Ideal Money and Asymptotically Ideal Money

by John Nash

After writing and speaking on a concept of "ideal money" I later also thought of a parallel concept which can be called "asymptotically ideal money". The former concept was finally described in a paper published in July 2002 and it essentially involves the concept of some sort of an international convention which would define a good basis for standardizing the value of currencies. The concept presented in "Ideal Money" was there described as not suited to the conceivable situation where a world empire would exist and provide a global currency.

(For example, if the Byzantine Empire had been able to expand so as to cover all of the world (or the "known world") then the currency of that empire would be the world currency, whether good or bad, but the imperial government would be influenced by different incentives than those which influence separate and differentiable states which, to some extent, compete with regard to seeking to appear advanced and well-governed.)

If there is not a world empire there may yet be a considerable degree of international cooperation of states and enterprises based in various locations. So some rational cooperation in relation to money is quite possible. We see now the illustration of the European bloc of countries which now use the "euro" currency. And in the past the fact that many countries sought to standardize the values of their currencies in relation to gold definitely involved an effective sort of international cooperation even though some of the countries could find the resulting circumstances unpleasant.

Ideal Money

The concept I developed of "Ideal Money" became, in my view of it, sufficiently advanced when I conceived of a practical basis for a standardization of the comparison of the value of a currency with an appropriate standard or ideal. And the key to that was the idea of an ICPI or (international) "Industrial Consumption Price Index". (That is thus like the U.S. CPI which controls Social Security payouts but would be adapted to relate to industrial producers rather than to individuals and it is envisioned as being essentially dependent, by choice of its definition, on costs that are very global in nature, like, for example, the cost of oil from OPEC and other producers or the cost of platinum, tungsten, palladium, or nickel.)

Thus the suggested solution for an "ideal" money was analogous to the "classical" concept of "gold standard" money but evolved beyond a dependence one any one specific commodity or the presumption of any need to keep reserve amounts of any particular commodity in storage (like gold in storage at Fort Knox). (Of course it would be wise, strategically and defensively, for any large state facing the possibility of involvements in wars or other international conflicts to have SOME sorts of stored resources including also things of general value, like gold or silver.)

It is clear that the use of an "ICPI" index of prices, or of a more elaborated concept of a smoothed index would involve a variety of complications through the options to be chosen among. Thus simply from the complexities and the options there could be difficulties in achieving an agreement of a number of states on the use of any practical convention.

But 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 occurs to me to think that that which is not achieved by a grand action of establishment by "fiat" may alternatively tend to come into existence as a consequence of a process of evolution. And of course, after a certain degree of progress by "evolution" the rest of the progress could possibly be realized by a convention or a process of "fiat".

Currencies of Improving Quality

From the viewpoint of parties domiciled outside of the territory of where a specific currency (such as, e.g. the currency of Brazil) is established the "quality" of that currency is evaluated according to the reasonable appraisals of the probabilities of loss in value of the unit of that currency, particularly in comparison with other currencies and also in comparison with alternatives available for use for "storage of value", like gold or commodities in general.

The more that the probabilities of loss seem to be large the more that currency will be evaluated as of "low quality".

On the other hand, "Keynesian" central bankers or associated and advising economists, WITHIN the state responsible for the currency in question (such as, e.g. Brazil), may be arguing that they should have and use methods of operation that will tend to act in varying degrees at various times to increase the supply of the currency and thus cause, ultimately, declines in its value. They may argue that these actions, in which they have some discretionary options, are beneficial for the general welfare within the territory of the state (e.g., Brazil).

Whether or not the options exploited by "Keynesian" central bankers and advisors are beneficial to the general welfare in the corresponding territories (e.g., Brazil) it is very clear, game theoretically, that they give those who can act on these options ADDITIONAL STRATEGIES that they otherwise would not be likely to have available. So it is also plausible that psychologically the having of these options would seem to be very desirable in contrast to their renunciation.

So I want to suggest now the possibility that, within the context of varieties of currencies which are of the type typically found nowadays and since the time of the influence of "the Keynesians" (and after the time of the formerly used "gold standard" or other forms of currency linked to a value standard), there is some real possibility that the typical "rate of depreciation" of currencies may tend to decrease. Thus there may evolve more disillusionment with the "Keynesian" methods that tend to cause to exist a continual (sometimes intermittent) deterioration in the internationally observable value of a specific national currency. (This would apply to "the euro" also, as if that were effectively the currency of an "United States of Europe".)

The actors on the stage of the drama formed by the actions that determine the trends in the value of a national currency are themselves players in a game and they can be rationally viewed as such. The theme of "rational expectations" naturally enters. Those who ARE NOT in control but who ARE naturally concerned with the expectations for the value trend of a national currency cannot be wisely assumed to be entirely naive and unable to form "rational expectations" regarding the currency. So the (possibly) "Keynesian" players in this game have natural opponents (or co-players, beyond zero-sum perspectives) who are interested in not being themselves "outsmarted" by those who control the options that determine, say, the quantity supplied of the national currency.

