The attempts to create a double standard of gold and silver failed lamentably. It was this failure that generated the gold standard — a manifestation of a crushing defeat of the governments and their cherished doctrines. FULL ARTICLE by Ludwig von Mises
Source link: http://archive.mises.org/12153/the-gold-standard/
The Gold Standard
Previous post: Why Not Universal Car Insurance?
Next post: Thinking for Oneself
{ 122 comments }
← Previous Comments
can anyone here point to information that shows where a near-constitutional gold and silver money system (us or elsewhere), where from what i understand, private/foreign coins and the people’s right to mine gold and silver for minting at us mints operates in a way better than the current fiat currency system?i have read, but cant confirm that recessions were more common in decades past (though perhaps with less accurate data???). were these recessions due in large part to receipts for gold being printed in excess of gold???economagic.com states that m1 went from 800 billion to about 1.2 trillion in 1995. for the next 5 years m1 decreased about 100 billion to 1.1 trillion. if true???if gold and silver were money what would prompt people to (likely) part with gold and silver money to get new, not existing, gold and silver money?a very inexpensive high yielding mining process developed by people likely paid in gold and silver money??lent or ‘credited’ mining equipment in the hopes the newly mined gold and silver that made its way into money would be more profitable than selling or using the mining equiopment elsewhere?? despite the (alleged) reduction in PP of the new gold and silver????if the process described above are what would likely occur to add new gold and silver money is that a ‘better’ method that the seemingly planned currency increases that occur now???
“The Fed offers NOTHING on their “note”” i guess you mean here a federal reserve note?? do you mean something else??
do you wish they did??? if they offered 1/35th an ounce of gold what would you do??
does the 3legal tender status of the note get you things that you desire or would you rather get 1/35th an ounce of gold with the note and then get some other things with the gold??
Frank:
“The “+1 oz worth of stuff bought” is to be paid for from future earnings, not current assets (via the IOU).”
If not for the IOU, he would have bought the same stuff with his other assets, which might or might not have included future earnings. The IOU doesn’t make the issuer any wealthier, so he has no more demand for goods than before, and there is no upward pressure on prices.
“The IOUs just create more claims on the existing stuff. Sure, in small quantities, people could work more hours or whatever to increase productivity and be able to meet these additional claims.”
With no IOU’s, the landowner would have bought candy in exchange for a square foot of his land. With IOU’s, he buys the candy with an IOU, which gives its bearer a lien against the same square foot of land. The IOU’s do not create more claims, they merely facilitate what is, at bottom, barter of one good for another. Increases in productivity are irrelevant. I’ve never said anything about productivity, although some of the old, fallacious attacks on the real bills doctrine acted as if productivity was relevant. The version of the RBD that I advocate says that its backing that matters, not productivity.
“saying the Fed gets an asset when it buys a bond is circular – it is getting one bit of paper back in exchange for another. These mortgage securities assets they are getting – are they getting assets? Really?”
The landowner, after issuing (say) $400 against the 1000 oz. worth of land he owns, could then print up 100 new dollars and use them to buy a $100 bond, denominated in dollars. The landowner’s assets and liabilities would rise in step, and the value of his dollars would therefore be unaffected even though he is backing a dollar with another dollar. Of course, if he acted like the Fed and got a bond worth only $60 in exchange for his $100, then that would be inflationary, since backing falls behind money-issue. But you talk as if the landowner might just as well have issued the new $100 in exchange for nothing at all.
Periods of free banking have virtually always involved fractional reserve banking. If they avoided inflation, it wasn’t because they avoided “issuing too many IOUS”, it was because they held adequate backing for the IOU’s that they did issue.
Still waiting to hear you, or anyone, answer my point about why 1 loaf=1 oz.=$1.
The IOU doesn’t make the issuer any wealthier, so he has no more demand for goods than before, and there is no upward pressure on prices. But according to you, the farmer has ‘created money’ by issuing the IOU, and thus, can spend the amount of the IOU that he couldn’t before. With no IOU’s, the landowner would have bought candy in exchange for a square foot of his land. See, this is what bothers me about your example–You assume that the farmer’s IOU will be accepted by the grocery store. Sure, go to any grocery store today and see if they accept your IOU. And if not, why, the store will just accept the title to a square foot of his land instead. This is not a realistic example, even in some imaginable free society, and not just today’s status quo. There’s also this question of confusion over IOU’s and money. An IOU is not money unless it is a generally accepted medium of exchange by society. Just as the grocery store is not likely to accept an IOU, most other businesses will not, either. If a piece of paper is issued by a bank and that piece of paper is a claim on an asset that the bank owns, i.e., it’s a certificate, then the paper is a money substitute and the asset is the actual money being traded. The certificate isn’t an IOU, but a title on that quantity of the asset. Federal Reserve Notes are “backed” by Treasury Bills, thus the FRN’s should be the money substitute and the the T-bills should be the money. But FRN’s are not certificates as a gold or silver certificate would be, because you cannot go to a Fed bank and claim what the FRN supposedly represents, because the Fed doesn’t treat FRN’s as certificates–they don’t entitle you to anything that they wouldn’t buy otherwise. Furthermore, we know that the Treasury bills are not money because if you do have some, you cannot use them at the grocery store to buy food or other goods and services. Thus, if the FRN is not a certificate or claim, it is a fiat currency, regardless of any “backing” that it may supposedly come from. The “backing” is just the mechanism the Fed uses to issue currency in whatever amount they want to put out.
