The following is part 2 (and the conclusion so far, until next discussion) of a long facebook discussion primarily about gold as money. For Part 1, see here.
That result is enabled by the money supply being inflated, which is bad, because it means that people can’t store value in money, and so they buy more consumer order goods, which borks our economy (like when we overbuy housing, as in right now).
When debt was secured by metal, we couldn’t have the same kind of results as the link above. And that’s a good thing, because it gives individuals power over their economic future in a way that fiat currency does not. And individuals make better decisions acting on their own behalf in their own interest than the Fed does or can.
There’s all my assertions and assumptions in one place!
All currency is fiat currency because monetary value is a function of human convention and not an intrinsic property of a good or service.
Rival, there is no such thing as intrinsic value. But that doesn’t make all currency, fiat currency. Gold/silver were technically commodity currencies that were based on market prices. However, governments did attempt to fix the value by fiat; but this didn’t work that well because gold/silver had other valuations. Not intrinsic value, just other human valuations for the metal. That’s why I’d say commodity currencies aren’t fiat currencies; even if the gov’t tries.
Brian, would you prefer the State to back the US by gold or for the state to just allow for free currency competition within its jurisdiction? Namely by removing legal tender laws.
The problem with the arguments I’ve heard in favour of a gold standard or free banking (i.e allowing individual private banks to issue their own currencies) is that they invariably compare their optimistic theoretically perfect system with the practical implementation of the current fiat system. What you’d actually get in the case of a gold standard would be the government just making arbitrary changes to the $/gold rate like they did in the 1970’s which would have all the problems of the current system, only being less efficient and more costly to run. If you could get all the main economic powers in the world to sign on and somehow pledge they wouldn’t drop out when convenient for them it’d help a bit, but what’s the chances of that happening!?
In the case of the free banking approach, you’d have what happened back in the 19th century when such was available – frequent bank failures leading to losses to the holders of such script (rather than the insiders who had a huge information advantage), and very high transaction costs where every business needed to keep track of the current value of all of these separate currencies. Certainly there’d be better implementation if it were done these days, since information can be obtained a lot more cheaply than back then, but basically it’d be throwing the whole population a bucket load of additional risk to deal with individually, with which they have no particular skill or ability. As a system, the main reason it got scrapped back then was it sucked.
Brian, even with a gold standard you’re still at the whim of government policy changes. If you like though you can get as much economic security as you want by converting your $’s to commodities. The problem is that approach leads to steep transaction costs, taxes (eg gold sales get taxed at a higher rate as a “collectible”), and overall very low or negative returns. All that and you still have risks, only they’re different ones. Alternately you could put savings into inflation protected bonds which are more likely to be cost effective. You’d just have to trust the government not to withhold payments/default on them
“What you’d actually get in the case of a gold standard would be the government just making arbitrary changes to the $/gold rate” — Well then that isn’t really a free market currency then is it Alex? How come we don’t have all the main economic powers in the world signing on and pledging that they will continue using oil or coal for energy generation? An actual free market currency is one where the states don’t regulate the value of the underlying commodity. If the states do regulate the value, then you have a fiat currency like Rival Guy was complaining about. Modern gold standard proponents (and I can’t speak for all of them, just the Austrian School gents) don’t want to go back to the old fiat gold standard; but instead want to advance on it with an actual, market based currency. Rothbard wrote a lot on it:
What’s to stop a state from buying enough of a commodity to control its value? Your commodity currency is only meaningfully distinct from a strict fiat currency so long as no individual or consortium is able to control the commodity itself. Then we’re back at an effective fiat currency, although potentially a fiat by a private entity rather than a government.
And why would you want to use a finite commodity, with practical value, for the backing of a currency? Won’t that just encourage hoarding, and in so doing, make it more expensive and more difficult to produce goods that use that commodity? Which, in the case of gold, includes motherboards, an item I’m guessing you don’t want to artificially raise the price or restrict the production of. And failing that, would it not create the case that every motherboard (or necklace, or earring, or astronaut’s visor, or anything else that uses gold) decrease the total monetary supply? That seems undesirable if you want a stable currency.
John, I was speaking to the feasibility of a gold standard. To answer you, here’s some thoughts on what would occur in actually implementing a full commodity money system. I’ll stick with gold, but the same arguments apply to eg cigarettes, beaver pelts, salt or whatever other commodity is chosen.
So if a government all of a sudden decided on eg gold as the new currency – firstly that would be an arbitrary decision and rather than making the people in the country with gold suddenly rich a plausible scenario would be, as mentioned, the government controlling the exchange rate or making it illegal to own bullion, both of which have happened before in the US. The decision of how much gold the government needs to buy up to back its dollars is going to be a problem. Do you assume the current market valuation is correct? Do you just force the government to buy up however many trillion dollars of gold they need to back the current number of dollars in existence and peg the dollar wherever it ends up? US currency is something like $10 trillion dollars, which is the current value of all the mined gold in existence. It’s already got a fairly large reserve but would still need to go out and buy a couple of thousand tons of gold on the open market. I’m sure the other countries with large gold supplies would be happy to make that trade, though the price would go up a lot particularly if the purchase happened quickly. If you want an international gold standard, try doing that for all the other countries in the world as well and see how that works out.
Okay, so let’s say you get past the implementation issues, the inevitable reallocation of wealth based on the arbitrary choice of metal etc. You peg the dollar to a constant x weight of gold, and allow people to use it as currency.
