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Source link: http://archive.mises.org/13499/the-new-push-for-a-global-currency/

The New Push for a Global Currency

August 6, 2010 by

Under a gold standard, the physical metal is the limit, and the market is the master. Under a global paper system, the paper provides no limit whatsoever. And the politicians are the masters. FULL ARTICLE by Llewellyn H. Rockwell, Jr.

{ 104 comments }

J. Murray August 6, 2010 at 7:33 am

Such a bizarre world the IMF lives in. They somehow believe changing the color of the ink on the bill and forcing all 7 billion of us to use it will make our troubles go away. Making a central bank bigger just makes the failure bigger. A global version of the Fed isn’t going to fix anything, just make everyone fail at the same time.

Baten August 6, 2010 at 8:15 am

I am sure that they (the IMF and political elite) know this thing is going to implode at some point in the future. They just hope that it is far enough that it will not happen in their lifetime, so they will make a ton of money/gold by the time of the collapse.
The more I look at things, the more I came to the conclusion that for the state system to collapse, we need to pass through a phase of united world government that will finally make things too much to bear for everybody – and spark the movement to get rid of the state alltogether.
The world government collapse should give rise to a world of small libertarian city-states, in which the only service provided by the state should be a form of police that defends persons and property.

Nick Bradley August 6, 2010 at 10:33 am

Why would it implode? There is so much slack capacity (if they had access to capital) in the developing world that there might not even be any price inflation.

And who said anything about a world government? Not even the marxists, like Hardt and Negri, authors of ‘Empire’, foresee the emergence of a global state or even the resurgence of nationalism.

This is nothing more than global wealth redistribution from the global middle and upper middle classes to the global elite and the global working class: China India, Brazil, Vietnam, the Philippines, etc.

billwald August 6, 2010 at 3:31 pm

Exactly! But not because they care about the peasants in 3rd world countries. The purpose is to destroy the middle class and regress to the world historical standard of 80% slaves and serfs and 5% stinking rich. The rest will be professional people and small business owners.

I wish people who knew better would stop referring to paper money. 90% of US money in circulation is electronic transfer. Paper currency is less than 2% and half of that is outside the country. It is paper currency which makes large scale corruption and drug dealing possible.

Nick Bradley August 6, 2010 at 10:22 am

Its quite logical from the IMF’s standpoint: they would redirect capital from the West to the developing world, and the Global Elite who run the IMF would directly benefit from the explosion in output in the Third World.

Christopher August 6, 2010 at 8:45 am

What if The Fed has instructed the banks to NOT lend their excess reserves because both the banks and The Fed know that eventually The Fed will have to re-exchange all those mortgage back securities?

Maybe the guys at the IMF haven’t caught on to this?

Nick Bradley August 6, 2010 at 10:44 am

The reserves aren’t being lent out because there is nothing worth investing in.

The Fed understands this, and is perfectly content with letting the banks fix their balance sheets with interest arbitrage from the reserves.

Banks are borrowing those reserves at 0.25% and loaning it back to the treasury at 3% (10-year treasuries). When the banks feel they can make loans with a low risk of default, they will sell their T-Bills and make loans. Yields on sovereign debt and interest rates will shoot up, which the banks will benefit from (since they’re already sold their T-Bills).

Christopher August 6, 2010 at 11:27 am

“The reserves aren’t being lent out because there is nothing worth investing in.

The Fed understands this, and is perfectly content with letting the banks fix their balance sheets with interest arbitrage from the reserves.”

But do we know that for certain? Could you imagine the uproar if it became public that the switch was merely designed to give the appearance of stability?

Nick Bradley August 6, 2010 at 11:40 am

We know this because the banks are buying treasuries. Since they’re buying treasuris, the only other scenario is stealth monetization. Where the Fed is giving money to banks to buy treasury debt (real monetization is when the Fed directly purchases debt); i see this as unlikely because it would have been identified already — no way you can keep a secret with a thousand banks and all their employees.

I was reading a newspaper article the other day and it highlighted a poll of Americans on Fed policy. Three-quarters of Americans are unhappy with Fed policy, but the majority of those that are unhappy think that the Fed isn’t doing enough to get banks to loan out money. People would be VERY upset if they discovered this was deliberate (I don’t think it is).

Abhilash Nambiar August 6, 2010 at 9:10 am

The push for a global currency will be meaningless without the push for a global government. Otherwise what we will end up with will be a stateless central bank. How can a stateless central bank force its currency on anyone?

Russell August 6, 2010 at 9:19 am

True but who is going to push for a global government and more importantly, who wants one. It will certainly lead to even more global decisions to favor one group at the expense of another by people who have no clue or interest local concerns.

Nick Bradley August 6, 2010 at 10:19 am

A global state would be unnecessary.

It would be a post-state, surpranational entity.

The Elite in the West would be 100% behind this because they would be first in line to access Bancors.

And the more developed developing world (China, India, Indonesia, Brazil, Vietnam, Russia, Bangladesh, the Philippines, and Turkey — most of the world’s population) would be doing backflips because they would get equal access to capital — the West currently has the advantage of a stable monetary regime.

How would resistance form??? You would need to see strong public backlash in Western Countries.

billwald August 6, 2010 at 3:35 pm

Global banking, NOT global government. The machinery is already in place, World Bank. IMF . . . .

Russell August 6, 2010 at 9:33 am

Good analysis. The problem is political. Governments will not give up the right to print money so they rely on all sorts of cockamamie (Keynesian and Monetarits) theories to support their right to create fiat money.

The problem with Monetarism and Keynesianism is that these theories were formed in response to business conditions under severe strain as a result of a poorly designed money and banking system. These schools do not start with trying to identify a simple, basic economic principle that is strong enough to serve as a firm foundation for efficient economic growth.

The obvious common sense principle that is consistent with human nature is that one should create value and add it to the economic pie before one is permitted to share in the economic pie. There is nothing surprising about this. In fact most people believe that they first have to work to obtain a share of the pie. It should be non-controversial.

Requiring creation of new value is the best way to encourage continuous growth of the economic pie. It benefits anyone who is willing to work for his or her share. Whoever creates new value that they do not immediately consume can do with it what he or she pleases including helping family, friends or those less fortunate. He or she can vote for governments that tax some of this new value to provide whatever services he or she believes is appropriate.

But it is not because following this principle would constain government spending what it was able to take in in taxes.

Anyone who can just create money out of thin air by, say, printing it in their basement has no incentive to work or be careful what they do with it. Governments like the ability to print money because politicians can avoid the politically responsible requirement of raising taxes and then facing the voters.

Were this principle of requiring the creation of new value before sharing in the economic pie followed, business cycles, government default, bank default and inflation, could be minimized. This would require making some very simple, but apparently politically impossible to make, changes in the system: Require a) 100% reserve banking and b) that all paper money to be 100% backed by gold.

This regime would not eliminate investment risk taking and losses. But the losses would be borne by the risk taking investor whose assets are dissipated rather than by the dissipation of the value of assets owned by the rest of the market participants. Dissipation of others assets is what occurs when a borrower of fiat money fails to repay the issuer. The issuer could be either Federal Reserve which has no constraints whatsoever on the creation of fiat money or its proxy, banks who issue credit under the current fractional reserve banking scheme.

