[Mirror] The Search for John Nash’s Ideal Money

NOTE: This is just a mirror of my old writing from 2018 for record-keeping purposes. 1) My current self does not consider this writing to carry useful insights, 2) I may no longer agree / believe with some of the details here, and 3) this is just poorly written.

AGAIN, you will NOT gain insights by reading this.

The adoption of the Bretton-Woods monetary system in the 1940’s led to the US dollar becoming the world’s reserve currency even to this day. Because of this, the US suffers from the Triffin dilemma where the devaluation of its domestic currency in order to make importing from the US favorable is leads to friction between international countries. An artificial devaluation could help the domestic economy in the short term but hurts the global economy in the long term.

Keynes suggested a international reserve currency named bancor, preventing countries from screwing over the global economy for short term domestic benefits. This unfortunately was not adopted, with the US dollar instead becoming the global reserve currency.

In the late 1950’s John Nash came up with the idea of “Ideal Money”, a currency without (price) inflation nor deflation. In other words, Nash’s proposal was to have a currency with a stable value as the world’s reserve currency. He saw the possibility of achieving this by creating an Industrial Consumption Price Index (ICPI), a basket of chosen commodity prices and pegging his currency to this value. International prices of commodities crucial to industrial production such as base metals would be converted to an index using a method identical to the widely used Consumer Price Index.

If the Keynesian view of wage stickiness is correct, Ideal Money might have an another great advantage. From a Keynesian standpoint, price inflation lags behind monetary inflation and wage increase lags behind price inflation. The result is that the wage will always lag behind price increases, therefore leading to overall market inefficiencies. A wage that don’t follow supply-demand equilibrium (being paid less than the ideal market value of a specific labour) leaves workers to spends less than their work value, decreasing the maximum possible increase in productivity. A lagging wage increase could also lead to constant social tensions, workers demanding wage increases in response to a higher cost of living.

Eliminating price inflation removes the fundamental reason behind lagging wages, thus resulting in higher overall productivity and a decrease in social tensions.