First there would be a huge demand for gold leading to a boom in mining way beyond what is efficient for that market. People will be literally pulling teeth out at the new values. Realistically there is not enough of it on the planet to provide measurable amounts for daily transactions in the US, far less for an international system. Not only that, but there are issues with weight/quality, storage etc which would be very costly to deal with on a daily basis. It would end up relying on eg sealed containers that contain a tiny fraction of an ounce of gold (and the inevitable trust issues with that), or costly training for individuals and the purchase of assay equipment at every point of sale. So realistically you’re stuck with keeping a paper currency and giving people/other countries the right to exchange at a few banks at that rate for gold or dollars whenever they like. That would make it less ridiculously expensive, though still costly. You’d then also be relying more on trust that the government is actually holding the reserves it says it was to back those paper dollars. Maybe you encourage regular audits, or with international negotiations of balance of payments, shipping bullion back and forth (at considerable risk and expense).
Leaving all that aside, you now have a very deflationary system. If the economy and the transactions in it expand faster than the (somewhat random) gold supply, people will put off some current investment and spending since their saved gold/dollars will become more valuable over time, which leads to economic growth being capped, as well as partially reallocated to gold production as mentioned before.
Also, if the fluctuation between gold reserve and economic growth becomes large there will be unforeseen wealth reallocation between lenders and debtors very similar to the consequence of unforeseen inflation.
You still end up with speculation risk – a lot of people point to spikes in gold value as indicative purely of a plummeting value of the dollar, but really it’s mostly just shifts in demand for that asset. A gold standard makes everyone’s wealth subject to the vagaries of the fluctuation of a single asset. People like to put up charts showing how nicely gold’s value has increased over the last decades, but rarely do you get charts of the early 1980’s where it lost 2/3 of its value over two years.
And all for what? At huge cost you still end up with a limited inflation/deflation problem, though with the far more pernicious effects of deflation. You still get business cycles, regular recessions etc. You still run the risk of the government leaving the system instead of going into hyperinflation levels of seigniorage.
Rival, as long as the currency meets the “divisible” aspect of money (I think Aristotle first came up with the requirements for moneys) it doesn’t matter how much of the money supply there is, as long as it’s relatively stable and not prone to big swings up or down (like a big bank bailout creating a trillion dollars; or a massive silver discovery like in the America’s that caused monetary inflation in Spain from the conquistadors bringing it back, correct my history if I got it wrong).
Alex, I don’t want a State created gold standard. There’s a difference between that and a free market currency system. There is no “pegging” to the dollar. That creates all the issues we had ye’ olden days (though personally I think those problems were less bad than the current problems, but that’s a different issue and subjective).
The supply/demand issues are fixed by making the value of the US dollar float with respect to gold, just as it is today. So what’s the difference you ask? Laws. I want to remove the laws benefiting the US dollar to allow for better competition between currencies. The state has shut down private mints attempting to make and circulate a metals based currency.
As for deflationary effects, unlike Keynesian economists who think that a 2-5% inflationary environment is good, I prefer a 2-5% deflationary environment. There really isn’t going to be as many issues with that as Keynesian economists falsely believe. A mild deflationary environment encourages saving, whereas a mild inflationary environment encourages consumption, and it isn’t consumption that leads to increases in investment and capital growth; it’s saving. If a deflationary environment encourages people to “put off current investment and spending” then where does that money go? In a bank. Earning interest. And what does the bank do with it? They lend it. At interest. In fact, given freely floating interest rates, interest rates will accommodate by increasing in order to increase savings (who wouldn’t put money in a bank CD giving 6% annual?) and decrease borrowing until that an even point is reached. The interest rate shouldn’t be governed by a couple of bureaucrats anyways. A free market currency, requires a free market interest rate.
The current business cycles are caused by a non-floating interest rate. How do you propose that a hard currency in a mild deflationary environment would cause business cycles? Even if they did, the entire foundation of the cycles would be different then the current fiat system. How do you think they would differ?
Inflation of the commodity supplies due to mining are really a non issue in today’s environment. All the huge – pick gold off the ground – are essentially gone. Mines take years to build and operate. All of which gives a lot of time for the futures market to stabilize gold. The commodity inflation seen by the US (from california’s gold boom) and Spain (from the america’s silver boom) was rare in history, and would be even rarer in a modern world.
Oh, I forgot to address the small divisible coinage issue that you brought up. Question, how much actual cash to you handle now a days and how much is handled by banks? Me, I rarely even touch real cash anymore. I let the banks transfer cash bank and forth and I have digits in my account representing cash. Why wouldn’t that be the same for commodity currencies? In fact, if you aren’t a US citizen you can already have gold debit card useable with visa & MasterCard locations: http://europacbank.com/ The bank just transfer the gold back and forth whenever they deem read to match books. Or more likely they sell it when they need to on the open market to transfer USD to the necessary banks.
Anyways, in that case, there is no reason why you can’t trade gold down to the micro-gram without issue. Banks can just make it redeemable in 1/10oz amounts or whatever bank competition ends up making. Maybe offering reduced premiums for larger coins.
Regarding the gold debit card, I am unable to find out why a US citizen can’t get it; but that most likely goes back to my earlier statement about removing laws benefiting the US dollar over other currencies.
A couple of quick points: There were plenty of deep recessions during the gold standard era as well due to the standard reasons – large companies going bankrupt, supply and demand shocks from both national and international causes. They weren’t caused by cycles of interest rates, but it hasn’t really been shown that current business cycles are any different.
I already addressed some of the private mint problems. Given the case you’re putting forward there isn’t anything to require people to accept all these other privately issued currencies, so sure you can offer me $100 in some gold based currency but I’m going to discount a large percent of its value to accept it, or I’ll say I don’t accept it at all and you need to get it exchanged for some other currency (at a cost). The more different types, the more the discounts are likely to happen.
