The Truth We Can't Face -America As A Third Rate Nation

[Vladimir Berkov]

1. High instrinsic value - FAIL The FRT is intrinsically worthless.

Not anymore than notes backed by gold. With gold-backed notes, the worth is based on the trust that the notes can be redeemed. With FRNs, the worth is based on the trust that the US Government will continue to exist, and the Federal Reserve will continue to operate in its present manner.

2. Scarcity - FAIL - the FRT can be produced infinitely as long as the printing press is running.

But this simply doesn't happen. With a gold standard, the same problem could occur, although instead of printing more money per ce the government can simply revalue the dollar in comparison to gold. Today the gold is worth $10 per unit, tomorrow it could be worth $20 per unit. The only thing preventing this is the government not doing so. The only way to have true scarcity is to have all specie made out of the precious metal itself, or some other type of scarce commodity. This is unfeasible for multiple, readily apparent reasons.

3. Homogeneity - facilitates divisibility FAIL The FRT has no substance and therefore no homogeneity.
Of course the FRN is homogenous. Whatever problems you might have with it, it certainly is homogenous. At least last time i checked, pretty much all the bills and coins are the same, and the value is the same per coin or bill.

4. Divisibility - FAIL The FRT has no substance and therefore no divisibility.

See above. I can get divide my money or change smaller amounts into larger bills or coins. It is divisible for sure.

7. Universal desirability MAYBE The FRT is universally desirable but when inflated or hyperinflated, it loses that desirability. Money, on the other hand, is always universally desirable.

The US dollar is pretty much the world standard for currency. In fact, certain small nations are starting to use the US dollar as their national currency! You seem to assume that because US dollars might at some point become worthless, they currently have no value. This is illogical.

8. Durability - FAIL A bill lasts only several years, it can be burned, cut and
destroyed in other ways while a coin lasts decades if not centuries.

It is durable enough, and the cost of taking used bills out of circulation and making new replacements is negligable. Even on a gold standard, one needs paper or electronic currency. It is just a practical necessity.

9. Difficult to counterfeit - ensures that money is not destroyed FAIL The FRT
is very easy to counterfeit by the agency that issues them, in a sense every FRT created is
counterfeit because none are redeemable.

You are perverting the definition. It is probably no harder to counterfeit a gold coin than it is a bill. And in general practice, bills are easier to detect as counterfeits especially now with modern optical scanners and the new type of larger denominational bills. How is your average joe on the street going to tell a fake gold coin from a real gold coin?

 

[Soap]

Chipper- I would say that your friend's description of money is somewhat inaccurate in the first place.

What is money? Money is simply a measure of debt: an I.O.U. if you will. This measure of debt is backed by the issuer or by some third party.

1. High instrinsic value - FAIL The FRT is intrinsically worthless.

Gold-backed currency is intrinsically worthless if: 1- The backer no longer exists, 2- The backer lied, 3- Gold is somehow less scarce...and the list could go on.

2. Scarcity - FAIL - the FRT can be produced infinitely as long as the printing press is running.

Any backer can issue an infinite amount of currency...but they won't stay in business very long. Any government, bank, etc. will be thrown out of the market if they try to do something like that.

3. Homogeneity - facilitates divisibility FAIL The FRT has no substance and therefore no homogeneity

You can get USDs in a number of useful sizes for exchange...I fail to see your point here.

5. Portability - YES

Nearly all money is portable...woo hoo!

6. Recognition - YES

I agree.

7. Universal desirability MAYBE The FRT is universally desirable but when inflated or hyperinflated, it loses that desirability. Money, on the other hand, is always universally desirable.

Nothing is universally desireable. Incans didn't value gold nearly as high as Spaniards did.

8. Durability - FAIL A bill lasts only several years, it can be burned, cut and
destroyed in other ways while a coin lasts decades if not centuries.

You can get USDs in coin form.

9. Difficult to counterfeit - ensures that money is not destroyed FAIL The FRT
is very easy to counterfeit by the agency that issues them, in a sense every FRT created is
counterfeit because none are redeemable.

By your assessment, all currency is easy to counterfeit. All currency is issued by a backer. The backer can issue at their discretion.

10. Denominated in units of weight - FAIL It is not denominated in anything, it is an abstraction, a zero on the computer screen.

This is not necessarily an essential characteristic of money since money is a measure of debt.



