Should and will the Fed be abolished?

[ShackledNation]

Paper money would never come into existence unless it was originally backed by a market created currency (like gold) or decreed by government (hence the name fiat currency). Would you ever barter for pieces of paper in exchange for your cow? Not unless that paper was a receipt to gold or the actual currency. Today we use paper because government decrees we use paper. It was once exchangeable for gold and silver. Now it is not, and can be created with no restraint.

You are mistaken. Money creation by commercial banks is restrained first by the amount of their deposits and second by the reserve requirement.

The Federal Reserve is not limited by any reserve requirements or deposits when it creates money. So yes, money can be created without restraint.

When you deposit $100 in the bank, you probably worked for that money. Maybe it represented a day's work. Loaning that money out is perfectly fine. But if it is loaned out, you cannot have access to it. If you put $100 in the bank, and they loan out $90, the only way you can ever withdraw more than $10 is if you use the 10% reserves of other banking customers.

Yes! So why is that a problem? You already admitted bank runs are no longer an issue. Bzzzzt! Wrong. If a bank gave money to both the depositor and borrower such that their reserve requirement at the end of the day was too low, they would simply borrow in the Fed Funds market. In your imaginary world, banks would never need to worry about reserve requirements or too many withdrawals, they would "simply create more money".

First of all, I never said bank runs are not an issue. Since October of 2000, hundreds of banks have failed.
FDIC: Failed Bank List

I said that our government and the Federal Reserve subsidize banks (specifically the big ones in bed with government) so they do not fail. Maybe you are fine with that. As for why there is a problem...the point was not that you are using someone else's money. It was more the fact that the money is not there despite the banks giving every demand deposit customer access to their full accounts when only 10% is there. The problem is creating money to finance more loans rather than transfer actual saved money.

This created money is loaned out. This is done by making loans financed by deposits of already loaned funds. If a bank loans out $90, and then the debtor deposits that $90, the bank would still have $90. The depositor transferred $90 to the bank. The bank then transferred the $90 to the debtor, who then transferred it back into the bank. But under fractional reserve banking, the bank says there is $180. In order to do this, it must pretend that it never actually loaned out the depositor's funds. On the bank records, the depositor accounts will remain unchanged with every loan made from them, representing just that practice. But the debtor accounts will increase.

LOL! Make up your mind. Either they "simply create more money" or they need deposits in order to make loans.
And your last point is wrong, the depositor accounts do not remain unchanged.
Every loan in which the borrower keeps the money at the same bank means a new deposit.
$100, first deposit.
$90 borrowed but stays at the bank, $190 in deposits and $90 in loans.
Next loan, $81 borrowed but stays at the bank, $271 in deposits, $171 in loans.
At every point in the cycle, loans are less than deposits.

You aren't following me at all. If you read my post clearly, you would have seen that the result is more deposits. Let me reiterate.

Here is what would happen under a nonfractional reserve banking system. Bob deposits $100 in a bank. The bank loans out $90 of Bob's money by putting it in another account accessible to the debtor. It changes Bob's account to $10, alerting Bob that his money has been loaned. No money creation. But that is not what happens under our system.

The bank does not say Bob's account has $10 when it makes a loan. It says Bob's account still has $100. Deposits of debtors (those receiving loans from the bank) will increase as loans are made. But deposits of those who finance the loans with their deposits remain unchanged.

When a normal loan is made, the provider of the funds for the loan would not be able to access the funds provided for the loan. Those funds would be in use by the debtor. Under our current system, when you deposit money in a demand deposit, it is not used to create loans but to create money. You always have access to your account. But if your account is used to make loans, how can this be? The solution is to fudge the numbers and create more money. This practice is bizarre at best and fraudulent at worst.

The solution is modern banking. If you don't like it, please, don't deposit money into or borrow from a bank. Their is no fraud involved. If you don't realize that banks are in business to take deposits (and pay interest on them) and make loans from those deposits (and charge interest on those loans), you're probably too dumb to open a bank account.

So you admit modern banking involves fudging the numbers to create money and the illusion of wealth? Modern banking is a nightmare that causes the business cycle. Enough with your pathetic personal attack responses. Such attacks are the mark of a closed mind. Taking deposits and making loans from deposits is perfectly legitimate. But that is not all that is going on. You deposit $100 in the bank. The bank loans out $90. That $90 is redeposited. There is now $190 according to the banks. It is unbelievable how difficult it is for you to see the absurdity in that. If a deposit was used to finance a loan, the money supply could not increase because money would be transferred. Instead, banks fudge the numbers so they can give customers the impression that their deposits are accessible on demand at all times. They simply create money to finance new loans. The amount of money they create is limited by how much is deposited. But as more money is created, more is deposited, and the supply will expand to no end.

