What is good money?

What is Good Money?

What is the difference between good money and bad money? Is there a spectrum of moneyness? Is political money worse than commodity money? Jeff Deist and Ben Nadelstein discuss the Quantity Theory of Money, hoarding money as an economic good, and Say’s Law.

Connect with Jeff and Monetary Metals on X: @JeffDeist @Monetary_Metals

Additional Resources

Start Earning Interest on Gold

The Case for Gold Yield in an Investment Portfolio

How NOT to Think About Gold

6 Reasons why Gold is the Best Money

Is Gold an Inflation Hedge?

W.H. Hutt

Podcast Chapters

00:00 – Jeff Deist

00:49 – Degrees of moneyness

02:03 – Subjective value 

03:26 – Stock to flow ratios

05:08 – Quantity theory of money

06:12 – Money as a commodity 

07:38 – Impacts of political money 

10:05 – Hoarding money

11:27 – Economic policies

16:35 – Nation’s calling card

19:30 – The dollar’s future

21:38 – Monetary Metals


Ben Nadelstein:

Welcome back to the Gold Exchange podcast. My name is Benjamin Nadelstein. I’m joined by the General Counsel of Monetary Metals, Jeff Deist. Jeff, how are you doing today?

Jeff Deist:

Good afternoon, Ben. I’m doing great. How are you?

Ben Nadelstein:

Jeff, I want you to talk with me a little bit about what you think the difference between good money is and bad money, or just maybe even neutral money.

Jeff Deist:

It’s interesting we talk about this. We use the term good money, and I think we should because there could be degrees of moneyness amongst currencies, amongst types money that make one, let’s say, a high-end luxury car and one a Hugo. In other words, there can be degrees of money in this, and there can be varying qualities of money. I think most of us would say that we’d rather hold Swiss francs than Argentine pesos at the moment, for example. We always understand that money can be good or bad, better or worse. What we essentially mean by that, of course, from the holder of the money’s perspective is, does it maintain its purchasing power or even ideally appreciate a little bit with respect to its purchasing power against real goods and services? That’s what we’d like out of our money, I think most of us. Now, there are other qualities. We’ve all read some basic economics and understand the portability and divisibility and durability and some of these other qualities that make money good or better anyway. But I do push back against the idea that any money, and I’ll even include gold and silver in this, has intrinsic value.

Nothing has intrinsic value. Human beings imbue money with value. If I’m stuck alone in the middle of a desert, I’d rather have a gallon of water than all the gold in the world. In that particular circumstance, I don’t have much subjective value or utility for gold. But in my present circumstances, I would love to be gifted with all the gold in the world. It’s always a subjective matter. We have to understand that that’s really a key to understanding money. Fiat money has subjective value. Gold, Bitcoin, they all have subjective value assigned to them by humans. None of us acting alone can create that market or force anyone to accept anything. I think if we want to understand in the political context what makes for good money, I think we have to go to this concept of stock to flow ratio. In other words, while the money supply per se, I think is a bit of a misguiding term, it doesn’t really help us understand the world. Rothbard said, Hey, it doesn’t really matter what the money supply is because prices will just adjust. What matters is if central banks or treasuries are mucking about with the money supply and changing it abruptly or quickly in ways that the market can’t catch up to or that benefit certain, let’s say, we say, favored constituencies who get that new money sooner in the process.

But stock to flow basically means how much of a certain currency or form of money exists, and then how much new currency or that form of money comes online, let’s say, each 12-month period. As we know, in the past couple of years, especially since COVID, the supply of US dollars, both actual physical currency and more importantly, the electronic form, has risen dramatically faster than, in my opinion, the demand for them. Whereas with a physical precious metal form of money like gold, you have to go out and mine it. You have to pull it out of the ground. What we’ve seen historically, even when the market price of gold rises very quickly, and let’s say gold as a commod, as apart from its moneyness, when In history, we’ve seen that when the price goes way up, a bunch of people immediately start putting capital into mining because they’d like to get in on that action and produce some gold. But it’s really difficult to marshal the physical capital resources to increase the supply of gold, physical gold on Earth, any more than, let’s say, about 2% in a given year. That’s when people really get into mining intensively because they see the price of gold going up or they project that it’s going to go up rapidly, and thus mining will be profitable with all the costs of water and diesel and labor and all the other things that go into mining.