The big academic objection to the gold standard is that there is not enough gold to support new economic growth. This is fallacious. The value of money is always relative. Prices go up and down in a free market based on supply and demand. When gold is serving as money, it is simply being used as a marker entitling the holder to his allocate share of the economic pie. The value of money at a given point in time fluctuates depending on the amount of money people have that they are willing to spend and what is available to them for that money which in turn depends on the size and composition of the economic pie. So long as the money can be sufficiently dividable, as is possible by issuing notes backed by smaller and smaller amounts of gold, there will always be sufficient money to divide up the economic pie and accommodate any growth engendered by more work or more efficiency or more creativity.

Prices will simply go down and money will be worth more if there is growth in the size of the economic pie. Conversely, if the pie shrinks, the money is worth less and prices will go up. This is true whether the money is gold backed or something else or backed by nothing.

From these principles, it becomes apparent that the important characteristic of money is that it should be fixed in quantity (but easily dividable into smaller pieces). This is the antithesis of the system we now how with the Federal Reserve or any central bank and the fractional reserve banking system able to create money out of thin air. They are like the guy with the printing press who does not have to work to obtain money while everyone else does.

This money created out of thin air send false demand signals into a market that views money as representing the creation of something of value. The Federal Reserve and Banks create nothing of value other than a new claim against the existing economic pie that dilutes everyone else’s claim. Now it is possible that this new claim could result in an investment that creates new inventions that ultimately increase the size of the economic pie, but people are a lot more careful about their investments when they have some skin in the game, i.e., had to first work for the money they invested. The creation of fiat money results in a heads I win, tails you lose situation for those who issue the fiat money. In the subprime mortgage market, it resulted in huge mal-investment of other peoples and waste (booms and busts). It exacerbates the size of the swings in boom and bust cycles. It is an unsound foundation for an economic system.

Everyone who criticizes the gold standard assumes that the gold standard cannot work because of the experience after WWI and WWII where countries could not stay on the gold standard. What no one really considers is that governments were never really on a 100% gold standard. Banks were allowed to practice fractional reserve banking and governments issued much more money than they had gold to back it up. I think the U.S. in the 30s held about a 20% gold reserve for the gold redeemable dollars it issued. It was a highly leveraged situation that could not withstand the inevitable swings in economic behavior it engenders.

So when the inevitable leverage induced boom and bust came along, of course they couldn’t stay on the fractional reserve gold standard. This led to Keynes criticizing the gold standard but what he was really criticizing was the fractional reserve gold standard, a highly leveraged construct, which has inherent instability. But Keynes idea apparently was to replace the fractional gold standard with no gold standard which was even worse as there is no tether to prevent the creation of fiat money. And that is the system we have today.

Had the government been unable to print money not backed 100% by gold in the 20s, it could not have created the excess currency that lead to the bubble and crash in 1929. Had there been 100% reserve banking in the 30s, there would have been no run on the banks because people would have known that their money was indeed safe. Growth under a 100% gold reserve banking system would be slower and steadier with smaller bubbles and smaller busts. This would result in fewer wasted assets and more stable and greater longer term growth. People would sleep better at night.
But governments don’t want to give up the ability to create fiat money rather than being forced to tax people for money they want to spend. This is the real barrier to adopting a responsible monetary regime and the reason this article is looking evidence of the implementation of a gold standard despite government opposition.

If voters really understood the unsound nature of the current system, there would be some hope for change. Imparting this understanding is the admirable goal of the Mises Institute. I fully support it.

guard August 9, 2010 at 1:09 am

Thank you for this brief and to the point analysis. The actual amount of physical gold available is immaterial, as you point out, because it can be divided into any arbitrarily small amount. Another objection to gold is that it has no “real” value, having few practical uses, and therefore it is irrational for people to impute any value to it. This is true, but irrelevant, since the fact is that people DO impute value to gold and always have. This “irrational” valuation of gold is not going to change. Bottom line is that there are physical limits to how much gold is available, even if the earth is a hollow shell filled with gold. Electronic money on the other hand…

Zorg August 9, 2010 at 1:29 pm

Of course, the answer to that objection is that nothing has “real” value.
Things have value – in an economic sense – to you if you value them.
And it’s perfectly rational to value something that others value
almost universally. It would be irrational, on the other hand, to push
a system onto people by force such as the Fed system.

Gold has never been about “practical uses” like other commodities
as it has always been a luxury good due to its rarity. That is why it
has a perfectly practical use as money. It’s great at being money. It’s
not so great at being a food or a hand tool.

All of these objections you hear to gold-as-money are silly. People
repeat them mindlessly because they are put out there by the ignorant
establishment “economists” and political hacks.

Russell August 10, 2010 at 4:59 pm

Amen

Marco August 6, 2010 at 9:52 am

You guys seen this?

http://www.bitcoin.org/

Russell August 6, 2010 at 12:10 pm

Very interesting!

Nick Bradley August 6, 2010 at 10:14 am

As with any interventionist act, there would be winners and losers.

The winners:

- ‘Global Cities’: as with any fiat regime, those who can access to the new money first benefit the most. In this case, it would be those connected to global finance; their host regions would benefit as well. So we’re talking about New York, London, Frankfurt, Shanghai, Hong Kong, etc.

- The ‘BRICs”: another big winner would be developing countries. Currently, most of the developing countries, such as India, China, Brazil, Vietnam, etc all have interently unstable monetary regimes and capital invested there demands a premium — or it is scared off due to monetary uncertainty. But if a Western Monetary regime was imposed on these countries, they would be a much more attractive place to invest. India is a great example — their horrendus monetary policy scares away hundreds of billions in capital every year. But if the monetary risk of doing business in India is the same as in Western Europe or the US, then they’re going to go to India.

So, the developing world will dramatically improve its ability to access capital.

Losers:

Members of the regular economy in countries with stable monetary regimes. Economic actors in the US, Japan, and the EU who are more removed from the global finance market will suffer. There will be relatively less capital available because it will flow to the developing world.

Summary:

A global monetary regime would probably increase global total output because it would make the developing world a far more attractive place to invest. Imagine if India had the same access to capital that the West has?

China, India, Indonesia, Brazil, Vietnam, Bangladesh, the Philippines, and Turkey account for over 50% of the world’s population — and all suffer from a lack of access to capital (partly due to unstable monetary regimes).

If capital were free to invest in these countries, output would skyrocket. But the global middle class and upper middle class (the US and Western Europe) would suffer (although they would get cheaper goods and servies). The Global Elite would become dramatically wealthier in the process.

John August 6, 2010 at 10:33 am

What is the universal gold standard but a universal currency? At least that was the opinion of Von Mises.