In a deflationary economy you won’t be earning interest in a savings account. You’ll still be charged regular deposit fees and be earning less than that unless you’re willing to take on risk of loss of principal. If you keep it in a bank they have little incentive to lend and companies have little incentive to borrow (since there is very little consumption going on due to the deflation). In a nutshell the economy goes down the toilet. Low steady inflation is easy to contract around and budget for. Deflation is a lot less so.
Say the value of gold increased to 10 or 100 times its current value due to the huge stock piles then required by central banks. What crazy schemes become worthwhile? Filtering the oceans, mining the ocean floor, asteroid mining? Personally I’d prefer investment $’s to be used for something actually productive.
For the Europac card – nothing wrong with that as a service, and modern technology can keep some of the costs down for sure… if you don’t mind paying the 4% transaction costs every time you buy or sell your gold & $5 every time you use the card to spend. Plus you’d be placing a lot of trust in a small offshore bank.
“so sure you can offer me $100 in some gold based currency but I’m going to discount a large percent of its value to accept it, or I’ll say I don’t accept it at all and you need to get it exchanged for some other currency (at a cost). The more different types, the more the discounts are likely to happen.” – I see nothing wrong with that. Though the non-money value of the medium will heavily restrict the discounts. Why would I pay you a 5% discount when I can go to a coin store and get a 1% discount?
“Plus you’d be placing a lot of trust in a small offshore bank.” – Like MF Global?
“. if you don’t mind paying the 4% transaction costs every time” – Credit card companies charge 3% don’t they? Companies just eat that cost in order to get business.
So if a deflationary economy occurs because people have a higher future expectation of monetary value so they “hoard” currency. And this doesn’t cause interest rates to rise? Are you saying that interest rates would be low in a deflation or that deflation/inflation have no effect on free market interest rates?
“What crazy schemes become worthwhile? Filtering the oceans, mining the ocean floor, asteroid mining?” – Considering that the technology involved do these “crazy schemes” is beyond what current technology allows, I don’t see how incentivizing this is a bad thing. The capital build up and R&D necessary to do such a thing would be hugely beneficial to non-commodity parties as well. Can you imagine how awesome it would be to be able to mine an asteroid? Hmm, it seems that commodity prices are high enough already for that actually:
http://www.planetaryresources.com/ and more power too them!
Overall transaction costs would be higher throughout the economy. There’ll be some transactions at the margin that get lost due to the added costs due to the increase in risks due to asymmetric information.
There are many reasons for deflation but in general terms a shock leading to a fall in aggregate demand relative to the money supply. The tendency to hoard cash is both a rational response to deflation and the cause of such a crisis to continue. Increased saving in a free market under such circumstances would lower nominal interest rates further however there would be a distinction between real and nominal rates. Real rates would be higher under deflation. Since consumer spending stays low, businesses would still not invest despite the low-interest rates and so the spiral downwards would continue. Job layoffs, bankruptcies, default on debts leading to bank losses as well, distressed selling of assets. Fire and brimstone coming down from the skies. Rivers and seas boiling. Forty years of darkness, earthquakes, volcanoes… The dead rising from the grave, human sacrifice, dogs and cats living together… mass hysteria.
wrt the promotion of gold seeking investments, keep in mind that while there may be some positive repercussions it would still be a highly inefficient allocation of resources.
Heh, cats and dogs. Fantasy land!
In your list of “due to”s, you ended with asymmetric information. Our current system is horribly asymmetric. A few bankers decide what to do with the currency and decide what to tell us. Their dollar is an enforced monopoly. Under a commodity standard with current technology the information about the currency itself would be better spread out and decentralized. A few bankers can fabricate some zeros in a computer in an instant causing markets to jump; but mines can’t noticeably ramp up production in less than a month, and that’s probably optimistic.
You say that people will hoard the currency increasing the deflation, because of the expected future value of the currency, therefore we should decrease the value of the currency to reduce hoarding. Should this same logic be applied to digital products whose value increases every year? I certainly hoarded my cash, waiting to purchase a tablet until my dollar was worth enough to purchase one for cheaper, cause I was positive that I’d be able to wait and get it for cheaper. In putting words in your mouth, you’d say then that it would be better for the economy if I had purchased a more expensive tablet, while I’d say that it was better for the economy for me to wait.
Would you, like me, prefer to remove the laws on the dollar maintaining its legislated monopoly and allow for free competition? If the fiat system really is better (more efficient, more stable, encourages stronger growth) as you posit, then free market laws tell us that a commodity currency would eventually become defunct and unused. Correct? So what do you have to lose, would be in favor of removing legislation and taxes around other currencies to allow their use? Competition’s a good thing right?
John, I totally agree – the fiat money supply system could be pretty much automated – eg set it to increase at a rate to produce inflation of 2% or as some function of GDP and leave it alone. At the least Fed policy decisions should be transparent etc. That would make the economy more robust since people wouldn’t be hanging on the Fed’s every announcement.
The difference with your digital product example is that companies still have an incentive to create products due to competition. There is no incentive for everyone to behave that way, and even if they did we’d have some minor changes in price or a little longer product development. In the meantime you could still spend on other markets which weren’t developing so quickly. In deflation there is the same incentive for everyone, for all there spending decisions – the consequences of which lead to even more of the same.
So long as nobody is required to accept those private currencies it’s fine with me. The tax law’s already set up to cope with bartering of services so that wouldn’t add a lot of complications. For your tax payment you’d need to convince the government to accept it in that denomination voluntarily or broker it through a third-party till then.
So how do you feel about bitcoin then? While I don’t have any, I’ve looked it over and it does fit the bill of a steadily regulated fiat currency. Though, no, there’s a fixed theoretical amount I think. So you’d probably dislike that over commodities which can at least be continually mined. If bitcoin increased at a nominal, fixed inflation rate, would you prefer that over the dollar?