 

[Toddsterpatriot]

Paper money would never come into existence unless it was originally backed by a market created currency (like gold) or decreed by government (hence the name fiat currency). Would you ever barter for pieces of paper in exchange for your cow? Not unless that paper was a receipt to gold or the actual currency. Today we use paper because government decrees we use paper. It was once exchangeable for gold and silver. Now it is not, and can be created with no restraint.

You are mistaken. Money creation by commercial banks is restrained first by the amount of their deposits and second by the reserve requirement.

The Federal Reserve is not limited by any reserve requirements or deposits when it creates money. So yes, money can be created without restraint.

Don't confuse Central Banks with commercial banks. That's just too much on top of all your other mistakes.

First of all, I never said bank runs are not an issue. Since October of 2000, hundreds of banks have failed.
FDIC: Failed Bank List

Banks fail? I guess they can't just create money?

I said that our government and the Federal Reserve subsidize banks (specifically the big ones in bed with government) so they do not fail. Maybe you are fine with that. As for why there is a problem...the point was not that you are using someone else's money. It was more the fact that the money is not there despite the banks giving every demand deposit customer access to their full accounts when only 10% is there. The problem is creating money to finance more loans rather than transfer actual saved money.

Yes, what's the problem? If a bank needs more reserves to cover too many withdrawals, they borrow more reserves.
Banks don't create more money to finance more loans. If they could do that, they'd never fail. They create loans out of deposits.

You aren't following me at all. If you read my post clearly, you would have seen that the result is more deposits. Let me reiterate.

Here is what would happen under a nonfractional reserve banking system. Bob deposits $100 in a bank. The bank loans out $90 of Bob's money by putting it in another account accessible to the debtor. It changes Bob's account to $10, alerting Bob that his money has been loaned. No money creation. But that is not what happens under our system.

This is Bob, why the F*** do you have the wrong balance in my account. LOL!

The bank does not say Bob's account has $10 when it makes a loan. It says Bob's account still has $100. Deposits of debtors (those receiving loans from the bank) will increase as loans are made. But deposits of those who finance the loans with their deposits remain unchanged.

Yes, my deposit account remains the same whether they lend it out or not. Just as your CD remains the same.....

When a normal loan is made, the provider of the funds for the loan would not be able to access the funds provided for the loan. Those funds would be in use by the debtor. Under our current system, when you deposit money in a demand deposit, it is not used to create loans but to create money. You always have access to your account. But if your account is used to make loans, how can this be? The solution is to fudge the numbers and create more money. This practice is bizarre at best and fraudulent at worst.

The solution is modern banking. If you don't like it, please, don't deposit money into or borrow from a bank. Their is no fraud involved. If you don't realize that banks are in business to take deposits (and pay interest on them) and make loans from those deposits (and charge interest on those loans), you're probably too dumb to open a bank account.

So you admit modern banking involves fudging the numbers to create money and the illusion of wealth? Modern banking is a nightmare that causes the business cycle.

I admit than by borrowing, you can increase the money supply. I guess there was no business cycle when 99.99999% of the world was subsistence farming to eke out a living. Let's go back there so you don't have to worry about modern banking.

Enough with your pathetic personal attack responses. Such attacks are the mark of a closed mind. Taking deposits and making loans from deposits is perfectly legitimate. But that is not all that is going on. You deposit $100 in the bank. The bank loans out $90. That $90 is redeposited. There is now $190 according to the banks. It is unbelievable how difficult it is for you to see the absurdity in that. If a deposit was used to finance a loan, the money supply could not increase because money would be transferred. Instead, banks fudge the numbers so they can give customers the impression that their deposits are accessible on demand at all times. They simply create money to finance new loans. The amount of money they create is limited by how much is deposited. But as more money is created, more is deposited, and the supply will expand to no end.

Yeah, sorry if you feel you've been attacked. I get frustrated when I'm talking to a fan of Rothbard who doesn't understand the simplest fact of modern finance and banking.

 

[Moonglow]

You are mistaken. Money creation by commercial banks is restrained first by the amount of their deposits and second by the reserve requirement.

