Fiat Currency: What Are You Going To Replace It With?
Fiat currency makes me nervous. As we saw almost two weeks ago, it is hopelessly vulnerable to manipulation. Too much money leads to inflation, too little to depression. In consequence, the global economy is forced to walk something of a tight rope guided only by frequently blundering central bankers.
There is, therefore, an understandable push to deprive inept appointees of the power of life and death over the economy and return to a currency backed by something. This might mean gold, or basket of metals, or something else entirely: the point, as I understand it, is to be able to swap your bits of paper for something else with intrinsic value so that the minute the government starts looking a bit shifty, you can, so to speak, cash in your chips.
Unfortunately, this makes me nervous, too. Possibly more so. Before the M.D.s in the Ricochet community start diagnosing me with something which explains my flightiness, allow me briefly to make a case against a gold standard, since this seems like the most favored option of those I have mentioned above:
- It derives much of its intrinsic value from cosmetic and industrial demand. Roughly 50% of gold is used for jewelry, and a further 10% in industry. A gold standard would therefore link currency value to fashion. Imagine if either gold became less desirable as a component of jewelry, causing the price of gold to decline steeply, or gold was discovered to be integral to, say, commercially viable nuclear fusion, causing the price to increase steeply. Both eventualities would play havoc with international trade unless the price of gold was set by the government and its movements strictly monitored and controlled (this precaution would, it seems to me, rather defeat the point of having a gold-backed currency in the first place).
- It is a volatile commodity. A related point to (1), but different. In the last 10 years the price of gold has increased by 440%. Some of this may be due to increased demand for jewelry by the new middle class in Asia and the depreciation of the U.S. dollar, but much of it has come from fears about the worth of other currencies. If the dollar had been seen even a quarter of this increase, exports would have surely dwindled massively. If you want a recent case in point look at Switzerland, which recently had to peg the CHF to the Euro because currency traders considered it a safe haven and were destroying its export-based industries - imagine how much worse this would have been if the CHF were backed by gold.
- The government still has the whip hand. I have never been able to understand why mainstream libertarians (if that isn't an oxymoron) want the federal government to have a monopoly on the issuance of currency. History has shown, I think we can agree, that governments are useless at being in charge of currency; why, therefore, tolerate its involvement at all? Hayek wanted to let banks issue their own currencies, so people could choose in which currency they wanted to transact their business. Why gold rather than this?
I'm sure that there are many counter-arguments to the points I have just made. Perhaps they don't apply to the same degree to other non-fiat currency options which others prefer. Let me have it, Ricochet.
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Comments:
Nov '11
Re: Fiat Currency: What Are You Going To Replace It With?
FloppyDisk90
That's exactly my point. Any gov't willing to debase it's fiat money will have zero issue with reneging on its asset backed promises. · 2 hours ago
As we have seen. This is not a thing that should be trusted to governments. They only monopolize it so they can control money when they need to pay for wars.
Aug '10
Re: Fiat Currency: What Are You Going To Replace It With?
So a currency backed by a commodity is one where I can go to a Federal Reserve Bank and swap the currency for the assets at a fixed price, correct?
Is it not true that when governments issued currency under those rules that it required some sort of asset price fixing / anti-hoarding / fixed exchange rate laws to make it work. (I am referring to the Bretton Woods system founded after 1945.) Under that system there was both a free market and a government market for gold. When Nixon issued his executive order the government market went away. Leaving the free market.
So today, if you desire to hedge against inflation, you can buy all the gold or any other commodity you desire to construct that hedge. However, the commodity bet as a hedge against inflation may not be a good one, as shown here in the famous Simon-Erlich wager.
What I don't get is Fred's insistance that he must be able to exchange his money for gold from the government instead of the free market.
Think of all those other requirements (read laws) that you have to have to make a hard currency work.
Nov '10
Re: Fiat Currency: What Are You Going To Replace It With?
Fred Cole
In the case of the US Dollar its backed by force in the form of legal tender laws and the other laws supporting the US government's monopoly on currency. · 3 hours ago
If that's the only source of value the dollar has, then why does printing more of it devalue it? $1 = $1 and that will never change; if the value of $1 changes, it must be relative to something else.
Edited on September 25, 2012 at 11:42pmNov '11
Re: Fiat Currency: What Are You Going To Replace It With?
Umbra Fractus
Fred Cole
In the case of the US Dollar its backed by force in the form of legal tender laws and the other laws supporting the US government's monopoly on currency. · 3 hours ago
If that's the onlysource of value the dollar has, then why does printing more of it devalue it? $1 = $1 and that will never change; if the value of $1 changes, it must be relative to something else. · 7 minutes ago
Edited 5 minutes ago
Because the supply of dollars has increased.