“So long as nobody is required to accept those private currencies it’s fine with me.” — great! That’s half the battle. Given the choice between forced fiat and forced commodity standards I’d choose commodity (and you’d choose fiat) but that’s like choosing a jailer that beats me less, over the one who beats me more. My actual preference is to allow free competition in currencies within localized states to do the moral thing and “let the market decide”. Buuut, I think you get that point by now huh? I probably don’t need to discuss how I’d prefer the jailer who’d beat me more.
Could you repeat your middle paragraph again? I don’t get what you are referring to.. at least not enough to retort. “everyone to behave that way” what way? For everyone to create products?
“minor changes in price or a little longer product development.” – you mean from higher interest rates? so less borrowing?
“In deflation there is the same incentive for everyone” what incentive? To not spend? To put money in the bank instead?
Take a look at Ch15 “The Miser” in this book. It’s 5 pages long, and a short read. I just re-read it in 7ish minutes. Pg111. It might help you explain the above questions if you understand my econ background.
http://mises.org/books/defending.pdf Author is professor of economics at Loyola univ. He explains my views on deflation fears better than myself, probably because I learned them from him.
Bitcoins interesting. I looked at it a while ago. I’ve no problem with it existing, though it seems to have a somewhat unhealthy relation with money laundering these days. Their ‘mining’ method to get new coins into the market is ingenious, though I do wonder if all that computer power could be put to better use. Since it is designed to be international rather than based for a national economy the fixed inflation or relation to gdp wouldn’t be the same. So long as the money supply growth is predictable and there are other alternatives it shouldn’t matter. Personally I’d be concerned with 1. changes in legislation, and 2. some shady insider who’s planted some code deep in the system.
Sorry if I was unclear – let me fill that paragraph out a bit:
The difference with your digital product example is that in that situation companies still have an incentive to create products. If they don’t keep doing new research then other companies will move into their market. If a lot of people changed their preferences in such a way they might change their product, put out a cheaper interim one or such like, but there’d still be gains from trade. If everybody decided to not buy a hard drive for the next 10 years then a bunch of companies would go out of business in that market, but the other markets would be fine. There is also no incentive leading everyone to suddenly have a long-term consumption preference – your situation might allow you to wait for the next version to come out, but someone else needs to use one right away. Your choice not to spend would also not necessitate saving. you could still spend on other markets which weren’t developing their technology so quickly. In deflation, however, everyone has the same goal: to hoard cash since the value of the dollar itself is increasing they should reduce all their spending as much as possible so they can by things for cheaper real prices later. Everyone will be spending less overall to be able to consume more in the future. Whether they put money in the bank or not is irrelevant under deflation since the banks too would have the same incentives – they also would prefer to have $1 later rather than now which is the opposite to their customary deposit relationship with a customer – the consequences of which leads to even more deflation. Nobody buys, everyone saves, businesses go bankrupt and don’t pay their debts, banks go bankrupt and (unless there is FDIC in this world) don’t pay their depositors, who then cut their spending back even more.
Okay, I gave it a quick read – here’s my notes as I went through it.
There’s nothing wrong with saving – since if it’s done in eg a savings account it gets re-invested or helps lower interest rates which make other investment projects become financially feasible. There are tax incentives that promote this kind of behaviour. There’s really nothing wrong on an individual basis with hoarding if that’s what their utility function requires. If it’s a company sitting on piles of cash (as many are these days) then that problem is solved by competition.
When you look at the macroeconomic picture, under a fiat system even the large-scale threat of deflation isn’t a problem since the Fed can always purchase Treasury bonds and thus increase the bank’s cash holdings, to some degree releasing more cash into the economy. With a commodity money system you’re stuck with the deflation though. What can look fine for an individual hoarder looks a lot less beneficial when everyone does it.
The start of p114 is problematic – in lowering prices there is some harm to the manufacturer/retailer/investor who loses some of the return on their sales due to the lower profit, or by even having to sell at a loss. To occur this assumes that the consumers as a whole have shifted their preferences to wanting to save more with no other changes. However it’s much more common to occur under some shock to the economy.
While technological advancement wouldn’t directly lead to a recession, there would be a spike in short-term unemployment in that industry. If there was a major loss of aggregate demand then there would be a loss of employment throughout the economy.
While the example has some appeal, it really doesn’t apply when you consider how businesses actually work. For some industries a profit margin of 3% is the norm. Consider what happens when lower demand for their product leads to all the prices being cut – they can’t make their loan payments and still go into bankruptcy. Eventually a new equilibrium is found with fewer companies competing. Now an argument can be made they shouldn’t have taken on so much leverage if their revenues were uncertain, but these sort of unexpected demand shocks and shifts in markets do happen since there’s so much uncertainty in investment decisions.
Moving along, there’s no particular harm with people hoarding a bit and not investing in a fiat economy since such cases have very little effect on prices at the individual level. In fact that’s a big argument in favour of minting collectible coins. It doesn’t mean that on a national level people suddenly stopping spending is going to do anything but cause economic turbulence which leads to hardship though. If one person hoards cash than no problem. If enough people suddenly stop buying goods then companies go bankrupt, people are laid off. Theoretically they could find new jobs right away, but practically speaking it’ll take a while. An enlightened bank might also cut the debt’s interest rates and principle, but they seem to be highly averse to that in practice – probably due to signaling and moral hazard problems. In the meantime everyone – consumers, businesses, banks etc all drastically cut back on spending. The problem with deflation is that it creates a self-perpetuating system of lower spending, lower investment, lower employment where everyone in the economy’s incentives all are pulling in that same direction. And so the simple solution is to print gobs of money which the gold standard is unable to do. Instead it has to wait while the economy shrinks down and stabilizes at a smaller level and is based on spending that people can’t put off.
