany. That would be comparable to conditions in the USA where items can be ordered from catalogs and shipped interstate with only the complication of the state retail sales taxes sometimes being involved.

                States Without Sin

    (This was originally presented in "blackboard display" format, rather than in verbal lecture style.)  
    
    It was observed that the states listed:     Luxembourg, Andorra, Liechtenstein, San Marino, Monaco, and the Vatican City; have been constitutionally without "sin", in the sense of the defaulting of bankrupts, and they have also not themselves "pardoned" any money debtors. This is simply because they have not printed any money for which they would also determine the value. Each of these would either issue a currency with value defined by the value of the currency issued by some larger state or simply not issue any currency.
    And outside of Europe there are Panama and Liberia which can be named as examples of the same category.

           Economics and Money Quality

    How does the traditional quality of a state's currency correlate with the typical level of economic advancement and the "standard of living"? The correlation seems to be positive since Switzerland 
has a notably high standard of prosperity and notably "good" money, and of course the whole spectrum of prosperity and money quality of states must be studied for a scientific conclusion.

      How Could "Good Money" Become a Standard?

    The historical fact seems to be that the "gold standard" was, in its time, a basis that favored the prosperity of the U.K. and of other states like the USA and Switzerland that adopted the concept of the standard.  But nowadays few would propose a return to the actual use simply of the metal gold as a standard. Several factors can be mentioned: (1) The cost of mining gold effectively does depend on the technology. Recent cyanide leaching techniques have made it again possible to profitably mine gold at formerly abandoned sites in the USA so that the USA is now a big producer. But the unpredictability of the cost is a negative factor. (2) The location of potential gold mining places may not be "politically appealing" so that it would seem undesirable to make a political choice to enhance the economic importance of those particular areas. (3) There is some negative psychology about gold so that even if it were the most logical choice, after all, still the unpopularity of the idea could be very obstructive.
    But a modern alternative is possible, one that would provide a good standard independent of state pardoners". This idea occurred to me comparatively recently.
    But the possibilities with regard to actually establishing a norm of money systems which could qualify as of "ideal" type are dependent on the political circumstances of the world. If the world 
had in fact become a single empire with a central government for the whole world then what is now international trade, with shipping on the oceans through areas considered to be the property of no state, would be replaced by the equivalent of domestic commerce within the USA.
    And this would profoundly modify the circumstances relevant to the establishing of "good" or "bad" systems of money. What I have to suggest is not 
viewed as appropriate for the world empire context.
    It can also be remarked that "bad" money, or the inverse of "good" or "ideal" money is basically a consequence of deficiencies on the part of governments and politicians of a sort relating to morals, virtue, 
or ethics. Thus the phenomena of "bad money" are essentially understandable via Machiavellian studies.
    We of Terra could be taught how to have ideal monetary systems if wise and benevolent extra-terrestrials were to "take us in hand" and administer our national money systems analogously to how the currency of Hong Kong was administered during the later years of British Hong Kong.

             Natural Comparisons of Value

    In most states having an "advanced economy" there are statistics prepared by the authorities that are comparable to the U.S. "consumer price index". (In the U.S. this statistic goes back to times when the dollar was indeed a gold standard currency.) As inflation 
has become more of a standard and expected phenomenon 
the CPI has been used and interpreted as the most realistic and practical measure of the actual rate of the inflation. When it is at the 2% or 3% level it is currently fashionable for all economic and financial
commentators to say that "inflation is not a problem" or "inflation is under control". This of course involves a sort of psychology. Over the current expected human lifetime of 70 years one unit of currency of the value at the time of a person's birth would be worth more than 4 units of it of the value 
at the time of that person's expiration.