Really, what makes money good is, of course, its value, and that is subjective. But there are some objective criteria you, especially the stock to flow ratio and some of those other properties that make some money better and some money worse.

Ben Nadelstein:

I think one way that I usually think about this is there’s this quantity theory of money, and people talk all, Well, how many dollars out there? We’ve made or borrowed or printed, whatever they want to say, more dollars in the last year than we have since 1970 or whatever it may be. Obviously, that matters in some way, but in other ways, it doesn’t really affect the dollar compared to maybe other currencies. Maybe it does affect the dollar compared to the dollar price of gold or gold priced in dollars. But one way I think about it, too, is that if you’re thinking of money as a commodity the same way you think of it as shoes or commodity or cars or commodity, that explains the mining aspect where someone says, Hey, listen, it’s just really not profitable right now to go into the ground to get more oil because the oil price is, let’s say, 100 bucks a barrel, and it would cost me $150 to go get that oil. You can think of money or gold or whatever your commodity is in the same way. It might not be the case that it is worthwhile for a miner to go into the ground and grab those resources like oil and labor and supplies and digging equipment to get more gold out of the ground.

And until the market actually demands more gold, or more money, it won’t be made. And so there’s a market or voluntary signal from people saying, Hey, we want more of this commodity the same way. People say, Hey, we want more shoes, versus with a more politicized money, which is maybe a tool of governments. Governments can say, Hey, you know what? We want more spending in health care, or We want more spending on a green new deal. And so they’ll say, Hey, let’s just create more of these government currencies or government credits, and we’ll siphon them or funnel them to where we politically see fit. And oftentimes, that political aspect of money is not seen. And also the unseen consequences of that on interest rates, on market actors is sometimes not really discussed, where it just says, Hey, we can make more of this currency, which is true. But to what end and with what in the background happening, I think, makes a question of, is this actually a good money and for who? Because for most voluntary transactions like, Hey, I want a new pair of sneakers. Because clearly you’re providing value. That’s why someone’s exchanging with you.

Exchanges only happen when there’s value on both sides. Versus in a political money, that’s obviously more of a bureaucratic decision to say, Hey, we, the bureaucracy, have decided. We want more engineers or more infrastructure or more health care spending. The question is, what is good money, but also what is good money for who and for what purpose?

Jeff Deist:

Well, it’s very difficult to know how much money there should be. That should not be a political question. When it comes to the supply of US dollars between the treasury and the Fed, we are every bit as bureaucratic, every bit as statist as the former Soviet Union was when it came to how many bushels of wheat should be produced by Soviet farmers or what should the price of a of a Trabant be, an Eastern European car. Unfortunately, we don’t have a market in money, and nobody can know how much money there should be. No human or group of humans has that ability. We all understand the concept of dispersed knowledge. We’ve all read our Hayek, and we all understand the price signal information that the market provides. That’s how somebody like Nike can actually use the market signals and profit or loss to figure out how many new shoes to produce. In a given year. Then they take that risk. If they don’t sell, they’ll have to, I don’t know, cut the price or whatever they do. But money doesn’t work that way, and we all understand that. But this idea of the quantity theory of money, that if we want more of something, we have to create more money because the market’s growing or the population is growing or demand to hold dollars is growing.

I mean, this is all pretty shaky stuff. We tend to assign the quantity theory of money to the monitorists like Milton Friedmann and Anna Schwartz, to the Chicago School where Friedmann was, of course. We view it as almost this mid-20th century concept. But it’s been around longer than that. If you can go back and read Mises in 1912, the theory of money and Credit, and he was criticizing the quantity theory of money. He says, It’s too mechanical. We can’t know if, let’s say, magically, you could press a button tomorrow and the supply of US dollars, physical and electronic within the United States alone, for the sake of our hypothetical here, were to double, it does not follow that all prices uniformly would exactly double in response to that. No, some people would hold on to this new higher balance in their checking account, let’s say. They’d hold on to it more than others. Other people would run out and spend more of it. And of course, given what we know about the diminishing marginal utility of money, if all of a sudden people had twice as much, they might change what they buy. Instead of just buying basics like grocery or rent, they might go out and buy something fancy that they wouldn’t have bought.