Imagine a group of 3 close friends who have reasonably high trust in each other. Now lets say their names are A,B, and C. A helps B install a 2 mile line of fence. B writes an I.O.U. on a piece of paper that he will mow his lawn thrice per week for 8 weeks in return. Now A possesses the note, but A decides that he needs a truck part that C possesses. Provided that B is indiffernent, A can give the note to C to pay for the part. This is an extremely simple example of a single unit of currency, in this case an I.O.U. issued by B. This I.O.U. is currency that did not exhibit the "nine characteristics". To be universally accepted the currency should have a few of those characteristics but all nine don't really define money.

 

[Chipper]

1. High instrinsic value - FAIL The FRT is intrinsically worthless.

Not anymore than notes backed by gold. With gold-backed notes, the worth is based on the trust that the notes can be redeemed. With FRNs, the worth is based on the trust that the US Government will continue to exist, and the Federal Reserve will continue to operate in its present manner.

Hmm...How did we jump to the value of notes? Regardless of that, an element of trust must exist in any economic system. I personally do not trust the government to handle money. Not to coin it, not to print it, not to tax it, not to collect it, not to spend it. I am a spendthrift. Yet in my life I have never acheived the levels of stupidity attained by the federal or any other level of government who are, ostensibly, the object of the public's trust. I do not trust that the US government or the Federal Reserve System will continue to exist. In no way have they proven themselves to be a stable entity nor will they continue to operate in their present manner. I would be willing to trust an independent bank and their issue of notes for my deposit of gold much more than I do or would the government. My costs for such a service might be higher than what we now have but at least I could shop for the best value in security, trust and acceptance by other similar enterprises. The FRT is fiat. It has NO intrinsic value other than, perhaps, the value of the paper or the metals in which FRTs are coined. Gold or other precious metals by there very definition have an intrinsic value as they are precious metals. Therefore, it stands. The FRT fails this test

2. Scarcity - FAIL - the FRT can be produced infinitely as long as the printing press is running.

But this simply doesn't happen. With a gold standard, the same problem could occur, although instead of printing more money per ce the government can simply revalue the dollar in comparison to gold. Today the gold is worth $10 per unit, tomorrow it could be worth $20 per unit. The only thing preventing this is the government not doing so. The only way to have true scarcity is to have all specie made out of the precious metal itself, or some other type of scarce commodity. This is unfeasible for multiple, readily apparent reasons.

Yes. Only when you have a government monopoly on the issue and valuing of money. Even then, there is a limit to the quantity of gold on earth or in the earth. No such limit exists on the quantity of printing press money. So it stands, the FRT fails this test.

3. Homogeneity - facilitates divisibility FAIL The FRT has no substance and therefore no homogeneity.

Of course the FRN is homogenous. Whatever problems you might have with it, it certainly is homogenous. At least last time i checked, pretty much all the bills and coins are the same, and the value is the same per coin or bill.

Yes. Mathematically you are correct. 0 divided by 0 = 0. A 1/2" x 1/2" corner of a dollar bill will yield no value. A 1/16" x 1/16" "nibble" out of a Susan B. Anthony coin will yield no value. The same size nibble out of a gold or silver coin will yield value. Why? Because of the intrinsic value of the substance (see #2 above). When in school, I was taught fundamental mathematics by the rote method. Today, 2 divided by 2 still = 1. I wrote stuff all during class on paper. Other than the personal value to me of learning, those scraps of paper represent no value. I could use any object to demonstrate that the equation would always work. Simply applying an equation to an object does not impart any value to the object. If there is any value in the object, it existed before any equation was applied.

4. Divisibility - FAIL The FRT has no substance and therefore no divisibility.

See above. I can get divide my money or change smaller amounts into larger bills or coins. It is divisible for sure.

Hmm...See my response to #3 above.

7. Universal desirability MAYBE The FRT is universally desirable but when inflated or hyperinflated, it loses that desirability. Money, on the other hand, is always universally desirable.

The US dollar is pretty much the world standard for currency. In fact, certain small nations are starting to use the US dollar as their national currency! You seem to assume that because US dollars might at some point become worthless, they currently have no value. This is illogical.

FRTs currently have value, only it is measured in trust. The FRT is still without intrinsic value. When it is seen that the emperor truly has no clothes, well...the outcome is predictable. Speaking of smaller nations, how's Argentina these days? Seems to me they adopted the dollar.