The Federal Reserve is not limited by any reserve requirements or deposits when it creates money. So yes, money can be created without restraint.

Don't confuse Central Banks with commercial banks. That's just too much on top of all your other mistakes.


Banks fail? I guess they can't just create money?Yes, what's the problem? If a bank needs more reserves to cover too many withdrawals, they borrow more reserves.
Banks don't create more money to finance more loans. If they could do that, they'd never fail. They create loans out of deposits.


This is Bob, why the F*** do you have the wrong balance in my account. LOL!

Yes, my deposit account remains the same whether they lend it out or not. Just as your CD remains the same.....

So you admit modern banking involves fudging the numbers to create money and the illusion of wealth? Modern banking is a nightmare that causes the business cycle.

I admit than by borrowing, you can increase the money supply. I guess there was no business cycle when 99.99999% of the world was subsistence farming to eke out a living. Let's go back there so you don't have to worry about modern banking.

Enough with your pathetic personal attack responses. Such attacks are the mark of a closed mind. Taking deposits and making loans from deposits is perfectly legitimate. But that is not all that is going on. You deposit $100 in the bank. The bank loans out $90. That $90 is redeposited. There is now $190 according to the banks. It is unbelievable how difficult it is for you to see the absurdity in that. If a deposit was used to finance a loan, the money supply could not increase because money would be transferred. Instead, banks fudge the numbers so they can give customers the impression that their deposits are accessible on demand at all times. They simply create money to finance new loans. The amount of money they create is limited by how much is deposited. But as more money is created, more is deposited, and the supply will expand to no end.

Yeah, sorry if you feel you've been attacked. I get frustrated when I'm talking to a fan of Rothbard who doesn't understand the simplest fact of modern finance and banking.

you got that right

 

[Brutus]

What you quoted had nothing to do with paper vs. gold. And our supply is not limited. It is indefinite.

you mean the supply of paper money is infinite?? Yes, but only until there is a simple law that says paper must be, in effect, as limited as gold with the sole objective of keeping prices steady.

Once that happens all of our problems are solved. So then, what is it that you still don't understand?[/QUOTE]

If paper money must be as limited as gold, you get a gold standard. Which I would agree with.

it has nothing to do with gold. Paper money has to be limited enough to keep inflation at 0% .

As for the objective of money to keep prices steady: not really. The purpose of money is to provide a medium of exchange before anything else.

what??? paper money is only useful as a medium of exchange to the extent its quanity and velocity keeps prices constant

Don't forget that money too has a price.

???????????

 

[Toro]

The price of money is the rate of interest.

 

[ShackledNation]

What you quoted had nothing to do with paper vs. gold. And our supply is not limited. It is indefinite.

you mean the supply of paper money is infinite?? Yes, but only until there is a simple law that says paper must be, in effect, as limited as gold with the sole objective of keeping prices steady.

Once that happens all of our problems are solved. So then, what is it that you still don't understand?

Are you talking about a gold standard? Because I would love that. I am talking about our current paper money system. As long as we have fractional reserve banking, it will continue to expand without end.

If paper money must be as limited as gold, you get a gold standard. Which I would agree with.

it has nothing to do with gold. Paper money has to be limited enough to keep inflation at 0% .

That means no creation of new money. Which I support. But why would you prefer paper receipts backed by nothing as opposed to paper receipts backed by gold or some other commodity? With paper money backed by nothing, government could just print more money. With a currency redeemable in gold, printing more money would deplete a country's gold reserves, restraining the creation of receipts.

As for the objective of money to keep prices steady: not really. The purpose of money is to provide a medium of exchange before anything else.

what??? paper money is only useful as a medium of exchange to the extent its quantity and velocity keeps prices constant

The primary purpose of money is to act as a medium of exchange. We don't use money to keep prices steady. We use money in exchange for goods and services. Money with a constant quantity is best used as money, which is why rare metals came about as currency in much of the world.

Don't forget that money too has a price.

???????????

It is incredibly important to understand the concept that money has a price if one is ever to understanding monetary policy. The price of money is its purchasing power. When you buy a $600 TV, the TV retailer is buying $600. In other words, the price of money is the array of goods and services it can buy. $50 costs 1 video game or a pair of jeans or 2 shirts or 1/2 DVD player. According to the law of supply, when you increase the supply of something, you decrease its price. In the case of money, price is represented by purchasing power. When you increase the supply of money, you decrease its purchasing power. Thus, you create the phenomenon of overall rises in prices known as inflation.

