What Does ChatGPT Know about Money?

by
George Ford Smith
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Given the contentious topic of money and its influence on the world, I decided to see what ChatGPT “knows” about it. I was surprised by the breadth of its responses, as well as its information on free market positions, especially those of the Austrian school.

Though my prompts (queries) were exactly as I present them here, ChatGPT was so expansive I had to edit its results due to article length restrictions. For emphasis and to mark subject headings ChatGPT frequently used bold-face text. I italicized portions of its replies, which are indented, to stress points I thought were especially important, and I added links in a few cases to augment ChatGPT’s response.

Let’s begin.

Smith: Is it true that money arose from barter as a response to the problem of a double-coincidence of wants? And is it also true that the commodity eventually chosen to serve as a medium of exchange was determined by market participants? And further, is it true that in all of human history no paper money was ever freely chosen as money, and that paper money was always imposed on the market?

After explaining what is meant by the double-coincidence of wants, ChatGPT went on to say:

ChatGPT: 

Economists like Carl Menger, a key figure in the Austrian School, argued that money emerged spontaneously from the marketplace, not through government decree. . .

Over time, market participants naturally gravitated toward using certain commodities that had desirable qualities—those that were widely valued, durable, divisible, portable, and had a stable supply. These commodities were easily traded because people generally accepted them as being valuable. . . .

Importantly, no central authority had to mandate that these commodities be used as money. People recognized the benefits of using certain commodities, and through repeated use in trade, these commodities became widely accepted as money.

No Paper Money Was Ever Freely Chosen as Money.

Initially, paper money began as a substitute for commodity money, like gold or silver. . . .

Importantly, people accepted these paper notes voluntarily because they were confident they could redeem them for a tangible commodity, making these notes convenient substitutes for carrying physical gold or silver. . . .

Historically, when governments detached paper money from any redeemable commodity, it was usually under duress . . .

Smith: How did money go from market control to government control?

ChatGPT: 

The shift evolved over centuries, largely driven by governments’ desire to centralize power, finance wars, and stabilize or control the economy.

Minting Coins: Governments took control of minting coins from precious metals. In doing so, they could stamp their own symbols, which ensured a standard weight and purity of coins. . . The market still valued these coins based on the amount of metal they contained . . .

Over time, governments would reduce the amount of precious metal in coins (e.g., mixing in cheaper metals like copper) while keeping the face value the same. This allowed governments to produce more coins to finance wars or other expenditures. . . This led to inflation, as the debased currency lost value.

When bank notes emerged, they were a receipt or promissory note issued by private banks, representing a claim on a certain amount of gold or silver held in reserve. . . The value of the note was tied to the gold or silver it could be exchanged for.

Over time, governments began to recognize the power of issuing banknotes themselves. In some cases, governments gave exclusive rights to central banks to issue currency. For example, the Bank of England was granted a monopoly on issuing banknotes in 1694. This gave the government greater control over the money supply, but the banknotes were still convertible into gold or silver, meaning the market ultimately determined their value.

The 19th century saw the rise of the gold standard, which became a key feature of the global monetary system. Under the gold standard, the value of national currencies was directly tied to a fixed quantity of gold. . . Central banks played a key role in managing the money supply, but their actions were still constrained by the need to maintain gold reserves.

The Decline of the Gold Standard and the Rise of Fiat Currency

Several key historical events led to this shift:

Great Depression:  In the U.S., President Franklin D. Roosevelt ended the convertibility of dollars to gold for private citizens in 1933. . . 

Bretton Woods System: After World War II, the Bretton Woods Agreement established the U.S. dollar as the world’s reserve currency, with other currencies pegged to the dollar, and the dollar itself was pegged to gold. This system lasted until 1971, when President Richard Nixon ended the convertibility of the U.S. dollar into gold, effectively ending the gold standard worldwide. This marked the official transition to fiat money.

Conclusion: Money transitioned from being under the control of market participants—where commodities like gold and silver served as money chosen through voluntary exchange—to being under the control of governments through a combination of centralized minting, regulation, and eventually fiat money systems. 

Smith: Which has been better for personal liberty and prosperity: An unbacked fiat currency or a metallic-based money (privately minted gold or silver coins) with paper substitutes that promise “payable on demand”?

ChatGPT: 

Metallic-based money has three advantages:

Personal liberty: Through decentralized control over money . . . individuals and businesses can own, hold, and trade physical wealth directly.

Limited government power: A metallic standard places strict limits on the government’s ability to print money, thereby restricting its capacity to inflate the currency, fund wars, or finance deficit spending without directly taxing its citizens.

Freedom from Inflation: Under a metallic-based system, inflation is usually minimal or nonexistent, which preserves individuals’ purchasing power. Citizens have greater control over their wealth without worrying about their savings being eroded by inflationary policies.

However, the fixed supply of precious metals can limit economic growth, especially if the economy grows faster than the supply of gold or silver. This can lead to deflation (falling prices), which can discourage borrowing and investment, potentially slowing down economic progress.

As we see in this last paragraph ChatGPT “believes” an increase in the money supply is needed to sustain economic growth and cautions us about deflation being disruptive of “economic progress” — two positions at odds with historical fact and Austrian School theory. I tried to get it to admit its inconsistency.

Smith: In the latter part of the 19th century when there was no Fed we had a prosperous economy with price deflation, per officialdata.org. 

Specifically, for the period 1879-1912, “The dollar had an average deflation rate of -0.09% per year since 1879, producing a cumulative price change of -3.00%. This means that prices in 1912 are 3% lower than average prices since 1879, according to the Bureau of Labor Statistics consumer price index.”

 One of the reasons for instituting a central bank was to avoid the Panics that plagued the economy during the 19th century. Yet, the Fed was in charge during the 1929 Crash and the Great Recession of 2008-2009, all the while the dollar continued its nosedive to oblivion. Do you think this is a good report card for the Fed?

ChatGPT: 

Prosperity with Deflation: The period from 1879 to 1912 did indeed see price deflation, meaning that the purchasing power of the dollar increased slightly over time. 

This deflation was largely due to the gold standard, which limited the money supply and helped stabilize prices. During this period, the U.S. experienced significant economic growth, industrialization, and an increase in real wages, despite the deflation.

Creation of the Fed: The Federal Reserve was established in 1913 partly to address the financial instability and frequent panics of the 19th century. . . .

1929 Crash and Great Depression: Despite the Fed’s creation, the U.S. experienced the Great Depression following the 1929 stock market crash. . . .

Great Recession of 2008-2009: The Fed was also in charge during the Great Recession, another severe economic downturn that exposed weaknesses in the financial system. . . .

Conclusion: A Mixed Legacy

The Fed’s legacy is indeed mixed. While it has played a critical role in stabilizing the economy during certain periods, it has also been associated with significant economic failures, including the Great Depression and the erosion of the dollar’s value. The comparison with the late 19th century highlights that economic growth and stability were possible without a central bank, but also that the absence of a central bank did not prevent severe financial panics.

Those panics are well-known to have been fostered by fractional-reserve banking and the prohibition on branch banking.

Conclusion

I found no evidence that ChatGPT was biased in its responses. It treated government and free market positions according to the training it received, which was a mixture of statism and free markets. Users should challenge ChatGPT by questioning its responses with contrary information, as I did with deflation and prosperity of the late 19th century. 

If mankind has a future, a flourishing of critical thinking has to start somewhere, so perhaps generative AIs such as ChatGPT can serve as a model and inducement.