8. Durability - FAIL A bill lasts only several years, it can be burned, cut and destroyed in other ways while a coin lasts decades if not centuries.

It is durable enough, and the cost of taking used bills out of circulation and making new replacements is negligable. Even on a gold standard, one needs paper or electronic currency. It is just a practical necessity.

Yes, but why add a needless expenditure? Also, if FRTs had any intrinsic value there would exist no need to destroy and replace.

9. Difficult to counterfeit - ensures that money is not destroyed FAIL The FRT is very easy to counterfeit by the agency that issues them, in a sense every FRT created is
counterfeit because none are redeemable.

You are perverting the definition. It is probably no harder to counterfeit a gold coin than it is a bill. And in general practice, bills are easier to detect as counterfeits especially now with modern optical scanners and the new type of larger denominational bills. How is your average joe on the street going to tell a fake gold coin from a real gold coin?

How is the average Joe on the street going to spot a counterfeited FRT? Modern copiers make wonderful copies. Besides, purchasing the necessary metals to effectively counterfeit gold coins represents a far larger investment than paper and ink which would effectively and deeply cut the counterfeiter's profit margin thus making it less likely that gold coin would be counterfeited. It's also much easier to conceal a printing press or copier operation than it is to conceal a metal stamping operation. also, the market would provide a method to inexpensively detect counterfeit coins. We can scan retinas now.

These are good objections Vladimir. The points on which differ are essentially:
Government control of money and it's value-
Intrinsic value of money-

These constitute major differences. I suspect that your thoughts are representative of what many do think of money and it's functions within a nation. If current trends are indicative of future circumstances, hard money will win out simply based on the fact that it has intrinsic value. The pace of inflation will soon enough render the dollar truly worthless. The vast difference in prices for the same item that has occured over the past 40 years is being recognized as the tragedy and deception of fiat currency. The same piese of arable land that sold for $250 dollars/acre in 1963 now sells for $2200.00. The land remains the same. It is the dollar that has lost it's value. Kaylee brought to mind the extremes of inflation that killed the Weimar republic. I assert that the same is occuring now only in a controlled slow-motion. We are reaching a similar economic end with the dollar. As we continue to reach for this end people will once again demand an intrinsic value in what they use for money. Gold is still able to purchase more bread than trust.

Chipper

 

[Chipper]

Dan Flory,

First off, let me say Howd to a fellow Hoosier! My wife is a graduate of Purdue. I'm an IU guy.

Chipper- I would say that your friend's description of money is somewhat inaccurate in the first place.

What is money? Money is simply a measure of debt: an I.O.U. if you will. This measure of debt is backed by the issuer or by some third party.

I beg to differ Dan. Under our current system I would agree that the FRT represents a measure of debt. The debt it represents cannot be collected on. I cannot go to my next door neighbors and say "I've got 5,000 FRTs and since it is a debt you need to pay up." I cannot go to a bank and say, "I've got 175,000 FRTs in my account which you owe me. You need to pay up in (precious metal of my choice)." I cannot go to the US Treasury and say," My total net worth is X FRTs. Since these are a debt, you owe me. Pay up in (precious metal of my choice)." So this debt is worthless to me. This makes FRTs worthless to me because they are tokens. There is nothing against which I may redeem them.

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1. High instrinsic value - FAIL The FRT is intrinsically worthless.
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Gold-backed currency is intrinsically worthless if: 1- The backer no longer exists, 2- The backer lied, 3- Gold is somehow less scarce...and the list could go on.

Yes. This is the risk. No matter how hard we may try, we simply cannot eliminate risk. Entire industries are built around the fact that we cannot eliminate risk. Besides, we are NOt talking about gold backed currency. We are talking about gold as currency. There is a world of difference.

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2. Scarcity - FAIL - the FRT can be produced infinitely as long as the printing press is running.
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Any backer can issue an infinite amount of currency...but they won't stay in business very long. Any government, bank, etc. will be thrown out of the market if they try to do something like that.

Our government and fed reserve system are doing just that and yes. You are correct. They will disappear from the market. Gold is a finite resource. We do not know how finite it is. We do know that it is finite. Printing press money is infinite.

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3. Homogeneity - facilitates divisibility FAIL The FRT has no substance and therefore no homogeneity
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You can get USDs in a number of useful sizes for exchange...I fail to see your point here.

