Banks and the nature of Money

[TheEvilDetector]

I've doing a bit of thinking about the nature of money.

First of all I am sure no-one will disagree that the dollar bill like any currency has no inherent value other than that which we assign to it.

Here is a simple proof.

You and I both have an identical TV set. I choose to sell it for $100 and you choose to sell it for $200. Obviously, the value of the dollar is different in each case, because the product is exactly the same. So there is no inherent value in the dollar, because you choose the value of it in relation to any good or service you wish to buy or sell. It is just a token of exchange and there is a perception of value only because of certain benchmarks on the price of things, when expressed in terms of dollars.

Second, all modern societies use an agreed upon token of exchange, in case of US, it is a dollar bill. The question of course is, who introduces these tokens into society to facilitate exchange of goods and services. Well, in case of US, it is the central bank.

The central bank loans money into existence, therefore every single dollar that is circulating is part of the debt that ultimately must be repaid to central bank. From the point of view of the central bank, it is great. Without introducing any tangible goods or services into society its making money.

The natural question at this point is this:

Why cant the central bank simply give the money to the government to use as they see fit, whenever they ask for it without the expectation of any money being paid back. I think the answer should be obvious to all. If they simply gave money to government, then there would be NO way whatsoever to curtail spending, such a policy would lead to astronomical inflation in short order.

The other question is, why cant the central bank give the money to the government and expect only the original amount to be paid back. Well if the central bank did that, they could not make any income. On the other hand if the bank kept the returned currency, then it would be seen by all as a mechanism of simply printing your own wealth, which would not be tolerated by anybody.

So the only remaining option is to charge interest on the money, and keep the interest as income, with the returned principal cancelling original printed out money in the books. This seems like a fair deal. The government gets to have all the money it needs, and the bank seems to make legitimate profits from it, and at the same time, there is some sort of a break on run-away inflation since the government is obligated to pay interest back at minimum. Specifically, given that interest comes from taxes, and that the people will object to too many taxes, there is an inherent moderator on the borrowing capacity.

Now, what are the popular objections to such a system. Well first of all there is the whole concept of money without any backing. Then there is the concept of having to tax people to pay back interest. Then there is the legitimate resentment felt by people about the bankers who issue the tokens of exchange and enrich themselves from interest without performing any tangible service or introducing any tangible good into society.

Now, what could be the legitimate alternatives to such a system:

Well here is a revolutionary idea.

Individuals who work, accumulate credits, exchangeable for credit notes at a government office. So only individuals not corporations have the means to obtain notes of credit.
Alternatively, individuals could obtain equivalent weight of gold.

(there is of course the danger, of business hiring workers for jobs that do not serve any purpose or paying ridiculously high salaries, therefore there would have to be a mechanism that would limit the amount of credits a business could grant workers, i suppose laws would have to be put in place to prevent specific types of fraud that are possible in this system)

Businesses that need to borrow money, borrow from interested collection of individuals on the free market facilitated by an open free market system.

Money is introduced into society by the means of exchange of electronics credits into paper money by individuals who worked actual hours at legitimate jobs.

Wealth in society is the sum of all hours worked, since hours worked is proportional to net services or goods produced and accordingly
money in society tracks the net actual wealth of society and its value is thus kept stable.

Importantly there is no net debt on society.

Also there is no need for income tax or existence of central bank.

Comments, corrections, criticisms welcome.

[TheEvilDetector]

Bump!!

[foofighter20x]

Bad. Idea. This just creates another government program where the the government has a stranglehold on the currency. And that only begs for government abuse.

A free market, gold backed currency is the only answer.

[TheEvilDetector]

In my proposition, the role of government is limited to simply exchanging electronic work credits for paper credits (to facilitate subsequent exchange). It cannot introduce paper without a fair exchange for credits (no interest of any kind) or alter its value (at least not without congress having a say in it).

You do need a federally controlled medium of exchange otherwise fraud will run rampant.

In terms, of your mention of gold backed currency. There is nothing wrong with that.
I have nothing against that. However, I am focussing on the method of introduction of currency into society rather than the currency itself. Most of the problem with currency comes from the method by which it is introduced into society. At the moment, every single dollar in society is part of a debt that must be repaid to the federal reserve.

My proposition, if implemented, would mean that every dollar in society has been earned by somebody and has to be repaid to noone.

If you read carefully what I wrote the details should become apparent.

[foofighter20x]

Give government an inch, and they'll take a mile.

You need to listen to this free audio book (http://www.mises.org/media.aspx?action=category&ID=92) by renowned economist Murray Rothbard.

[foofighter20x]

Or you can download/read the book here if you want.

What Has Government Done to Our Money? (http://www.mises.org/money.asp)

[TheEvilDetector]

How do you see the monetary system working under RP? who prints money? who introduces money into society? How is inflation controlled?