And so fancy things, I don’t know, jewelry or something, might go up faster than staples like food and rent in that scenario. So just like the value of money is subjective, what people would go spend it on based on the quantity is also subjective. And I think one of the real tragedies, not just in the quantitative money in the monetary school, but also in the broader, I would even assign this to the Keynesian or the Neoclassical schools of economics, is that there’s this disdain for people holding large cash balances. This idea that people could hoard money. We need money in circulation. We need to worry about the velocity of money. That’s the famous V in MV equals PQ. Keith Wiener talks about how there’s always a fudge factor in that equation. If If the numbers don’t add up, you just change one of the variables. But this idea that hoarding money or that large money balances is somehow bad for the economy is just a terrible idea because first it implies that a healthy economy is based on consumption rather than production. I would say that that’s quite the opposite, that production creates the circumstances for us to consume.

We all go out and work or do what we do to produce an income, and that’s how we get our ability to consume things in the first place. That’s Say’s law, Jean Baptiste Say, the famous Say’s law. I mean, that’s Say’s law in a nutshell. But more importantly, if we look at this idea of hoarding or cash balances, which is oftentimes in the economic literature connected to or tied to this idea of money supply or the quantity theory of money. There’s a British economist, W. H. H. Hutt, wrote this article in the 1950s. It was called the yield from money held. We say, What could possibly be the yield from money held other than maybe the simple interest we get at the bank? What do we yield from that? Well, again, it’s subjective. If people are more uncertain, as they certainly were during COVID, for example, people were worried about, Hey, am I going to lose my job? Is the economy going to shut down? Is travel going to shut down? Is dining out going to shut down? It was a very uneasy and a certain time for people. So there is a natural human tendency to increase one’s cash balances in that time.

It’s like, Hey, honey, COVID just hit. I don’t know about our business. Maybe we should just hold on to that $10,000 that we were going to spend on a fancy vacation. I mean, that’s human nature. We know that uncertainty tends to make people hold higher cash balances. So what that does is it creates a psychic benefit In other words, people would rather have more cash and the certainty that that would bring, like knowing, let’s say, Hey, if in three months I lose my job, I will have that several extra months of rent in my cash balance. That gives me a better feeling inside. We can call that psychic profit, for lack of a better description, that makes me feel better than perhaps going on that vacation I mentioned. Let’s just hold off. That’s the yield from money held. What happens, different people have different subjective approaches to this. What happens is that when some people hold more money, that actually benefits the economy in the sense that because that money is not being spent, generally speaking, that’s deflationary with respect to prices. We want people to have some savings. We want people to be able to deal with a rainy day, the loss of a job, an unforeseen expense, whatever it might be.

We want to encourage that, I think, from my perspective. This yield from money held is really, in a sense, this psychic benefit we get from this. It’s really a refutation of this quantity theory of money, this consumption mania that we have to get more money out there. If things heat up too much, says Milton Friedmann, the monetarist, well, we just pull some of that back through monetary policy. We print fewer dollars the next year, or we stop printing so many this year. Of course, there’s an uneasy analog here to modern monetary theory, which is generally viewed as more of a left-wing economic perspective, whereas Milton Friedmann is generally viewed more on the right wing or free market side of things. But the modern monetary theorists have the same concept. Hey, let’s just spend the money we need to spend. If inflation starts to heat up too much, we’ll just pull some of that money back through taxes. All of this really goes to, I think, what is a very anti-human impulse, this idea that we need to use economic policy so called where really we just need the market. We don’t need policy from government.

We need this economic policy to steer humans to do this or that. If they’re saving too much, well, let’s lower interest rates, maybe even in the negative territory, as we saw in Europe, to force them to get out there and spend because that’s what the economy needs. We need to tinker with the money supply. That’s what the quantity theory of money, and that’s what the monetary school suggests. Sometimes we just need to open the floodgates and stop worrying about spending altogether because sovereign government has the unlimited ability to create more money at will. There’s just these far away resource constraints. But we’re not even We’re close to that because there’s all this slack, so-called in the economy. That’s what the modern monetary theorists say. It all comes down to this same mania, this idea that more money is a panacea because it makes people spend. But the problem with all of this, Ben, is that more money in and of itself does not create a single new good or service. It does not in and of itself create any new economic activity. Prices just adjust. I think when we talk about, Hey, what’s good money?