Toro made a good comment by bringing up interest rates, which are also prices relating to money. But they are not the price of money exactly. They are the price of borrowing, or the price of loanable funds. Interest rates relay time preference. If the interest rate is low, it means suppliers of loans are very willing to make loans, or on the demand side it means debtors need to be enticed to take out more loans. The supply of loanable funds normally is made up of savings. Increased savings would increase the supply of loanable funds, making loans cheaper and reducing the interest rate. That is why the federal reserve creates more money--to lower the interest rate. The Federal Reserve is trying to entice more borrowing caused by lower interest rates. In doing so, it gives the impression of greater savings.

Here is where the problem comes in. Money is a medium of exchange. If you increase the supply of money, you decrease its purchasing power. So if you increase the money supply by 1 trillion dollars, you will ultimately get rises in prices equal to that level. This will occur over time in different industries. Often, the money is funneled into the "best investment of the times" which in the recent recession was housing. But it is all a mess. Say the 1 trillion in new money is loaned and makes its way into the economy. $1 trillion dollars worth of new projects will be started. But as the other effect of money creation--rising prices--occurs, the projects cannot be sustained. They will fail, and you will get economic disaster. You will get the collapse of the housing market. You get the dreadful business cycle.

 

[Brutus]

What you quoted had nothing to do with paper vs. gold. And our supply is not limited. It is indefinite.

you mean the supply of paper money is infinite?? Yes, but only until there is a simple law that says paper must be, in effect, as limited as gold with the sole objective of keeping prices steady.

Once that happens all of our problems are solved. So then, what is it that you still don't understand

are you talking about a gold standard? Because I would love that. I am talking about our current paper money system. As long as we have fractional reserve banking, it will continue to expand without end.

That means no creation of new money. Which I support.

a common sense paper system would create enough new money to keep prices constant as the economy grew.

But why would you prefer paper receipts backed by nothing

they are backed by full faith and credit of federal government and 100% seem to take that seriously

as opposed to paper receipts backed by gold or some other commodity?

we had gold in panic of 1907 that led to Fed. A gold standard is very complicated too with much government intervention. IN any case there is no constituiency for new gold standard.

With paper money backed by nothing, government could just print more money.

and with gold we had the long depression and the panic of 1907

With a currency redeemable in gold, printing more money would deplete a country's gold reserves, restraining the creation of receipts.

there are numerous ways to abuse each system. IF the law is no inflation then all problems are solved.

The primary purpose of money is to act as a medium of exchange. We don't use money to keep prices steady.

money without constant pricces is far less valuable as a medium of exchange

We use money in exchange for goods and services. Money with a constant quantity is best used as money, which is why rare metals came about as currency in much of the world.

if you trust government with nuclear weapons you can trust them to make money. THe issue is whether we all understand how much to print

Don't forget that money too has a price.

???????????

It is incredibly important to understand the concept that money has a price if one is ever to understanding monetary policy. The price of money is its purchasing power. When you buy a $600 TV, the TV retailer is buying $600. In other words, the price of money is the array of goods and services it can buy. $50 costs 1 video game or a pair of jeans or 2 shirts or 1/2 DVD player. According to the law of supply, when you increase the supply of something, you decrease its price. In the case of money, price is represented by purchasing power. When you increase the supply of money, you decrease its purchasing power. Thus, you create the phenomenon of overall rises in prices known as inflation.

and???

Toro made a good comment by bringing up interest rates, which are also prices relating to money. But they are not the price of money exactly. They are the price of borrowing, or the price of loanable funds. Interest rates relay time preference. If the interest rate is low, it means suppliers of loans are very willing to make loans, or on the demand side it means debtors need to be enticed to take out more loans. The supply of loanable funds normally is made up of savings. Increased savings would increase the supply of loanable funds, making loans cheaper and reducing the interest rate. That is why the federal reserve creates more money--to lower the interest rate. The Federal Reserve is trying to entice more borrowing caused by lower interest rates. In doing so, it gives the impression of greater savings.

Here is where the problem comes in. Money is a medium of exchange. If you increase the supply of money, you decrease its purchasing power. So if you increase the money supply by 1 trillion dollars, you will ultimately get rises in prices equal to that level. This will occur over time in different industries. Often, the money is funneled into the "best investment of the times" which in the recent recession was housing. But it is all a mess. Say the 1 trillion in new money is loaned and makes its way into the economy. $1 trillion dollars worth of new projects will be started. But as the other effect of money creation--rising prices--occurs, the projects cannot be sustained. They will fail, and you will get economic disaster. You will get the collapse of the housing market. You get the dreadful business cycle.