[TheEvilDetector]

I see, RP would reintroduce the idea of private coinage? So suppose society settled on the gold standard. Then people who own gold could get that gold coined, either by themselves, private entities or even government right? Then that gold coin would be legal tender? So the amount of money in society would simply be the total amount of gold coins available?

Would the limitations on annual production of gold coins (due to the physically limited nature of it) be a break on economic growth of society?
---
edit. all points understood, thanks for the info (demand/supply logic in good, services and the money itself)

edit 2: interesting now to note that historically all gold was confiscated, thus the government (no doubt at the encouragement of the fed) took away any possibility of society running their own money without government interference.

[TheEvilDetector]

the wonderful things you learn when you do the bare minimum of research

from http://www.mises.org/money/3s11.asp

"It became clear to governments that they could not afford to allow people to own and keep their gold. Government could never cement its power over a nation's currency, if the people, when in need, could repudiate the fiat paper and turn to gold for its money. Accordingly, governments have outlawed gold holding by their citizens. Gold, except for a negligible amount permitted for industrial and ornamental purposes, has generally been nationalized. To ask for return of the public's confiscated property is now considered hopelessly backward and old¦fashioned. "

[foofighter20x]

How do you see the monetary system working under RP? who prints money? who introduces money into society? How is inflation controlled?

1.) Dr Paul is a subscriber to the Austrian School of Economics, so his ideal is embodied in the works of the Mises Institute.
2.) Ideally, no government would print money. Banks would only issue receipts for gold on deposit. Any bank caught abusing that system would in turn be viewed as criminal and hopefully no one would do business with that bank nor trade goods for that bank's worthless receipts.
3.) The consumer and producers do. They do this by mutually deciding what they will accept in trade. Eventually, everyone will settle on the same commodity to use as a medium of exchange. In the past it's been gold. In the future it will likely be the same.
4.) With a commodity-backed currency, inflation isn't really the great problem we face today--only counterfeiting is. Both occur, but in such rare instances that they are either extremely minor or entirely negligible or non-existant.


I see, RP would reintroduce the idea of private coinage? So suppose society settled on the gold standard. Then people who own gold could get that gold coined, either by themselves, private entities or even government right? Then that gold coin would be legal tender? So the amount of money in society would simply be the total amount of gold coins available?

Would the limitations on annual production of gold coins (due to the physically limited nature of it) be a break on economic growth of society?

5.) Yes.
6.) Yes. Whoever offers the coining service at the best price would get the business.
7.) No. It would only be legal tender if the government forced it to be by law. People could still trade with other commodities if it mutually suited both buyer and seller.
8.) Not necessarily--such a limitation would exist only if no one would accept anything other than gold. But that's unlikely. Other commodities could be used also. The free market gold standard isn't limited to gold per se, just mostly gold--and lacking that, whatever the buyer and seller mutually agree upon.
9.) Why would there be a limitation on how many coins could be made, aside from the absolute limitation of all gold being coined? Who said there ever would exist any limitation besides the one I gave? Non-coined gold bullion could be used in trade too. Also, there would be no break on society either. If gold became more abundant or scarce, market prices would adjust accordingly. If gold got too scarce, another currency would emerge--most likely silver or some other metal that is both rare yet more abundant than gold or silver. The key here is that the market would efficiently manage all of this.

This is all covered in the book I linked.

Give it a look. ;)

[TheEvilDetector]

yep everything you said makes sense now. thanks for the info :)
legendary

and whats worrying is how we allowed ourselves to fall into such an abusive system as is the case currently. do congressmen not have any brains? why did they allow the fed to take over? if people knew this stuff back then, fed would never have taken over. I think politicians need an economic education before office :)

[foofighter20x]

I should add to number 7.

Legal tender laws allow the buyer to force the seller--via government writ--to accept a certain currency.

Such laws are undesirable.

[TheEvilDetector]

agreed. that audio book is extremely englightening. now i see just how screwed up the current "money" is. it seems that this "money" is simply used to enrich people who dont do anything useful in society and make everyone else poor, because fundamentally this "money" is just debt instead of what it should be which is a freely tradeable commodity which happens to be mostly used for exchange such as gold or silver.

[foofighter20x]

yep everything you said makes sense now. thanks for the info :)
legendary

and whats worrying is how we allowed ourselves to fall into such an abusive system as is the case currently. do congressmen not have any brains? why did they allow the fed to take over? if people knew this stuff back then, fed would never have taken over. I think politicians need an economic education before office :)

Long historical abuses which people became either complacent with or ignorant of is why.

And Congress in 1913 might have probably had brains. I'm guessing they were owned by special interests back then, just like today...

The masses were easily manipulated by fear. Sound familiar?! Their fear in this case was of failing banks. Read up on the Panic of 1907.

I think it'd be a great qualification for office, but if it's required, then government would need to provide it to everyone. And then you have to ask: who determines their grade, hmm?

[TheEvilDetector]

yeah, i see your point.

In general forced education of a certain subject is not very nice as it violates free will etc.

