Fiat Money and its Social Significance

[Kimura]

There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.

Many people, mostly gold bugs, seem unnerved that modern money isn't back anything, such as gold, for instance. They tend to think that this makes modern money a less reliable "store of value". Sure, it's completely logical to assume that a mismanaged monetary system, or a scenario like an oil-price shock, can cause inflation. But the VAST majority of these people don't understand the other side of the spectrum. Under the gold standard, and as a direct of the gold standard, the world went through 8 different deflationary periods severe enough to be called depressions. Once we abolished the gold standard, we can haven't had of these any of these deflationary scenarios, which isn't coincidence.

 

[Kimura]

Sure you could. The government could charge the cattle rancher 10% of the increase in his herd; could charge the farmer 10% of his crop; and if I support myself via bartering a service for those beans and potatoes, the government could require me to turn over 10% of the potatoes and beans etc. that I receive. Of course that would make working the Treasury Dept. a very interesting and stressful gig what with thousands of cows, horses, pigs, etc. and truckloads of various commodities and products being delivered to its front door.

And we pay the President with 40 cows one month or other government employees an allotment of whatever critters or goods the government takes in.

Money does considerably simplify the process.

It sure does. I was talking about the current system, not hypothetical scenarios.

Well.. . .if you're going with realities, if I choose to accept all payments for my labor via bartering for commodities, products, and services, I would probably get away with paying no taxes as the government would not likely be tracking those transactions. But you're right that such would not technically do away with my tax obligations.

But, if there was no paper currency or coinage issues by the government, the government would HAVE to accept a couple of chickens or a pig or such as is the case in more primitive cultures.

Yeah, you could definitely get away with not paying taxes if you went that route. It would be an interesting experiment to see if one could do that for 12 months. I mean completely barter your labor for real goods and services for a period of 12 months.

 

[Foxfyre]

There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.

Paper currency does have to be tied to a value with the most logical standard being the income included in the gross domestic product. When the government prints substantially more money in order to spend substantially more money, it devalues all the money currently circulating in the system. We see it every time we go to the store and note a few extra cents on a head of lettuce or a can of peas. The fact that we have a totally dishonest and untrustworthy government who flat out lies to us about that in no way lessens the overall effect.

 

[TakeAStepBack]

There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.

Many people, mostly gold bugs, seem unnerved that modern money isn't back anything, such as gold, for instance. They tend to think that this makes modern money a less reliable "store of value". Sure, it's completely logical to assume that a mismanaged monetary system, or a scenario like an oil-price shock, can cause inflation. But the VAST majority of these people don't understand the other side of the spectrum. Under the gold standard, and as a direct of the gold standard, the world went through 8 different deflationary periods severe enough to be called depressions. Once we abolished the gold standard, we can haven't had of these any of these deflationary scenarios, which isn't coincidence.

Nonsense coupled with hyperbole.

Good Versus Bad Deflation: Lessons from the Gold Standard Era

The researchers identify separate "supply shocks," "money supply shocks," and "non-monetary demand shocks" on output and prices. Their analysis is grounded in a model of money supply under the international gold standard. Their results indicate that deflation in the three leading industrial nations in the late 19th century reflected both positive aggregate supply shocks and negative money supply shocks. Yet the latter had only a minor effect on output. The evidence thus suggests that deflation in the 19th century was primarily good, or at the very least neutral.

Moreover, the value of FRN since 1913 in the USA has decreased to almost zero of its initial value. Inflation is not better than small, corrective downturns. We've been in and out of recessions and depressions every 7 years since the complete abandonment of a currency anchor.

That too, is no coincidence.

 

[HelenaHandbag]

There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.

Paper currency does have to be tied to a value with the most logical standard being the income included in the gross domestic product. When the government prints substantially more money in order to spend substantially more money, it devalues all the money currently circulating in the system. We see it every time we go to the store and note a few extra cents on a head of lettuce or a can of peas. The fact that we have a totally dishonest and untrustworthy government who flat out lies to us about that in no way lessens the overall effect.

The biggest hole in that theory is that the same people who hold the control of the printing press are also the ones defining what the GDP is and isn't. Not at all surprisingly, they are also the same people who get to decide which products (i.e. food and fuel) get counted into their calculations of how inflation is measured.

Nice work, if you can get it.