I don't really think inflation causes a project to fail, I think its that there are too many projects that people don't get interested in supporting because they are not built with real hard earned money.

That explains the housing bubble popping far more than inflation. China has lots of inflation and money creation but still 10% growth becuase there is plenty of demand for the projects built on limitless credit.

 

[ShackledNation]

a common sense paper system would create enough new money to keep prices constant as the economy grew.

Why would you prefer a system with a currency redeemable in nothing vs. a currency redeemable in gold or any other commodity?

they are backed by full faith and credit of federal government and 100% seem to take that seriously

So we have money backed by faith and debt. Sound good to you? Judging by our current government's fiscal disaster, I hardly find that statement reassuring. All that really means is government is in complete control of our money.

we had gold in panic of 1907 that led to Fed. A gold standard is very complicated too with much government intervention. IN any case there is no constituiency for new gold standard.

The panic of 1907 was not caused by gold but fractional reserve banking. I never claimed simply having a gold standard would prevent panics. What is complicated about the gold standard?

and with gold we had the long depression and the panic of 1907

The Depression was after the creation of the Federal Reserve and the abolition of the classical gold standard. To finance WWI, governments massively inflated their currencies. This made redemption in gold impossible, so they went off the gold standard. The US inflated less, and did not go off the gold standard. The gold exchange standard preceding the Great Depression (beginning in 1926) is what caused disaster. After the currencies were devalued throughout the world, when the gold standard was reinstated it was reinstated at the same level as before. Despite the fact that there were many more British pounds, a pound was still redeemable in the same amount as before.

Britian kept the gold standard at pre WWI levels for its own currency. But such a standard would be unsustainable. To support it, it led the way at the Genoa conference. Rather than redeem currencies in gold, currencies would be redeemed in British pounds or US dollars. Currencies could only be redeemed in large gold bars, which few could actually afford. As a result, people redeemed their currency in the US dollar which was still on the classical gold standard. Because of the massive increase in printed currencies, this led to a gold drain.

You had a pyramid system in which US dollars were redeemable in gold, British pounds were redeemable in US dollars, and other currencies were redeemable in British pounds. It was a disaster, and far from a free market gold standard. Banks heavily inflated the currencies due to this system. In 1931, you saw the failure of inflated (meaning they creating a ton of money) banks across Europe, Britain went off the gold standard, and other countries soon followed.

So in short:
1. The gold standard did not cause the Great Depression because it did not truly exist in the international monetary system. At the time, the system was gold-exchange standard.
2. Fractional Reserve banking caused the panic of 1907, not the gold standard.

there are numerous ways to abuse each system. IF the law is no inflation then all problems are solved.

I am assuming you acknowledge that rises in price of certain goods are fine so long as the general price level is unchanged (meaning other prices fall). You cannot have prices that do not change at all in a free market. The notion is absurd. The whole purpose of prices is to balance supply and demand and reflect subjective consumer preferences at different times.

That said, a general rise in the price level defined today as inflation is terrible. But such inflation can only be caused by the creation of money. The best way to stop inflation is to end fractional reserve banking, the federal reserve, and have a currency fixed to a commodity that does not fluctuate wildly in supply.

money without constant pricces is far less valuable as a medium of exchange

The fact still holds that money's primary purpose is to act as a medium of exchange. If the money can be created or destroyed easily, it is probably not very good money. That is why fiat currency based only on paper is a poor choice of currency.

if you trust government with nuclear weapons you can trust them to make money.

You trust government with nuclear weapons????

THe issue is whether we all understand how much to print

Why do we need to increase the supply of money at all? If production increases, the supply of goods in relation to money increases. This increases the puchasing power of money, allowing for people to buy more with the money they have. This is how people rise out of poverty--economic expansion and production. If you cancel out the benefits of economic expansion by inflating the currency, you will have the poor remaining stagnant and the rich getting richer (for it is the rich and political elites that get the new money before the price level rises). That is exactly what we see today in America.

???????????

What is your confusion? Money has a price. The price of money is its purchasing power.
I went into detail about why already.

and???

Less purchasing power means savings and debt are both worth less. So what you have is a great way to deplete the savings of individuals to pay for the debts of other individuals and government. Less purchasing power also means less wealth for individuals in the economy that do not see an increase in money. Guess who gets the new money? It aint the poor. It is wall street and political elites. They get the new money, prices rise, but they remain rich because they are the holders of the expansion of the money supply.