Schools, however function this way perhaps schools could offer a voluntary course in basic mises economics, just as basic maths, basic physics, basic english is taught early on.

[foofighter20x]

While there are certainly benefits to education, my own personal belief is that no one should be forced to receive it if they don't want. However, that doesn't mean education shouldn't be emphatically encouraged.

And, of course, all such choices have consequences, whether good, bad, or both.

Parents would most likely make their kid go to school, though. If my kid refused, I'd tell them that they need to get a job and start helping around the house then, otherwise I'll kick'em to the curb. If they are grown up enough to decide not to go to school... ;)

[TheEvilDetector]

question:

if all money has to be backed by gold, that means banks fractional system cannot exist?

So banks money making ability is limited to loans on actual deposits?

Furthermore, I think a gold commodity money will be subject to deflation because intuitively I think there will always be more demand and production of goods than possible physical production of money (ie. gold). Over time a given weight of gold will buy more and more and more of a certain good. So a new commodity will have to introduced which is more abundant which then will take over it seems or perhaps gold coins will have to be subdivided.

[foofighter20x]

question:

if all money has to be backed by gold, that means banks fractional system cannot exist?

So banks money making ability is limited to loans on actual deposits?

Furthermore, I think a gold commodity money will be subject to deflation because intuitively I think there will always be more demand and production of goods than possible physical production of money (ie. gold). Over time a given weight of gold will buy more and more and more of a certain good. So a new commodity will have to introduced which is more abundant which then will take over it seems or perhaps gold coins will have to be subdivided.

1) No one said all money had to be backed by gold. A free market gold standard simply means the market determines the best commodity for money to be based on, and that commodity just happened to be gold. As to the fractional reserve lending portion of your question, the answer is: yeah, pretty much.
2) Yeah, pretty much.

And deflation is unlikely. Also, gold deflation would only be a problem to those who enter into long-term contracts that demand payment be made with gold. Like I said earlier, a free market gold standard doesn't limit the market to only gold as a medium of exchange but merely indicates gold is the most prefered medium--if gold becomes too scarce (i.e. deflates more than the market can bear) another precious metal will step in as substitute. What happens then is that the person holding all the gold (assuming it wasn't been used to create physical goods, like fillings or electrical wiring, etc) will just have all that gold sitting there doing nothing for him and he willl slowly spend it or leave it to his heirs... Spending it, whether by his own action or by that of his heirs, will slowly undo the effects of the deflation. In fact, if he holds it too long and the market decides to function without gold at all, then all that gold just may become near worthless!

[TheEvilDetector]

I don't think the gold can become worthless when it is becoming more scarce.

You say another metal will take over its place.
How many different metals are viable candidates to serve as commodity money?

Also what do you think about the following quote I pulled from "gold standard" entry in wiki:

"One of the foremost opponents of the gold standard was John Maynard Keynes who scorned basing the money supply on “dead metal.” Keynesians argue that the gold standard creates deflation which intensifies recessions as people are unwilling to spend money as prices fall, thus creating a downward spiral of economic activity. They also argue that the gold standard also removes the ability of governments to fight recessions by increasing the money supply to boost economic growth."

I think its a legitimate concern, what is your comment on that?

Some say that gold standard was responsible for the great depression (i am not buying into that, however deflation could certainly be a factor, and deflation causes unemployment, since economy slows).

On Gold Standard, inflation/deflation control is taken away from fed and goes to the gold producing nations ?

I also found this quote

"As far as why people don't think about deflation, my guess would be it's
because nobody in the U.S. has ever actually experienced it. I think there's
an assumption in the U.S. that prices will always and forever go up -- the
question is simply by how much.

As to the risks of inflation vs. deflation, inflation helps debtors (the real
value of debts falls over time) while deflation hurts debtors (the real value
of debts rises over time).

Clearly, the U.S. is a nation of debtors (negative personal savings rates for
the last year to year-and-a-half, record debt, record or near-record
bankruptcies), so deflation would be far worse for the U.S. than modest, stable
inflation. "

Is there any truth to this do you think?

and another quote i found

"But the gold amount in circulation hasn't. But if the econonmy grows
faster than the amount of money in circulation, you get deflation.
And contrary to what monetarists and gold bugs say, deflation is bad.
5% inflation are a nuisance, but 5% deflation means that the economy
is in deep shit. Deflation leads to money hoarding, which draws more
money from the market, leading to more deflation. Everybody tries to
keep his money as long as possible, buying only the baremost necessities,
and this as late as he can. The result is, of course, collapse.

The fundamental problem with the gold standard is that the money supply
cannot be adapted to the growth rate of the economy. Unless you try
to muddle through with fractional reserve - which is a ticket to
massive bank runs, which inevitably occur when things start going
bad and people lose confidence in the slips of paper they carry in
their pocket and rush to the banks to change them into gold.

