How Much Should a Kilogram Be Worth?

For all those interested in monetary policy, let me refer to a piece by my former boss and mentor, Seth Lipsky, former WSJ editor, owner of the New York Sun, and author of a new book on the Constitution. It’s in the latest issue of Hillsdale College’s Imprimis, and, with typical Lipskylike flair, compares the dollar to the kilogram. Let’s just say this: it’s not your father’s article on hard currencies. Here’s a sample:

Now, the record is clear in respect of how America’s founders viewed money. Many of them went into the Second United States Congress, where they established the value of the dollar at 371 ¼ grains of pure silver. The law through which they did that, the Coinage Act of 1792, noted that the amount of silver they were regulating for the dollar was the same as in a coin then in widespread use, known as the Spanish milled dollar. The law said a dollar could also be the free-market equivalent in gold. The Founders did not expect the value of the dollar to be changed any more than the persons who locked away that kilogram of platinum and iridium expected the cylinder to start losing mass. In fact, in this same 1792 law, they established the death penalty for debasing the dollar.

Today, members of the Federal Reserve Board don’t worry about how many grains of silver or gold are behind the dollar. They couldn’t care less. And this is what I believe is the most worrisome threat to property rights today. When the value of a dollar plunges at a dizzying rate—at one point in recent months it collapsed to less than 1

/1,400 of an ounce of gold—Fed Chairman Ben Bernanke goes up to Capitol Hill and declares merely that he is “puzzled.” No “new urgency” to redefine the dollar for him. The fact is that we’ve long since ceased to define the dollar, and it can float not only against other currencies but even against 371 ¼ grains of pure silver.

So, the New York Sun asked, why not float the kilogram? After all, when you go into the grocery to buy a pound of hamburger, why should you worry about how much hamburger you get—so long as it’s a pound’s worth? A pound is supposed to be .45359237 of a kilogram. But if Congress can permit Mr. Bernanke to use his judgment in deciding what a dollar is worth, why shouldn’t he—or some other Ph.D. from M.I.T.—be able to decide from day to day what a kilogram is worth?

  1. Jan-Michael Rives

    I’ve never taken an economics class, so I’m probably wrong, but isn’t the point of steady and slow inflation to reflect a growing economy? Every day new products are created and new resources are exploited, so there needs to be an increase in the number of circulating dollars to be able to exchange for those newly synthesized assets, right?

    As an aside, the current definition of a kilogram is in fact something that desperately needs to be updated. It’s a totally arbitrary amount that fluctuates every time the originals are remeasured. It should be redefined to be the mass of a fixed number of atoms of a certain element or the mass equivalent of a certain amount of energy. It shouldn’t be something that goes down every year… kind of like the value of the dollar.

  2. George Savage
    C

    Bill, I like Lipsky’s idea and, in the spirit of public service, offer a solution:  Henceforth my body weight will remain a constant.  This will allow me to indulge my love of chocolate ice cream without worry.  The public will likewise benefit from having an at-a-glance gauge for cumulative kilogram inflation by looking at my constantly updated photograph.  I’ll even keep a web-cam running in my kitchen so speculators can predict the future inflation rate by tracking the number of trips I make to the refrigerator on the weekend.

    No worries America, I’m here to help.

  3. Joseph Eagar

    The dollar’s fall has nothing to do with the federal reserve, and everything to do with our current account (trade) deficit (mostly caused by the federal deficit, a policy of ramping up consumption higher then it can go, etc).

    The long-term trend for the dollar hasn’t changed all that much since the Fed began printing (frustratingly enough; the damn thing is way too overvalued).  People don’t realize that governments can inflate simply by spending.  If they borrow from abroad they can delay that inflation (the borrowing prevents a devaluation) but eventually, the built-in debasing from fiscal deficits will come home to roost.

    By all means, the Fed may still screw this up.  It has managed to inflate other economies, like China and Brazil.  Still, surely we should care about our own economy?  I mean, we can’t very well deflate to maintain price levels in countries that peg to our currency.

  4. Ursula Hennessey
    C
    George Savage: Bill, I like Lipsky’s idea and, in the spirit of public service, offer a solution:  Henceforth my body weight will remain a constant.  This will allow me to indulge my love of chocolate ice cream without worry.  The public will likewise benefit from having an at-a-glance gauge for cumulative kilogram inflation by looking at my constantly updated photograph.  I’ll even keep a web-cam running in my kitchen so speculators can predict the future inflation rate by tracking the number of trips I make to the refrigerator on the weekend.