 

[TakeAStepBack]

There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.

Paper currency does have to be tied to a value with the most logical standard being the income included in the gross domestic product. When the government prints substantially more money in order to spend substantially more money, it devalues all the money currently circulating in the system. We see it every time we go to the store and note a few extra cents on a head of lettuce or a can of peas. The fact that we have a totally dishonest and untrustworthy government who flat out lies to us about that in no way lessens the overall effect.

The problem with this, is that placing a store of value on future production and earnings, instead of a tangible asset, creates a climate that is unstable, and the market does not make the determination, central planners do. And the results have thus far, ALL throughout history, have been disasterous.

 

[Kimura]

There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.

Paper currency does have to be tied to a value with the most logical standard being the income included in the gross domestic product. When the government prints substantially more money in order to spend substantially more money, it devalues all the money currently circulating in the system. We see it every time we go to the store and note a few extra cents on a head of lettuce or a can of peas. The fact that we have a totally dishonest and untrustworthy government who flat out lies to us about that in no way lessens the overall effect.

An increase in the supply of money isn't necessarily inflationary. We have to make a distinction between the monetary operations of the FED and government spending. The former isn’t “printing money”, but the latter is. When Uncle Sam confiscates more than it receives from us in taxes, we can technically say it’s “printing money”. New financial assets are creates which didn’t previously exist, so the supply of money has increased. I haven’t gotten into bank credit, which is also a form of money, but I want to delve into this notion of printing money, because the hard money types misconstrue this all 365 days per year, 24 hours a day, 7 days a week.

The hard money crowd views deficit spending as “printing money” , which it technically is, and it will create inflation. And to prove their case, they trot out the Quantity Theory of Money (MV=PV). It’s a concept which states that there’s a direct correlation between the quantity of money and the price level of real goods and services. The problem is, it’s incorrect, even Milton Friedman backed away from it later on in life.

Basically, M is the supply of $$$$, V is the velocity (how many time the $$$$ changes hands the economy, etc.), P is the price level, and Q is the net total amount of real goods and services produced. The hard money types insist, almost in a religious fervor, that increasing M (the supply of money) will increase the right side of the equation, which means inflation is upon us.

For example, let’s say I go to the store 10 times today and spend $20 dollars each time. If you plug that into the left side of the equation (V is 10, I went to the corner store 10 ten times, I spent $20.) This will tell us that $200 worth of stuff was sold. If I go 20 times, then $400 dollars’ worth of stuff is sold. The hard money types point to the increasing right hand side of the equation, then state as empirical fact that’s proof of rising prices. What they forgot is this equation has four components: M, V, P, and Q, and none of them are constants so to speak. M could increase, but V could decrease. What if I have $50 and only go to the store once? Only $50 worth of stuff is sold. Also, quantity on the right hand side can also change. Maybe we have an uptick in something which increases output and may actually cause falling prices. We could seem the money supply increase and see prices fall.

The Quantity Theory of Money tells us nothing, except that total amount of $$$$ spent equals total nominal output. It’s doesn’t give us totally accurate picture about prices. As a matter of fact, we see this playing out right before our eyes. The US has persistent record deficits, year after year, but prices are stable and even falling in some instances. The total velocity of $$$$ has substantially decreased, but the quantity remains high.

 

[HelenaHandbag]

At least a Vegas magic show has some dazzling stage productions to distract people from what the illusion is. Fiat money tricksters just bore you to death with nebulous and incomprehensible text bricks of jargon, in order to disguise the magic money tricks.

Think I need a couple cups of coffee.

 

[Foxfyre]

There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.

Paper currency does have to be tied to a value with the most logical standard being the income included in the gross domestic product. When the government prints substantially more money in order to spend substantially more money, it devalues all the money currently circulating in the system. We see it every time we go to the store and note a few extra cents on a head of lettuce or a can of peas. The fact that we have a totally dishonest and untrustworthy government who flat out lies to us about that in no way lessens the overall effect.

The problem with this, is that placing a store of value on future production and earnings, instead of a tangible asset, creates a climate that is unstable, and the market does not make the determination, central planners do. And the results have thus far, ALL throughout history, have been disasterous.

Ah but the income from the GNP IS a tangible asset. The government however simply prints money that it wishes to spend and ties it to nothing. Not the GNP. Not anticipated future earnings. It is absolutely the emperor wearing no clothes. And sooner or later, the tsunami of massive inflation that it is creating will manifest itself.