The medieval silver standard had the opposite problem: the silver supply
grew faster than the economy, with new silver mines opened in the
Carpathians (and the Black Death cutting the population of Europe by
1/3 or so in the mid-14th century, without eating away any silver).
The result was inflation, which was why more and more people insisted
on receiving their payments in gold. "


OK, I read enough about gold standard to ask how could we go on a gold standard or any other physically limited commodity and combat deflation?

Deflation is a very bad thing some argue its worse than inflation because under deflation people hoard cash because it is appreciating in value so fast which means that economy slows, investment goes down, unemployment rates go up etc....

Also if you are in debt and the value of money goes up, it means you have to pay back more than the original good is now worth.

(I am not against gold standard at all, I am just trying to understand it better).

[foofighter20x]

Hehehe... I thought I smelled bait...

So long as SOMEONE desires the gold, then yes the gold has value, but only to the person that desires it. Comprende?

Substitutes for gold: silver, platinum, ruthenium, rhodium, palladium, osmium, iridium and rhenium.

The answer to Keynes in a moment...

[foofighter20x]

"One of the foremost opponents of the gold standard was John Maynard Keynes who scorned basing the money supply on “dead metal.” Keynesians argue that the gold standard creates deflation which intensifies recessions as people are unwilling to spend money as prices fall, thus creating a downward spiral of economic activity. They also argue that the gold standard also removes the ability of governments to fight recessions by increasing the money supply to boost economic growth."

I think its a legitimate concern, what is your comment on that?

Some say that gold standard was responsible for the great depression (i am not buying into that, however deflation could certainly be a factor).

On Gold Standard, inflation/deflation control is taken away from fed and goes to the gold producing nations ?

Deflation didn't cause the GD. Contraction of the money supply and panics on insolvent banks (which can only happen under fractional reserve lending) caused the GD.

To your last question: No. Currencies of gold producing nations would inflate and the market would adjust accordingly.

Now, the response to Keynes (this was in the book I linked):

Professor Yeager and 100 Percent Gold

One of the most important discussions of the 100 percent gold standard in recent years is by Professor Leland Yeager. Professor Yeager, while actually at the opposite pole as an advocate of freely-fluctuating fiat moneys, recognizes the great superiority of 100 percent gold over the usual pre-1933 type of gold standard. The main objections to the gold standard are its vulnerabil*ity to great and sudden deflations and the difficulties that national authorities face when a specie drain abroad threatens domestic bank reserves and forces contraction. With 100 percent gold, Yeager recognizes, none of these problems would exist:

Under a 100 percent hard-money international gold standard, the currency of each country would consist exclusively of gold (or of gold plus fully-backed ware*house receipts for gold in the form of paper money and token coins). The government and its agencies would not have to worry about any drain on their reserves. The gold warehouses would never be embarrassed by re*quests to redeem paper money in gold, since each dollar of paper money in circulation would represent a dollar of gold actually in a warehouse. There would be no such thing as independent national monetary policies; the volume of money in each country would be determined by market forces. The world’s gold supply would be distributed among the various countries according to the demands for cash balances of the individuals in the various countries. There would be no danger of gold deserting some countries and piling up excessively in others for each individual would take care not to let his cash balance shrink or expand to a size which he considered inappropriate in view of his own income and wealth.

Under a 100 percent gold standard… the various countries would have a common monetary system, just as the various states of the United States now have a com*mon monetary system. There would be no more reason to worry about disequilibrium in the balance of payments of any particular country than there is now reason to worry about disequilibrium in the balance of payments of New York City. If each individual (and institution) took care to avoid persistent disequilibrium in his personal balance of payments, that would be enough The actions of indi*viduals in maintaining their cash balances at appropriate levels would “automatically” take care of the adequacy of each country’s money supply.

The problems of national reserves, deflation, and so forth, Yeager points out, are due to the fractional-re*serve nature of the gold standard, not to gold itself. “National fractional reserve systems are the real source of most of the difficulties blamed on the gold standard.” With fractional reserves, individual actions no longer suffice to assure automatically the proper distribution of the supply of gold. “The difficulties arise because the mixed national currencies—currencies which are largely paper and only partly gold—are insufficiently interna*tional. The main defect of the historical gold standard is the necessity of ‘protecting’ national gold reserves.” Cen*tral banking and its management only make things worse: “In short, whether a Central Bank amplifies the effects of gold flows, remains passive in the face of gold flows, or ‘offsets’ gold flows, its behavior is incompatible with the principles of the full-fledged gold standard. Indeed, any kind of monetary management runs counter to the principles of the pure gold standard.”