    No worries America, I’m here to help. · Mar 11 at 9:22am

    Oh, please, please do this, George! I’d be really good at predicting such market changes, and maybe, just maybe, strike it rich for the family! Even if I didn’t, it would be so *fun*!

  5. Joseph Eagar

    Also, remember that the gold standard really only works if everyone is on it–you need at least two or three countries to start with, at least.

    Also, for the gold standard to work its equally important to ban the effective destruction of gold/money as the creation–for example, borrowing gold inflows and putting them into a vault to prevent market forces from balancing trade (we did that and got the Depression, and German is doing the fiat equivalent and now half of Europe is in recession).

    A gold standard can only work with a global central bank, that enforces the rules. . .that’s why countries switched to floating currencies against each other.  They didn’t want a supranational monetary authority.  (btw, if you ban central banks altogether this problem goes away, and economic adjustment mechanisms tend to work better.  problems we now solve with fiscal transfers used to be solved by a more decentralized banking/currency system).

    [addendum: you don't need a global central bank, if no nation has a central bank or the power to thwart market forces from trade.  not sure if that was clear]

  6. Cas Balicki

    Pegging currency to a silly metal such as gold is deflationary in the sense that it is a drag on a prosperous economy. Take my word for this, you don’t want to do it no matter how may other countries you encourage to follow you down that rabbit hole, as deflation impedes the creation of treasure. Printing too much money is inflationary. Again not a great option as it destroys treasure already created. The  happy median is to match currency expansion to real economic growth. This is a hard thing to do, but sans political pressure it can be done. The answer is a full separation, not a Chinese wall as exists now, between government and central bank. The central bank or Federal Reserve must be as independent as possible from political pressure in order for it to steer a prudent economic course, something that government only does rarely.

  7. Joseph Eagar

    Cas, well, in a well-designed system, the level of circulating currency isn’t strictly limited by gold.  The historical sources on how this worked economically is a bit sketchy, but basically banks expand credit to keep regional trade in balance–and trade is what limits money supply growth.  Precious metals enforce balanced trade relationships; other then that, there isn’t much demand for them (at least compared to the number of people using cheques, or banknotes).

    It’s a bit complicated, and the historical record on how it worked (back in the 1800s when this sort of thing was done) is a bit sketchy.

    But the interesting thing is people can save simply by holding their money as banknotes.    And it is invested locally.  The single biggest problem in developing nations’ economies is the poor’s saving are not invested, since they can’t afford bank accounts.

    But for hundred of years, rural areas had note-issuing “country banks,” that could channel the savings of poor residents into investment–raising their standard of living, until real savings accounts become available.

    [edit: see this guy's work]

  8. Mark Wilson

    I think it’s a poor analogy.  Gold does not, and never will, represent a fixed amount of wealth, which money is the proxy for.

    Letting the kilogram float is so absurd that the comparison is meaningless.

  9. Foxman
    Jan-Michael Rives:As an aside, the current definition of a kilogram is in fact something that desperately needs to be updated. It’s a totally arbitrary amount that fluctuates every time the originals are remeasured. It should be redefined to be the mass of a fixed number of atoms of a certain element or the mass equivalent of a certain amount of energy. . · Mar 11 at 9:08am

    Edited on Mar 11 at 09:14 am

    One liter of water has a mass of one kilogram

  10. Joseph Eagar

    Demaratus: I’m shocked you managed to say that in one paragraph.  That’s what I was saying (badly) in my rambling take on decentralized systems.  They’re also the only way to make a gold standard work, since central banks can thwart market adjustments (perpetuating trade imbalances).

  11. George Savage
    C
    Foxman

    One liter of water has a mass of one kilogram · Mar 11 at 1:02pm

    Ah, but now you need to define what a liter is.  It never ends.

  12. Cas Balicki
    George Savage

    Foxman

    One liter of water has a mass of one kilogram · Mar 11 at 1:02pm

    Ah, but now you need to define what a liter is.  It never ends. · Mar 11 at 1:05pm

    That’s not a problem when it comes to scotch: One liter = too much.

  13. Mark Wilson
    Foxman

    One liter of water has a mass of one kilogram · Mar 11 at 1:02pm

    That depends on temperature, pressure, and purity.  It’s also easier to measure mass precisely than to measure volume.