 

[Kimura]

Moreover, the value of FRN since 1913 in the USA has decreased to almost zero of its initial value. Inflation is not better than small, corrective downturns. We've been in and out of recessions and depressions every 7 years since the complete abandonment of a currency anchor.

That too, is no coincidence.

This sounds like a Ron Paul-ism; the guy drones on and on about how the dollar has lost 95% of its value since 1913. So he's saying a basic real good or service in 1913 would be priced at 5 cents today. So what? The average earned income has increased over 6500% since 1913. The average earned income in 1913 was $750 per year, and today it's around $50,000 per year. Our average earned income has outpaced price inflation by roughly 230%.

 

[HelenaHandbag]

Paper currency does have to be tied to a value with the most logical standard being the income included in the gross domestic product. When the government prints substantially more money in order to spend substantially more money, it devalues all the money currently circulating in the system. We see it every time we go to the store and note a few extra cents on a head of lettuce or a can of peas. The fact that we have a totally dishonest and untrustworthy government who flat out lies to us about that in no way lessens the overall effect.

The problem with this, is that placing a store of value on future production and earnings, instead of a tangible asset, creates a climate that is unstable, and the market does not make the determination, central planners do. And the results have thus far, ALL throughout history, have been disasterous.

Ah but the income from the GNP IS a tangible asset. The government however simply prints money that it wishes to spend and ties it to nothing. Not the GNP. Not anticipated future earnings. It is absolutely the emperor wearing no clothes. And sooner or later, the tsunami of massive inflation that it is creating will manifest itself.

All of which just might work, if you had the whole system operated under a paradigm which precluded the meddling of greedy imperfect humans.

But this is not the case.

As we talked about a couple days ago in the context of politics, the same applies here: The more you centralize power, the more you will attract those who seek that power for the sake of the power. Historically speaking, these have been some of the greediest and most savage examples of humanity.

Something to add to the mix.

 

[TakeAStepBack]

Moreover, the value of FRN since 1913 in the USA has decreased to almost zero of its initial value. Inflation is not better than small, corrective downturns. We've been in and out of recessions and depressions every 7 years since the complete abandonment of a currency anchor.

That too, is no coincidence.

This sounds like a Ron Paul-ism; the guy drones on and on about how the dollar has lost 95% of its value since 1913. So he's saying a basic real good or service in 1913 would be priced at 5 cents today. So what? The average earned income has increased over 6500% since 1913. The average earned income in 1913 was $750 per year, and today it's around $50,000 per year. Our average earned income has outpaced price inflation by roughly 230%.

And yet, with all that (not that i agre with your assessment) is that we've still been in abnd out of recession after recession after depression under central planning.

 

[Kimura]

Moreover, the value of FRN since 1913 in the USA has decreased to almost zero of its initial value. Inflation is not better than small, corrective downturns. We've been in and out of recessions and depressions every 7 years since the complete abandonment of a currency anchor.

That too, is no coincidence.

This sounds like a Ron Paul-ism; the guy drones on and on about how the dollar has lost 95% of its value since 1913. So he's saying a basic real good or service in 1913 would be priced at 5 cents today. So what? The average earned income has increased over 6500% since 1913. The average earned income in 1913 was $750 per year, and today it's around $50,000 per year. Our average earned income has outpaced price inflation by roughly 230%.

And yet, with all that (not that i agre with your assessment) is that we've still been in abnd out of recession after recession after depression under central planning.

The gold standard gave us the following:

1) The Panic of 1819
2) The Panic of 1825
3) The Panic of 1837
4) The Panic of 1847
5) The Panic of 1857
6) The Panic of 1866
7) The Panic of 1873
8) The Panic of 1884
9) The Panic of 1890
10) The Panic of 1893
11) The Panic of 1907
12) The Great Depression

Out of the ten panics of the 19th century, all under the magnificent gold standard, they were followed by a deep recession and/or depression.

 

[TakeAStepBack]

This sounds like a Ron Paul-ism; the guy drones on and on about how the dollar has lost 95% of its value since 1913. So he's saying a basic real good or service in 1913 would be priced at 5 cents today. So what? The average earned income has increased over 6500% since 1913. The average earned income in 1913 was $750 per year, and today it's around $50,000 per year. Our average earned income has outpaced price inflation by roughly 230%.