         A Non-Political Value Standard

    A possible non-political basis for a value standard which could be used for money would be a 
good "ICPI" statistic where this acronym refers to "industrial consumption price index". That could 
be calculated from the international prices of commodities, such as copper, silver, tungsten, etc. that are used in industrial activities.
    Here we can return to the understanding that money has the practical value of creating games for traders that are games with transferable utility when without the money being available the game of the traders would be a game without transferable utility and thus naturally a game with less efficiency in relation to the possibilities for the participants of maximizing their combined situation of gains.
    And then if we consider which commodities would be optimally suitable to provide a basis for a means of transferring utility then, if we specifically consider the possibility that the trading partners may be located in different nations and perhaps on different continents then the suitability of such commodities, in relation to the ideal function of facilitating utility transfer, depends on the extent such a commodity can seem to have a value independent of 
its geographical location.
    Clearly, in terms of this geographical perspective, gold has been historically optimal and that largely because the labor cost of moving it 
over great distances is so small in relation to the value of what is transported. Thus it formed a very efficiently movable medium for the transportation 
of a value exchangeable for other values ultimately deriving, in one way or another, from human labor (with the achievements of warriors here also viewed as involving labor). But right now platinum would be even better than gold because of having more value per unit of weight.
    Crude petroleum could also be used for barter transactions, and in relation to the present state of the global economy it would seem a proper component of an index of prices of internationally traded commodities that enter into the costs of industrial consumption. We can see that times could change, especially if a "miracle energy source" were found, and thus if a good ICPI index is constructed it should not be expected to be valid, as initially defined, into all eternity. It would instead be appropriate 
for it to be regularly readjusted depending on how 
the patterns of international trade would actually 
evolve. Here, evidently, politicians in control of 
the authority behind standards COULD corrupt the continuity of a good standard, but depending on how things were fundamentally arranged, the probabilities of serious damage through "political corruption" might become as small as the probabilities that the values of the standard meter and kilogram will be corrupted through the actions of politicians.                                                     
    Also, commodities with easily and reliably calculable prices are most suitable, and relatively stable prices are very desirable.
    Another basic cost that could be used would be a standard transportation cost, the cost of shipping a unit quantity of something over long international distances.
    So it seems that such an ICPI index could be calculated in an essentially "scientific" fashion, after some practical initial choices were made. And this standard, as a basis for the standardization of the value of the international money unit, would remove, where it would be used, the political ro^les of the "grand pardoners", the state authorities 
that can forgive the debts of debtors including, particularly, those of themselves. (The "national debt" of a state can, in principle, be "trivialized" by a sufficient amount of inflation.)

            Euro, Frankfurt, Standard

    If such an objective and non-political standard were used in the Frankfurt of a euro-money system then there would not be an "Holy Roman Emperor" (although of a collective structure) with the power to pardon 
or not to pardon the debt-sins of all European debtors (of the zone) in general. So there would be nothing 
to argue about, such as whether or not those most desirous of Keynesian "pardoning" should be favored with a general pardoning of past debts by the fiat of inflation.

                 Refined Indices

    If the technical problem of designing an index 
of prices to serve as a basis for a money of standard value is considered in a more elaborate fashion it seems that there is the possibility of defining the sort of index which would vary "smoothly" and yet would also vary in an appropriate way over longer periods of time. Here the apparent problem is that the prices of certain commodities which would be ideally suited to measure long term changes in the costs of industrial production may tend naturally to be "volatile" in their variations depending on business cycles. And the prices of other commodities or services, etc. might tend to vary much more gradually or smoothly but not be reliable in terms of long term considerations for one or another reason.
    For example, the prices of copper and nickel might very well represent, over long time periods, the actual costs of industrial production, while the prices of silver and gold might tend to vary, comparatively, much more "smoothly" than those of the baser metals. It is possible to construct a price index, based on "moving averages", that would have the smoothness of the prices of the gold and silver and yet, over longer time periods, would basically follow the values of the baser metals. This could be done by computing a "moving average" of the base metals index computed by pricing them modulo the index of the precious metals.
    In actual application it would not be a matter 
of "base" and precious metals but rather of a variety 
of commodities that would be selected for their suitability in one sense or the other. And in the index formed from things with naturally "smoothly varying" prices it seems that it would be intrinsically quite feasible to make use of costs 
of services, or energy, or prices that depend on the national location of the definition of the commodity, service, or asset being priced.
    So by using this approach the temptation to include things that would otherwise seem inappropriate just to obtain stability or smoothness can be avoided.
    And of course the fundamental principle remains that if a political basis existed for changes in a standard index that it is not unlikely that a form 
of "corruption" would appear. This is comparable to the issue that was raised recently in the USA where certain interests wished to devalue the original CPI computed by the Labor Department so as to have more federal budget money available to reduce taxes or for other purposes with Social Security beneficiaries being given less.