In view of this eloquent depiction of the 100 percent gold standard, why does Yeager flatly reject it and call instead for freely fluctuating fiat money? Largely because only with fiat money can each governmental unit stabi*lize the price level in its own area in times of depression. Now I cannot pause to discuss further the policy of stabilization, which I believe to be both fallacious and disastrous. I can only point out that contrary to Profes*sor Yeager, price declines and exchange rate deprecia*tion are not simple alternatives. To believe this is to succumb to a fatal methodological holism and to aban*don the sound path of methodological individualism. If, for example, a steel union in a certain area is causing unemployment in steel by insisting on keeping its wage rates up though prices have fallen, I consider it at once unjust, a cause of misallocations and distortions of produc*tion, and positively futile to try to remedy the problem by forcing all the consumers in the area to suffer by paying higher prices for their imports (through a fall in the area’s exchange rate).

One problem that every monetary statist and na*tionalist has failed to face is the geographical boundary of each money. If there should be national fluctuating fiat money, what should be the boundaries of the “nation”? Surely political frontiers have little or no economic mean*ing. Professor Yeager is courageous enough to recognize this and to push fiat money almost to a reductio by advo*cating, or at least considering, entirely separate moneys for each region or even locality in a nation.

Yeager has not pushed the reductio far enough, however. Logically, the ultimate in freely fluctuating fiat moneys is a different money issued by each and every individual. We have seen that this could not come about on the free market. But suppose that this came about by momentum from the present system or through some other method. What then? Then we would have a world chaos indeed, with “Rothbards,” “Yeagers,” “Joneses,” and billions of other individual currencies freely fluctu*ating on the market. I think it would be instructive if some economist devoted himself to an intensive analysis of what such a world would look like. I think it safe to say that the world would be back to an enormously complex and chaotic form of barter and that trade would be reduced to a virtual standstill. For there would no longer be any sort of monetary medium for exchanges. Each separate exchange would require a different “money.” In fact, since money means a general medium of exchanges, it is doubtful if the very concept of money would any longer apply. Certainly the indispensable economic calculation provided by the money and price system would have to cease, since there would no longer be a common unit of account. This is a serious and not farfetched criticism of fiat-money proposals, because all of them introduce some of this chaotic element into the world economy. In short, fluctuating fiat moneys are disintegrative of the very function of money itself. If every individual had his own money, the disintegration of the very existence of money would be complete; but national—and still more regional and local—fiat moneys already partially disintegrate the money medium. They contradict the essence of the mon*etary function.

Finally, Professor Yeager wonders why such “orthodox liberals” as Mises, Hayek, and Robbins should have in*sisted on the “monetary internationalism” of the gold standard. Without presuming to speak for them, I think the answer can be put in two parts: (1) because they favor monetary freedom rather than government management and manipulation of money, and (2) because they favored the existence of money as compared to barter—because they believed that money is one of the greatest and most significant features of the modern market economy, and indeed of civilization itself. The more general the money, the greater the scope for division of labor and for the interregional exchange of goods and services that stem from the market economy. A monetary medium is therefore critical to the free market, and the wider the use of this money, the more extensive the market and the better it can function. In short, true freedom of trade does require an international commodity money—as the history of the market economy of recent centuries has shown—gold and silver. Any breakup of such an international medium by statist fiat paper inevitably cripples and disintegrates the free market, and robs the world of the fruits of that market. Ultimately, the issue is a stark one: we can either return to gold or we can pursue the fiat path and return to barter. It is perhaps not hyperbole to say that civiliza*tion itself is at stake in our decision.

[TheEvilDetector]

Dont you think those elements you listed (apart from silver) are not very practical or abundant enough?

as to yeager, what about economic growth that outpaces growth of gold production, this would have to lead to deflation, since you have more goods and services and less gold available or any other physically limited natural commodity.

I am not trying to bait btw, but I do have legitimate concerns.

I think fundamentally, commodity money leads to deflation and fiat money leads to inflation. Lets assume what I say is true (maybe its not). Which is worse deflation or inflation at the same %level both without any income taxes? (By the way, if the fed didn't charge interest we could have inflation without income tax, not that the fed would ever do that)

[foofighter20x]

Quit editing after-the-fact, man! :rolleyes: *sigh*


I also found this quote

"As far as why people don't think about deflation, my guess would be it's
because nobody in the U.S. has ever actually experienced it. I think there's
an assumption in the U.S. that prices will always and forever go up -- the
question is simply by how much.

As to the risks of inflation vs. deflation, inflation helps debtors (the real
value of debts falls over time) while deflation hurts debtors (the real value
of debts rises over time).

Clearly, the U.S. is a nation of debtors (negative personal savings rates for
the last year to year-and-a-half, record debt, record or near-record
bankruptcies), so deflation would be far worse for the U.S. than modest, stable
inflation. "

Is there any truth to this do you think?

and another quote i found

"But the gold amount in circulation hasn't. But if the econonmy grows
faster than the amount of money in circulation, you get deflation.
And contrary to what monetarists and gold bugs say, deflation is bad.
5% inflation are a nuisance, but 5% deflation means that the economy
is in deep shit. Deflation leads to money hoarding, which draws more
money from the market, leading to more deflation. Everybody tries to
keep his money as long as possible, buying only the baremost necessities,
and this as late as he can. The result is, of course, collapse.