Signs of Attitudes (Among Central Banking Authorities)

On the web page of the Swedish State Bank there appears a sort of speedometer measuring the rate of inflation. The fact that this appears indicates several things about the psychology of the responsible authorities there. One of these is that they have the concept that the government can choose policies to control the rate indicated and that varying consequent results (as regards the value of that rate of depreciation (of the value of the currency)) may be achieved as a result of various conceivable choices of policy. (In the case of a poorer nation it might seem more likely that the authorities would not usually seem to have any ability to control the rate of inflation, as measured modulo the domestic currency of that poorer nation.)

Now the possible area for evolution is that if, say, an inflation rate of between 1% and 3% is now considered desirable and appropriate in Sweden, then, if it is really controllable, why shouldn't a rate between 1/2 % and 3/2 % be even more desirable? (The rate measured by the Swedish speedometer is determined in relation to a domestic CPI calculated for Sweden.)

Signs of the Times (Among National Currency Authorities)

Comparatively very recently a few countries in South America and Central America have adopted schemes that put them in positions analogous to those of Luxembourg and Liechtenstein with regard to the provisions for their domestic currency. Here Argentina and El Salvador can be mentioned. They are adopting (at least temporarily) expedients that put the value of their domestic money on a fixed relation to the U. S. dollar. And of course Panama has had such a situation for a long time previously.

This is not "ideal money" because the U. S. dollar is not an ideal standard for money value. But the countries adopting such expedients thus offer their citizens, at least for as long as they manage to or choose to continue it, a deliverance from a typical past tradition of national currencies of even less stable value than that of the (historically observed) U. S. dollar.

But if, for example, all of the countries of the world would base the value for their national currencies on the value of the British currency then this situation would appear singular and unstable, while it was not so singular for a lot of countries to base their currency value on gold.

So the United Nations building can be in New York and the IMF and the IBRD institutions in Washington, DC, USA, but these historical facts do not make the U. S. dollar a good standard of value which the managers of currency systems in other countries could justifiably exploit to permanently fix the relative values of their national currencies.

The metric system does not work because French chefs de cuisine are constantly cooking up new and delicious culinary creations which the rest of the world then follows imitatively. Rather, it works because it is something invented on a scientific basis and in fact, after Waterloo, it was not first accepted in France but rather in The Netherlands.

Price Indexes in General

Various states calculate some sort of a CPI or measure of the "cost of living" for inhabitants of their territory. It is possible that "globalization" and in general trends leading to more non-local sources for basic needs like food and clothing will have the effect of making CPI indices calculated in different states tend to become concordant. Of course the effects of taxes can be very complicating in relation to comparisons of distinct national CPI indices.

It seems possible and not unlikely, however, that if two states evolve towards having currencies or more stable value as measured locally by national CPI indices that then also these distinct currencies would tend to evolve towards more stable comparative relations of value.

Then the limiting or "asymptotic" result of such an evolutionary trend would be in effect "ideal money" but this as a result achieved without the adoption of anything like an ICPI index as a basis for the standard of value.

Tax Revenues Complications

It is very well known among economists who study "macroeconomics" (or the large scale picture of a national economy) that inflation, of itself, produces the effect of varieties of taxation.

On the one hand owners of state obligation securities (bonds, notes, etc.) find that the value of their holdings are reduced as the "true" value of a unit of the domestic money is reduced by inflation. So they are as if taxed on their holdings. And on the other hand, if the state has established a form of "capital gains tax" then the effect of inflation is to add an amount to whatever would be calculated as the "capital gain" on property held for a time and then sold. A nominal gain can even be created by inflation where a "true value" measure would have fairly determined a loss.

Then these considerations make clear, for example, that if, say, the state finances of Xland operated stably with a capital gains tax and with stable "targeted inflation" of 2.5 % annually than that there would be a loss of state revenues if the inflation rate were reduced to zero. That is, there would be a loss that could be expected in the area of the capital gains tax revenues.

So we can see that for the government of a state, acting on its own independently of other states, to rationally contemplate the evolution of the inflation rate for its currency towards zero there are clearly some very relevant considerations relating to tax revenue expectations.

Psychological Considerations

A truly "Machiavellian" regime can rationally scheme to make the citizenry of the state FEEL well served (at least for a relatively short time period) independently of whatever might be most truly best for them (as seen from an "Olympian" viewpoint). Here it can be noted that if there is gradual inflation then there should tend to be more and more "millionaires" as a fraction of the population. If instead there were fewer and fewer of these then that might conceivably impact negatively on the psychology of the citizenry.

It is also notable that there has been an overall sense of always increasing human per capita wealth, globally, as technological advances continue to modify the nature of the global economy. But consider the effect of measuring wealth purely in terms of square miles owned per capita of the earth's land surface. If each Hopi tribesman owns x by this measure and each Navaho tribesman owns y by the measure then, with global population steadily increasing, should they feel happy or sad?

Perhaps humanity will REALLY arrive at increased wealth if we can successfully colonize lands beyond Terra, like the surfaces of Mars, the Moon, and some asteroids. (But of course we could not illogically claim ALREADY to own the whole Solar System at least, so it is clear that psychological alternatives enter here also with regard to the issue of the "true" evaluation of per capita wealth.)

Possibly the full psychological effect of human "ownership" of the surface of Mars would not be realized until that area had been divided into plots regarded as the private property of specific corporate or personal owners!