Toro made a good comment by bringing up interest rates, which are also prices relating to money. But they are not the price of money exactly. They are the price of borrowing, or the price of loanable funds. Interest rates relay time preference. If the interest rate is low, it means suppliers of loans are very willing to make loans, or on the demand side it means debtors need to be enticed to take out more loans. The supply of loanable funds normally is made up of savings. Increased savings would increase the supply of loanable funds, making loans cheaper and reducing the interest rate. That is why the federal reserve creates more money--to lower the interest rate. The Federal Reserve is trying to entice more borrowing caused by lower interest rates. In doing so, it gives the impression of greater savings.

Here is where the problem comes in. Money is a medium of exchange. If you increase the supply of money, you decrease its purchasing power. So if you increase the money supply by 1 trillion dollars, you will ultimately get rises in prices equal to that level. This will occur over time in different industries. Often, the money is funneled into the "best investment of the times" which in the recent recession was housing. But it is all a mess. Say the 1 trillion in new money is loaned and makes its way into the economy. $1 trillion dollars worth of new projects will be started. But as the other effect of money creation--rising prices--occurs, the projects cannot be sustained. They will fail, and you will get economic disaster. You will get the collapse of the housing market. You get the dreadful business cycle.

I don't really think inflation causes a project to fail, I think its that there are too many projects that people don't get interested in supporting because they are not built with real hard earned money.

Right! They are not built with real hard earned money! That is why they fail. These projects are financed by money created out of thin air. Because expansion of the money supply reduces purchasing power, consumers will not have the savings to buy the products. It does not matter how much they want the products. Demand necessitates actually paying and having the ability to pay. Inflation is the harsh reality that you cannot print savings and wealth into existence. The savings do not exist. The problem is not rising prices. Rising prices is the symptom. The problem is expanding the money supply and believing the myth that doing so will facilitate real growth.

That explains the housing bubble popping far more than inflation.

Prices would have risen elsewhere if not in housing. When you expand the money supply you will have prices higher than they would have been. There are many reasons why housing came about as the investment of choice. Cheap loans, sub primate mortgages, tax incentives, government encouragement for "everyone to own their own home", the Community Reinvestment act, and many other factors.

China has lots of inflation and money creation but still 10% growth becuase there is plenty of demand for the projects built on limitless credit.

Chinese growth is grossly overstated. Here is an article referencing studies on the topic.
China and the Development Myth - D.W. MacKenzie - Mises Daily

However, it is true that China has had good growth in recent decades. But this is because it has adopted increasingly free market reforms.

Much of Chinese growth, however, because it is controlelled by government, is not wealth the economy wants or needs. China has many ghost cities with no inhabitants.
The Inevitable Result of Central Planning: China’s Ghost Cities and Malls (Watch the video, the article is not as important)
Classic example of the mismangement you get with central planning. If you create a trillion pins and nothing else, GDP will rise. But that is not wealth and productivity. True productivity is producing what people want. You cant eat pins. You have all these projects created that people cannot afford and don't want.

China's growth is an example of a bubble economy waiting to collapse. China's housing market is in a massive bubble. These ghost cities make this evident. You have over construction unmet by actual demand because it does not exist. China is very successful in producing things people wont buy.

China is plagued by staggering levels of credit expansion, speculation, malinvestment, and toxic loans — much like what we saw in America. No government can overcome the laws of economics. China will see falling prices and less growth in the near future. Their economy is not healthy at all.

 

[Brutus]

a common sense paper system would create enough new money to keep prices constant as the economy grew.

Why would you prefer a system with a currency redeemable in nothing vs. a currency redeemable in gold or any other commodity?[/quote]


who cares if it is gold or autos???? As long as paper or gold are limited in supply all is fine

they are backed by full faith and credit of federal government and 100% seem to take that seriously

So we have money backed by faith and debt. Sound good to you? Judging by our current government's fiscal disaster, I hardly find that statement reassuring. All that really means is government is in complete control of our money.

as long as gold or paper are limited in supply all is fine

The panic of 1907 was not caused by gold but fractional reserve banking. I never claimed simply having a gold standard would prevent panics. What is complicated about the gold standard

of course banks need to make money by lending more than they have in deposits

The Depression was after the creation of the Federal Reserve

the Long Depression was before

So in short:
1. The gold standard did not cause the Great Depression because it did not truly exist in the international monetary system. At the time, the system was gold-exchange standard.

all agree; so?????????