You can get gold and silver coins in a number of useful sizes also.
Please see my response to Vladimir in the previous post.

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5. Portability - YES
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Nearly all money is portable...woo hoo!

then you would agree that portability is a necessary point in what defines money.

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6. Recognition - YES
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I agree.

Yes.

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7. Universal desirability MAYBE The FRT is universally desirable but when inflated or hyperinflated, it loses that desirability. Money, on the other hand, is always universally desirable.
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Nothing is universally desireable. Incans didn't value gold nearly as high as Spaniards did.

Nevertheless, the Incas still valued gold. Somehow, I don't think their artifacts would be as beautiful if FRTs were used. However, the invention of toilet paper may have been hurried if FRTs were available then.

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8. Durability - FAIL A bill lasts only several years, it can be burned, cut and destroyed in other ways while a coin lasts decades if not centuries.
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You can get USDs in coin form.

Yes. A no-value-added alternative to paper. Not suitable for use as a toiletry. Please see my response to Vladimir.

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9. Difficult to counterfeit - ensures that money is not destroyed FAIL The FRT is very easy to counterfeit by the agency that issues them, in a sense every FRT created is counterfeit because none are redeemable.
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By your assessment, all currency is easy to counterfeit. All currency is issued by a backer. The backer can issue at their discretion.

That's a pretty broad reading Dan. Coins are less profitable to counterfeit than paper. In today's systems currency is issued by governments. They do issue at their discretion. With coins of precious metals any fiat issuance will result in a devaluation of the issuers holdings. This is akin to giving away money or at the least striving to make oneslf poorer. This action would be illogical. Amazingly governments and central banks do just this sort of thing.

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10. Denominated in units of weight - FAIL It is not denominated in anything, it is an abstraction, a zero on the computer screen.
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This is not necessarily an essential characteristic of money since money is a measure of debt.

Precisely. This is because money is not a measure of debt. Money is property. It is a means of exchange. It is a store of wealth. It has intrinsic value. Other than a means of exchange, FRTs simply fail at these qualifications for money.

Imagine a group of 3 close friends who have reasonably high trust in each other. Now lets say their names are A,B, and C. A helps B install a 2 mile line of fence. B writes an I.O.U. on a piece of paper that he will mow his lawn thrice per week for 8 weeks in return. Now A possesses the note, but A decides that he needs a truck part that C possesses. Provided that B is indiffernent, A can give the note to C to pay for the part. This is an extremely simple example of a single unit of currency, in this case an I.O.U. issued by B. This I.O.U. is currency that did not exhibit the "nine characteristics". To be universally accepted the currency should have a few of those characteristics but all nine don't really define money.

In your example all that was exchanged was trust. There is NO intrinsic value in the note. Yours is a perfect of example of what is used today as as money. Let's say A took that note to Fred's Grocery and Lotto mart. Do you think that Fred would accept a valueless note? Fred is not a party to your trust scheme. Fred would invite you to shop elsewhere or you could come back, provided you brought something of real value. In your system, once trust breaks down, the whole system will collapse and everybody involved will be left with lots of pieces of useless debt. It's a scam. It's a confidence game. Why? because the entire system is predicated on trust. Trust breaks down when one party becomes openly self-centered and establishes a track record of unreliability. This is part of why so many marriages fail. This is part of why so many other relationships in life fail. This is why our current monetary system will fail. Rome is long gone but, some of it coins still have value. The Spanish Empire is long gone but dubloons still hold value. Why? Because of the intrinsic value of precious metals. The same cannot be said of the dollar.

Chipper

 

[JohnBT]

"Rome is long gone but, some of it coins still have value. The Spanish Empire is long gone but dubloons still hold value. Why?"

Why? That's easy. Because someone has verified, certified and attested to the fact that the coins are actually made gold or silver and are not plated counterfeits.

You might as well pay the experts to attest to the fact that a USD is a real USD and not have to lug the bags of coins to the store to do your shopping.

John

 

[Bahadur]

"Rome is long gone but, some of it coins still have value. The Spanish Empire is long gone but dubloons still hold value. Why?"

That's funny, because when the central government in Rome became unstable, the provincials in many parts of the empire began to refuse to use and accept money (hard currency, too, containing "precious" metals) and began to rely on a barter system, contributing to the eventual development of feudalism.