May '11
Re: Fiat Currency: What Are You Going To Replace It With?
BJRR
I remember watching a video of Milton Friedman where he says that the only hedge against inflation is high living. Rakes are good, but champagne and sports cars might be more interesting. · 8 hours ago
Edited 8 hours ago
I definitely agree. I like champagne much more than real pain.
Mar '11
Re: Fiat Currency: What Are You Going To Replace It With?
There is a false assumption in this. Gold does not have an 'intrinsic value'. For humans, something like food might be considered to have 'intrinsic value', but gold only has market value.
It sometimes seems as though it has intrinsic value because everyone else so readily accepts it in payment, and indeed prefers it to currency in some times of crisis. But this is more a function of its compactness, imperishability and the reasonably constant, and measured, increase in its supply.
But imagine if we were on a gold standard and in fifty years someone towed a largely gold asteroid into Earth orbit. The total amount of gold mined in the history of the world amounts to a cube a little over 20 metres per side. There isn't very much. It wouldn't take very much of an injection to totally destroy your monetary system.
Nov '10
Re: Fiat Currency: What Are You Going To Replace It With?
To rigid for whom? For some central authority who wants to monopolize counterfeiting, to QE us all unto the promised land?
It isn't up to you to decide personally what gold is fit for. It's up to the market to decide.
If people in general decide that they want to use a shiny commodity as a general indirect medium of exchange, as opposed to a tooth filler or whatever, then perhaps their collective evaluations should count for something, and not yours for everything.
You cheerlead for a central authority to retain the flexibility to print wealth at the expense of others. Yet to turn up your nose at the idea that a commodity that has other uses should also be valued as a spontaneous means of exchange by market participants.
Whose side are you on?
Edward Smith: I agree.
The Gold Standard is not a good idea. It is too rigid. I am not saying the current QE standard is healthy, but more flexibility is a good idea. And gold is much too useful to be locked up as bullion. In fact, it is far to versatile a metal to be used in so limited a way.
Nov '10
Re: Fiat Currency: What Are You Going To Replace It With?
You are mistaken.
No good or service has intrinsic value. If something is subjectively valued by people, then it acquires value. That's it and that's all.
To a hunger striker, intent on killing themselves, food loses its positive value. So there is nothing intrinsic about value. It's observer-relative.
(Note: I mean economic value, not moral value.)
Now, it often happens--though it is not a law of nature--that people spontaneously value gold, for its cosmetic and functional uses.
Given gold's other properties--such a durability, divisibility, and density--it thereafter often spontaneously emerges as a preferred general means of exchange too: money.
Being valued as money is also subjective--just like every other valuation.
Money becomes money when everyone thinks that everyone thinks that everyone will accept it as a medium of exchange.
That something is potentially a valued commodity is one way of reassuring them that it will be.
Stephen Dawson: There is a false assumption in this. Gold does not have an 'intrinsic value'. For humans, something like food might be considered to have 'intrinsic value', but gold only has market value.
It sometimes seemsas though it has intrinsic
Mar '11
Re: Fiat Currency: What Are You Going To Replace It With?
Milton had the best idea let a computer program run the Fed I think only on the Taylor rule.
Sep '12
Re: Fiat Currency: What Are You Going To Replace It With?
If you covet a sound monetary regime, you need to grasp why M fluctuates. Few understand how bank lending expands and contracts the money supply. You need to understand the importance of lending ratios, interbank lending rates, and the Fed lending rate.
If we had a 100% reserve banking regime, M would stay far more constant. I believe it would mostly abolish the business cycle. I plan to finish reading Jesus Huerta de Soto before saying more.
What I'm uncertain about is whether the money supply should stay static or be pegged to the k-percent money creation rule. Either way, we end money mischief. The one "activist" tool I'd still leave to government is the option to replace some dollars with stamp scrip.
As for the backing of money with materials, I suggest seabed materials in international waters. If these goods can only be purchased with US dollars, the ocean floors become our figurative gold vaults, and reinforces the dollars standing as the international reserve currency.
Nov '10
Re: Fiat Currency: What Are You Going To Replace It With?
A better idea would be to get the government the hell out of money.
Sep '12
Re: Fiat Currency: What Are You Going To Replace It With?
To those of you arguing about values, Alfred Marshall resolved this over a hundred years ago with his supply and demand curves. Just saying.
Nov '10
Re: Fiat Currency: What Are You Going To Replace It With?
What if no one valued the seabed materials? How could they back paper tickets then?
Can't we just let people decide for themselves what they want money to be, instead of having elites deciding for them?