J. Murray August 6, 2010 at 10:41 am

The difference is that gold can’t just be willed into existence in any quantity desired just becuase the one in power wants to buy something. The IMF and other major actors don’t want a gold standard for that reason. Inflation is the best way to tax a population without them getting up in arms. To get gold, the IMF either has to make something that the person wants to buy or has to outright confiscate it. The problem is that the IMF doesn’t do anything we’re willing to pay for and outright confiscation will ruffle feathers among us commoners. Going the paper route avoids those two problems and allows the IMF to blame outside forces when it inevitably fails (see how the Fed, the current Congress and President are behaving for example).

Nick Bradley August 6, 2010 at 10:48 am

J Murray,

This is less of a tax than a relative redistribution of wealth from the glboal middle class to the global working class and the elite.

The Global elite will be the first to access new capital, and the developing world will have better relative access to capital vis-a-vis the West.

J. Murray August 6, 2010 at 11:34 am

Precisely, and there’s no better way to redistribute wealth than to inflate it away. A gold-based currency doens’t have this feature, so the only way to redistribute it is to forcibly take it away, which creates unrest.

Nick Bradley August 6, 2010 at 11:42 am

But unless people are packing gold coins around, there is going to be paper gold, and if that’s the case there is gonna be some “FRB-ing” going down.

There is also the possibility of Fiat Gold: look at the gold ETFs.

Russell August 6, 2010 at 12:14 pm

The goal is not redistribution of wealth. It is creating an economic system most efficiently allocates scarce resources to create the largest economic pie possible with the least waste. Once you have created it, what you do with your share is your own business. You can keep it, give it away, or give it to the government to redistribute.

Inflation undermines efficient use of scarce resources because it distorts the pricing signals which signal where the demand really is.

Nick Bradley August 6, 2010 at 1:09 pm

Are you saying that a global fiat currency would not redistribute?

Because if the goal is to simply grow the pie, without regards to rights, a global fiat could win hands down:

1. with a common currency, international trade would proliferate.
2. With a common monetary system, the 50% of the world that is a developing country (excluding the backwaters like Pakistan and Iran), these economies get access to capital

J. Murray August 6, 2010 at 1:16 pm

They wouldn’t have any more access to capital than they do now. The Dollar is already effectively the world currency. Turkey’s decision to use a local currency doesn’t block them off from international investment. The only reason they don’t have access to capital is the ones with the capital don’t trust their regime. The same goes with most every other third world nation. The limiting factor isn’t some irrational refusal to use the local currency, it’s the fact that investors don’t know if the local government will swoop in and nationalize what they just built. Excessive government abuse is the main feature in nearly every third world nation on the planet. A single world currency won’t change this basic fact.

Nick Bradley August 8, 2010 at 3:56 pm

Russell,

Of course those who produce have the right to the fruits of their labor, that is my point: even though aggregate production would grow due to subsidized third-world growth, it would occur at the expense of the Western middle class.

Nick Bradley August 6, 2010 at 3:33 pm

J Murray,

A global currency regime would foster uniform inflation rates (for the most part) and would remove independent monetary policy.

Unpredictable, incompetent monetary policy by a third world country is frightening to an investor.

Look at global inflation rates — they’re all over the map!

https://www.cia.gov/library/publications/the-world-factbook/fields/2092.html

A global monetary regime also hammers in similar banking and financial structures, so the third world will become more familiar and inviting to investors.

Russell August 6, 2010 at 8:35 pm

Nick,

When you say “simply simply grow the pie without regard to rights”‘, you are missing a fundamental point. Who has a more fundamental right to the fruits of labor than the one who performed the labor? Should I have the right to tell you to sharenthe money you earned with me? That is no basis for a sound economic system because there are no limits and it will discourage work and productivity. Without work and productivity added to the market, there is nothing to share?

Ohhh Henry August 6, 2010 at 10:57 am

Fiat money needs an army in order to compel people to accept its meaningless IOUs on pain of death. Standing armies need fiat money to exist and fiat money needs an army. I think that you will find that they have been entwined throughout history, as neither can exist without the other.

For now and the foreseeable future there is only one source of power which is capable of enforcing worldwide paper money. The bancor will go nowhere unless the US military gives it full backing – in other words, unless the bancor is USD_2.0 run out of Manhattan via its satellite office in DC (or rather, out of the Pentagon in Virginia). If this scheme doesn’t fly then the amero will be trotted out as a second-best option in order to have a USD_2.0 “lite” which can at least dominate the western hemisphere.

Nick Bradley August 6, 2010 at 11:17 am

Henry,

Under the current system where the USD is the hegemonic currency, you are correct. The USD is backed by the Pentagon as well as other instruments of national power (sanctions, trade deals, clout in WTO regulations, etc.).

But under a global currency, no such coercion is necessary:

The majority of the world’s population — those who reside in the ”
more developed” developing world (China, India, Brazil, Indonesia, Philippines, etc) would directly benefit from a global currency. The biggest comparative disadvantage for the working class economies is their relatively underdeveloped financial system and the uncertainty in their monetary systems. What a global currency does is neutralize this competitive category, and the BRICs improve their ability to access capital.

The Global Elite that run the Western Countries, whose populations would be the most hostile to a global currency, would also benefit (obviously).

So, the threat is internal — domestic. That means Western countries would have to enforce the use of the BanCor domestically. They can accomplish by (again) seizing gold, and making the BanCor legal tender (and requiring all tax payments to be be made in BanCors).

Zach Bibeault August 6, 2010 at 11:04 am

“Every proposal of a drastic solution such as this always comes with a warning of some equally drastic consequence of failing to adopt the proposal. In this case, the IMF actually raises questions about the survivability of the dollar itself. “There has been a long-running debate speculating on whether the dollar could collapse,” says the paper. It raises the worry that if a run on the dollar materializes, central banks could attempt to race each other to dump it permanently.”

Typical awful Keynesian logic — the likelihood of monetary chaos, and thus the likelihood of massive dumping of a fiat currency, is far greater under their ridiculous global currency idea.

Mike Sproul August 6, 2010 at 11:15 am

If money is convertible into gold at a fixed rate, then the government will let the quantity of money outrun its backing, and it will no longer be able to maintain the old rate of convertibility. The government will have to devalue or face a run. A gold standard does not protect against that.

If money is not convertible, then as the quantity of money again outruns its backing, the value of the money will drop to reflect the new level of backing per currency unit, and we get the same devaluation as before, but without the bank run on the government.

On the other hand, if so-called libertarians would stop calling for a gold standard, get back on the right track and just demand that the government stop meddling in money and banking, then all of these government-created problems would be handled by a competitive banking system, which would issue whatever kind of money survives the test of the market.

Nick Bradley August 6, 2010 at 11:19 am

Mike,

Good points on the virtues of free banking and the pitfalls of a gold standard.

but what you fail to mention is the Fractional Reserve Banking, regardless of its mechanism, encourages bubbles and malinvestment.

That’s why Rothbard simply concluded that FRB should be declared an act of fraud — that would solve the problem.