You see, a silver coin does not have an inherent value if your only concerns are protection from the marauders and food for subsistence AT THE SAME TIME the central government is unstable and is unable to back the "value" of such a coin in terms of other goods (for example, food) and services (for example, protection).

 

[Chris Rhines]

The differences between a currency system and a private placement of debt between two individuals are much more than a matter of scale, but let's set that aside for a moment. In an IOU like Dan describes, you are accepting a debt because you trust your friend, with no verification of value (the purpose of a commidity backing) required. This can work between two individuals, because they have 1.) what amounts to a contract for repayment under mutually acceptable terms, and 2.) a level of trust that said contract will not be violated.

Now we look at a currency system between a single central government and an individual. Considering that the government determines the value of the debt you hold, and changes that value on a regular basis, it is impossible to consider the government a trustworthy party to the contract. Since the government holds a monopoly on the minting and valuation of currency, the government can manipulate the value of the currency at will, and there is no recourse or means of preventing it.

A central gold standard would be a little bit better, in that the central bank's refusal to remit X amount of gold/note is much more clearly a case of fraud. However, there is still the issue of monopoly. If the government suddenly decides to not honor its debts, there's not much Joe Public can do about it.

The ideal state, and the one that I have advocated from the beginning, is to entirely remove the government from the banking industry, and allow private banks to mint their own money, to succede or fail on the open market.

I would have no moral objection to a private mint issuing fiat money in such a system; I just don't see it as being very likely. Who in their right mind would prefer. "This note is legal tender in the amount of $20, because we say so," to "This note is redeemable in X amount of gold on demand?"

But who's to say?

- Chris

 

[Kaylee]

Wow! Who'lda thunk this thread would have such staying power to it? Kinda cool....

1. Thanks Vlad! I do think it will be implemented after a fasion eventually. Unofficially at first, and eventually become widely adopted as nations gain and lose confidence around it. But then, I'm an optimist.

2.

The entities that could change the valuation in the short term are very limited: government, exceptionally wealthy individuals/corporations, or very large banks.

Interestingly enough, the entities which greatly influence the valuation of our current USD are: government, exceptionally wealthy individuals/corporations, or very large banks. Think about that.

Very good point Daniel!
But remember that only one of the three has something to gain by debasing its own currency though... and that's the one with the army-enforced monopoly on making it now.

3. Chipper -- I LOVE your friend's definition of money and its required characteristics. Makes about the most sense of any definition I've seen. I'd argue some of your details about how the FRT fails divisibility etc, as the fiat system is more than just any given token in it... but on the whole, I agree. Best not to get to distracted in the details just yet...

4. So... Daniel... I'm gonna have to also disagree with your interpretation of "money as debt." Paper money originated that way to be sure -- "X" owes "Y" a "Z" number of coins. Further, much of the modern money system is brought into being by the creation of debt, again re the fractional reserve and private creditors... so that would explain the popular current understanding of money as debt. But it's not an inherent quality of money.

Money is simply a tool like any other.. a "medium of exchange." How well different solutions to the problem that tool was designed to solve work is what it comes down to ... I think what we're arguing now as "the M16 sucks" in paper form.

5.

You might as well pay the experts to attest to the fact that a USD is a real USD and not have to lug the bags of coins to the store to do your shopping.

Two issues here.
First, a gold-based (not backed, again) system would by no means require carrying around coins or other inconveniences, any more than our present system requires carrying around a wad of paper for every transaction. Backed paper notes and electronic transactions are quite possible with a metallic system.. and as noted, the latter already exists.

Second, no, the difference is in the inherent value of the metal (a cultural matter granted -- albeit a very enduring one). Fiat currency holds its value only so long as the issuing nation exists. After that, it's a mere curiosity. I have a neat little 2 million mark note from 1923 Germany I got for just that reason. Reminds me to keep perspective on the little green pieces of paper in my pocket. A coin, historical and collector's value aside, will always have its metallic value as well.

also, the market would provide a method to inexpensively detect counterfeit coins

Just jumping in on this one 'cause it's cool. Specific weight prolly... always worked before. If you can verify the physical mass, and verify the weight, you've just verified the substance. Chemistry 101.

Also, well.. carrying around gold coins prolly wouldn't be as common as we're thinking, just 'cause it's less convenient that an electronic account with a banking network. But the times that they are.. I'd suspect them to be coated in a thin plastic shell to prevent clipping and rubbing away of metal. No reason this shell couldn't contain an electronic marker with a verification code from the issuing bank.