Travis McKee: If you covet a sound monetary regime, you need to grasp why M fluctuates. Few understand how bank lending expands and contracts the money supply. You need to understand the importance of lending ratios, interbank lending rates, and the Fed lending rate.
If we had a 100% reserve banking regime, M would stay far more constant. I believe it would mostly abolish the business cycle.
What I'm uncertain about is whether the money supply should stay static or be pegged to the k-percent money creation rule. Either way, we end money mischief. The one "activist" tool I'd still leave to government is the option to replace some dollars with stamp scrip.
As for the backing of money with materials, I suggest seabed materials in international waters. If these goods can only be purchased with US dollars, the ocean floors become our figurative gold vaults, and reinforces the dollars standing as the international reserve currency. · in 0 minutes
Nov '10
Re: Fiat Currency: What Are You Going To Replace It With?
Valuation is logically antecedent to supply and demand. Price does not explain value: it is a function of value.
Jul '12
Re: Fiat Currency: What Are You Going To Replace It With?
How about Congress pass legislation intentionally inflating the currency to say... $2000/oz AU? This could be accomplished by the mechanism of simply printing money and purchasing gold from large institutional venders who will be attracted to this offer, as the value of gold is below that threshold currently. The legislation would mandate that the Government would have to sell gold back at that rate as well, (probably at some minimum purchase quantity) ensuring that the government is essentially in a golden straitjacket - they can't print too much money, or people will wipe out the Fed's gold reserves, and when people want to sell gold to the central bank they are allowed to print money representing that value. The purchase/selling of gold would equilibrate the price very quickly, and being as it's unlikely that there is going to be a massive quantity of gold discovered any time soon the money supply will be pretty stable.
This would require an amendment to the Constitution however, as nothing would strictly bar Congress from arbitrarily then setting the value of an oz. of gold to say, $10,000 or something, but it seems like a start.
Jul '12
Re: Fiat Currency: What Are You Going To Replace It With?
As an added bonus: Perhaps we could do the same thing with flawless, manmade diamonds. It would have to added benefit of crushing the De Beers cartel.
Sep '12
Re: Fiat Currency: What Are You Going To Replace It With?
Gold does not fluctuate in value. Gold merely is. It is a store of value. Apparent price fluctuation in Gold are merely fluctuations in the value of the unit of account, currently fiat currency which is not worth the value of the ink and paper intrinsically.
A Gold standard tend to generate a mild deflation to other prices, as the price level must decline to account for greater volume of goods, but roughly the same amount of Gold. It is thus disfavored by debtors, as they prefer to repay debt with depreciate currency units, rather than appreciated ones.
The primary benefit of a Gold standard is that it prevents politicians from monkeying with the savings and earned capital within the economy. Worthwhile for that reason alone!
Gold and Silver coinage are the only constitutional legal tender in the US.
May '12
Re: Fiat Currency: What Are You Going To Replace It With?
Aodhan:
I'd simply rather see gold used for jewelry and circuitry and to line astronaut's helmets to block out unfiltered sunlight rather than shoring up currency. I see diamonds in the same way. Having seen what jewelers made for the Wallis Simpson, and learned what a diamond drill tip can bore through, why not use them use them properly rather than hoping they can make currencies stronger that are subject to people's foolish decisions.
I think we have already established that using the gold standard did not curb inflation in the 1900's, and did not stop the various Banks of the United States from printing worthless scrip and collapsing.
I would not mind old fashioned Bank Notes, but can we get there from here?
On a private note, you inferred that I had taken a side I simply had not. My subsequent comments in this thread should have clarified that for you.
In fact, this Post takes no sides. It only seeks to explore where best to go now that the Federal Reserve system has failed.
Don't argue when a discussion is what is taking place.
May '12
Re: Fiat Currency: What Are You Going To Replace It With?
Here's a thought. When money was literally gold, silver bronze and copper the problem kept arising of the coinage being debased. This happened to the Athenian Owl, to the Roman Aurelius (time and time again), and to the British Groat & Sovereign.
No metal in the world can prevent people from trying to stretch out the coinage or print more money. Only we can.
Sep '12
Re: Fiat Currency: What Are You Going To Replace It With?
This scheme seems good, but, haha, would you really expect governments to not manipulate banks and bank markets? Oh wait, they already do... Still, it seems like it removes power from politicians so its probably a good thing..
Fred Cole: Banks could issue their currency backed or not backed by gold or silver or oil or diamonds or uranium or by nothing, and the market could decide the value of that currency and how they would trade.
Any government solution would be open to endless political struggles and debates and divisiveness and then, always, government manipulation. · 11 hours ago