Money: Our 'symbolic, mutually shared illusion'
It's been an illustrative couple of weeks in what one might call “the philosophy of money.”
I’m thinking specifically of the recent Bitcoin and gold price crashes. Fans of Bitcoin and gold often claim they are superior stores of value compared with fiat money. As a number of pundits have pointed out, those assertions look less plausible now, if indeed they were plausible to begin with.
I suspect most of you are familiar with the term “fiat money.” It refers to money backed only by a government’s stipulation that that’s what it is. Modern currency is largely fiat money; the United States has employed it since leaving the gold standard (which it did in two stages, under Franklin Roosevelt in 1933 and Richard Nixon in 1971).
The government can alter the supply of fiat money at will. For some people, this is a feature; for others, a bug. For Keynesians, monetary policy is an essential tool in the policy toolkit. Those suspicious of active governments and Federal Reserve machinations, on the other hand, worry that loose monetary policy will trigger high inflation, eroding the dollar’s value and the average person’s economic security with it. (Remember the 1970s?)
But if you don’t trust dollars — or yen or euros or baht — where can you go? Well, historically, gold has been a reliable backup when paper money turns worthless. And Bitcoin’s design makes it a close digital analogue to gold. There’s a limit to the supply of Bitcoins, and they can be acquired only through “mining” or trading. No one gets to wave a magic wand and make them worth more or less than their market value.
So how’s that working out? Well, Bitcoin went haywire early this month, crashing from $260 to $63, then bouncing around like a cat on a hot griddle. Put the Bitcoin price chart next to a seismograph recording of the Fukushima earthquake and you’d be hard-pressed to tell which is which.
Gold, meanwhile, experienced its worst price drop since 1983 on Monday, falling 9 percent to $1,361. It was at $1,388 per ounce Thursday afternoon, down from a high in September of $1,900, according to Bloomberg.
Hard to square those developments with the notion of gold or Bitcoin as stable stores of value.
Which brings us to the philosophy of money. As Neil Irwin points out in this excellent Wonkblog post (which references one of the best Onion articles of all time), money isn’t real. It’s a “symbolic, mutually shared illusion.”
It’s a sort of Platonic ideal, one might say. And like any Platonic ideal, it turns out to be devilishly hard to instantiate in the real world in anything approaching its Platonic form.
For one thing, a currency supply has to be elastic “in order to keep prices stable even as people’s demand for money varies,” as Irwin says.
That’s why we have a central bank, staffed by experts and isolated (more or less) from politics, charged with a dual mandate: stable prices and maximum employment.
How’s that worked out? Up until 2008, economists were prone to speak in glowing terms of the “Great Moderation.” Post-recession, however, the Fed’s track record looks shakier. We haven’t had runaway inflation, but unemployment has stayed stubbornly high.
With conventional monetary policy exhausted, the Fed has resorted to unconventional policies, the effectiveness and riskiness of which are hotly debated, not least within the Fed’s Open Market Committee itself.
Still, the Fed’s limits notwithstanding, mainstream economists believe reverting to gold would make us far worse off, roughly for the reason Irwin gives.
As a former philosophy major, I find the shared-illusion view of money fascinating. It’s extraordinary that we ascribe so much reality to this accounting system for value that we’ve created. Nor can I think of any other shared illusion that requires a Ph.D. to do the math.
As for paranoia about the Fed, I can sympathize to some extent. It’s not as though secretive governmental institutions have had a stellar track record through the ages.
But look again at Bitcoin’s track record and tell me if you’d like to see the dollar making those moves.
As Irwin concludes: “To function in a modern economy, you’re always putting your faith in something, whether you like it or not.”