J. Murray August 6, 2010 at 11:31 am

The thing is, many of us are proponents of free banking, where people use whatever they want as money. It allows for fractional reserve banking, but depositers are given the choice to determine if they’re willing to deposit in such a bank or not, and even determine the degree of risk they’re willing to engage in by deciding what kind of reserve they’re willing to deposit with. By having competing currencies and competing banking models, it keeps many of the problems of the fiat system in-check, mainly holding inflation in check and placing strong limits on reserve ratios to keep banking customers as any kind of inflation or excess fractional reserve lending will scare away customers to competing banks and competing currencies.

The reason the libertarian movement seems caught up in the gold standard is many of them are recent converts to the political philosophy. While many free banking libertarians believe the gold standard will be the inevitable money of choice in the long-run (gold is difficult to manipulate), newer libertarians shedding statist philosophies tend to confuse this as a policy decision. Further, newer libertarians haven’t come up to full speed on personal choice and liberty. If it’s my choice to deposit with a bank that engages in fractional reserve lending, that’s my decision. It does have its advantages as I am trading away a portion of my demand deposit for loan as opposed to paying a monthly fee to keep my money in their vaults like a full reserve bank would likely require. Fractional lending is just one vehicle of revenue generation and payment for services. The only way I would call it fraud is if I am either forced into using that system (like modern banking under the Federal Reserve) or if the reserve ratios are not properly advertized in the depositor agreement.

Nick Bradley August 6, 2010 at 12:05 pm

I do believe Free Banking is better than the current system; shoot, even fully-competitive fiat currencies would be better (i.e. getting rid of legal tender laws). But its still FRB, is fraudulent, and will lead to malinvestment and bubbles.

I’m almost an anti-gold bug. By every objective measure, gold is either overpriced or fairly priced…yet these crazies think its going to go to $10,000 an ounce or something like that. Take any measure of Gold’s value prior to 1913 and adjust it to today…it is overpriced.

Perhaps the best is Gold-in-circulation to GDP.

Since Gold is a medium of exchange, the amount of gold in circulation should keep up with the amount of economic activity. So Global GDP is up 40x since 1910, so the supply of gold should be 40x larger to be at $20 an ounce, correct? I think its gone up 10x.

Same for the money supply.

If you look at the CPI, Gold should by $400 an ounce.

Russell August 6, 2010 at 12:23 pm

Your observation is consistent with the normal academic objection to the gold standard, i.e., that there is not enough gold to support new economic growth. I think this is fallacious. The value of money is always relative. Prices go up and down in a free market based on supply and demand.

When gold is serving as money, it is simply being used as a marker entitling the holder to his allocate share of the economic pie vis a vis other holders of money. The value of money at a given point in time fluctuates depending on the amount of money people have that they are willing to spend and what is available to them to buy for that money which in turn depends on the size and composition of the economic pie.

So long as the money can be sufficiently dividable, as is possible by issuing notes backed by smaller and smaller amounts of gold, there will always be sufficient money to divide up the economic pie and accommodate any growth engendered by more work or more efficiency or more creativity or some combination thereof.

With economic growth and a static amount of money, prices will simply go down and money will be worth more. Conversely, if the pie shrinks, the money is worth less and prices will go up. This is true whether the money is gold backed or something else or backed by nothing. anything that causes the pie to shrink is bad as is anything that increases the amount of money without increasing the size of the pie (like inflation).

Nick Bradley August 6, 2010 at 1:13 pm

I don’t think you understood my argument.

Since the gold supply has not grown as fast as GDP growth, the pirce has to be higher than $20.67 the historic (pre-1913) price for an ounce of gold. So if the gold supply doubled, and the economy went up 40x, then gold should be ABOUT $400/oz, right?

And if the gold supply stayed static, the price should have went up 40x, right?

Usually when confronted with these facts, gold bugs just stop responding.

J. Murray August 6, 2010 at 1:28 pm

GDP and the price of gold aren’t remotely connected. The problem is that you’ve confused GPD with national wealth and commodity pricing. GDP is designed specifically to justify government spending and monetary inflation as the GDP is not adjusted to account for money growth and considers government spending a net positive. I would say the primary reason for the silence is that no one has approached them with the confused notion that gold prices and GDP should increase at the same pace.

Basically, gold is just another commodity on the market. If I were to, say, attempt to correlate our economy through CPUs, we would run into a similar confusion, just in the opposite direction. If the GDP is 2x greater today than it was in 1985, how come CPUs cost half as much? The same question can be raised no matter what commodity you chose. Wheat, soybeans, oil, etc.

Further, GDP is calculated via transactions. The value of an ounce of gold has no impact on this as 1 ounce of gold traded 10 times generates more GDP than 2 ounces of gold traded 4 times. Gold valued at $300/ounce traded 10 times generates a higher GDP than gold valued at $900/ounce being traded twice. GDP and the relative value of the money aren’t closely connected, the real key to GDP growth is velocity and volume of trade. More voluminous trades happening more frequently generates the GDP growth, not the value of the money.

Hence why it makes perfect sense that gold can be 58 times the price of the 1912 level while the economy only 40x the size of the 1912 GDP. Between the far flung removal of money value from GDP and the fact that GDP is a questionable statistic, i would be highly surprised if the two did manage to match up in growth rate.

Nick Bradley August 6, 2010 at 3:44 pm

No, the problem is that you’re not actually reading what I’ve written.

You are correct that GDP is NOT the same as national wealth. What GDP is, as any austrian will tell you, is an aggregate measure of all economic activity going on in a country. And since money (gold) is a medium of exchange, it should increase with GDP.

money (gold) is used to facilitate transactions, and the more transactions or activity there is, the more money there should be. In a free market, the supply of gold produced would grow with economic growth.

so if the price of gold can’t be tied to growth in economic activity (GDP), can’t be tied to the price of goods and services, and can’t be tied to the money supply, how the heck to gold bugs claim that the price will go up.

Its a sign of psychosis.

If you look at how much ‘stuff’ an ounce of gold buys, its even cheaper! Gary North has pointed out that an ounce of Gold has always bought a finely tailored men’s suit, and that’s the same today.

ABR August 7, 2010 at 1:18 am

“In a free market, the supply of gold produced would grow with economic growth.” — That’s insane! The supply of gold could remain static while an economy boomed.

tkwelge August 7, 2010 at 1:29 pm

“If you look at how much ‘stuff’ an ounce of gold buys, its even cheaper! Gary North has pointed out that an ounce of Gold has always bought a finely tailored men’s suit, and that’s the same today.”

You are cherry picking examples. Depending on the product, an ounce of gold buys a lot more than it used to. In fact, for most products, this is the case. As for your other points, you have to realize that the demand for gold for commercial/industrial uses has increased. The value of gold as money isn’t the value of gold itself. It is the fact that a gold based currency would limit the ability of banks to expand credit artificially.

J. Murray August 7, 2010 at 8:01 pm

Uh, I did read what you wrote. The dollar price of gold has no bearing on GDP levels. It’s just how many green pieces of paper we are willing to trade for it. The value of a currency has nothing to do with GDP. The two aren’t linked.

Nick Bradley August 8, 2010 at 3:58 pm

ABR,

Of course the supply of gold can remain static while the economy boomed, but the price would go up and there would be an incentive to produce more gold (or introduce more gold into the market).