I think in terms of security, bitcoin is pretty safe. I think it’s code is open source, though I could be wrong. Personally I hope it continues to do well as an anonymous digital currency (like cash) has some very positive privacy effects.
So in terms of your deflation scenario, if everyone hoards immediately such that it causes a collapse, then wouldn’t that be short lived? The value of the money would rise incredibly fast to find its demand/supply equilibrium. I would propose that this transition would be fast enough that only the highly leveraged companies would go out of business (due directly to deflationary effects). If the incentive to hoard is so strong, what keeps the monetary value rising so strongly over the long-term? Besides the 2-5% I mean. If the economy grows at 8%/year, and the money supply only 3% then deflation effects of ~5% would be seen (all things being equal of course).
“What can look fine for an individual hoarder looks a lot less beneficial when everyone does it. “ I still think you are missing some of the economic effects that can occur when “everyone does it”. Not that I explain that well either of course.
Okay, so say there is a huge, lengthy economic downturn upon turning to a free commodity money (which I think would be rather short actually) and once stabilized; what would occur to cause further deflation besides economic growth that surpasses monetary inflation? What do you think would cause further major booms/busts? I would argue that the business cycle would drastically change and reduce its effect because the interest rate can’t be monkeyed with as readily causing mass delusions. Instead, just the more normal, localized delusions would occur due to whatever human fancies come our way.
Well everyone can’t just stop spending entirely – there are day to day requirements that still need to get paid – food, shelter etc. The things that happen less are investment decisions by businesses, major appliance purchases by consumers that aren’t immediately necessary, new technological gadgets etc so it’s always going to be a question of degrees rather than absolutes. These forces take some time to filter through the economy. It may happen in stages where the reduction in demand from one round leads to further layoffs and bankruptcies, leading to further reduction in demand through a few cycles, but yes, it might be possible for a very fragile economy that eg held a lot of debt, to collapse quickly then reach a floor based on what ongoing spending can’t be delayed and who can’t be laid off. A complicating factor would be any automatic government spending that would kick in for eg unemployment benefits. That would on one side slow the plummet of the economy and on the other end create some kind of stability a bit earlier on than otherwise. Either way, if the gdp was low enough to be supported by the money supply, things would return a bit to normal – no more deflation, people start to do their long term purchases etc, until the economy goes out of whack with the money supply again. Or real prices may still be expected to fall a bit (but not as much as before) so some spending starts to happen but economic growth stays at a slower rate than otherwise.
Wrt just the highly leveraged companies going bankrupt, maybe to start with – that’d depend on the distribution of debt, elasticities of demand and so on. But as far as consequences think back to an average recession, the first thing that happens when companies lose demand is a round of layoffs (new unemployment claims is used as a leading indicator of recessions). This is true for companies that aren’t at risk of bankruptcy. So on top of the highly leveraged companies going bankrupt you get unemployment increases from other companies as well, you get decreasing wages since the real $ value is higher they can be paid fewer of them, there is more competition for existing jobs, and all of which put downward pressure on prices. Now to offset the downward direction of prices, while companies are busy laying off employees, they are also cutting production to support price levels, so the economy’s death spiral isn’t a foregone conclusion – it’s more a race to see if those companies can weather the storm while it lasts before they too go under.
There were regular expansion/recessions under the gold standard before. From 1869 to 1933 there were apparently 19 of them and they tended to be both bigger and last longer than ones post 1933. There’s no reason to think that wouldn’t happen again. So you have demand shocks on one side, as well as the inevitable supply shocks on the other. Additionally you’d need to factor in that other countries wouldn’t be under a gold standard, so a lot of the self-correcting properties of a commodity system wouldn’t have the predicted effect. If there were a balance of payments surplus, countries wouldn’t offset the flows of money with shipments of gold, so there’d be factors pulling the fixed gold to dollar ratio out of whack. Statistically, the variance of prices since the Fed started its modern policies at the end of the 70’s have been way lower than during the gold standard years.
Why’d you use 1869 to 1933? The federal reserve system was established around 1913, and the second us bank was removed ~1836. Though the actions around the civil war (1861-1865) would essentially nullify any free market currency as the dollar was nationalized again and would continue to have serious capital requirement issues ongoing to the present day. So you have, ~25 years of the closest thing to a free market currency the US has seen. Not the longest period of time. But if we look using wikipedia and excluding the crises created by the demise of the 2nd Bank of US you have four recessions/crises listed:
1845-86: wiki says mild enough to be a slowdown in growth. no cause listed
1847-48: tough time created by the Cleveland Trust Company’s ties to Britain when it undergoes the panic of 1847. nothing to do with the US money supply really.
1853-54: a decrease of business investment, “little evidence of a contraction”. no cause listed besides interest rates rising to which stems railroad investments. Arguably a good thing considering the trouble railroads would see in the post-free market currency eras.
1857: apparently caused by the need for the US to greatly slow down its agrarian exports to Europe. that’s a pretty big shift in the supply/demand structure for businesses so no wonder we went through a contraction. nothing to do with money supply.
1860-61: Hadn’t heard of this one. looks like some financial issues came up but then was solved by development of 3rd party clearing houses for financial institutions.
Overall, a very short period of time, but relatively stable I’d say. Not really long enough to draw a clear-cut case for private currency standards, but it certainly helps in my opinion.
Can you explain back to me what you think I mean when I discuss a free market commodity standard? I don’t think our ideas match based on your comments.
