Ideal Money and Asymptotically Ideal Money

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" and this can

be contrasted with more recent attitudes which have been very much influenced by the Keynesians and by the results of their influence on government policies since the 30’s.

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.


(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.


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. And (4) It can be recognized as wasteful of labor if gold is accumulated much beyond its various uses and put into storage vaults like in Fort Knox in the USA.

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 on the topic of "ideal money" is not viewed as appropriate for the world empire context, however the alternative concept of "asymptotically ideal money" could be useful in the world empire context. The citizens or inhabitants of such an empire would not be able to compare their empire’s money with that of another empire but they would be able to approve or disapprove of the stability or instability of prices and costs resulting from the nature of the money used

in the empire.

It can also be observed that "bad" money, or the inverse of "good" or "ideal" money is frequently or typically a consequence of deficiencies on the part of governments and politicians of a sort relating to morals, virtue, or ethics. So it is arguable that the phenomena of "bad money" are in those cases understandable via Machiavellian studies. And "rational expectations" and games of deception are relevant here. If the inhabitants of the principality

of a Machiavellian prince can well understand the prince’s schemes relating

to the issuance of money then they can strategically adapt optimally to the circumstances.

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 4 or more 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.)

# Conclusion of First Part # # #

# The presentation on the topic of “ideal money” itself is being #

# abbreviated from the full length of the discussion that could be given #

# in a lecture but we can now refer to the published paper on "Ideal #

# Money" that was in the July 2002 issue of the Southern Economic Journal.# # #


Asymptotically Ideal Money

One cannot logically feel confident of the adoption internationally

of an ideal system of currency or currencies in an achievement analogous to

the achievement of the metric system or of "the euro". Such a result would necessarily have a political content since it is the states that control

and supply the various currencies that are in use at the present time.

And projects requiring political support may be difficult to achieve or comparatively easy to achieve depending on elements of "political reality" which may differ considerably from the actual merits or lack of merits of

the projects (as evaluated from, say, a scientific or economic or medical viewpoint).

So it occurred to me to think that the improvement in the quality of forms of money or currency being used in the world might result by a process of evolution instead of as a result of an analogue of the adoption of the metric system or of the "euro". And of course, after a certain degree of progress by evolution the rest of the progress could possibly be realized

by a convention thus, in effect, by "fiat" of some sort.

And there was a specific development observable in the actual behavior

of "central bankers" and/or "money managers" that suggested some interesting possibilities.

A Symptom of Current Attitudes Towards Inflation

In relatively quite recent times a scheme, or perhaps a "line" (analogous to a "political line"), has emerged which is called "inflation targeting". Although of course this doctrine, if honestly used as a program, naturally tends to comparatively restrain the inflationary options of central bankers and treasuries, yet it is popular with many of them. This "line" seems to have originated in New Zealand where it is observable that their dollar is the most depreciated of all national dollar-named currencies.

(It seems conceivable to me that the very fact of the maximally depreciated value of the NZ$ put political and psychological pressure on the state authorities there so as to force them towards a modest degree of reform. Clearly, New Zealand is not an impoverished "3rd world" country.)

To me it seems a striking paradox that central bankers and their economist advisers can think in terms of having a "targeted" rate for inflation without realizing that that rate should be zero!

This paradox, or my perception of it, was what led me to the concept

of "Asymptotically Ideal Money". Suppose that there were, formerly, "free Keynesians" and then, later, there came to be "restrained Keynesians" whose freedom to freely issue additional money and credits however they might please to do so would have become a bit restrained by the need to support a doctrine of targeted inflation. Then the "customers" (as it were) of the treasury and central bankers would become in a position to ask, seeing the program of "inflation targeting" in operation, "Why should not the target rate be set lower so that we would have more stable prices?". And I ask, rhetorically, "Why, indeed? That seems like a good question."

So it seems to me that no actual target rate for inflation could be justified for an indefinite length of time. Perhaps if the managers could replace the word "inflation" with an euphemism of politically correct appearances they might more easily maintain the scheme or "line" of justification for inflation.

And I have made also the observation that among the assortment of states where already there has been, to some extent, the adoption of the use of a "line" of inflation targeting, that the rates chosen for the targeting have, perhaps unsurprisingly, simply varied with the "common sense" external or international appraisal of the historical quality of the money of each of those states. And thus to pretend to be a state with high quality money a state would need to choose a comparatively lower rate for its inflation rate target.