“If not for the IOU, he would have bought the same stuff with his other assets, which might or might not have included future earnings. The IOU doesn’t make the issuer any wealthier, so he has no more demand for goods than before, and there is no upward pressure on prices.”
You’re going round in circles. Phrase it however you like – either he spends the IOUs AND the silver he would have spent without having created any IOUs and therefore the money supply has increased; or he keeps back an amount of silver corresponding to the additional IOUs under his mattress in which case there is no increase in the money supply and there is no problem, like i already said. If he has no more demand for goods than before, then some of his silver income is now unused and so he has silver lying around which he has chosen not to use and to use his IOUs instead. In this case, the IOUs are just property titles to silver – I’ve already said this doesn’t cause any problems so I don’t know why we’re debating this. The interesting case is quite obviously when the guy prints IOUs and spends them to get more stuff than he had before.
“With no IOU’s, the landowner would have bought candy in exchange for a square foot of his land. With IOU’s, he buys the candy with an IOU, which gives its bearer a lien against the same square foot of land.”
Circles again. This whole discussion was predicated on you saying that the IOUs were operating as money because of the good standing of the issuer. So now you’re saying that we don’t need IOUs and can use sq feet of land? ok, whatever – either way, if people are using the land as money in everyday transactions with x sq feet as 1 oz of silver, then this is adding to the amount of ozs of silver in circulation and will put upward pressure on prices.
If people are exchanging the land for stuff but are not using the land as money ie. the land is not qualified to be money as it is not in general marketable enough to be money, but people are just swapping land for candy on an ad hoc basis as and when they feel like it, then it may effect their cash balances yes.
But again, that is a different scenario. If most of the transactions in this economy are exchanges of land and you can lower your cash balances by simply bartering the land, then it makes sense to do this. This is not the point though. You stated that IOUs were being exchanged and they would be usable as future rental payments and therefore pass as money. In other words, people might accept the IOUs for two reasons; to pay rent on the land they want to rent OR (having no interest at all in the land) they might accept the IOUs in order to exchange them later for something else, and the IOUs are marketable enough to do this. Either they are marketable enough to be money or they are not, and each scenario is different – before this carries on, what scenario are we discussing?
(And I’m too tired to answer paragraph 3 – in it, you’re assuming the new things that I’ve pointed out above. And I have no idea what the different between avoiding issuing too many IOUs and making sure you have adequate backing for the ones you do issue is.)
I’m not the one going in circles. Start with a bank that receives 100 oz. of silver on deposit and issues 100 silver IOU’s. Then let the banker issue and lend 200 more silver IOU’s to a farmer, who offers a 200 oz. lien on his land. Each silver IOU must be worth 1 oz, even though the quantity of those IOU’s might have tripled. In effect, other assets besides silver are being coined into money.
If this happened in a small town, then the issue of 200 silver IOU’s might cause the town to export 200 oz. of silver, and this would not affect the world price of silver. If it happened in the whole world at once, then as the IOU’s displaced silver there would be a one-time fall in the value of silver to its ‘use value’. After that, the issue of additional silver IOU’s could not reduce the value of silver any further, so additional issues of silver IOU’s would have no further effect on prices.
“And I have no idea what the different between avoiding issuing too many IOUs and making sure you have adequate backing for the ones you do issue is.”
Having adequate backing for the IOU’s you do issue means that if you issue 100 silver IOU’s, you have at least 100 oz. worth of assets that you can use to buy them back. If you issue 300 silver IOU’s, you have at least 300 oz. worth of assets with which to buy them back. As long as the issuer has enough assets to buy back all the IOU’s he has issued, there is no such thing as issuing too many IOU’s.
Mike – you say
“In effect, other assets besides silver are being coined into money.”
Yes, that is exactly what is going on.
And it is also your view that because the IOUs are “backed” by the land, then there will be no inflation. This is your view is it not?