Question, if the US announced it was going to back all its currency through gold tomorrow, what would you do? Run down to the gold shop with everyone else? short the price of gold? buy some paper-backed ETFs? Do you think there would be a “gold run” on all available physical, maybe even including jewelry at Fred Meyers and pawn shops? Also, do you think the price would jump immediately? Would you be able to purchase gold at roughly today’s prices? If not, then assuming the US state would have to purchase gold on the open market, why do you think the price would continue to increase at something more than 20% for multiple years (enough to cause a few crises)? Even if the US bought most of the world’s investment grade central bank gold, anything under 15k/Toz would be a bargain (calculated using central bank holdings and M2 money supply). I still don’t see how you could have a multiyear long process of massive increases of value. Besides, if investment gold really jumped to 15k/ounce, you’d see a lot of jewelry being sold to help push the price down. Given the theoretically amount of gold on the planet, if all of it came to the states you’d have ~$1000/Toz. A pretty good margin for supply meeting greatly expanded demand.
” If there were a balance of payments surplus, countries wouldn’t offset the flows of money with shipments of gold, so there’d be factors pulling the fixed gold to dollar ratio out of whack.” In a free market, anything being “out of whack” is a great opportunity. A surplus of foreign currencies reduces foreign import costs (making gold imports cheaper); while a deficit reduces export costs for non-gold goods or straight gold (so exports of either gold or goods would increase reducing the deficit).
For the first part of your post….
1836-1861 was a bit different to the later periods, but if you want to include that, sure…up to a point. There were 18 of the 33 states at the time that eventually adopted free banking, but only three of them did it before 1849. It was certainly an interesting period, particularly with provisions like double indemnity by stockholders to insure the safety of their banks in some states. Here are some papers that go into depth about it. There’ve also been some good Econtalk podcasts on the matter.
If we’re talking about commodity money, that period had some very strong ties with it – there were gold coins issued by Congress, but the bank notes from free banking had an indirect method of redeeming it for gold and were based more on the value of state bonds they used frequently as surety. The notes were also discounted or not usable in regular transactions were those banks to be looking shaky.
For the 1913 vs 1933 choice, there were definitely an assortment of odds and ends going on around the time, but up through Roosevelt’s order in 1933 the US’s creditors could still demand payment in gold.
Additionally in 1934 the Gold Reserve act made it so people could no longer contract options to have debts paid in gold or dollars. The Federal Reserve up through all the law changes in the 1930’s was a very different animal compared with what followed. Also –
“Throughout the period under which the United States had a metallic standard, paper money was extensively used. A variety of bank notes circulated, even without being legal tender. Various notes issued by the Treasury also circulated without being legal tender. This use of paper money is entirely consistent with a gold standard. Much of the money used under a gold standard is not gold, but promises to pay gold. To help ensure that the paper notes theretofore issued by banks were honored, the government created the national bank system in 1863. In 1913, it created the Federal Reserve System to help ensure that checks were similarly honored. The creation of the Federal Reserve did not end the gold standard. The gold standard ended in 1933 when the federal government halted convertibility of notes into gold and nationalized the private gold stock. The dollar was devalued in terms of its gold content, and made convertible into gold for official international transactions only.” http://www.fas.org/sgp/crs/misc/R41887.pdf
So for ‘free market commodity standard” here’s my opinion/description.
For the commodity part – an issuing body can only issue currency, notes etc up to at most the value of assets they have (in this case a specific asset like gold). So for the US to switch to an entirely gold backed currency, they would need to maintain stores of sufficient gold to redeem it to people wandering in with notes. In practice that’s somewhat toothless unless it’s applied internationally. Without international penalties to the exchange rate, the first time a major war comes along and we’d be straight off the gold standard again.
The free market part could be taken as the ability of different people, corporations etc to issue their own currencies that people can accept or not in the market place. The combination of the two would require these issuing parties to be willing to redeem their notes for gold at any point. The specifics of that ability get a bit stickier when the commodities are less specific and simply require some mix of assets, since the requirement of a specific commodity takes a bit of the “free” part out of the market.You could get a picture of what it’d be like in practice by considering what it was like going around Europe pre-Euro. Lots of transaction costs and exchange fees. In fact, why not save time and effort and just accept any other country’s currency here. No more need to mint coins and notes. We could rely on the free market to allow consumers to pick and value the individual currencies appropriately based on the issuing country’s assets.
If the US announced a switch to gold tomorrow, I imagine though markets aren’t entirely efficient, that the price of gold would’ve already largely adjusted to that news by the time I could get near any.There would still be huge uncertainty as to whether the politicians would really be that insane affecting the price as well, but I wouldn’t have any insider knowledge to get a good deal on that volatility. In any case, it does seem odd to fixate so much on gold. Why not silver, or oil? You’re saying that the US should buy huge amounts of gold at prices up to 10 times the current market price so they can put it in a hole in the ground and leave it there. That’s hardly a bargain. Surely there are better things to spend the money on. With your numbers, it also means you’re giving up on the international gold standard idea which was one of the main selling features.
You wouldn’t need a 20% growth rate annual growth rate in price. All you need is gold growth to be lower than gdp growth over time. Over a few years the difference would be sufficient to set off a recession due to the deflation. Either that or you just get persistently lower growth of the economy through a more continuous effect.
wrt the balance of payments thing – so for foreigners looking to purchase US export goods, at the heart of it they will need to purchase it, at least indirectly, with gold. Don’t you think that’ll limit US trade somewhat? Particularly if, by this point, the US has just about all the world’s gold. You could force that system to work but it’d be hugely inefficient
We could also shift this discussion to messaging rather than carrying on clogging up Brian’s feed!
Man, don’t you ever sleep? If Brian minds, sure. Otherwise it is nice to have it public, though I’m sure we are being ignored by now.
dangit, new keyboard, i keep hitting “enter” instead of ‘ causing my messages to be sent early. hence the “edited”
“an issuing body can only issue currency, notes etc up to at most the value of assets they have (in this case a specific asset like gold).” >> Correct, but theoretically it could be silver, oil, property, commercial shares, … similar to what you mention later on
“The free market part could be taken as the ability of different people, corporations etc to issue their own currencies that people can accept or not in the market place. The combination of the two would require these issuing parties to be willing to redeem their notes for gold at any point.” >> Or whatever asset the company decided to back it with (if any!, think bitcoin, backed not by property but by “anonymity”, whatever asset class THAT falls into).