Eric August 6, 2010 at 12:23 pm

I’ve struggled with the notion of FRB being fraud as well. I ask myself, how can it be fraud if everyone knows they are doing it and voluntarily deposits their money into the banking system.

Of course the system we have now is not voluntary, and that is the problem.

I tend to think of fraction reserves as sort of how an insurance company works. You deposit funds into the insurance company, and instead of a demand account, you have a contract which states how you get your withdrawals. If such and such happens, you can withdraw this and that amount of funds. The insurance company hires actuaries to compute how much reserves to keep based on probabilities of withdrawals (e.g. mortality tables in the case of life insurance). But it is clear, your ability to withdraw is dependent on the claims paying ability of the company.

But an insurance company, like an FRB can have what amounts to a run. Suppose there is some sort of event, earthquake etc. that the insurance company can’t pay everyone off because too many claims occurred at the same time. Do we call this fraud? What if the insurance contract states that in this sort of an event, they pay claims in proportion to whatever reserves they have at the present time. I don’t think it would be fraud in this case.

FRB could be setup with the same sort of contract.

I remember as a child in the 1950s looking at my first passbook at a savings and loan. I was puzzled by the statement on the back that I had to give 90 days notice of any withdrawal. I asked my dad and he said, “oh that’s just a technical requirement, don’t worry, you can get your money out at any time”. I think that disclaimer eliminated the fraud, assuming 90 days would be enough time for them to get their reserves in order.

Russell August 6, 2010 at 12:29 pm

From a strictly legal point of view, it is not a fraud, it is just a bad system because economically. It sends false demand signals into the economy creating apparent, but false, demand signals (this is where the economic fraud comes in). This in turn causes mis-investment, investments that would otherwise not have been made if more accurate demand signals were not distorted by the inflationary currency. It causes less efficient allocation of scarce resources.It is a bad system. Like the houses in the story of the three pigs, it is a house made of straw. If you want a house made of bricks, back the currency with gold and get the government out of the currency and banking business and ban fractional reserve banking.

Eric August 6, 2010 at 12:53 pm

Aren’t the false signals a result of an artificial interest rate being set too low or too high? I’m not sure how this would occur if there wasn’t a central bank coordinating all the interest rates of all the banks – through force.

With free banking, I would think that the market would force interest rates to be, well, the true market rate, because of competition. And therefore, if the interest rate is not artificial, then it should be the best signal of how many real resources have been saved. That should eliminate the problem of mal-investment clusters.

J. Murray August 6, 2010 at 1:33 pm

Exactly, it’s the interest rate that is the problem. The removal of a central bank and retaining of FRB in a free banking environment would not be able to manipulate the interest rate. People would be highly unlikely to deposit into a bank that states they can only guarantee that 10% of their assets are available for withdrawl and credit can only go so far as how much currency is available from savings. The only reason the interest rates can be held so low for so long is not fractional reserve banking but the existence of a central bank that permits borrowing at those low interest rates to lend to borrowers. While the Fed may deny their impact on long term rates, the common practice is to borrow short term and continually roll over the loan to the Fed to maintain a 30 year vehicle. In effect, short and long term rates are fairly close since both are primarily funded by the interbank loan set by the Fed.

Russell August 6, 2010 at 3:29 pm

No, central banks fiddling with interest rates is a separate problem. Here is the problem with FRB. When people make spending decisions, they look at all their assets, cash, loans, time deposits, home equity etc. When they look at their demand deposits, they view that as money that is 100% there. Let’s say the demand deposit is $100, so teh depositor sees $100 in his account. He sees a wallet on sale for $10, he likes it, it is only 10% of his available cash so he buys it.

But the $10 is really all of his available cash in the bank because under FRB, the bank can lend out $90 of the $100 but he does not know it. $90 has been lent to someone else who sees the $90 as readily spendable cash and spends it too. If the depositor knew that $10 was really all of his available cash, it would likely affect his spending decision and he might only be willing to pay $1 for a wallet or not buy one at all. A market is made up of millions of people making similar subjective decisions. So fractional reserve banking gives the appearance of more apparent money than there really is. This distorts demand and therefore price signals in the economy. It leads to higher spending choices that the depositor otherwise would not make if he were aware of the real circumstances. Before the FDIC, when depositors did wake up or get nervous, you had a run on the bank.

The banks should be required to maintain 100% reserves on demand deposits. If they want to charge fees for it fine. But it will result in a more efficient allocation of resources. Also, there would be no run on the bank risk.

Russell August 6, 2010 at 12:38 pm

FRB is not a fraud in the legal sense because the fine print on the passbook allows it. But economically it is a fraud because it sends false demand signals into the market. 99% of the depositors do not realize that the demand deposit is not really there and they don’t care because of deposit insurance. So they behave and spend as if it is all there and are freer with their money than they would otherwise be if they thought only 10% of it was there. This raises and distorts prices causing misallocation of resources.

tralphkays August 6, 2010 at 2:32 pm

The fine print you mention does not say what you imply, it only gives the bank some time to honor the claim, it does not remove the legal obligation to eventually return the money. FRB is fraud by current legal standards and is legal only by specific legislative permit.

Russell August 6, 2010 at 3:32 pm

All I implying is that the bank does not have to pay the money on demand. It get’s time to pay it back because it is not all there. Hopefully, its loans will pan out and they will be able to pay it back. But it is an entirely different situation than if money were all there.

Nick Bradley August 6, 2010 at 1:15 pm

That’s called a time deposit (like a CD).

Under a Rothbardian system, time deposits could be lent out with FRB methods, demand deposits could not…that would be fraud.

Russell August 6, 2010 at 3:33 pm

Right and the depositor would get interest or some benefit for that. The depositor would also not assume that the money was available on demand and make his spending decisions accordingly.

Nick Bradley August 6, 2010 at 3:46 pm

We’re in agreement. In a Free Banking system, loanable funds would have to come from time deposits.

tralphkays August 6, 2010 at 2:27 pm

It is fraud because the bank tells all depositors that, subject to some possible delays, that it can return everyones money if they ask for it. This is a mathematical impossibility under fractional reserve banking. The only way a fractional reserve bank could avoid fraud would be if they told every depositor that they had no legal obligation to return that persons money. A business that took peoples money with no legal obligation to return it hardly fits the definition of a bank.

Russell August 6, 2010 at 3:34 pm

It is a loan situation disguised as a bailment from a practical perspective that has economic consequences. It is functionally dishonest.

Russell August 6, 2010 at 8:50 pm

Mike,

You said:

>>If money is convertible into gold at a fixed rate, then the government will let the quantity of money outrun its backing, and it will no longer be able to maintain the old rate of convertibility.

This is only true if the government is permitted to print money that is redeemable for more gold than it has. If it is not allowed to do that, then there is no problem.

Aaron August 6, 2010 at 12:13 pm

Private currencies in the form of ETF’s stand ready to replace fiat money. Lift the taxation associated with them and people simply have to trade in their paper money for GLD, SLV, PALL, etc.

