Kryptonite, a Better Alternative to Gold For a Monetary Standard

by Thomas W. Lynch

2010 05 06

Copyright © 2010 Thomas W Lynch, All Rights Reserved

Revised from "The Nature of Money", Copyright © 2008.

This article satires the call for a new gold standard, but makes some good points while doing so.

Preface

If the distinguished Congressional representative from Galveston, my home port, can be taken seriously with his discussions on the Gold standard, then certainly my essay on the nature of money will be greatly appreciated.

In these times after the financial crisis there are many arm chair pundits on economics and the meaning of money. Herein I light my pipe and pontificate with the others.

Suddenly many of my friends and relatives with diverse careers ranging from landscapers to fishermen have developed opinions on the nature of money. Rather than speak to all of them one on one, which certainly would be a lot of fun and involve more alcohol than is healthy for intellectuals, I will write a single manuscript to be viewed on the web. Make no mistake the opinions of my friends are very important as my friends are the voters. Their education, our education, our pontifications, should not be taken lightly.

Finally, if I meet one more Chinaman complaining that the U.S. is printing money I will scream. For surely that is what the U.S. should be doing, but is not. I explain further in a later section.

A Better Alternative Than Gold

Up until the times of president McKinley, the U.S. had a Gold standard for money. Gold is very heavy, so instead of lugging around a bunch of Gold all the time, which would surely weigh down one's wagon when heading to the feed store, one carried some paper that promised a quantity of Gold of a given amount was sitting in Fort Knox or some analogous location.

Gold standard dollars were in fact Gold certificates. In theory one could at any time go to the source and turn in that certificate for the Gold which was promised on its face. Well except for one thing, and that is the government wouldn't let you do it. The reason given was that as a basis of the economy the official Gold supply was too important to just allow free trade of it into and out of Fort Knox. The more astute, excuse me, I mean the more cynical, have noted that there is probably not really any Gold in Fort Knox as a pile of Gold would be too tempting for politicians to let it be. If they are right it didn't really matter, because people believed the Gold was there and it all worked out the same anyway. It is a matter of history.

In any case one has to question the wisdom of placing one's whole economy in guarded buildings. What if someone comes and blows the buildings up? It has happened in other places and other times.

There are some other problems with a Gold standard. When the economy expands there are more dollars needed. Consider for example the expansion of population from 6 million people to 360 million people that has occurred since the Revolution. If the Gold supply were fixed, then the same number of dollars would now have to circulate among 60 times the number of people. On average, each of us would have to have 1/60th the number of dollars. But with fewer dollars, each dollar would have to be worth more. One dollar would become what 60 dollars used to be. Such massive deflation would be a bit inconvenient.

Actually the situation is worse than this. Not only do we have a larger population, but our economy has grown, the average person demands more wealth than before. Furthermore, dollars are now used by foreign countries. Taking all this into account, the average penny of 18th century would be worth $100 today. Hmm, perhaps the government should invent a new tier of currency, the 1/10th penny, the 1/100th penny etc.

Or perhaps as the economy grows, the U.S. should buy more Gold. Is there enough? But what should this Gold be bought with? Say I own a Gold mine in Colorado. Now I sell my Gold to the government for dollars. Now this is interesting, the government gave me a piece of paper that they simply printed. Not only that, as the owner of the Gold mine who receives all of the new paper certificates . I am now in charge of wealth distribution for the nation! All new money must pass through me. If the economy expands by 100 times, that means that I must be made as rich as all the expanded economy combined, after all I actually still own all the Gold produced. It is just being held for me in Fort Knox and I have the paper to prove it.

Clearly it is not acceptable that all wealth introduced into the economy must pass through Gold producers. However, the only alternative is for the government to own the Gold mines. That is right, communist style seizing of an industry by the government in the name of the economy. If you find Gold in your backyard, then the government is going to have to take your land in the name of the better good.

And what about industry? Gold is an ideal substance for electrical connectors, mechanical bonds that need to conduct heat, and a number of other applications. Are we to handicap industry in the name of the economy? Perhaps we are to set up a large legislative, regulatory, and use monitoring structure for the use of Gold? But what of the salvers who would recover Gold from produced items? There will in addition have to be a policing force to watch for this.

There is an additional problem. What if the whole world does not agree that the Gold standard is the way to go? What if there is a Gold producer nation that undersells the government regulated price of Gold? Perhaps the U.S. is to invade this country in order to stop the threat to its economy? Surely there must be a customs system that watches for the smuggling of black market Gold. Would it be possible that the U.S. would be more successful with this than with drugs and immigration?

And why Gold? Why not platinum, uranium, diamonds, or some other substance? There is in fact no economics based or scientific based reason to chose to base an economy on Gold. Any substance that can be well controlled by the government could be used.

Indeed why don't we use moon rocks ?! Currently there is no industrial use. There is no need to put them in a fort as they are perfectly safe where they are. Indeed they can be rendered valueless in any location except on the moon, so even if someone managed to steal some it would not do them any good. The best part is that there is perfect ability to audit that the supply has not been stolen as one can see the moon in the sky most any clear night.

Accordingly, the volume of the moon could be divided into equal volume sectors. Each sector would be numbered, and those numbers would be held in reserve by the government and then used when dollars are printed. Astronomers and scientists could verify the volume calculations against the database of serial numbers.

Alas, there are still some problems. In this case the supply is truly fixed, so once the serial numbers are depleted the money supply becomes fixed. Also the moon is occasionally modified by meteor impacts, so the supply would be somewhat variable. There is a possibility that an industrial use will be found for moon rocks. But perhaps the largest problem is that the moon may soon become inhabited. Can we tolerate people living on the money supply? But the moon may well become an important low gravity space station.