“The specifics of that ability get a bit stickier when the commodities are less specific and simply require some mix of assets, since the requirement of a specific commodity takes a bit of the “free” part out of the market” >> It only removes the “free” part if the commodity is enforced by legal standards. If freely chosen, then no liberty issue arises.
“You could get a picture of what it’d be like in practice by considering what it was like going around Europe pre-Euro. Lots of transaction costs and exchange fees. “ >> and yet in ancient europe you could bring one nation’s recognized gold coin into another country without issue. A reserve currency if you will, much how the US is treated today.
“In any case, it does seem odd to fixate so much on gold. Why not silver, or oil?” >> I’m open to the idea if that is what would be freely chosen, but gold historically seems to be the best asset for use as money, just as aluminum makes a better aircraft material over concrete. It’s natural form suites it for that purpose.
“You’re saying that the US should buy huge amounts of gold at prices up to 10 times the current market price so they can put it in a hole in the ground and leave it there. That’s hardly a bargain. Surely there are better things to spend the money on.” >> As opposed to trillion-dollar bailouts? Come on, now you are just quibbling. Even you must admit that a rigidly backed currency reduces frivolous spending. I say rigidly because for most of US history (even under a pseudo gold standard) it wasn’t rigidly backed as the state could still create monster unbacked debts.
“With your numbers, it also means you’re giving up on the international gold standard idea which was one of the main selling features. “ >> Oh, I wasn’t giving up. I was just giving those as examples. Using a value of world wealth at $200 trillion, that would mean a gold price of 37k. Pretty high, at that price I’m sure you’d starting seeing monetary competition from silver, platinum, palladium and other such precious metals. Or even digital currencies, who knows. The market can sort it out in an efficient manner, that’s what it does doesn’t it?
“Over a few years the difference would be sufficient to set off a recession due to the deflation. ” >> I disagree. You’ll have to explain how you think the difference effects currency stability enough to cause a mass change in consumer/investor behavior that is unforeseen. As if it’s foreseen it can would be something similar to “just get[ting] persistently lower growth of the economy through a more continuous effect. ”
“so for foreigners looking to purchase US export goods, at the heart of it they will need to purchase it, at least indirectly, with gold. “ >> That would only apply if domestic businesses would only accept gold; but chances are if the currency is a solid currency (krone versus Zimbabwe) then they may very well accept it and use it for purchases. If not, then yes, the exchange would end up being in gold. But say, if the US did end up holding all the gold. You don’t see that as a scarcity issue that the market could handle? Why do you think the market can handle small things like iPods but not big things like currency?
In your own defense, I didn’t quite mean the last bit like it sounded. You haven’t explicitly stated that you don’t think the free market can handle currency. In fact, I think you are generally fine with that. It’s just that I view fractional reserve fiat currency doing about as well as Palm Pilots do in a world of iPhones and androids.
Paragraph by paragraph –
I do wonder why you would classify Bitcoin as not a fiat currency. It seems to have more similarities with that than with commodity money. Anonymity is an interesting property, but cash has that as well, and you can’t really trade Bitcoins in for their appropriate weight n ‘anonymity’.
Wrt the free market system under many assets, it sounds like you’re requiring the availability and verification of a lot of very difficult to value information about the issuers’ assets so people can make decisions on a particular currency’s value. How is that an improvement on our current system?
Were you thinking of any particular time period of European history? Generally there were still similar costs involved in day-to-day use of historical gold coins though, as well as the problems that come from having different commodity basis (such as silver and copper) in play at the same time. Also adding forgery, debasement and edge clipping which made their use a lot less cut and dried.
First you’re assuming I think trillion-dollar bailouts are a good thing. One can be in favour of a fiat system but also prefer limitations on the Fed’s flexibility to influence markets. That said, despite all that money sloshing around, there’s still not any real sign of an inflation problem. And who do you think would be the ones most likely to be issuing these free market currencies – banks? The ones that needed bailing out? How would all those individual owners have dealt with the loss of value of their currency holdings? The only things that really constrains government spending are 1) a well-informed electorate voting for decent policies, 2) having a fully international commodity system with all its costs – and even then, a country with the economic clout of the US could still walk away from it.
You’re still looking at this free market commodity system in terms of all the possible benefits and glossing over the costs. Every person and business having to deal with the day-to-day fluctuations of a bunch of metals in order to do all their transactions would be a huge cost in terms of both time and risk. What you’re really saying at that point is – let’s go back to bartering but with a sufficient amount of shiny objects around of different values to get past the matching problem.
Markets are good at many things. If that were the situation set up, I’m sure some cost cutting measures would come to light, for a price, but it all seems to be a lot of work trying to fix a system that’s working quite well.
Back to the deflation problem, think about it this way. Let’s say the economy is growing at 4% faster than the money supply. A triple A rated company goes to a bank to borrow some money. They would normally get a loan at somewhat less than 4%, but given the deflation rate the bank has no incentive to lend since over time they would get back less than they were lending and would be better off holding the cash. They might lend at 5% but would demand the project be just about riskless for that rate. Projects earning less than that just wouldn’t get funded. There would be similar effects throughout the credit markets leading to reductions in investment. The more I think about it, the more it seems the economic growth rate would just keep getting pulled back to an upper limit of the currency growth rate. It probably wouldn’t get a chance to build up to any level it could recess from!