The ideal state, and the one that I have advocated from the beginning, is to entirely remove the government from the banking industry, and allow private banks to mint their own money, to succede or fail on the open market.

Amen!

later y'all..

-K

 

[Kaylee]

Oh yeah.. two more things.

One -- any institution offering substitute notes or electronic accounts, be they governmental or private runs into some of the "10 qualities" problems already brought up, specifically intrinsic value. Personally, I think those problems are minimal, provided that the issuer maintains 100% reserves (and won't revalue them, as governments like to do). Which leads us to.....

Two -- Chipper and I have to acknowledge (sorry Chipper) that a fractional reserve system has some advantages as well. By allowing banks to issue more "money" than they hold as "backing" the money supply expands at a faster rate. This means more business loans, more startups, and eventually faster economic growth than under a 100% reserve system. The counterpoint, of course, is that it also can contract at a faster rate. eep.

-K

 

[Soap]

Goodness! I go off to my evil capitalist instruction classes and look what happens!

Chipper- We kicked yer butt in basketball therefore I don't need to reply to any thing your write from here on out...

I beg to differ Dan. Under our current system I would agree that the FRT represents a measure of debt....is nothing against which I may redeem them.

Your first two examples are incorrect since your neighbor nor the bank issued the currency. As for the third, the fact that you cannot redeem anything from the U.S. Treasury simply states that you have fiat money and not hard money. The difference between the two is negligible yet vast all at the same time.

Yes. This is the risk. No matter how hard we may try, we simply cannot eliminate risk. Entire industries are built around the fact that we cannot eliminate risk. Besides, we are NOt talking about gold backed currency. We are talking about gold as currency. There is a world of difference.

Sorry, I thought you were talking about gold-backed currency. But gold is intrinsically worthless nonetheless since value is subjective.

Our government and fed reserve system are doing just that and yes. You are correct. They will disappear from the market. Gold is a finite resource. We do not know how finite it is. We do know that it is finite. Printing press money is infinite.

Every resource is finite. Even the printing press. But regardless, the amount of gold in an economy will still suffer fluctuations due to the new discovery of gold or the consumption of gold.

Nevertheless, the Incas still valued gold. Somehow, I don't think their artifacts would be as beautiful if FRTs were used. However, the invention of toilet paper may have been hurried if FRTs were available then.

My wife is an artist, should we use paint just because beautiful things were made of it? Incans valued gold as a medium for art and architecture, not as a measure of value.

Yes. A no-value-added alternative to paper. Not suitable for use as a toiletry. Please see my response to Vladimir.

Coining anything is an expenditure.

That's a pretty broad reading Dan. Coins...do just this sort of thing.

Think about banks which hold large sums of pure gold. They could influence the supply to a degree that would essentially act as inflation.

Precisely. This is because money is not a measure of debt. Money is property. It is a means of exchange. It is a store of wealth. It has intrinsic value. Other than a means of exchange, FRTs simply fail at these qualifications for money.

Money is a promise, there is no intrinsic value to this. It is not a store of wealth unless the issuer backs it or society (or whomever you're trading with) agrees that it has a certain value.

In your example all that was exchanged was trust...same cannot be said of the dollar.

NOTHING in this world has intrinsic value. Value is simply what a buyer and a seller agree upon. Once the trust breaks down an entire economy will die, regardless of the medium of exchange. Every single transaction involves trust between the buyer and seller. Nothing in the world can change that fact.

 

[Soap]

Kaylee- As you probably know, I normally argue hard money but this time I wanted to argue fiat just for the mental exercise.

Very good point Daniel!
But remember that only one of the three has something to gain by debasing its own currency though... and that's the one with the army-enforced monopoly on making it now.

Thanks! You illustrate a good point as well.

So... Daniel... I'm gonna have to also disagree with your interpretation of "money as debt." Paper money originated that way to be sure -- "X" owes "Y" a "Z" number of coins. Further, much of the modern money system is brought into being by the creation of debt, again re the fractional reserve and private creditors... so that would explain the popular current understanding of money as debt. But it's not an inherent quality of money.

If it is not a measure of debt...what is it?

 

[Vladimir Berkov]

Let me voice a pragmatic opinion.

Gold does make a reliable currency. Under certain, very specific conditions.