Pluto as a replacement perhaps? Or safer yet, why don't we use one of these planets discovered with the Hubble circling a distant star?

Or why use a *real* planet at all? The mathematical model for partitioning up the moon remains valid even if the moon ceases to exist. This is analogous to the Gold standard still working if the conspiracy theorists are correct there really isn't any Gold in Fort Knox. Indeed such a math model is actually easier and less expensive than monitoring the surface of the moon for illegal mining activities or meteor impacts. Obviously, the best thing to base the money supply on is an imaginary fixed supply substance.

Yes, imaginary orbiting planet Kryptonite. Kryptonite is a rectangular piped shapped planet, so it is very easily modeled and partitioned into fixed size volume units . with each unit corresponding to a dollar. However, planet Kryptonite differs from the moon (and other planets) in that it doesn't actually exist. Really for the purposes of establishing a fixed supply of serial numbers to be placed on dollars - what is the difference between a dot on a picture taken by Hubble that is perhaps accurately modeled into volume units, and a made up place that is perfectly described in a model on the Internet?

In fact, planet Kryptonite has many advantages over using moon rocks (or Gold). It can never become useful in an industrial process. No one will ever live on it. It is impossible for thieves to steal or trade Kryptonite, as it doesn't really exist. Unlike the Gold supply or the moon rock supply there is no problem in expanding the size of planet Kryptonite when the economy expands. To expand planet Kryptonite, we simply stack on some more fixed size volume units to the model. The events on planet Kryptonite are more easily monitored than those with the Gold supply or moon rocks. With Gold we rely on the people of Fort Knox to tell us - if they can. With moon rocks we could watch with telescopes or lunar satellites. However, with planet Kryptonite we have a cheaper more accurate approach . just check the website.

Yes, there are still points where the money supply can be attacked between the modeling and printing of the dollars. However, these points exist for Gold and moon rocks as well. The planet Kryptonite approach has only advantages and no disadvantages.

But just to make really sure that nothing goes wrong on Planet Kryptonite, we can send Ron Paul there to watch over it.

Of Money and Stocks

The more astute will in fact note that the current monetary system is already based on the Kryptonite model suggested in the prior section. In a sense there are two halves for the money supply problem. The first half is the basis of money, the second half is the mechanics of implementing that basis.

In this case the basis of money is a mathematical model, one isomorphic to a Kryptonite money standard. The second half is that of controlling the money supply so that it matches that of the expansion of the economy.

Governments are not the only entity to publish certificates of trade. There are in fact many such instruments. Take for example stocks. Each stock issued by a company is said to represent ownership of the company. Dollars are in fact such stocks. Planet Kryptonite is in fact the U.S., and like a stock, each dollar represents part ownership in the U.S., and that of other economies that use dollars. Like stocks, there are many regulations that limit how dollars may be distributed and spent.

It is often said that how much a stock is worth is based on the perceived value of a company. But in fact, this is only half the equation. The other half is the value of the instrument that the stock can be traded for. If stocks are to be traded for dollars, and there is high confidence in the health of the company the stock is representing, and low confidence in dollars, then the stock will be worth a lot of dollars. If there is high confidence in the company being traded, and high confidence in dollars, then each stock will trade for fewer dollars than in the prior case.

When a company generates a great deal of confidence in its ability to generate wealth, and it desires to monetize a new project, the company may chose to sell stocks. In order to do this the company prints the stocks and puts them on the market. Because there is high confidence in the company, the value of stocks in the company will not fall. However, if the company exceeds the market's confidence in the company to return on such investment, the value of stocks in the company will fall. If the value falls the company may not be able to raise money for its new project. Stock holders, both current and potential, have a say in what projects a company and its management team may undertake.

Note how new stocks are created. They are simply printed and offered for sale.

Similarly, a company may buy back stocks in order to reduce supply and maintain the stock's value. A company will do this in order to maintain market confidence in its stock, and thus preserve the stocks leverage for monetizing future projects.

Now look at the U.S. system for managing dollars. It is very different. A dollar is never issued without an instrument for doing so. The most common perhaps being treasury bonds. As a prerequisit for issuing new dollars treasury bonds are sold. Such a treasury bonds earn interest. Hence, when the U.S. distributes new dollars it actually reduces the number of dollars available, as it has promised to return to another party more dollars than it printed. We call this promise, this obligation, debt.

Such a system is a 'run away' system as debt will always exceed the money distributed. This guarantees that in the long run that more money must be printed, in turn more debt generated. Taxing the populace that happens to own dollars does not change this equation, and in fact makes the situation worse as the tax burden causes the economy to contract.

So in point of fact the current system fails to be able to expand the money supply as the economy expands. It is analogous to a gold standard where for completely artificial reasons the onerous of the distribution of wealth is transferred to the gold suppliers. In this case for completely artificial reasons there is a delayed onerous of the distribution of wealth falling upon the buyers of the treasury bonds.

Imagine what would happen to companies if they identified all stocks sales with debt? Equity would cease to exist, and the only form of financing would be debt financing. Ownership of a company would only occur upon liquidation, and liquidation would occur at a point of contraction for the company when it defaulted on its loan payments. Hence corporations would expand forever or borrow money to pay for debt services at the very times there is low confidence in the company . so terms will be bad. Such companies will quickly be controlled by banks rather than corporate owners. It is an interesting model, a very different one, a much less stable one.

It follows that the U.S. should be doing the same thing with its equity as companies do. When the economy is expanding and confidence increases in the dollar, the U.S. should print more money at an equal rate so that the value of the dollar remains constant . without selling debt instruments. It should use these dollars to buy current debt back and to purchase government services.

Note, taxes play no role in such a system, and are not needed. This is analogous to the way we capitalize companies without requiring continuous payment from stock holders.