The fundamental problem with the gold standard is that the money supply
cannot be adapted to the growth rate of the economy. Unless you try
to muddle through with fractional reserve - which is a ticket to
massive bank runs, which inevitably occur when things start going
bad and people lose confidence in the slips of paper they carry in
their pocket and rush to the banks to change them into gold.

The medieval silver standard had the opposite problem: the silver supply
grew faster than the economy, with new silver mines opened in the
Carpathians (and the Black Death cutting the population of Europe by
1/3 or so in the mid-14th century, without eating away any silver).
The result was inflation, which was why more and more people insisted
on receiving their payments in gold. "

(I am not against gold standard at all, I am just trying to understand it better).

These leave supply and demand out of the picture entirely. As such, they are patently wrong.

Governments tend to inflate simply because it's easier than raising taxes. It's taxation in secret, k? It's easier just to have the central bank print and loan the new money that didn't exist than to take already existing money in the open view of the taxpayer. It's the printing of that new money which causes inflation.

If there were strong deflation, and there were no interference from government, no one would borrow! If they did borrow, they'd want the debt to be indexed somehow so that they don't wind up paying back more. They would know that gold was becoming scarcer and act accordingly. Inflation only helps debtors in the quotes above because the government prints--via loans from the central bank--new money so rampantly.

If the rate of inflation or deflation were negligible, like they would be under the gold standard, then the rate of inflation or deflation wouldn't really matter. They'd be too small to even notice.

[foofighter20x]

Dont you think those elements you listed (apart from silver) are not very practical or abundant enough?

as to yeager, what about economic growth that outpaces growth of gold production, this would have to lead to deflation, since you have more goods and services and less gold availabel or any other physically limited natural commodity.

I am not trying to bait btw, but I do have legitimate concerns.

I think fundamentally, commodity money leads to deflation and fiat money leads to inflation.

It doesn't really matter how abundant they are. Some are in fact more rare than gold. Stop making the mistake of thinking you are only limited to using just one metal. You can use them all! The key to it all is, however, that the market determine the value of the rate of exchange, not government.

As to Yeager... Again, stop assuming prices are static. You are leaving out Supply and Demand again. If the rate of production outpaces the growth of gold, guess what?! Supply and Demand will kick in! Less money (demand) chasing more goods (supply) means lower prices. As the prices go down, so does the cost of living. On the business side, as prices go down, so does profit margin. Once the profit margin gets too low, either firings or pay cuts will take place (most likely the latter, not the former). In a free market, however, this pay cut doesn't matter as the cost of living has gone down already ahead of the pay cut, if not in tandem.

Deflation is only a problem when government enforces the value of money. If you let the market manage it all, inflation and deflation are no longer things you need to worry about.

[TheEvilDetector]

I agree that if there was deflation no one would borrow since you would have to be stupid to take out loans and pay back much more than you should.

Also I think noone would spend as much, because they would want to hold onto their money as much as possible, since it is appreciating so fast.

This lack of spending would slow the economy down, which isn't a good thing, since it tends to increase unemployment and also leads to big losses for companies holding onto stoc

Even with all the provisions you set out, wouldn't the market spiral more and more into deflation, since the originating conditions are not addressed.

I can understand, lower pay, lower prices, lower profits (at least in numeric terms, not necessarily in value terms). What of the people who are holding onto cash and spending less and less because the value is going up too much of the money commodity?

[foofighter20x]

I agree that if there was deflation no one would borrow since you would have to be stupid to take out loans and pay back much more than you should.

Also I think noone would spend as much, because they would want to hold onto their money as much as possible, since it is appreciating so fast.

This lack of spending would slow the economy down, which isn't a good thing, since it tends to increase unemployment and also leads to big losses for companies holding onto stocks.

You say under gold standard deflation would be low, but how can you guarantee that. If the gold mining is very slow, but the economy is growing very fast, the discrepancy would certainly lead to deflation dont you think? Can you explain to me how the free market would ensure that deflation is kept in check?

They can't hold onto all the money forever. Again, the problem is government control and interference. The market maintains equilibrium most efficiently. Government interference in the market it like a winding spring. It keeps things relatively steady on one end, but that spring is still turning on the other and only builds tension. After a certain point, government can't maintain the stability any more and the shit hits the fan--the spring recoils violently.

Also, the "deflation" you speak of reeks of the GD, which, as I already said, was caused by a contraction of the money supply by a government central bank, and market manipulation by big private banks (who, not surprisingly owned the largest shares of the central bank), not by free market deflation." The GD was the 'recoil' from government interference, not free market deflation.

Free market deflation is meaningless for ther reason I explained in my last post.

Dude, it's getting late for me, I have to be up well before sunrise b/c of my job, and you keep begging the question. You are putting new spin on the same questions to the point where I'm giving the same answer over and over. I'm thinking you don't want to be convinced--that, despite your statement to the otherwise, you are set in your frame of thinking and are starting to fight the reasoning and logic of what I've said.