1.) The government cannot run deficits, nor can it finance expenditures through the sale of bonds in excess of its gold reserves. That means that under a gold standard, Bush's current budget is out. You can't run a deficit of $300 billion in a gold standard system. It also means that one cannot finance a war such as WW2, through the sale of securities and loans from financial institutions. One would have to go off the gold standard, under the premise that it would be reinstated at the end of the war. This may be possible, but history shows it is very difficult, Great Britain being the prime example.

2.) The guarantor would have to be the United States Government, Federal Reserve, or some other quasi-government institution. A private currency system simply wouldn't have the one essential element of money, trust. The people don't currently trust corporations with such mundane things as keeping honest books, much less operating a system on which the collective monetary fate of the country rests. A joint public-private system would work best, as it could maintain the trust inherent in the US government while addressing the concerns of private-interest banks, and financial institutions.

3.) A system based on weight of metals alone is unfeasible. Nobody wants to carry a bunch of gold coins in their pocket. Most people today don't even carry any great deal of cash. Personally, unless I know I will need it, I rarely carry more than $50-60 in cash at any one time. I can rely on my credit card for most purchases. A workable gold standard system would necessitate the minting of non-gold coins and paper bills. Such a system would have to be national in scope, as well as trusted. This is a further reason why a public/private institution such as the Federal Reserve would have to be involved.

4.) A suitable system for foreign trade and investment would have to be devised. There must be good safeguards to prevent gold from "fleeing" the country, thus rendering the currency bankrupt. Under the classical standard, all major trading nations collectively maintained a working balance of trade in gold and instituted domestic policies to maintain reserves. In the current world-wide financial climate, where no other nation will likely reciprocate a gold standard, other measures must be devised.

5.) Going back to the gold standard will take some time. A good solution Greenspan once posited was that interest on government securities be paid in gold. Such plans would have to be further investigated, as well as the ramifications of all US dollars held by foreign governments and investors.

 

[Pendragon]

Ok you wack-a-doos.

Which of you refuses to use US currency?

 

[Oleg Volk]

One would have to go off the gold standard, under the premise that it would be reinstated at the end of the war.

They could sell bonds, redeemable in gold.

If no one buys them, it means that the people don't want to pay for the war effort, either because they have no confidence in replayment, or because they have no money to spend on the war effort or becasue they do not wish to endure hardship in order to win (rightly or wrongly).

I suspect that war bonds would be pretty popular if the buyers knew they'd be paid in gold and not in debased paper currency...though the entire tax-paying population would end up providing the interest on that loan. No perfect solutions, I guess.

 

[Vladimir Berkov]

Oleg, that would only work if the costs of the war could be covered by the current free reserves.

The problem is that is almost impossible to wage a large-scale, long-lasting conflict that way. WW1 killed the gold standard in GB and the rest of Europe. It only lasted in the US because we got involved so late. WW2 killed off any hope of getting back the system.

 

[ahenry]

Obviously there is no "grand unified theory of economics," which can explain everything according to a specific model. However, the fact that the system is quite complex is not a hinderance to its study. Think of it as analogous to hydrodynamics. In studying the movement of water, you are looking at trillions of individual elements operating individually. Obviously, there is no way to get an answer by looking at each element, yet through the construction of models which can simplify the actual structure to the extent we can derive formulas, we CAN study it.

There were once three men stranded on a deserted island. One was a chemist, one a physicist, the other an economist. Their only means of food was a collection of canned goods. They had no means of opening the cans so each set out to open them according to their abilities. The chemist attempted to formulate a chemical that would eat through the metal. The physicist tried to determine how much force would be needed to break through the top. The economist constructed a model saying, “lets suppose we have a can-openerâ€.


The above story was given to me courtesy of one of my old econ profs, and appears to only provide humor to those that make a practice of studying the “dismal scienceâ€.

 

[Vladimir Berkov]

lol

 

[Bahadur]

If the government suddenly decides to not honor its debts, there's not much Joe Public can do about it.

True enough. However, governments that value stability won't do it because it will destroy its future credibility and wreak havoc in the economy.

The international monetary system essentially "prices" various currencies (as well as government bonds) partly based on the probabilities of default.

So, in a way, such a behavior is accordingly rewarded and punished, i.e. self-regulated.