2. Fractional Reserve banking caused the panic of 1907, not the gold standard.

how do you have a gold standard without fractional reserve?

That said, a general rise in the price level defined today as inflation is terrible. But such inflation can only be caused by the creation of money. The best way to stop inflation is to end fractional reserve banking, the federal reserve, and have a currency fixed to a commodity that does not fluctuate wildly in supply.

or simply have paper money and a no inflation policy

The fact still holds that money's primary purpose is to act as a medium of exchange.

but its not a good medium if its value changes a lot

If the money can be created or destroyed easily, it is probably not very good money. That is why fiat currency based only on paper is a poor choice of currency.

its a great choice if there is agreement about how much to print

You trust government with nuclear weapons???

?

longest peace in recent history thanks to our governments control of nuke

Why do we need to increase the supply of money at all?

so prices stay constant as economy grows

If production increases, the supply of goods in relation to money increases. This increases the puchasing power of money, allowing for people to buy more with the money they have. This is how people rise out of poverty--economic expansion and production.

deflation means depression since you can wait till tomorrow to do everything cheaper

If you cancel out the benefits of economic expansion by inflating the currency,

no idea how you get expansion by inflating currency

you will have the poor remaining stagnant and the rich getting richer (for it is the rich and political elites that get the new money before the price level rises). That is exactly what we see today in America.

much of it went first to unqualified home buyers

China has lots of inflation and money creation but still 10% growth becuase there is plenty of demand for the projects built on limitless credit.[/quote]

Chinese growth is grossly overstated.

I doubt it. They have a trillion of our debt and they buy more cars than we do now. 30 years ago they bought 0 cars. You can look at their economy 100 different ways and 100 different economists have and the growth is about 10% a year.

china has increasingly adopted free market practices

yes but tons and tons of government control and tons and tons and tons of private money and credit creation over which the central government has little control.

Much of Chinese growth, however, because it is controlelled by government, is not wealth the economy wants or needs. China has many ghost cities with no inhabitants.

yes and still they get 10% growth

Classic example of the mismangement you get with central planning.

10% growth for 30 years is not mismanagement but rather a miracle never seen before

If you create a trillion pins and nothing else, GDP will rise. But that is not wealth and productivity. True productivity is producing what people want. You cant eat pins. You have all these projects created that people cannot afford and don't want.

10% growth

China's growth is an example of a bubble economy waiting to collapse.

a 30 year 10% growth bubble???? A busted watch still works once second a day. keep calling it a bubble and eventually you'll be right and will claim credit

China's housing market is in a massive bubble. These ghost cities make this evident. You have over construction unmet by actual demand because it does not exist. China is very successful in producing things people wont buy.

10% real growth. THe stuff at Walmart is not free!!!.

China is plagued by staggering levels of credit expansion, speculation, malinvestment, and toxic loans — much like what we saw in America. No government can overcome the laws of economics. China will see falling prices and less growth in the near future. Their economy is not healthy at all.

liberatrians have been predicting huge inflation here for 4 years now, but eventually they may be right.l

 

[Toddsterpatriot]

of course banks need to make money by lending more than they have in deposits

But of course banks cannot lend more than their deposits.

 

[Toro]

of course banks need to make money by lending more than they have in deposits

But of course banks cannot lend more than their deposits.

Banks can't lend more than their liabilities, of which deposits are a part.

 

[Toddsterpatriot]

of course banks need to make money by lending more than they have in deposits

But of course banks cannot lend more than their deposits.

Banks can't lend more than their liabilities, of which deposits are a part.

Correct!

 

[Brutus]

of course banks need to make money by lending more than they have in deposits

But of course banks cannot lend more than their deposits.

I thought fractional reserve banking was common???

 

[Toddsterpatriot]

of course banks need to make money by lending more than they have in deposits

But of course banks cannot lend more than their deposits.

I thought fractional reserve banking was common???

It is common. Every modern bank for the last several hundred years uses it.

 

[Brutus]

of course banks need to make money by lending more than they have in deposits

But of course banks cannot lend more than their deposits.

I thought fractional reserve banking was common???

It is common. Every modern bank for the last several hundred years uses it.

so now you know they can lend more than their deposits

 

[Toddsterpatriot]

of course banks need to make money by lending more than they have in deposits

But of course banks cannot lend more than their deposits.

