Gold standard?

Will Wilkinson quotes Brad DeLong on Freidman’s monetarism,

In economic reality, “money supply” means not just cash money but also credit entries the Federal Reserve has made in commercial banks’ accounts at the Fed; plus all the credit entries commercial banks have made in households’ and businesses’ checking accounts; plus savings account balances; plus (usually) money market mutual-fund balances; plus (sometimes) trade credit and the ceilings between credit card limits and consumers’ current balances.

No central banker controls all these vast and varied sluices of the money supply – at least not in economic reality. When banks and businesses and households get scared and cautious and feel poor, they take steps to shrink the economic reality that is the “money supply.” Businesses extend less trade credit. Credit card companies cut off cards and reduce ceilings. Banks call in loans and then take no steps to replace the deposits extinguished by the loan pay-downs. Without a single bureaucrat making a single decision to slow down a single printing press, the money supply shrinks—disastrously in episodes like the Great Depression. Thus in emergencies, to say that all the central bank has to do is to keep the money supply growing smoothly is very like saying that all the captain of the Titanic has to do is to keep the deck of the ship level.

Will comments that,

[Brad] seems primarily to be pushing the idea that Monetariasm has to give way to Keynesian fiscal demand priming when monetary responses to recession get tapped out. But I think one could just as easily infer from Brad’s argument that since ideal monetary central planning isn’t really possible, we ought to give up trying and fully legalize markets in privately-issued money.

The link Will offers is to the Cato report, “Is the Gold Standard Still the Gold Standard among Monetary Systems?”

It’s a good article and it makes the important central point: fiat money is subject to considerably worse inflation than money backed by a commodity.

the average inflation rate for the fiat standard observations is 9.17 percent per year; the average inflation rate for the commodity standard observations is 1.75 percent per year. …

A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money. …

A gold standard does entail resource costs of mining the gold that is lodged in bank vaults. But so too does a fiat standard entail resource costs, primarily in the form of the deadweight costs of inflation.

Of course, there are still some reasonable objections to the gold standard, in particular the fact that if the U.S. were the only country to revert to a gold standard, we’d lose out on the benefit of fixed exchange rates and we’d see greater instability in gold’s purchasing power. There’s also the risk of shock from sudden shifts in supply.

I’ve never been a real gold bug, although I’m very sympathetic to the arguments they make; inflation–especially hyper inflation–really, really sucks. But inflation isn’t a necessary consequence of fiat money; fiat money just makes inflation easier.

Inflation is the result of bad decisions made by the people who manage money. All regulated monetary systems are vulnerable to inflation. The central cause of inflation is a desire to create value out of thin air, either by printing more bills, entering into greater debt, or devaluing the bills themselves. The U.S. was on a gold standard until we couldn’t be because we’d printed too much money and didn’t have the gold to back it up. That’s not a “whoops,” that’s deliberate manipulation of the money supply to devalue debt: inflation. A gold standard can mitigate the risk of inflation only so long as the government doens’t deliberately undercut the standard.

A gold standard combined with free banking would be largely immune to widespread inflation, but the risk of individual banks deliberately undercutting their own reserves is still pretty high. Banks issuing gold-backed currency would have strong incentive to dilute the value of their bills relative to their competitors and given the recent history of credit default swaps, I don’t think it’s reasonable to expect private banks to always operate with own best interests at heart.

What we need is some way to experiment with different kinds of currencies, some way to test various forms of monetary policy without crippling the economy or punishing real people. What we need is a kind of virtual economy… we need World of Warcraft.

World of Warcraft and other large online games have economies that are sufficiently large and complex to act as informative models for monetary experiments. WoW, for example, struggles constantly with inflation because its currency is backed by fiat. But what if it weren’t? What if Blizzard were amenable to reserving some WoW servers for economic experimentation?

I think such experiments would be enlightening.

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Virtual Murder

Following up on yesterday’s item about virtual theft is a story about virtual murder in Japan. (Again, from Eugene Volokh.)

Like the theft, this virtual murder was accomplished through the use of real-world force.