This is simply not true. For example, imagine a community which has members who are largely self-sufficient (each family grows their own food in their garden by hand) but each only makes one type of clothing or else is involved in growing cotton. There is 10 oz of silver held in someone’s vault, and property titles for this silver in circulation for this 10 oz which people use for the trades of the cotton and the clothes (once made).The land is not bought and sold – people have their own land, and that’s that. You declare that you have created property titles for your land and intend to use them to trade at 1 oz per 10 sq feet (assume people agree to this situation and value for the sake of argument). You have 100 sq ft of land – so now, the amount of “silver” in circulation is 20 oz. (Now, to be clear, I think we fail at this step – it makes no sense to me at all. But for the sake of argument, let’s say you propose this and people agree – and frb everywhere means that the evidence is on your side).
So you start spending the new IOUs and are changing shirts twice as often or whatever. One guy might change from making pants to shirts say. But if someone is making more shirts, he is making less pants – there will appear to be a “boom” in shirts at first but eventually things will even out and, whatever way you look at it, the output from the amount of hours worked and amount of resources used up in the production of clothing will be traded as before and be largely the same. The purchasing power that people’s cash balances must hold has not changed – each still wants the same “proportion” of this total amount of clothing and clothing resources. But now there are more IOUs than before.The amount of money in circulation representing these trades and the cash balances people want has increased and so the prices will, other things equal, rise.
This is an extreme case to show the principle. In the situation you described, it is harder to see – land is traded a bit to start with and then a bit more (via the IOUs) later after the IOUs are introduced. But it comes down to the same thing.
Frank:
Your objections are answered by the Law of the Reflux. As a simple illustration, suppose that people use silver coins as money, and one day someone (it could be anyone) mints a large amount of silver bullion into coins. If the amount of coins was already sufficient for people to conduct their business, then people will melt the coins back to bullion as fast as they are minted. The unwanted coins ‘reflux’ to bullion. Now, instead of minting new coins, someone issues silver IOU’s, fully backed by his stock of bullion. If people prefer the IOU’s to coins, then the coins will reflux to bullion. If people prefer the coins to the IOU’s, then the IOU’s will reflux to their issuer in exchange for bullion. If those new IOU’s, instead of being backed by silver bullion, were instead backed by an equal value of land, wheat, or any other good, the result will be no different. So when your 10 new IOU’s are issued as you described, then 10 oz. worth of silver or IOU’s will reflux, and the money supply is unchanged.
The question that is still hanging fire is whether the silver IOU’s from my example must always be worth 1 oz. of silver. A simple arbitrage argument says they must be. If the IOU’s started trading on the street for .99 oz, then everyone would buy IOU’s on the street for .99 oz., and take the IOU to the bank, where they get 1 oz., a profit of .01 oz. Once the bank’s 100 oz of silver are paid out, people will instead take their IOU’s to the bank in exchange for bank assets (IOU’s backed by liens on property) that are worth 1 oz. Once again the customers earn an arbitrage profit of .01 oz every time. This arbitrage process assures that the value of the (adequately backed) silver IOU can never fall below 1 oz.
Sorry, I can’t summon the energy for this now Mike. This whole discussion was predicated on you saying the land owner issued IOUs and they were used as money alongside the original silver. You then went back on this so I asked you to clarify – and we decided to proceed on the basis that they were being used as money alongside the silver. Now once again you’re explaining to me that coins and IOUs will “reflux” in and out of use as money, negating all the previous discussion about what happens to the prices if the IOUS are in circulation with the silver.
I think there’s a reason you can’t stick to the assumptions. It’s because what you are proposing doesn’t make sense. What if EVERYONE issued paper money for EVERY asset they have (and therefore all the IOUs are “backed” as you say) and did or tried to use them as money? I presume constant prices is what you would expect after such an event. I’m sorry but you’re simply wrong.
At least one of my posts has been lost in transmission, and this new blog system that fragments the thread is taking too much time. I’ll wait until things are working better to try posting again.
“Just as the grocery store is not likely to accept an IOU, most other businesses will not, either.”
is the current paper-dollar-currency an iou or or is it similar to gold/silver money only in the sense that gold/silver coin (or title to) would be final payment and the dollar is final because of govt thugs???
if this is true…..”there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits, which latter constituted fiduciary media.
http://mises.org/daily/3556
if true…..is final payment of the fiduciary aspect of the current dollar-currency different only in the sense that is is ‘a delivery of paper-dollars sitting somewhere ready to be delivered (FDIC decree or transfers???)
economagic.com says m1 went from about 1.1 trillion in 2000 to 1.8 trillion in 2010. a 700 billion dollar increase over a 10 year period.
is that in some way far different than the amount of gold/silver money increase that would have occurred using gold/silver money to get more gold/silver out of the ground?????
would a better economic effect have taken place using gold/silver money to get more gold/silver money into the economy???
does anyone have information that would show how many of the mining expeditions were funded and carried out during the gold rushes in california??
was it delivery or gold and silver coin to the west from the east or from mexico??? was it more likely paper dollars that exceeded the amount of existing gold and silver? was equipment mostly given on credit for soon to be extracted gold/silver???
