Settlement

This post is the result of a dialogue at The Daily Bell.  It was prompted by an editorial written by Hugo Salinas Price, entitled “Of Bubbles and Bitcoins.”  The pertinent comment in the editorial, and my feedback to it, as follows:

HSP: In the exchange of any given merchandise for gold (or silver), neither of the parties to the interchange ends up owing the other party. There has been "settlement."

BM: There is settlement when one individual trades a coconut for a dollar bill. Neither owes the other anything more.

I did not intend to write a post about this, but the subsequent dialogue influenced my thinking. 

I guess I am confused about the term “settlement.”  Please bear with me….

I give you a coconut in exchange for your giving me an apple.  We agree that neither of us owes the other anything more.  This certainly seems like a settled trade to me.

Now, I give you a coconut in exchange for your giving me a gram of gold.  We agree that neither of us owes the other anything more.  This also certainly seems like a settled trade to me.

Let’s try another.  I give you a coconut in exchange for your giving me a plain white sheet of paper.  We agree that neither of us owes the other anything more.  Is there something about this trade that remains in the not-settled arena?  It seems to me this trade is also settled.

I will now take one more step: I give you a coconut in exchange for your giving me a piece of paper with a pretty painting on it – perhaps a lovely seascape.  We agree that neither of us owes the other anything more.  Not settled?  No, I think still settled.

Last step.  I give you a coconut in exchange for your giving me a piece of paper with a picture of a dead politician on the front and a picture of some monument to the state on the back.   We agree that neither of us owes the other anything more. 

It is argued, at least by HSP and a few feed-backers at DB, that this trade is not settled.  But why not?  Neither party owes the other anything more.

The closest answer comes from mava:

When you sell a coconut for a dollar, you receive no settlement, because the dollar is only a promise, not a good in itself.

But somehow, it is suggested that gold is different in this regard.  Why?  Is not gold only a “promise” in the sense that the term is used in this sentence?  After all, there is no guarantee regarding the future value or desirability of my gold.  Am I not dependent on someone accepting the gold in the future for something I desire?

But wait (I hear it coming), gold is a good – it is a commodity, useful for purposes other than money.  Yes, I understand this.  But what is a piece of paper with a painting on it, other than a commodity, useful for purposes other than money?  Is the argument that a painting of a seascape fits this definition, but a painting of a dead politician does not?  I hope not.

When you sell a coconut for gold, you have settled the transaction, because you have already received something in exchange, that does not depend on whether your buyer has funds (bounced checks), or, whether the system is in good standing (such as is a big question with the dollar and the bitcoin), or whether your bank happens to be on a particula island (Cyprus).

Each of these apparent problems is equally an issue with gold: a bounced check – equally a problem if you accept a certificate for gold as opposed to the coin; system in good standing – what does this even mean?  A system is functioning or it isn’t – the fiat system is functioning today as the primary means of trade for (my guess) 99% of global transactions.  This isn’t enough?; bad bank – what about a bad vault?

But I greatly deviate from my original point.  When I make a trade of something for something, there is settlement.  That I choose to accept a piece of paper with a picture of a dead politician on the front and a picture of some monument to the state on the back is my own problem, isn’t it? 

The person who gave me that piece of paper owes me nothing more.  What more is there to settle?  Any good I accept that is not for consumption purposes comes with the same risk – that someone will want it when I am ready to consume at some point in the future.

To avoid more strawmen – yes, I believe gold stands the test of time better than pieces of papers with a dead politician’s picture on it.  But this doesn’t change the fact of settlement when that paper is used in trade. 

What is good for the micro is good for the macro.  Only macro-economic-policy-planning-economists believe otherwise.