Ideal money.

• Author: Nash, John F., Jr.
• Position: Distinguished Guest Lecture - Brief Article

1. Introduction

   The special commodity, or medium, that we call money has a long and interesting history, and since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have, we may become irrational in thinking about it and fail to be able to reason about it like we do about a technology, such as radio, to be used more or less efficiently. Therefore, I wish to present the argument that various interests and groups, notably including Keynesian economists, have sold to the public as a quasi doctrine that teaches, in effect, that "less is more" or that (in other words) "bad money is better than good money." Here we may recall the classic ancient economics saying called Gresham's law: "The bad money drives out the good." This saying of Gresham's is of interest here mainly because it illustrates the old, or "classical," concept of bad money, which is not in line with the thinking of Keynesian economists.

2. Money, Utility, and Game Theory

   In the sort of game theory that is studied and applied by economists, the concept of utility is very fundamental and essential. Von Neumann and Morgenstern (1953) give a notably good and thorough treatment of utility in their book on game theory and economic behavior. The concept of (mathematical) utility does indeed predate the book of Von Neumann and Morgenstern. For example, as a concept, mathematical utility can be traced back to a paper published in 1886 in Pisa by G. B. Antonelli (Antonelli 1971).

   When one studies what are called cooperative games, which, in economic terms, include mergers and acquisitions or cartel formation, it is found to be appropriate and is standard to classify these games into two basic groups: games with transferable utility (type 1) and games without transferable utility (type 2). In the world of practical realities, it is money that typically brings into existence games of type 1 rather than games of type 2; money is the "lubricant" that enables the efficient transfer of utility. Moreover, in general, if games can be transformed from type 2 to type 1, there is a gain, on average, for all of the players in terms of whatever the expected outcome might be.

   However, money's function in generally facilitating the transfer of utility would seem to be performed as well by the currency of Thailand as by that of Switzerland. One can ask the question, How do "good money" and "bad money" differ, if at all, with regard to the valuable function of facilitating utility transfer? But if we consider contracts with a relatively long time axis, then the difference can be seen clearly.

   Consider a society in which the money in use is subject to a rapid and unpredictable rate of inflation such that money worth 100 now might be worth between 50 and 10 by a year from now. Who would want to lend money for the term of a year? In this context, we can see how the quality of a money standard can strongly influence areas of the economy involving financing with longer-term credits.

   Keynesians

   The thinking of J. M. Keynes was actually multidimensional, and consequently there are quite different varieties of persons at the present time who follow, in one way or another, some of the thinking of Keynes. Of course, some of his thinking was scientifically accurate and thus not disputable. For example, an early book written by Keynes (1921) was the mathematical text A Treatise on Probability.

   The label Keynesian is convenient, but to be safe, we should define this term to constitute a party that can be criticized and contrasted with other parties. Thus, let us define Keynesian to be descriptive of a school of thought that originated at the time of the devaluations of the pound and the dollar in the early 1930s. Then, more specifically, a Keynesian would favor the existence of a manipulative state establishment of central bank and treasury that would continuously seek to achieve "economic welfare" objectives with comparatively little regard for the long-term reputation of the national currency and its associated effects on the reputation of financial enterprises domestic to the state.

   And, indeed, a very famous saying of Keynes's was "... in the long run we will all be dead. ..."

3. Historical Observations

   The history of the gold standard is rather interesting. It can be traced back to 1717. when Isaac Newton, as "Master of the Mint" in London, set a standard quantum of gold to correspond to the currency called the pound sterling. In 1931, this standard finally failed to be supported any longer, and this happened at a time when the London government had shifted to the left politically and at a time of global economic stresses.

   The U.S. dollar had itself been imitatively put on a fixed relation to gold, like various other currencies at various times. That relation was not supported after 1933, similarly to the case for the British pound. Another similarly linked currency was the Swiss franc. In its case, the original standard relation...