ECONOMY: Money that Grows on Trees!

I wish to propose the radical notion that we grow our money on trees. 

Seriously. 

Think I'm crazy?  Then let me give you some back ground...

When my students first learn about the complexities and problems of the international financial system; the technocratic imperfections of running a money supply; and the other arcane issues involved in monetary economics, one of the first solutions they come to is a return to the Gold Standard. 

What could be more elemental?  Gold is sound.  It is a reliable store of value.  I tell them that in times of trouble investors tend to seek shelter in the stable price of gold.  So, I routinely forgive them of this leap of logic. Young minds, like all minds, seek the path of least resistance to solve problems, and kudos to them for trying.  And we do indeed now have major politicians who have caught the new Gold Bug (Ron Paul, please stand up!).

But besides the empirical problems of how the system actually functioned, we can see the problems with such an approach at a far more fundamental level: gold is only valuable because it is scarce.  And the reason gold is scarce is completely socially constructed.  Gold has value because we have said it has value. 

This is ironic.  The reason so many students flock to the gold standard as an answer is the response to their "shocking" discovery of fiat currencies.  Fiat currencies are forms of money that have simply been deemed legal tender.  You have to pay your taxes in it, therefore, it has value.  It is a total social construction. 

So, many students, and now evidently, many Tea Party politicians, jump to the conclusion that a retreat to a solid store of value is warranted.  Back to the Gold Standard. 

They forget, or never consider that the value of gold itself is a social construction.  Every bit as much a social construction as a fiat currency.

Now if both the gold standard and fiat currencies are based on social constructions, one might conclude that they are in fact equal in terms of their effectiveness. This is false.

Gold has value because it is scarce.  Never mind the complexities of trying to balance global trade by having to trade equivalent amounts of gold and the like.  I'll leave that for another post, another day, when I might actually be interested to take that on (don't hold your breath...). 

Fiat currencies have no such constraint, at least in theory.  Money can be printed in any quantity needed.  The real constraints comes by way of interest rate or inflation.  But the inflation threat argument is normally hauled out long before it is truly threatening.  In a slack economy with lots of unemployment (sound familiar?) such a threat is greatly muted, and the benefits of such money creation normally far outweigh the costs. 

So, the main difference between a "fiat social construction" and a "gold social construction" is one of plenty versus scarcity. 

But in the real world, even fiat currencies impose artificial scarcity.  This is done mainly by the socially constructed monetary creation process.   In the USA, for instance, the government ceded creation of currency to the Federal Reserve and its fractional reserve banking system.

Money is created as debt.  With interest.  A debt even the federal government must repay at some point (though this is done often by simply printing more currency--a fact that often unnecessarily alarms my students).  So, the fact that this debt must be paid off before profits are realized imposes a kind of scarcity on the system. 

So, if both fiat and gold are scarce social constructions.  Is it possible to imagine a plentiful social construction? 

Maybe we could just produce more gold.  Of course, there is a limited supply of this and it turns out that the mining of gold is damaging to both the Earth it is mined from and the human beings who do the mining. 

So, we need a plentiful, non-polluting, non-harming social construction. 

We need trees.  Or more accurately, more leaves. 

I like oxygen, you like oxygen, we all like oxygen.  

What if every so often we counted the leaves on trees to determine the money supply?  We could create lots of new jobs employing all those tree climbers.  And if we need more money, we just plant more trees. 

Something we need to do anyway!

The supply of trees and leaves is virtually unlimited and if we continue as we are and deplete the world's resources of trees, we are all going to die. 

So, the Leaf Standard, as it were, is more than just a social construction, it is also a store of real value.  That is something your average, everyday gold standard does not have.  My Leaf Standard punks your Gold Standard any day of the week!

Of course, the point here is not to propose a new Leaf Standard, it is instead to point out the futility and rather ridiculous nature of arguing for a return to the gold standard. 

But if I had to choose between the two, I'd opt for money growing on trees every time!