I thought fractional reserve banking was common???

It is common. Every modern bank for the last several hundred years uses it.

so now you know they can lend more than their deposits

No, fractional reserve banking means a fraction is held in reserve, so loans are less than, not more than deposits (liabilities).

 

[Toro]

The Depression was after the creation of the Federal Reserve and the abolition of the classical gold standard. To finance WWI, governments massively inflated their currencies. This made redemption in gold impossible, so they went off the gold standard. The US inflated less, and did not go off the gold standard. The gold exchange standard preceding the Great Depression (beginning in 1926) is what caused disaster. After the currencies were devalued throughout the world, when the gold standard was reinstated it was reinstated at the same level as before. Despite the fact that there were many more British pounds, a pound was still redeemable in the same amount as before.

Britian kept the gold standard at pre WWI levels for its own currency. But such a standard would be unsustainable. To support it, it led the way at the Genoa conference. Rather than redeem currencies in gold, currencies would be redeemed in British pounds or US dollars. Currencies could only be redeemed in large gold bars, which few could actually afford. As a result, people redeemed their currency in the US dollar which was still on the classical gold standard. Because of the massive increase in printed currencies, this led to a gold drain.

You had a pyramid system in which US dollars were redeemable in gold, British pounds were redeemable in US dollars, and other currencies were redeemable in British pounds. It was a disaster, and far from a free market gold standard. Banks heavily inflated the currencies due to this system. In 1931, you saw the failure of inflated (meaning they creating a ton of money) banks across Europe, Britain went off the gold standard, and other countries soon followed.

So in short:
1. The gold standard did not cause the Great Depression because it did not truly exist in the international monetary system. At the time, the system was gold-exchange standard.
2. Fractional Reserve banking caused the panic of 1907, not the gold standard.

I would not blame the gold standard for the Great Depression, but it certainly inhibited the recovery. Countries that devalued or abandoned the gold standard in the early 30s were the first to begin recovering. The Federal Reserve in 1931, in an attempt to stem the outflow of gold as countries abandoned the gold standard and started expanding, raised the interest rate from 1.5% to 3.5%, which was nuts in the midst of the Depression. This attempted defense of the gold standard contributed to the final collapse into 1932, as the Fed did the exact opposite of what was required by taking balances out of the economy. Milton Friedman was correct. Abandoning the gold standard and the creation of the FDIC were probably the two most important government policies contributing to the end of the Depression as the government was able to increase the money supply and give confidence in the banking system to depositors.

While the monetary system after WWI was not a true gold standard, that is sort of like saying the USSR was not true communism. It doesn't really matter, since the primary driver was the anchoring of the global monetary system was to gold. What you are seeing today in Greece is what happens to (an admittedly profligate) economy that does not have control over its currency. The inability to affect the supply of money to offset economic volatility increases economic volatility, not decreases it. Empirically, there is evidence that economies with central banks are less volatile than those without.

Another problem with the gold standard is that the necessary growth in the supply of gold does not approximate growth in the economy. This is important because rising economic wealth requires an increase in the supply of money. If economic growth rises faster than the supply of money, real interest rates will rise, which will lower growth to below its potential since tight monetary policy will slow growth.

Dogmatic free market theoreticians argue that rising gold prices will cause an increase in the supply of gold as excess profits will lead to capital flooding into the gold mining industry. This may be true in theory, but it doesn't necessarily hold in practice. For example, we are currently in one of gold's biggest bull markets of all time, as gold has risen from $250 to $1500 in a decade. However, mine output is about the same as it was 10 years ago. The marginal cost of gold at the bottom of the gold bear market was ~$320 an ounce. Today it is $800 an ounce. Gold miners are making big profits today compared to losses a decade ago. Yet the supply of gold being taken out of the earth is about the same. According to dogmatic free market theory, that shouldn't happen.

It may be, however, that the gold bugs wind up being correct. It may be that the end of true fiat money is on the horizon. It may be that at least some sort of anchoring of currencies to something tangible is necessary. We may be precipitating a dollar or some fiat currency crisis some time in the future. The monetary authorities have fucked it up so badly, we may be living through history and the ultimate end of the fiat currency system.

 

[Neubarth]

The FED is the greatest thing this country has ever had. Only a total idiot would attempt to deny that.

 

[Brutus]

The FED is the greatest thing this country has ever had. Only a total idiot would attempt to deny that.

Then you must feel the Great Depression was the greatest thing this country has ever had.