Eric August 6, 2010 at 12:36 pm

Good idea. But what measure would one use to determine the exchange rate. Won’t we still need a standard “money” to use for economic calculation? Otherwise, we would need to have a whole range of conversions, GLD to SLV, GLD to PALL, SLV to PALL etc. And that is what we had with barter.

Aaron August 6, 2010 at 1:52 pm

Eric ~ The measure that is used in the exchange rate would be determined by the subjective values that each party places on a trade and the medium of exchange. There is no official “standard” required. The exchange rate is also influenced by supply and demand factors associated with the medium of exchange. Check out Olivi, Buridan, and Azpilcueta on this issue.

Eric August 6, 2010 at 3:56 pm

But if you have a medium of exchange, then isn’t that a “money”? My question is based on the idea that a money is useful because it allows one to do economic calculation.

I recall Rothbard giving an example of what it would be like without a common money, you’d have to say, I earned 8 eggs, 4 minutes of an economic lecture and two ham sandwiches today.

I’m guessing that one of the ETFs would become more commonly traded and therefore would become the standard. Then I could say I earned 8 shares of GLD today. When trading for SLV, OIL, or PALL etc. One would offer some amount of GLD. So in that sense, GLD would become a money.

Nick Bradley August 6, 2010 at 1:17 pm

If the value of gold ETFs exceed the value of gold, then gold ETFs are practicing fractional reserve banking. malinvestment will occur, and there will be a correction.

Aaron August 6, 2010 at 1:58 pm

Nick Bradley ~ These ETF products are backed by bullion. Yes, if the issuer were to issue paper claims that exceeded the value of holdings, it would result in an oversupply and malinvestments would occur. Such an ETF would be acting in the same manner as a central bank that had a “gold standard” associated with its money.

The solution would be for the market to punish the ETF issuer. I personally would choose a more sound ETF in such a case.

My point in all of this, is that a foundation has already been provided by the market to do away with fiat money. The practical objections that are always levied against hard money have been primarily solved with these ETF products! It is amazing what can happen when the market is allowed to operate.

Nick Bradley August 6, 2010 at 3:47 pm

today, in 2010, gold ETFs exceed bullion

Mike Sproul August 6, 2010 at 1:21 pm

Rothbard was wrong when he said fractional reserve banking is fraudulent. As J. Murray notes, it is just a form of voluntary trade. Libertarians should be arguing in favor of it, not against it. Furthermore, fractional reserve banking causes no malinvestment. A bank that gives me a $100 checking account, in exchange, perhaps, for a $100 bond that I own, has not changed my net worth. I have no more demand for goods than before, so there is no effect on prices.

On Russell’s point that gold money can simply be divided into smaller units: That assumes that gold has value because of demand for it as money. On the backing theory view, it really is possible to have too little money in circulation without driving up its value. That leads to a tight money condition, which is recessionary.

tralphkays August 6, 2010 at 2:34 pm

Not this fool again!

Beefcake the Mighty August 6, 2010 at 2:53 pm

Yup, any discussion on monetary issues here, and you can be sure that Mike Sproul, the man who thinks classical RBD wasn’t crankish enough and added his own fallacies to it, will show up.

tralphkays August 6, 2010 at 3:09 pm

Yes, the unsinkable mike sproul, no matter how completely and convincingly he and his crazy ideas are torpedoed, he bobs back to the surface, just like a turd in a septic tank.

Russell August 6, 2010 at 3:45 pm

Mike, you don’t get a $100 demand deposit in return for a $100 bond. Think about it. If you are willing to do that, I can supply you with a lot of bonds which I will purchase for less than $100.

As for the gold point, you are right, gold has value as money. Money has no value in and of itself beyone what it can buy. One does not consume money. One consumes goods and services one buys with money. The more goods and services we can buy with our money, the better off we are. If we keep money fixed in total amount (but infinitely dividable), then when the economic pie increased, the money is worth more and money can facilitate the trading of the goods and services. When the pie shrinks, your money is worth less. So we want to follow economic rules that tend to encourage growth of the economic pie.

The fundamental rule that does this is the rule that before you can take a piece of the pie, you have to first add something to the pie. If you create and add more than you take out, you have savings. Your savings will be worth more tomorrow if the pie is bigger. If the pie is smaller than when you saved, your money will be worth less.

The emphasis here is on the goods and services the comprise the economic pie, not the money which everyone seems overly obsessed with. Money is just a marker entitling the holder to a share of the pie. We want a bigger pie, not more money.

Eric August 6, 2010 at 2:00 pm

Why can’t gold be divided into smaller units regardless of its demand as money? I don’t see what one has to do with the other. As a commodity, gold can be divided up. I can buy jewelery with gold in a smaller percentage of purity if gold becomes more expensive relative to other goods.

Also, the notion of money in circulation is wrong. Money does not circulate like electrons in a wire. It’s a bad analogy. Money acts like a catalyst. It allows some other transaction to take place more efficiently while the catalyst is never used up. Also, stating that money can be scarce without its value increasing is to deny supply and demand theory.

And what do you mean by tight money? Isn’t that simply the same as money has become more scarce relative to other goods? And again, this would make it’s exchange value with other goods become higher due to it’s lower relative supply.

Mike Sproul August 6, 2010 at 2:57 pm

Eric:

There have been many historical episodes where people complained of a shortage of coins or other money, (e.g., the American colonies, as explained by Andrew McFarland Davis) and the complaints appear genuine. One theory is that as British coins wear, there is less money in circulation, but any attempt by the mint to produce new coins is hopeless, since the new full-weight coins will be hoarded or melted. This in turn leads to a shortage of coins in the colonies, and to recession.

Now, if free banking were allowed in the colonies, banks would fill the void by issuing paper or checking account money, denominated in coins, but backed by the property of people who borrow from the banks. But what if free banking is disallowed, as it normally has been? Then if the amount of coins in circulation is, say, half of what is needed to conduct business comfortably, then the value of those coins would not double. After all, that colony holds a negligible amount of the word’s gold and silver, and the problems of one colony would have no effect on the world prices of gold and silver. Thus money really would be tight, and as people are forced to use less efficient means of trade, business slows, and we have a recession.

tralphkays August 6, 2010 at 3:12 pm

Eric, ignore this guy, he and his ideas have been overwhelmingly dealt with previously, he is a gadfly.

Beefcake the Mighty August 6, 2010 at 3:29 pm

A gadfly? You’re far too kind.

Eric August 6, 2010 at 3:47 pm

He serves as a good devils advocate.

If everyone here expressed only the orthodox Austrian viewpoint, then I think I would learn less. I like trying out my understanding of things against someone who has a different view.

And unlike other sites where my Austrian perspective is shouted down with insults and pigeon holing (e.g. Oh, you’re a tea partyier, no wonder!) Mike is polite and his posts are readable.

tralphkays August 6, 2010 at 3:54 pm

Good points, we just want to warn you that Mike Sproul, though polite is not reasonable, there will not be any free exchange of ideas with him, only the same regurgitation of already debunked theories on his part. Those of us who have gone through this with him previously are frankly sick of him, but you are right, he makes a good practise dummy. Have at it!