  14. Jan-Michael Rives
    Foxman

    Jan-Michael Rives:As an aside, the current definition of a kilogram is in fact something that desperately needs to be updated. It’s a totally arbitrary amount that fluctuates every time the originals are remeasured. It should be redefined to be the mass of a fixed number of atoms of a certain element or the mass equivalent of a certain amount of energy. . · Mar 11 at 9:08am

    Edited on Mar 11 at 09:14 am 

     One liter of water has a mass of one kilogram · Mar 11 at 1:02pm

    Pah, I wish: http://en.wikipedia.org/wiki/Kilogram#Stability_of_the_international_prototype_kilogram

    http://en.wikipedia.org/wiki/Kilogram#Proposed_future_definitions

  15. Demaratus

    A better solution would be competing private currencies. Then all of your eggs aren’t in one basket, so to speak, and the stability of the currency isn’t dependent on only one forecast of economic growth. Private currency would be like any other good, with markets sorting out winners and losers. This and private banking like Scotland had in the 18th century would solve our problems. America has been subject to rent seaking and dysfunction in these areas since the founding: the Founders were good political philosophers, but they were lousy economists (not entirely their fault, as this stuff wasn’t worked out for another century).

  16. Demaratus

    Thanks, Joe. However, I fear that, to someone who isn’t already informed on these subjects and isn’t willing to go do some research to fill in the gaps, what I wrote won’t make a lot of sense. But, it was late and I was in a hurry, as now. I don’t have time to find the specific episode, but in the last 6 months or so Russ Roberts and a guest, on the Econtalk podcast, covered the topic of how America has always had a dysfunctional banking system because the charter system encouraged unit banking (banks with only one or a few branches) which is inherently unstable because the banks have difficulty, outside of capital market hubs like NYC, diversifying risk away from the local economic situation. Unit banking was encouraged by the state chartering system because the established players with limited geographic charters and thus a small effective monopoly, pressured legislators to prevent new charters being issued that provided other banks with a broader range and more branches. Why? Because these bigger banks would have a competitive advantage.

  17. Cas Balicki

    Part of the problem, Joseph, is that you just moved a discussion of money supply into the realm of banking oversight and regulation. I agree that banks can and do create money, and are therefore subject to more regulation than most commercial enterprises. But much of the debate about money creation revolves around the definition of money. Now, its been some years since I last looked at central bank supply numbers, but when I last did look the supply measures were M1, M2, M3, etc. Don’t press me on this, because I no longer remember these definitions and don’t at this moment have time to look them up. What the The Fed does is set interest rates and reserve requirements for the nation’s banks, which act as a brake on a bank’s ability to lend, read create money. Yes, people can hold notes, but notes or cash is a liability in the hands of the holder due to the risk of losing that cash. To turn money into an asset it must be moved from pockets into investments, if this is not done efficiently in poor countries, those countries will remain poor.

  18. Joseph Eagar

    Cas: oh no, I didn’t mean to imply anything on regulation (I doubt it’d be much different?).  I was describing a separate monetary system–where banks do not simply issue deposits, but actually issue currency.

  19. Joseph Eagar

    Well, branch banking and large, diversified banks aren’t strictly necessary (the alternative is securitization and deposit insurance).  On that front, our modern system isn’t all that bad (at least among small and medium sized banks).  In many countries the banks run a significant portion of the economy (not so much in the United States, but Germany, Japan, China, etc).  Americans have always hated this idea.

    That’s why our stock markets are so highly developed.  It’s why our financial system is so market-based, why securitization popped up, deposit insurance, etc.  Outside of the large banks, it works fairly well.

    However, some market mechanisms we used to rely on are no longer there, and our attempts to replace them with tax transfers hasn’t worked.

  20. Demaratus

    To wrap this up for now, let me close with what I think the lesson is once one understands the historical circumstances that have brought us to where we are today: due to the economic inneficency of the unit banking we had at the founding, and the economic inneficencies that were perpetuated by rent seaking and economic illiteracy among the Founders and their political successors, subsequent regulation aimed at defeating the economic instability caused by our banking system was designed with a false undersatanding of the forces at work; thus, all this regulation did was at best further muddle attempts at sound understanding and at worst introduce more economic inneficoencies and instability to the system. We’re so far from the truth in this area in how our laws are structured that we must step back to the first priciples, tear down the nightmarish edifice constructed so far, and replace it with a simple legal structure that is in allignment with the real economic truth of the matter. You may say this is unrealistic, but any effort that doesn’t make the case for the truth and instead aims for another incrimental fix will fail due to the flaws imbeded beneath.

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