There were once three men stranded on a deserted island. One was a chemist, one a physicist, the other an economist. Their only means of food was a collection of canned goods. They had no means of opening the cans so each set out to open them according to their abilities. The chemist attempted to formulate a chemical that would eat through the metal. The physicist tried to determine how much force would be needed to break through the top. The economist constructed a model saying, “lets suppose we have a can-openerâ€.

In the version I read:

The physicist tries to calculate high much force he should generate by throwing a rock and hitting the can. Then the others object that the force may knock the can open and spill the precious food (only one can in this version).

The chemist wanted to boil the can open through the building of the internal pressure. The same objection (spilling the food when the can bursts open).

The the economist screams "I got it! We will just assume that there is a can opener!"

The moral of the joke: economics is a science of assumptions.

 

[Byron Quick]

If the government suddenly decides to not honor its debts, there's not much Joe Public can do about it.

Really? Joe Public can revolt and if successful can put all of the politicians in front of a brick wall and shoot each and every one of them...along with the bureaucrats who worked for them.


Such a fate, every generation or so, would probably result in much more circumspect behavious by both politicians and bureaucrats.

 

[Soap]

The international monetary system essentially "prices" various currencies (as well as government bonds) partly based on the probabilities of default.

So, in a way, such a behavior is accordingly rewarded and punished, i.e. self-regulated.

Excellent point!

 

[Chipper]

Daniel,

Perhaps you are already aware of this piece but, I thought I would post a portion of it as it exemplifies this dichotomy between money being property and the attributes attached to an object by making it legal tender. The first quote is from a supreme court decision. The second quote is from Eugene C. Holloway, J.D., L.L.M (Admin. Law Economic Regulation) . Part III of Holloway's essay can be found here:
http://www.gold-eagle.com/editorials_03/holloway013003.html

Links to Parts I & II are provided at the above site.

The power to 'coin money and regulate the value thereof, and of foreign coin,' is a prerogative of sovereignty and a power exclusively vested in the Congress of the United States. The power which the government of the Philippine Islands has in respect to a local coinage is derived from the express act of Congress. Along with the power to strike gold and silver pesos for local circulation in the islands was granted the power to provide such measures as that government should 'deem proper,' not inconsistent with the organic law of July 1, 1902, necessary to maintain the parity between the gold and silver pesos. Although the Philippine act cannot, therefore, be said to overstep the wide legislative discretion in respect of measures to preserve a parity between the gold and silver pesos, yet it is said that if the particular measure resorted to be one which operates to deprive the owner of silver pesos of the difference between their bullion and coin value, he has had his property taken from him without compensation, and, in its wider sense, without that due process of law guaranteed by the fundamental act of July, 1902

Conceding the title of the owner of such coins, yet there is attached to such ownership those limitations which public policy may require by reason of their quality as a legal tender and as a medium of exchange. These limitations are due to the fact that public law gives to such coinage a value which does not attach as a mere consequence of intrinsic value. Their quality as a legal tender is an attribute of law aside from their bullion value. They bear, therefore, the impress of sovereign power which fixes value and authorizes their use in exchange. As an incident, government may punish defacement and mutilation, and constitute any such act, when fraudulently done, a misdemeanor. . . .

However unwise a law may be, aimed at the exportation of such coins, in the face of the axioms against obstructing the free flow of commerce, there can be no serious doubt but that the power to coin money includes the power to prevent its outflow from the country of its origin. To justify the exercise of such a power it is only necessary that it shall appear that the means are reasonably adapted to conserve the general public interest, and are not an arbitrary interference with private rights of contract or property. The law here in question is plainly within the limits of the police power, and not an arbitrary or unreasonable interference with private rights.

The Court takes three important positions here. First, the power to coin money includes the power to prevent its outflow from the country. Second, even though the bullion is the property of the individual, by its conversion to legal tender, it has been impressed with the interest of the sovereign and thus becomes something over which the government has the right to exercise control as part of the prerogatives of sovereignty. Third, depriving the owner of the opportunity to realize the difference between the face value and the bullion value of coins is not an unconstitutional taking of property without due process.

Even the highly vaunted (though much over-rated) supreme court finds that money is property BUT becomes under the caprice of legislative fiat what is called legal tender. At no point is it considered to be debt. It probably wasn't until Nixon totally severed all connection between the dollar and gold that the notion of dollars representing pieces of debt began to take hold. You would be correct if you stated that today's dollar (and other totally fiat currencies) is debt. This does not extend to all forms of money. Money therefore, is not debt.

Chipper