Eric August 6, 2010 at 3:38 pm

Worn coins should be discounted. The milling marks around the edges can be used to determine wear and tear. I don’t deny that coins do wear out. One solution to that problem today is to not actually transport the gold, as described above in numerous posts, such as using gold debit cards or ETFs.

In older times, pirates cut coins into eight pieces to increase the number of “coins” available for trade, and each piece of eight then would have a higher value relative to the whole coin (at some point in the past – that is, the value of each 1/8th of the metal would trade for more goods than before).

I don’t see why an isolated colony couldn’t do the same thing. If history shows otherwise, I’d want to look to see what sort of force was applied by those in the colony since on a free market, the relative prices should simply adjust freely.

If gold becomes so scarce that it’s difficult to use as a money, then something else, e.g. silver, would likely become a money. Of course if you place a value on a coin and use force to make it be accepted on face value, then we no longer have a free market in money. You mention a mint, but that has the smell of a government behind it.

I doubt very much that a shortage of coinage will keep people from finding some alternative medium of exchange. They can use foreign coins, or any commodity that is handy. There is no reason to assume trade will slow and a recession will take hold. In America they once used tobacco for a medium of exchange. That’s gotta be a bad money, but it shows that if money is scarce, people will adjust.

tralphkays August 6, 2010 at 3:47 pm

Eric, you show an uncommon amount of sense, good for you.

Russell August 6, 2010 at 3:52 pm

The main problem of money is finding a way to provide it that does not allow the creation of more of it out of thin air. Gold is not perfect because more is continuously found but it is much better than trusting other people (like governments) not to create it.

Russell August 6, 2010 at 3:49 pm

Mike, you are way off base about too little money. See my explanation above. When money is tight, it is because prices are too high in the judgment of those who have it, not because the money doesn’t exist. You are too obsessed with money because you don’t understand how money works.

billwald August 6, 2010 at 4:06 pm

In the bad old days, most people were paid once a month. If every worker was paid on the first of the month under a cash money system there would need to be available in company, government, and bank vaults sufficient cash excess cash to pay every person. Median family income is around $50K and there are around 80 million families? The Treasury has about 180 million ounces of gold. A little over 2 OZ gold per family?

If we were on a gold economy . . . if payday on the 1st of the month is like “passing go” and the bank held all the money on the last day of the month, the minimum value of the gold would be around $2,500/oz? But everyone isn’t broke the day before payday.

tralphkays August 6, 2010 at 4:17 pm

Whaaaat?

Russell August 6, 2010 at 9:08 pm

Nick,

You said:

>>money (gold) is used to facilitate transactions, and the more transactions or activity there is, the more money there should be. In a free market, the supply of gold produced would grow with economic growth.

This is not true. More gold is not necessary to accomodate growth. More money can be supplied by dividing the existing money into smaller parts. Money is a commodity whose function is to facilitate trade. A monetary unit that is redeemable for 1 oz of gold can be divided into 2 monetary units that can be redeemed for 1/2 oz each. There is no need to grow the supply of gold to facilitate growth.

Growth in goods and services means the same amount of money is worth more and conversely, shrinkage of the pie mean the same amount of money is worth less in terms of consumable goods and services. The value of money is irrelevant other than to be used to maximize efficient allocation of resources to permit maximum economic growth.

If you don’t understand this point, then you really cannot appreciate the role of money in facilitating a healthy economy.

Nick Bradley August 8, 2010 at 4:01 pm

Russell,

If the existing money supply was divided into smaller units, the price would be higher, correct?

And if the price is higher, then more would be more produced, correct?

In a free market, money would be produced just like any other good. If demand goes up, then production would increase to satisfy that demand.

Gerry Flaychy August 10, 2010 at 8:17 pm

One bill of $100 is the same amount of cash as 100 bills of $1.
A piece of 100 on. of gold divide in 100 pieces of 1 on. doesn’t change the amount of gold.

In a free market, if demand for money goes up, the price of money will go up,
just like any other good, i.e. the rate of interest will go up.

Joe R August 6, 2010 at 9:33 pm

Would it be a valid assumption to believe that under a world bank and its universal unit of exchange, that the USA would not be able to print what passed for money? If that is true and we were dependent on a world banks money, how would the USA be any different from Greece in our current economic circumstance?

Russell August 7, 2010 at 12:54 pm

Joe, We would be no different but the world government is not likely to be any more trustworthy than the US government when it comes to printing money.

Joe R August 8, 2010 at 9:50 am

Thanks Russell – My thought was that we would become dependent on less controllable foreign crooks rather than more controllable domestic crooks.

I’m not an economist, but I understand the rudiments. Engineering and mechanics (the physical universe) are the foundation of my understanding of everything. Of two gears in contact, when one turns clockwise, the other will turn counterclockwise.

My observation is that:

Altering the quantity of currency in circulation alters the value of nothing except the value of the currency.

At the moment a loan is entered into, your current net worth is diminished by the interest obligation and until something is done to increase (or decrease) the value of the borrowed cash in hand, current net worth is not altered.

Advocates of a fiat currency believe that they have the ability to ignore laws of physics with impunity.

Advocates of a commodity based currency believe that the value of an apple is not altered by the exchange medium.

Russell August 9, 2010 at 8:51 am

Joe,

Very succinctly and aptly put!

Russell

Nick Bradley August 8, 2010 at 4:03 pm

We would probably be the biggest shareholder in a global federal reserve, so the USG could probably influence Global central bank policy more than any other state.

Mike Sproul August 7, 2010 at 12:38 am

Russell:
“>>If money is convertible into gold at a fixed rate, then the government will let the quantity of money outrun its backing, and it will no longer be able to maintain the old rate of convertibility.

This is only true if the government is permitted to print money that is redeemable for more gold than it has. If it is not allowed to do that, then there is no problem.”

Consider a government whose only asset is ‘taxes receivable’ worth 1000 oz. of silver. That government can issue paper shillings and declare them acceptable for 1 oz. worth of taxes. If the government issues, say, 600 paper shillings and spends them on candy, then each shilling will be worth 1 oz, even though the government has no actual silver backing the shillings at all. So there is at least one case where the government can issue more shillings than it can cover in actual silver, and there is no problem.

Eric:

You don’t have to read too far through the works of A.M. Davis, Curtis Nettels, Leslie Brock, John McCusker, and even Hayek etc. to conclude that money shortages have been quite real and have had severely recessionary effects. If some form of money is considerably better than the next best alternative, then a restriction of that money will hamper trade.

Quantity theorists normally speak as if we could cut the quantity of paper dollars in half, and the result would be that each paper dollar would rise to twice its old value, so the real quantity of money would not change. But as the money-issuing bank retires 100 dollars, it normally loses 100 dollars worth of its assets in the associated open-market sale. Thus the bank’s assets fall in step with the quantity of money, and the value of each dollar is unaffected, even as their quantity is cut in half. If the void created by that reduction in the real quantity of money is not easily and quickly filled by some alternative money, trade will be stifled.