Apart from those characteristics, maybe physical characteristics of gold, which we happen to like at Monetary Metals, there’s also what makes good money is money that’s not tinkered with by treasury officials in any country or by central bank officials. I’ll finish with this. A couple of years ago, a good friend of mine named Rahim, who runs the Scolarium organization in Vienna, Austria, which is attempting to really bring the Austrian school back to Austria, which sounds ironic. He gave a talk about how in the political sense of fiat currencies, nonetheless, a currency is really a nation’s calling card. I thought that was a really fascinating way to put it. What’s good money? Well, we think in the former Zimbabwe, they had bad money. But for many, many, many decades, the British pound sterling, wow, that was good money. Now, it may have been backed by some unholy elements of the British Empire and its military might and that thing. But nonetheless, around the world, the British pound sterling was That was good money. That was accepted, that was known, and that was holding or increasing its value. The Swiss franc, we’ve often thought, wow, the Swiss franc.

Now, there’s a currency that you can be proud of and that anyone would like to exchange for and that really holds its value. Even the Swiss franc has lost some of its luster, especially in the past 10 years since the Swiss government rolled over on bank privacy and the Swiss Central Bank started buying FAN stocks and all kinds of other things on this balance sheet. Japanese Yen. I know you’ve done some shows just in the past few weeks about, oh, my gosh, we always think the Japanese is very circumspect and fiscally responsible. Obviously, they’ve had some some demographic problems and some debt problems relative to their national output. But nonetheless, all of a sudden, we finally see the terrible effects of that in the Yen melting down. You and I, Ben, happen to have the good fortune to be born in America. And so all of our lives, we have enjoyed this wonderful status of the US dollar, the world’s reserve currency used everywhere, accepted nearly everywhere. It settles international trades across the board. It’s used to buy oil from OPEC. We’ve got this big US military, big bad organization. You and I have enjoyed enormous benefits from that through no merit on our own, just simply by an accident of birth.

The United States government has been able to export a lot of inflation to the rest of the world. We’ve had enjoyed the status of the dollar as good money, in effect. Gold was always the best money, and we still think it is, but the dollar has been awfully good money for an awfully long time under the Bretton Wood system. There’s a real feeling that that is starting to unwind. I don’t mean in the sense of the Brix Nation or let’s say, a rising gold-backed currency in the East or the Middle East or in Russia. What I mean is that I think the world is coming to sense that US government is never going to get its fiscal house in that our bond debt is really junk bond status, that we are going to continue to spend wildly beyond tax revenues. As a result, we are going to continue to print wildly, and we’re just going to expect the rest of the world to accept that. I think coming out of COVID, the inflationary environment of the last couple of years has shocked a lot of people, and it’s brought us back to a period that no one has felt since almost 50 years ago in the ’70s, and that we’re entering a new era of permanent, or at least in the foreseeable future, stubborn, enduring inflation, that it’s at least 5%, it’s probably closer to 10.

I don’t believe government statistics in this area. That’s a new reality. I think that is shaking a lot of Americans to their core. They feel it, and they’re looking for alternatives. I think gold and silver, I think not just their price appreciation, but I think we’re going see them begin to decouple, as I said on a show with you a week or so ago. I think we’re going to start to see them decouple from things like US GDP, US unemployment, US inflation rate. I think we’re going to see, hopefully, a slow, steady increase in those two precious metals. As a result of that slow, steady increase, a renewed look at them for their moneyness elements. That’s really what monetary metals is all about. It’s trying to restore some of the moneyness to physical precious metals.

Ben Nadelstein:

Jeff, very interesting conversation about what is good money for those interested in learning more about what Monetary Metals is doing with gold and silver, check out monetary-metals. Com. Jeff, thanks so much.

Jeff Deist:

Thank you, Ben.

Additional Resources for Earning Interest in Gold

If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:

The New Way to Hold Gold

The New Way to Hold Gold

In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.






Case for Gold Yield in Investment Portfolios

The Case for Gold Yield in Investment Portfolios

Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.




0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.