And yet, with all that (not that i agre with your assessment) is that we've still been in abnd out of recession after recession after depression under central planning.

The gold standard gave us the following:

1) The Panic of 1819
2) The Panic of 1825
3) The Panic of 1837
4) The Panic of 1847
5) The Panic of 1857
6) The Panic of 1866
7) The Panic of 1873
8) The Panic of 1884
9) The Panic of 1890
10) The Panic of 1893
11) The Panic of 1907
12) The Great Depression

Out of the ten panics of the 19th century, all under the magnificent gold standard, they were followed by a deep recession and/or depression.

And each and every single one of them are the results of government interference or intervention in market forces. We can go through each one if you like. They aren't a result of the gold standard itself. Thats a fact.

 

[HelenaHandbag]

This sounds like a Ron Paul-ism; the guy drones on and on about how the dollar has lost 95% of its value since 1913. So he's saying a basic real good or service in 1913 would be priced at 5 cents today. So what? The average earned income has increased over 6500% since 1913. The average earned income in 1913 was $750 per year, and today it's around $50,000 per year. Our average earned income has outpaced price inflation by roughly 230%.

And yet, with all that (not that i agre with your assessment) is that we've still been in abnd out of recession after recession after depression under central planning.

The gold standard gave us the following:

1) The Panic of 1819
2) The Panic of 1825
3) The Panic of 1837
4) The Panic of 1847
5) The Panic of 1857
6) The Panic of 1866
7) The Panic of 1873
8) The Panic of 1884
9) The Panic of 1890
10) The Panic of 1893
11) The Panic of 1907
12) The Great Depression

Out of the ten panics of the 19th century, all under the magnificent gold standard, they were followed by a deep recession and/or depression.

One doesn't necessarily beget the other.

There are uncountable other aspects to modern life (better information, communication, and so on) that are also instrumental in economic well being.

Besides that, it's inarguable that manipulation of the fiat money supply played a large part in causing the Great Depression.

BTW, I notice you very conveniently omitted the post-WWI depression, which America bounded out of completely in the absence of Fed tinkering. I wonder why?

 

[Kimura]

And yet, with all that (not that i agre with your assessment) is that we've still been in abnd out of recession after recession after depression under central planning.

The gold standard gave us the following:

1) The Panic of 1819
2) The Panic of 1825
3) The Panic of 1837
4) The Panic of 1847
5) The Panic of 1857
6) The Panic of 1866
7) The Panic of 1873
8) The Panic of 1884
9) The Panic of 1890
10) The Panic of 1893
11) The Panic of 1907
12) The Great Depression

Out of the ten panics of the 19th century, all under the magnificent gold standard, they were followed by a deep recession and/or depression.

One doesn't necessarily beget the other.

There are uncountable other aspects to modern life (better information, communication, and so on) that are also instrumental in economic well being.

Besides that, it's inarguable that manipulation of the fiat money supply played a large part in causing the Great Depression.

BTW, I notice you very conveniently omitted the post-WWI depression, which America bounded out of completely in the absence of Fed tinkering. I wonder why?

The Panic of 1920 was the result of factories closing down or retooling after wartime production and demobilization. A massive amount of $$$$ was put into the hands of Americans as direct result of the deficits the government ran up in 1918 - 12% of GDP - and 1919 - 17% of GDP. This helped usher in the Roaring Twenties, even though Harding cut spending when he entered office. The Federal Reserve seemed more preoccupied with the exchange rate under the gold standard at the time, as opposed to any coherent domestic economic policy.

Secondly, the Great Depression was a DIRECT result of the gold standard.

 

[HelenaHandbag]

The gold standard gave us the following:

1) The Panic of 1819
2) The Panic of 1825
3) The Panic of 1837
4) The Panic of 1847
5) The Panic of 1857
6) The Panic of 1866
7) The Panic of 1873
8) The Panic of 1884
9) The Panic of 1890
10) The Panic of 1893
11) The Panic of 1907
12) The Great Depression

Out of the ten panics of the 19th century, all under the magnificent gold standard, they were followed by a deep recession and/or depression.

One doesn't necessarily beget the other.

There are uncountable other aspects to modern life (better information, communication, and so on) that are also instrumental in economic well being.