Russell August 7, 2010 at 1:00 pm

Mike,

You said >>”But as the money-issuing bank retires 100 dollars, it normally loses 100 dollars worth of its assets in the associated open-market sale. Thus the bank’s assets fall in step with the quantity of money, and the value of each dollar is unaffected, even as their quantity is cut in half. If the void created by that reduction in the real quantity of money is not easily and quickly filled by some alternative money, trade will be stifled.”

That is why all money should be fixed in quantity. There will never be a shortage of money. Banks won’t be able to issue or destroy it. It will always be available to facilitate trade. The reason to require 100% backing by gold to precisely to prevent the creation of unlimited amounts of money.

Russell August 7, 2010 at 12:52 pm

Mike,

I said:
“>>If money is convertible into gold at a fixed rate, then the government will let the quantity of money outrun its backing, and it will no longer be able to maintain the old rate of convertibility.

This is only true if the government is permitted to print money that is redeemable for more gold than it has. If it is not allowed to do that, then there is no problem.”

You disagreed saying >>>”Consider a government whose only asset is ‘taxes receivable’ worth 1000 oz. of silver. That government can issue paper shillings and declare them acceptable for 1 oz. worth of taxes. If the government issues, say, 600 paper shillings and spends them on candy, then each shilling will be worth 1 oz, even though the government has no actual silver backing the shillings at all. So there is at least one case where the government can issue more shillings than it can cover in actual silver, and there is no problem.”

But Mike, your example does not follow my paradigm of gold or commodity backed money. When I say “backed”, I mean that he government maintains enough gold, or other commodity that the money says it is redeemable in, at every point in time to redeem all the money. Your example hypothesises that the money does not even start out being backed by the silver it says it is redeemable in and they the government spend the silver it doesn’t have. This does not disprove my example. If you point is that one cannot trust governments not to do dishonest things as in our example, I would agree with that.

Russell

Klaus August 7, 2010 at 5:27 pm

Lew says “On many occasions over the last 20 years, such a [gold] system nearly came to be.”
Does anyone have a text or at least a list describing these attempts?

J Cuttance August 7, 2010 at 11:49 pm

I second that request.

Paul Vahur August 9, 2010 at 3:58 am
Mike Sproul August 7, 2010 at 11:23 pm

Russell:
“The reason to require 100% backing by gold to precisely to prevent the creation of unlimited amounts of money.”

But if the money supply moves in step with backing, the value of money is not affected by its quantity. It doesn’t matter if an economy has 100 paper dollars backed by assets worth 100 oz. of silver, or 100,000 paper dollars backed by assets worth 100,000 oz of silver. A dollar will be worth 1 oz in either case.

“When I say “backed”, I mean that he government maintains enough gold, or other commodity that the money says it is redeemable in, at every point in time to redeem all the money.”

Money has often been issued and backed in the way I described, and it has often been issued and backed in the way you described. Money might not be directly backed by gold, but it’s backed just the same, and it’s used just the same.

Russell August 9, 2010 at 9:09 am

Mike,

To your first point about increasing money backed by gold or silver by issuing more money when more gold or silver is found. Your point is accurate, there will be more money. More money realtive to other commodities means each dollar will be worth less vis a vis other commodities. This is the downside of commodity backed money; it can expand as more commodity is found or created.

That is why you want a commodity that is scarce, impossible to create and hard to find more of like gold to back your currency. The reason you want something to back the currency is that you do not want governments or banks to be able to create more currency as opposed to dividing up the same amount of currency in smaller pieces.

Currency is just used as an anonymous accounting chip to divide up goods and services available in the economy at any given time. You can’t each chips or make houses from chips or do anything with chips except use them to keep track of the holders allocate share of goods and services in the economy at a given point in time. People who have chips are supposed to have worked for them. If you allow people to create new chips,then you have more chips chasing the same pool of goods and services and each chip is worth less. This is not fair to those who worked for their chips. Those that spend the chips that they have not worked for send a false pricing signal into the economy which presumes that money represents prior creation of goods and services. Requiring people to do work and add to the economic pie before they obtain money is the best way to ensure that the economic pie will continue to grow. If people don’t have to do work and add to the economic pies to obtain money to buy things, as I am sure you can appreciate, it will undermine peoples motivation to work and in the long run result in a much smaller pie to divide.

As to your second point that money is often issued in the way you described, I am not disputing that fact. I am saying it is a poor way to run a money and banking system for the reasons set forth above. Your example does not address the logic of my argument under the set of facts given. It simply sets forth a different set of facts. One that may reflect the real world but we are discussing ways of changing real world behavior to something more optimal that will avoid the type of economic meltdowns we are experiencing now.

Mike Sproul August 9, 2010 at 12:59 pm

Russell:
“To your first point about increasing money backed by gold or silver by issuing more money when more gold or silver is found.”

I wasn’t speaking of issuing more money only when more gold or silver is found. For example, suppose the money supply is initially 100 oz. of silver. Then that 100 oz. gets deposited in a bank which issues units of paper currency (shillings), each backed by 1 oz. Then a farmer asks the bank for a loan of 200 brand new shillings, and the farmer posts his land, worth (at least) 200 oz of silver, as collateral. The money supply has just tripled, but each shilling is still worth 1 oz., since the banker is capable of buying back all of his shillings for either 1 actual oz., or for the equivalent value of the farmer’s IOU. As long as the bank’s customers agree to it (and they almost always do) there is no fraud, and the supply of money increases with no change in its value. There is also no change in the amount of silver relative to other goods. The farmer’s land has just been coined into money, that’s all.

jerry August 9, 2010 at 1:24 pm

Mike – why oh why are you trotting out the same tired nonsense? Answer my crystal clear question or stop waffling on about things which you don’t understand.

http://blog.mises.org/12367/should-the-quantity-of-money-be-increased/comment-page-1/#comment-683011

Russell August 10, 2010 at 5:26 pm

Mikes said:

>>I wasn’t speaking of issuing more money only when more gold or silver is found. For example, suppose the money supply is initially 100 oz. of silver. Then that 100 oz. gets deposited in a bank which issues units of paper currency (shillings), each backed by 1 oz. Then a farmer asks the bank for a loan of 200 brand new shillings, and the farmer posts his land, worth (at least) 200 oz of silver, as collateral. The money supply has just tripled, but each shilling is still worth 1 oz., since the banker is capable of buying back all of his shillings for either 1 actual oz., or for the equivalent value of the farmer’s IOU. As long as the bank’s customers agree to it (and they almost always do) there is no fraud, and the supply of money increases with no change in its value. There is also no change in the amount of silver relative to other goods. The farmer’s land has just been coined into money, that’s all.

Mike, here is the problem with your scenario, it is irrelevant how much the farmer’s land is worth, the bank can’t lend what it doesn’t have and it doesn’t have 200oz of silver. It only has 100oz of silver so it can’t issue 200 shillings redeemable for an 1 oz of silver each. You can’t lend what you don’t have. So it is in a barter system and in a sound money system it is no different.

Fred Kurz August 18, 2010 at 2:39 am

Very simply stated. Very well stated. From our Austrian eyrie we will watch the article play out on the intellectual(s) world stage.

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