Political Evolution

There perhaps will always be "politics", like also "death and taxes". But it is sometimes remarkable how political contexts can evolve. And in relation to that I think that it is possible that "the Keynesians" are like a political faction and that they may become less influential as a result of political evolution. The "Keynesian" view of things did not come into existence until after the time when what we can call "bolshevik communism" had become established in Russia. And by this label we wish to differentiate between any theoretical or ideal concept of communism and the actual form of governing regime structure that came to exercise state power in Moscow. (All over the world varieties of states make claims to have governments very properly or even ideally devoted to the interests of the citizens or nationals of those states and always an externally located critic can argue that the government is actually a sort of despotism.)

The Keynesians implicitly always have the argument that some good managers can do things of beneficial value, operating with the treasury and the central bank, and that it is not needed or appropriate for the citizenry

or the "customers" of the currency supplied by the state to actually understand, while the managers are managing, what exactly they are doing

and how it will affect the "pocketbook" circumstances of these customers.

I see this as analogous to how the "bolshevik communists" were claiming to provide something much better than the "bourgeois democracy" that they could not deny existed in some other countries. But in the end the "dictatorship of the proletariat" seemed to become rather exposed as simply the dictatorship of the regime. So there may be an analogy to this as regards those called "the Keynesians" in that while they have claimed to be operating for high and noble objectives of general welfare what is clearly true is that they have made it easier for governments to "print money".

So I see the Keynesians as in a weak sense comparable to the "bolsheviks" because of the support of both parties for a certain "lack of transparency" relating to the functions of government as seen by the citizenry. And for both of them it can be said that they tend to think in terms of government agencies operating in a benevolent fashion that is, however, beyond the comprehension of the citizens of the state. And this parallel makes it seem not implausible that a process of political evolution might lead to the expectation on the part of citizens in the "great democracies" that they should be better situated to be able to understand whatever will be the monetary policies which, indeed, are typically of great importance to citizens who may have alternative options for where to place their "savings".

Possible Evolution of the Quality of Currencies

It seems possible and not implausible that leading currencies in the future will evolve in such a way as to become of improved quality with regard to inflation. Here we use the "common sense" viewpoint of an observer located in a land politically independent of the country issuing the currency that is appraised. Thus less inflation corresponds directly with higher quality.

There may be a time of wide usage of the "line" of inflation targeting. And there may be a comparatively small number of "leading" currencies, such

as the US dollar, the "euro", the Japanese and Chinese currencies, and the British pound. If in each of the corresponding states the authorities were using, in some sense, "inflation targeting" then necessarily they would have some sort of a price index that could be related to their issued currency.

But it would ALSO be very natural for each state to look at the comparative behavior, in terms of value, of the other leading currencies.

Thus second order index comparisons become possible where the authorities in a state would look not only at domestic prices but also at international value comparisons.

And now we have only to imagine that a "groundswell" of "popular demand" for minimal inflation (and thus for money that would be viewed by foreign observers as of higher quality) could sufficiently influence the responsible authorities and governments so that they would so control the "supply side"

of their money management activities so as to achieve that (supposed to be popularly desired) result.

Here we can look at the early behavior of the "euro" as an example. It came out as a unit having unit value less than that of a British pound unit but worth more than a dollar. It would SEEM that in Frankfurt they EXPECTED that it would simply "float" at a value level above that of the US dollar unit. This did not occur, and it then began to seem as if it might be drifting relentlessly downward, like with the history of the old Italian lira. But then, after a time, for various reasons, presumably including supply restraint controls directed from Frankfurt, the decline was reversed and the euro regained enough value to have a respectable appearance. So we can see examples where the "asymptotic" behavior of a value under comparison can be different from an earlier apparent pattern.

Thus I think that "asymptotically ideal money" is a real possibility and that problems of political coordination do not make this very difficult to be achieved. But also, if there is in the first stage of progress the advent

of "asymptotically ideal" currencies then after that level of what might

be called "rationalization" is achieved there would be the possibility of

an international collaboration to set up value standards analogous to the standard measures used in the internationally accepted "metric system".

And here a side remark can be made, partially humorously, and just for illustration, that a POSSIBLE standard of value would be simply the cost of making a duplicate, of precisely the same composition and weight, of the "standard kilogram" located at Sevres near Paris.


Opening for Questions or Debate


(The talk text, just for the "ideal money" topic, 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, at a meeting in Tampa, Florida, USA and most recently at Peking University in Beijing, China. And then my lecture at the Tampa meeting was published in the SEJ journal. )

And the portion specifically concerned with "asymptotically ideal" currencies is added first for the talk in Amherst.