A 43-year-old Japanese piano teacher’s sudden divorce from her online husband in a virtual game world made her so angry that she logged on and killed his digital persona, police said Thursday.

The woman used login information she got from the 33-year-old office worker when their characters were happily married, and killed the character. The man complained to police when he discovered that his beloved online avatar was dead.

Volokh argues that,

Had she engaged in the “virtual killing” from her own account, by using a feature of the game that made such action possible, or even exploiting a bug in the game that made such action possible, it seems to me that this would just be an interesting extra twist in the game’s narrative. Such action should be dealt with by whatever mechanisms the game’s operators provide (perhaps including expulsion of the misbehaving user, if the operators view such conduct as misbehavior), or at most by a breach of contract lawsuit for violating any user license agreement terms — not by the real-world criminal law.

One interesting aspect of this is the amount of harm caused. In the virtual world (Maple Story, in this case) it should be possible for the administrators of the game to restore the dead avatar to life. In which case, the harm inflicted by the virtual murder amounts to at most a few days lost playing time. (And as it happens, Maple Story is free to play.)

This is a great example of the kind of issues that in-game, virtual courts could help resolve conflicts. The game has officially sanctioned marriages, creating invitation and reception mechanisms and even going so far as to reward the marrying couple with wedding rings. But the game did not provide a mechanism for divorce. The AP story is thin, but it seems as though some in-game mechanism to resolve disputes may have mollified the virtual wife.

Again, these cases are currently oddities only because the amounts of money involved in the disputes is still small. But the value of virtual goods will continue to rise, and as they do, these cases will become more common and more serious. (Maple Story is free to play, but players can purchase in game currency and special items by buying Nexon cash with hard currency.)

One absurdity: Maple Story prohibits “same-sex” marriages. Presumably because they think it would be wrong for two 12 year-old boys to virtually marry. Unless one is pretending to be a girl of course. Then it’s OK.

Virtual Law

From Eugene Volokh at, well… at Volokh.com

A Dutch court has convicted two youths of theft for stealing virtual items in a computer game and sentenced them to community service….

The Leeuwarden District Court says the culprits, 15 and 14 years old, coerced a 13-year-old boy into transferring a “virtual amulet and a virtual mask” from the online adventure game RuneScape to their game accounts.

“These virtual goods are goods (under Dutch law), so this is theft,” the court said Tuesday in a summary of its ruling….

Now this might sound odd — why should the legal system police “virtual theft,” especially since the ability to steal, defraud, and the like within a game may be an important part of the game? But things become much clearer when one reads the longer story, from Radio Netherlands Worldwide:

The culprits, who cannot be named due to their age, kicked, hit and threatened their classmate with a knife before the 13-year-old gave in and transferred the Runescape items, an amulet and a mask, to his attackers’ online accounts.

He makes the point that in this case real harm was done and so the ruling isn’t really all that surprising or notable. But he also says, “I continue to think that generally speaking the law shouldn’t prohibit purely in-game “theft,” “murder,” “rape,” and so on.”

I wonder.

Virtual economies are growing ever larger and more influential. The exchange rate for World of Warcraft gold (based on some admittedly back of the envelope calculations) is somewhere around 2.8 cents per gold piece, which means that one WoW gold is equal to about half a Yen.

At that rate of exchange, it’s common to find virtual items with significant real-world exchange value. If in-game theft or fraud robs a person of significant real-world value, I’m not sure that should exist outside the scope of law. Right now, the issue is complicated by terms-of-service agreements that generally prohibit selling virtual items for real cash, but such restrictions are not universal. At some point (sooner than later, I think), virtual fraud and virtual theft will rise to a level of actual harm that will be impossible for real-world law to ignore. I think the question of jurisdiction will be particularly interesting, as will be the development of virtual courts and virtual arbitration.

The largest virtual game worlds make for fascinating social laboratories. Since the worlds are essentially completely planned economies under the control of autocratic rulers with god-like powers, it’s especially fun to watch them struggle with the classic problems of a managed economy, like inflation. Friedrich Hayek would have loved World of Warcraft.

He’d have been a Gnome Tinker, of course.

Also, check out The Synthetic Worlds Initiative at Indiana University.