Apply simple free market supply and demand to anything and you can see that government interference in the market is what causes the problems.

[TheEvilDetector]

Lets forget government even exists for the purposes of my question, I have been working on that assumption for a while now, I am not sure why you keep bringing the government back into the equation.

I guess in your answer I do not see how a stable economy can exist (no net inflation/deflation) when there is an ever appreciating currency in a free market because there is a tendency for people to hold onto currency which is appreciating against goods, rather than freely exchanging it whenever they need goods. That's my whole point, that there is a sort of a drag on economic activity because people will tend to hoard appreciating currency.

I know the effect of deflation is lower prices, lower pay and lower profits, since that is how the free market reacts to an appreciating commodity currency. My question is simply, will the market regain balance or will it continue to slide further into deflation. If you do not increase the supply of commodity money, then my guess is yes. If you switch to another form of commodity money then the value of the previous form would drop drastically imho.

[SeanEdwards]

I think currency should be like common stock issued by public corporations. The Federal government should issue this currency, which essentially represents stock shares in the Federal government, into the market, and create a market for the currency by accepting it in payment for taxes and other fees of the government.

The value of this currency would be backed by a diversified mix of precious metals, tax revenues, and other wealth instruments, like shares in utilities and public infrastructure. Instead of a purely gold-backed currency, this currency would sort of be like those spider investment devices that represent a wide diversification of stocks. The idea is to provide a real value backing for the currency without artificially tying that value to only a few precious metals.

The entire process should be conducted in public by Congress so that everyone can look at the balance sheet of this operation and see how much of the currency is in circulation, and make assesments of how much real wealth each unit of currency represents.

If the money supply needs to be increased, then it should be handled like a stock split, with a new series of currency introduced that replaces the old series.

Basically, I'd like to see dollars be a lot more like Berkshire Hathaway stock, instead of the Enron stock it is today.

[foofighter20x]

I keep bringing government back into the equation because your questions are based on instances where government intervention was the cause of the problem. Not realizing that, the wording of your questions assume the free market was at fault, not government--that's not the case, it was the other way around: government was the source of the troubles, not the free market.

The effect of the deflationary drag in a free market is minimal at best. Why? Because of supply and demand.

I see what you are saying in that they will hold onto the appreciating currency. But, supply and demand will kick in. The more they hold onto the money, the more the price will go down (remember, less money chasing either a larger or static amount of goods equals lower prices). Once prices start going down, there will be a greater incentive for the consumer to purchase the good. Not everone will hold out for the same price amount unless they are highly organized, which is unlikely. Anyway, one by one, in a continuum, they will start to buy the good at the falling price until demand meets supply and equilibrium is achieved.

The market will always regain balance when left to itself.

[foofighter20x]

I think currency should be like common stock issued by public corporations. The Federal government should issue this currency, which essentially represents stock shares in the Federal government, into the market, and create a market for the currency by accepting it in payment for taxes and other fees of the government.

The value of this currency would be backed by a diversified mix of precious metals, tax revenues, and other wealth instruments, like shares in utilities and public infrastructure. Instead of a purely gold-backed currency, this currency would sort of be like those spider investment devices that represent a wide diversification of stocks. The idea is to provide a real value backing for the currency without artificially tying that value to only a few precious metals.

The entire process should be conducted in public by Congress so that everyone can look at the balance sheet of this operation and see how much of the currency is in circulation, and make assesments of how much real wealth each unit of currency represents.

If the money supply needs to be increased, then it should be handled like a stock split, with a new series of currency introduced that replaces the old series.

Basically, I'd like to see dollars be a lot more like Berkshire Hathaway stock, instead of the Enron stock it is today.

If we do it your way, is competition with government allowed? If not, who's to stop the government from issuing stock to themselves?

[TheEvilDetector]

I keep bringing government back into the equation because your questions are based on instances where government intervention was the cause of the problem. Not realizing that, the wording of your questions assume the free market was at fault, not government--that's not the case, it was the other way around: government was the source of the troubles, not the free market.

The effect of the deflationary drag in a free market is minimal at best. Why? Because of supply and demand.

I see what you are saying in that they will hold onto the appreciating currency. But, supply and demand will kick in. The more they hold onto the money, the more the price will go down (remember, less money chasing either a larger or static amount of goods equals lower prices). Once prices start going down, there will be a greater incentive for the consumer to purchase the good. Not everone will hold out for the same price amount unless they are highly organized, which is unlikely. Anyway, one by one, in a continuum, they will start to buy the good at the falling price until demand meets supply and equilibrium is achieved.

The market will always regain balance when left to itself.

I am not referring to government interference at all. Simply talking about a limitation on the expansion on the supply of gold which is used as a commodity money, which is simply due to time required to mine it, transport it etc and comparing that to the speed of the expansion of the economy ie. production/demand of goods/services just to maintain a certain standard of living and sufficient employment for an expanding population and to maintain general business profitability.

