A way to prevent inflation without a "gold standard" -------Warren D. Smith October 2000----------------- Without a gold (or equivalent) standard (an idea, incidentally, invented by Isaac Newton), all notions of the "value of a dollar" are simply based on psychology. For example, if, overnight, everybody decided the US$ was worth 50% as much, then it would be. Everybody would pay 2X as many dollars as wages, charge 2X as many dollars as prices, and everything would go on happily as before, and everybody would be just as happy as before - just with dollars moving twice as quickly through the pipelines of the economy (we could all just switch to $2 bills instead of $1 bills...) - except for those who had a lot of cash on hand and hence temporarily got creamed during the transition. (But other people would be happy about the effect of the transition - those who had debts.) With the present "floating currency" system, it is just psychology. There is nothing giving any absolute meaning to currency, nothing anchoring the length scale. And that is why inflation can happen even WITHOUT any change in money supply. All that is needed is a change in psychology. And in fact such changes in psychology do happen due to contracts that increase wages X% per year, corporate projections and plans based on future estimates of inflation, etc, which tug the prevailing psychology by X% per year. So here is my proposal. Suppose we make a law that the minimum wage is, say, $10^4/year (or equivalent), and the maximum wage is, say, $10^7/year. (Actually, a "hard cutoff" max wage is a bad idea, but we could make a soft cutoff by means of a progressive tax tending to 100% monotonically but never reaching it. Present progressive taxes with max bracket of, say, 40%, are inadequate; we need an approach to 100% otherwise there effectively is NO maximum wage.) Now, the value of money is tied to the most fundamental commodity - human labor - not gold. Money has an absolute meaning now and inflation (aside from temporary fluctuations) becomes (in the absence of anybody "printing money") impossible. (Note, a system with only a minimum wage, but no maximum wage, is no good: inflation is still possible, indeed maybe even encouraged - only DEflation is prevented. Furthermore the minimum wage - if it is to have meaning - would then have to keep being increased to keep up with inflation, which would only worsen inflation!) Capitalistic feedback still has a pretty wide range (factor 1000 or more) in which to motivate people, but no longer an infinitely wide range. Some would argue having min & max wages would be better for society, some would argue worse. But, compare the tremendous burden of imposing a gold standard on all of us. That means you need a government with a huge amount of gold on hand, comparable to all total money. That means people will mine a lot of gold uselessly for no reason. That means (bogeyman!) "Big Government!" So there would be a big cost. So the question is, would my suggestion cause more of a burden for society, than the gold standard suggestion, or less? I think: less. (Some would even argue this proposal would be a benefit not a burden, because it would "soften the cruelty" of pure capitalism.) Incidentally, there is a way to see my proposal as actually EQUIVALENT to Newton's Gold Standard idea. Newton's hope was, basically, that gold and silver would always be fairly expensive in terms of the human labor needed to produce them. That seemed plausible, especially during Newton's day. Thus if you guarantee to redeem British Pounds as a certain amount of silver, you assure the pound cannot inflate relative to human labor (if it did, people would just go for the silver). And indeed the Pound WAS essentially inflation free during the whole "Pound Sterling" silver-redeemability era lasting about 250 years. It worked. This has been claimed to have been a big part of the reason Britain ended up dominating the world. Namely, investors from all other countries were motivated to make investments in British companies or British banks (which ended up being the same thing), etc., because they wanted their investments to be inflation-proof. This allowed massive expansion by British companies, etc., leading them to take over the world. Meanwhile, nobody was going to invest in the French. When the British temporarily abandoned the silver redeemability assurance during two war periods, massive inflation resulted both times. Finally the British abandoned it permanently and went on the "float" system. Almost every currency is floating now, although I think a few like Swiss Francs have some weak partial links to gold or silver. So anyway: note that at its core, the Gold Standard is, just like my proposal, merely a way to tie the value of money to the value of human labor, thus giving the former an absolute meaning. Thus my idea really just IS the gold standard but without the (tremendously burdensome) need for the gold. A flaw in the Newton idea was there was nothing stopping DEflation from happening - gold merely stopped inflation. Maybe the British Pound could become worth far more than gold, and nobody would want the gold. In principle nothing stops this from happening, I guess. But in practice that was not a difficulty - since the prevailing psychology is to be dubious about the value of paper currency. Anyway, MY proposal overcomes this flaw in the Gold Standard idea and prevents motion BOTH ways, so it actually is better than gold. In view of what I've just been saying it is damned peculiar to find certain people arguing FOR re-instating the gold standard but AGAINST having a minimum wage. So now let us consider the burdens to society of having min & max wages. Alleged Burden #1: Ultra-rich people would leave the USA because earning as much as 1000 poor people is not good enough for them. But: Maybe actually a society without unboundedly poor people is a more attractive society to live in - so they would not leave. (Also, maybe NBA players can't leave and still be NBA players.) Alleged Burden #2: Ultra-rich people would have only 10% of the incentive to get richer, if they were in a 90% tax bracket, than if they were paying no taxes. Such smaller incentives would cause capitalism to work less well. But a counter-argument is: Maybe the ultra-rich, as is, are pretty motivated to simply do nothing and not work at all! If they found their wealth evaporating into taxes, then maybe they'd actually be more motivated! Also, those rich who ARE motivated to work to get even richer (and do not want to just sit back and do nothing) may be motivated more due to their personality than due to money per se. In that case, they'd still be equally motivated under the new system. Alleged Burden #3: the economy would export submin-wage jobs to other countries, causing US workers to lose out in the job hunt. But: would it? Actually, most min-wage and submin-wage earners are in jobs like: fast food cooks, supermarket checkout line, newspaper delivery, and agriculture food picker. These jobs are not exportable. You can't deliver my US newspaper if you live in Indonesia. So they would not be exported. What about, say, factory manufacturing jobs? Those workers already earn more than minimum wage at the moment, which is due purely to market effects, so this is not an issue! - but wait, their jobs ARE being exported! Strange eh? Besides, there would be nothing stopping paying somebody very low wages - simply make the dollar be worth very little. Specifically: if the market decided low-skill labor was not really worth $10000/year, then the market would make the dollar (since tied to the price of labor) worth less, and so things would self adjust. The only thing holding up the dollar would be the rich people's wages, AND the fact the rest of the world would want to invest in the new, inflation-proof, dollar, so the dollar would be worth a lot, so wages would stay up. If the envious rest of the world then decided they too wanted to get in on the benefits of having an inflation-proof currency, then still, no exportation of jobs would occur between two such countries - the only incentive would be to export them to countries of the old fashioned type. But then those countries, whose currency was inflating and whose workers were getting paid less and less, would have a lot of incentive to make their currency inflation-proof too. To conclude, all these kinds of "burdens to society" incurred by the min-max wage proposal, seem not as serious as might be thought. Meanwhile preventing inflation with a gold standard is enormously burdensome, and the present "float" system is subject to an enormous (?) risk that some sudden psychological shift will occur.