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Author: cnaylor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41315  
Subject: Re: Stupid is as Stupid Be Date: 7/21/2002 5:50 PM
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In the what commodities have been used to represent money, my thinking had gone a step further and asked what commodities will probably be used to represent money (energy) and/or should be used to represent money to make it the best correlation between wealth of society and what a society has produced (work equivalent of energy) - although probably neither will occur in my lifetime.

Allow me to digress... I'm by no means an expert, but I have always been puzzled by the use of gold to back paper money. I understood that its quantity was limited which was helpful to prevent inflation, but my concern was that gold, in and of itself has relatively little utility. I always thought that whatever was used as a foundation for paper money should be a substance which had real value to an average person.

To take the (hopefully) extreme example, suppose the event of a nuclear war or some other cataclysmic event which would cause most social and political institutions to collapse. In such an event, a medium of exchange might still be valuable but the acceptance of a particular good to represent money could be shaky. If you were selling something why would you accept something that might not be accepted by anyone else in trade? Gold has no inherent value. The average person can't do anything with gold - can't make anything with it that would directly benefit himself or enhance odds of survival. Contrast that with a society that uses grain as a medium of exchange. You can use it in trade, but you can also use it as food, because it has inherent utility, and thus you could always be assured of its acceptance. (Although, it certainly would have other limitations)

It tends to be these type of questions that keep me from investing in the traditional 'safe harbor' areas like gold during this market. I don't like owning it, because it's value depends almost entirely upon the acceptance of others, although that acceptance is very deeply ingrained, and I don't anticipate the type of scenario mentioned above. I much prefer the idea of investing in something like timber. (speaking of which, does anyone have any good sources for evaluating timberland values or values of timber companies?)

I recall hearing that Ben Graham had asked a similar question and written a book (I've seen it but not read it) proposing that currency be backed by a basket of goods that had inherent value. As I understand it, the government would be responsible for maintaining a stock of these goods, which would have to be rotated with new stock to maintain its freshness and hence usability. After all that, I don't really have a question, but I'd be interested to hear both your ideas on commodities to represent money and some more detail on your mental models.

Chris
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