So to reinstate, in my question, government does not cause the discrepancy between total amount of money available and total number of goods/services on offer, just imagine as I stated earlier that the government does not exist, for the purposes of my question.

Now you say that the consumers, seeing the price fall sufficiently, will begin to purchase goods and services, however business may go out of business before that even happens, people may be laid off. Business being at a mercy of customers who decide when to spend their ever appreciating currency (which is like a prime investment to them). Rather than being treated like a medium of exchange its being treated like a good investment.

The only way in this scenario for the price not to fall I suppose, is to limit economic expansion by reduction in supply of goods to counter the appreciation in money, this means that the economy is being forced to slow down and that there is a lowering of a standard of living as well.

Furthermore, in deflation, investment stops, since noone will borrow money (why would you borrow, if you have to pay back more when you borrowed allowing for interest), thus no one will be able to lend money, thus banks and the financial industry in general will die.

Perhaps the solution lies in having several competing commodity based moneys in circulation, whenever one is deflating, another one maybe inflating or held steady due to varying degrees of production.

In such a scenario, people would use whatever currency is holding value or depreciating rather than any that is appreciating.

What about tying money to energy commodities, since in some ways economy is linked to energy consumption.

For example, a dollar is equivalent to so many kWh ... just an idea:)

By the way, how would gold enter the market, I suppose gold producers would have to be paid something in order to obtain gold??

[SeanEdwards]

If we do it your way, is competition with government allowed? If not, who's to stop the government from issuing stock to themselves?

A unified currency has a lot of efficiency benefits. Dealing with a large number of exchange rates between different currencies is kind of a drag on commerce. It seems better if the money is a universally acceptable medium. But I'm not totally against more freedom in currencies if it can be made to work.

What stops the government from printing money from nothing? Hopefully, getting rid of the fed and making monetary policy decisions in open congressional session. It should basically be against the law to secretly manipulate the value of the currency as they've been doing. That's like changing the weights and measures without telling anyone.

[Justin]

Bad. Idea. This just creates another government program where the the government has a stranglehold on the currency. And that only begs for government abuse.

A free market, gold backed currency is the only answer.

I'd agree but for the "gold backed currency" part. A free market is the only answer. Let the market decide if gold is right or something else - or somethings else. Gold may ultimately *be* the answer, but that's for the market to decide :)

[Highmesa]

A unified currency has a lot of efficiency benefits. Dealing with a large number of exchange rates between different currencies is kind of a drag on commerce. It seems better if the money is a universally acceptable medium. But I'm not totally against more freedom in currencies if it can be made to work.

What stops the government from printing money from nothing? Hopefully, getting rid of the fed and making monetary policy decisions in open congressional session. It should basically be against the law to secretly manipulate the value of the currency as they've been doing. That's like changing the weights and measures without telling anyone.

I think the single most important aspect of reworking our currency is to allow for competition from private currencies. As long as this is allowed, I think the gov't can issue currency, even as I think you mentioned earlier backed by assets. The fact that there are alternative places for people to turn to in order to secure the value of their money keeps the gov't from inflating the currency. Private competition MUST MUST MUST be allowed. If the gov't is allowed a monopoly, they will eventually abuse it.

The market is already out there. Gov't may need to issue a currency for M1 purposes and consistency for day to day currency transactions, but the demand for actual currency and checks is diminishing by the day. I pay all my bills online, and if it was allowed, I could clear all these bills with some commodity (not only gold) backed private currency. There just has to be an ability to clear these accounts from a commodity to a currency, and that is already evolving. You can use a number of currency exchangers to fund debit cards that you can use to purchase products worldwide. They are expensive right now, but as there is more competition, costs will come down. There are already several established, audited, respected digital currencies out there.

The potential for a beautiful world with stable money is at our doorstep. The Federal Reserve is standing in the way.

[monotony]

For an excellent introduction and some of the history behind the dollar and the manipulation by the federal reserve, check out this documentary. (http://www.youtube.com/watch?v=_dmPchuXIXQ) It traces Aldrich, JP Morgan, Rockefeller and the rest of the Jekyll Island group's involvement and hijacking of our dollar and consequently our government.

[ThePieSwindler]

Question about Zeitgeist - i havent seen it, but i heard it ties in the history christianity, 9/11, and the federal reserve all in one. Does it just skip to each topic, or do the to supposed pagan origins of jesus actually have anything to do with the federal reserve? I'm planning on watching the movie when i get 2 hours to sit down and do so, but havent had a chance yet.

[monotony]

It has those three parts in it, but I only really send people the Federal Reserve part of it because I think that's the only part that might be appropriate to represent some of what Dr. Paul is up against. The other parts are irrelevant to him or his views so I usually don't send all 3 parts to people. There is another video on youtube called "Money Masters" which is just as good or better, but it's pretty long and most people don't want to sit through 2 hours about the Federal Reserve.