    Practical Considerations on Long Term Value 
    Trends And the Safe Deposit Box Singularity

    There is a problem for the issuer of a currency, whether in coinage, paper, or "electronic" form, that if this currency (or money) is TOO GOOD then it could be exploited by all sorts of parties and interests that might simply wish to safely deposit a store of wealth or even to conservatively invest some assets for future good value. (The word good is used here 
in terms of comparative value trends, like in "good investments".) Then under extreme conditions the currency issued by one state could be exploited 
by parties not of that state as a sort of "safe deposit box" on which they would not need to pay any rental fees or pay any fees like those paid to the managers of mutual funds for investment.
    But simply to improve the conditions under which agreements for long term lending and borrowing would be made a money would be more or less equivalently good if it had a completely steady and constant rate of inflation. Then this inflation rate could be added 
to all lending and borrowing contracts. So the problem of a money that would be "TOO GOOD" is thus avoidable.
    However, this is not known as a problem in the past history of money. And in fact there is a natural character of the sort of material things to which money standards have been related that makes them naturally tend not to provide "too good" a channel for investment. It has simply not been profitable, in the past, for any economic parties to use any variety of money as a channel for investment, although of course there has been much "currency speculation" which is a different thing.
    Of course also the issuer of a currency needs 
to be properly prepared for the possibility of speculation on the part of interests domiciled in foreign states, etc., etc.

               Natural Value Trends

   The long term trend of the value of any index of prices will depend, sometimes predictably, on the choice of the composition of that index. It is a coincidental fact that the inherent nature of mining and mining technology makes it possible for the prices of certain commodities that are produced as a result of the devotion of labor and capital to the effort of mining to increase less (or decrease more) than might be expected. There is a "dimension paradox": agricultural products are produced by using the 
2-dimensional resource of the earth's surface, so 
the "disappearing frontier" creates a limitation. 
But in contrast some mining, particularly for elemental metals, is essentially able to operate in 
3 dimensions, although of course there are increasing costs for deep digging. So really there is lots and lots of gold, silver, platinum, tungsten, etc. out there and more can be found by digging deeper.
    Thus an index can be so chosen that its value does not rise like that, say, of a "typical Rembrandt" or like the ratio of the human population to the total surface area of the Earth. If the value trend of a currency is such that a natural interest rate is not negative then it is not an unattractive task for 
a central currency authority to mint or print the physical currency that would circulate. Then the issuer of currency would be partially in the position of a borrower not paying interest on borrowed money.

         Opening for Questions or Debate

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    (The above text originally derives from my outline for the lectures given at various specific locations of the "European School of Economics" 
in Italy during October 1997. Subsequent to that time, after consulting with some of the economics faculty at Princeton, I learned of the work and publications of Friedrich von Hayek. I must say that my thinking is apparently quite parallel to his thinking in relation to money and particularly with regard to the non-typical viewpoint in relation to the functions of the authorities which in recent times have been the sources of currencies (earlier "coinage").)
    (There have been some later revisions and expansions of the text and I subsequently also spoke on this topic at Northwestern, at Yale, in Athens, Greece, and at a meeting in Tampa, Florida, USA.
And then my lecture there was published in the SEJ journal.)