Besides that, it's inarguable that manipulation of the fiat money supply played a large part in causing the Great Depression.

BTW, I notice you very conveniently omitted the post-WWI depression, which America bounded out of completely in the absence of Fed tinkering. I wonder why?

The Panic of 1920 was the result of factories closing down or retooling after wartime production and demobilization.

Well, DUH!

Not coincidentally, economic hard times have followed all of America's foolhardy wars.

In any case, it renders you list blaming economic malaise on the gold standard impotent.

A massive amount of $$$$ was put into the hands of Americans as direct result of the deficits the government ran up in 1918 - 12% of GDP - and 1919 - 17% of GDP. This helped usher in the Roaring Twenties, even though Harding cut spending when he entered office. The Federal Reserve seemed more preoccupied with the exchange rate under the gold standard at the time, as opposed to any coherent domestic economic policy.

And the deficits got run up in terms of?... Federal Reserve Notes, A.K.A. fiat currency.

Secondly, the Great Depression was a DIRECT result of the gold standard.

Baloney.

It was a direct result of politicians, Fed bureaucrats and technocrats -of all political persuasions- believing themselves to be economic gods in Washington D.C., who turned a minor economic recession into the biggest economic mess in American history.

 

[expat_panama]

...Out of the ten panics of the 19th century, all under the magnificent gold standard, they were followed by a deep recession and/or depression.

People like to imagine some mythical "good 'ol daze" when men were men and women were glad of it --pure fantasy.

Before the Fed the American economy spent most of its time in contraction with occasional sharp expansions, and with the Fed we've enjoyed a general expasion with occasional contractions.

 

[Kimura]

And the deficits got run up in terms of?... Federal Reserve Notes, A.K.A. fiat currency.

What's your point? Fiat money is simply state-issued currency, which we use as legal tender. There's nothing mystical or esoteric about it. Sorry, money isn't commodity, that ship has sailed and isn't coming back to port.

By the way, the gold standard is a form of government subsidy.

It was a direct result of politicians, Fed bureaucrats and technocrats -of all political persuasions- believing themselves to be economic gods in Washington D.C., who turned a minor economic recession into the biggest economic mess in American history.

When we were on the gold standard/fixed exchange, banks simply could not guarantee their funding. As an operational reality, fixed exchange rates had to operate with the constraint being on the supply side. The banks had to hold, as reserves of the convertible currency, enough $$$$ to meet the withdrawal desires of depositors. Confidence in such a system is VERY important. These banks simply couldn’t function properly with 100% reserves. The entire system was based on depositors not going into a panic and creating bank runs.

Like I stated before, the US went through some serious depressions in the 19th century, with the Panic of 1907 being serious enough for Congress to create the Federal Reserve System. The Great Depression was way more serious than what had transpired in 1907. The Federal Reserve was supposed to be the lender of last resort, but they failed as a RESULT of the gold standard. The gold standard prevented the FED from lending to banks in the convertible currency which was needed to meet withdrawal demands. After 1000s of banks collapsed, there was a bank holiday and we reorganized. Once they reopened, thanks to rational decision makers, the convertibility to gold was suspended. The federal government also created deposit insurance. In the end, the FED could not prevent the Great Depression, but it was getting off the gold standard which gave the county the tools to it required to dig itself out of an economic hole.

 

[TakeAStepBack]

Oh, please. Statists had been clamoring for a central banking autority for decades (and at times were successful). They dont need a real reason besides the ends justify the means.

The panic of 1907 was again, the result of an inflation stimulated by Secretary of the Treasury Leslie Shaw in the previous two years. Shaw, after his predecessor (Gage) had failed to create a central bank, Shaw was using the treasury to act as one. This greatly expanded credit (int he form of commercial bank deposits) that outpaced gold stock (significantly thinning reserves and outpacing even industrial production). in turn, the government allowed banks to suspend its obligations to redeem notes and deposits in gold. In particular, Shaw made open-market purchases in recessions and violated the Independent Treasury statutes confining Treasury funds to its own vaults, by depositing Treasury funds in favored large national banks. In his last annual report of 1906, Secretary Shaw urged that he be given total power to regulate all the nation's banks.




yet another instance of Statists attempting to overstep their bounds and in turn, and perhaps in hopes, of consolidating authority.