“if a few iou holders convinced a chemist to make a pesticide that would increase the farms yield and he accepted them yields could increase and prices decline.”
“convinced”? I presume you mean they gave him IOUs for investment in a project which means that he may – or may not – increase yields.
i said “THAT WOULD INCREASE THE FARMS YIELD” as i am sure has happened over the course of agricultural history. if the ious were for a stake in the newly pesticided land the and yields increased and veggie prices dropped…veggies being a much larger portion of the consumers incomes than a few organic compounds most outlays would decrease. the chemist could also just devote extra time to the pesticide project in acceptance of the ious that give him a stake in the higher output and reduced prices.
i just dont think your claim is 100 percent true.
Firstly, you don’t know a priori the difference between: the people who are going to invest the money so as to increase yield; those who genuinely think they will increase yield but aren’t good enough; and those who always had the intention of saying they would increase yield but of actually spending the IOUS for their own purposes (because they don’t want to go to the hassle of making something people want and getting silver that way, they’d rather just con you into giving them IOUs).
So if your theory rests on only giving the money to people who will increase yield, then so long as it is only you and Warren Buffet doling them out and picking winners, all will be well.
Secondly, I think you are missing the more fundamental point anyway. Are you thinking through exactly what increasing the yield means? If someone gets IOUs, then there are no MORE resources, they have claims only on the existing resources. Those existing resources that they appropriate had a certain productivity before. Now, only by virtue of you having some IOUs which people will accept as money, you are using these for some other purpose (crops or whatever). To be “better” for all, your use would have to be not just creating something “useful” but something more valuable to the community than the previous usage of theose resources was producing. If someone hands you IOUs and you spend them, how could you POSSIBLY know this is true?
I’m not sure which claim of mine you don’t think is 100% true. Is it the one that says
“So how can a “gold standard” put a break on inflation?”
should a break be put on inflation? what do you mean by inflation?
“The reality is that gold has not increased in value, but that the dollar has depreciated through inflation.”
can you say that gold has not increased in value? is there ever more gold sought after?
is it a reality that because people have more dollars they have more purchasing power??
if the existing resources can be damaged by bugs and a pesticide increases the viability of that resource i dont see why prices would have to rise
Those existing resources that they appropriate had a certain productivity before. Now, only by virtue of you having some IOUs which people will accept as money, you are using these for some other purpose (crops or whatever). To be “better” for al
no..i didnt say better for all i said a higher yield. get with it frank
Explain to me precisely what “higher yield” means then please.
So, you make a snarky comment because of a possible misunderstanding of a single three word phrase in my post and now won’t even clarify what you meant?
Is it because in trying to define “higher yield” precisely, you realised that you were thinking only of the “seen” yield produced by the receiver of the IOUs and were ignoring the “unseen” loss in yield caused by the withdrawal of resources from the previously existing areas of the economy?
Non-commodity money does not create any more resources, it does only one thing – it rearranges existing resources ie. it allows the receivers of the IOUs to rearrange the existing structure of production and allocation of resources by spending them. The big question you and other defenders of paper money need to answer is why you think the second arrangement of resources is better than the first. It’s really, at root, quite simple.
is the current paper-dollar-currency an iou or or is it similar to gold/silver money only in the sense that gold/silver coin (or title to) would be final payment and the dollar is final because of govt thugs???
if this is true…..”there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits, which latter constituted fiduciary media.
http://mises.org/daily/3556
if true…..is final payment of the fiduciary aspect of the current dollar-currency different only in the sense that is is ‘a delivery of paper-dollars sitting somewhere ready to be delivered (FDIC decree or transfers???)
economagic.com says m1 went from about 1.1 trillion in 2000 to 1.8 trillion in 2010. a 700 billion dollar increase over a 10 year period.
is that in some way far different than the amount of gold/silver money increase that would have occurred using gold/silver money to get more gold/silver out of the ground?????
would a better economic effect have taken place using gold/silver money to get more gold/silver money into the economy???
does anyone have information that would show how many of the mining expeditions were funded and carried out during the gold rushes in california??
was it delivery or gold and silver coin to the west from the east or from mexico??? was it more likely paper dollars that exceeded the amount of existing gold and silver? was equipment mostly given on credit for soon to be extracted gold/silver???
“I’m not the one going in circles. Start with a bank that receives 100 oz. of silver on deposit and issues 100 silver IOU’s.”
i guess the bank hold the 100 ounces of silver for when the ios make their way back to the bank??
” Then let the banker issue and lend 200 more silver IOU’s to a farmer, who offers a 200 oz. lien on his land. Each silver IOU must be worth 1 oz,…”
it seems that 100 ous would be worth 100 ounces and 200 silver ious wouldnt have any silver for owing..only some land that had a market price one day of 200 ounces of silver.
← Previous Comments
Comments on this entry are closed.