Yes, markets could handle a gold standard, but there would be high costs to its implementation and use. Small countries with screwed up economies that want to signal their new-found economic stability can back their currency with commodities and get good results from that. Giant, stable economies have nothing particular to gain from it that couldn’t happen far easier by other methods.
There are definite concerns to be kept in mind with fiat systems – but a lot of them would be similar to concerns running a government-run commodity system. The free market ones offset some of those concerns but replace them with others – The need for frequent verification of (often difficult to value) assets, costs of transactions, risks from changing commodity values, governments changing the rules again…..
I didn’t mean to classify bitcoin in with the non-fiat currencies. I just attempting to use it as a current example of a market fiat currency. It isn’t widely used, but it is used as a currency, and it is fiat. Proof that at least under current market conditions, fiat could be generally accepted. So, while I think under freer market conditions, backed currencies would have a larger role to play, I am okay with the market choosing fiat currencies if that is what it decides is good and proper. I just don’t think that’d be the case.
“it sounds like you’re requiring the availability and verification of a lot of very difficult to value information about the issuers’ assets so people can make decisions on a particular currency’s value. How is that an improvement on our current system?” >> I’m not requiring anything. The market requires or doesn’t require things. Even now, the market is creating improved ways of verification: https://www.silverbullion.com.sg/ShowArticle.aspx?ID=375 that would work for all manner of precious metals. As for an improvement, the improvement is on the increased long-term trust and stability of a currency and the ethical implications therein. The current international currency market (market, not individual currencies) is pretty decent in my opinion.
When I mentioned historical reserve currencies, something like this chart came to mind:
As for debasement, when that occurred is usually when the reserve currency status started to decline. The market for a currency has historically preferred a stable currency over increased money supply, particularly as that increased money supply went to the nobles or banks.
How would you propose limiting the Fed’s power? Currently their job is to keep low employment and stability. The currency is already run by hundreds of economists who you think would be best suited for the job. You can argue that it’s the political interests that mess it up, and we’d probably agree. So you could actually privatize it (which it’s really more of a corporatist ‘privatization’ right now.) and that’d be great. If that’s the case, then our political goals are aligned; but just our thoughts on where an actual free-market currency would go is different.
” I’m sure some cost cutting measures would come to light, for a price, but it all seems to be a lot of work trying to fix a system that’s working quite well.” >> if I look at stock charts, the debt, the reduced possibility for retirement for most Americans, pension plan dangers, I don’t see something that is working quite well. Instead I see a system that has created a higher than economically feasible time preference for a majority of the population through currency debasement and interest rate controls. It’s what currency statism produces every-time.
Okay, so it’s good that we agree that economic growth under an actual market commodity currency probably wouldn’t allow unsustainable growth nationwide to occur that requires a recession. Obviously this can still occur in small locales or businesses for reasons not related to money supply. So your complaint is that a commodity currency doesn’t allow for the growth difference between where unsustainable growth caused by faux interest rate adjustments from currency expansion starts and a commodity upper limit of stable growth? Namely, that there must be a market driven solution to allow for maximum economic growth while still controlling the unsustainable part? To you that would be a non-government controlled fiat currency? Or just a better governmentally designed one?
darnit, I hit enter again. I don’t see the edit button so I’m just going to continue.
” but a lot of them would be similar to concerns running a government-run commodity system. “ >> Agreed.
“The need for frequent verification of (often difficult to value) assets, costs of transactions, risks from changing commodity values, governments changing the rules again…..” >> same concerns apply to government-run systems. In fact, I’d say the rules apply greater to government-run systems. verification of assets are done in corporate America annually, I see no great concern with banks having annual 3rd party audits of their reserves. It happens anyways. My employer\ (manufacturing company) gets annual audits of their inventory. It’s a cost of doing business and maintaining trust with our customers as well as making sure that we aren’t missing anything in the long run as we are working for increased long-term gain. I don’t think there are substantial risk from “changing commodity values” in a modern world. Even if a massive gold deposit is found currently, there isn’t a huge change on the price of gold. The stuff takes years to get out of the ground and can thus be taken into the price gradually. Maybe if a gold meteor hit the ground with 200k metric tons of the stuff. But that isn’t a big risk. As for “government changing the rules again” that is as risky, if not more so, then the government changing the rules on us by heavily inflating the currency to pay for wars, welfare, bailouts, … These risks apply to any government controlled money supplies; a commodity currency just has added benefits of reduced government spending and forcing a lower time preference on citizenry.
Put it this way, for individuals to decide whether they want to hold, accept at face value or discount a particular currency in circulation they need to either take it on faith the market is valuing it correctly, have a good knowledge of the assets backing the currency, or have faith in some other organization that is verifying its worth. That’ll need to be true for at least the most popular currencies in circulation. In this instance, due to some of the inefficiencies of trade, there’s no reason the value of these currencies will be consistent throughout the market, which makes comparison shopping tricky. That was how it worked in the previous free banking era. Yes, it’s possible that inventive people would create credit cards that could be used for a lot of these transactions and are backed by a bunch of common metals. It just seems a lot of effort to go to for a lot of uncertainty and not much benefit. I haven’t noticed any large numbers of people fleeing the dollar yet. If that started to happen, the Fed would have more of an incentive to hold a larger assortment of assets (including gold and foreign currencies) and being more transparent about its policies all of which would lead to the same benefits as commodity backed currencies but without the downsides.
That’s an interesting historical article. Kind of funny seeing all those “the end is nigh for the dollar” comments from a couple of years back too!
Well it’s Congress’s job to supervise the Fed, and despite calls to the contrary it’s in its interests to have a rather hands off approach to the monetary policy aspects of the Fed’s job. They can rewrite the Fed’s mandate to change the reporting requirements, allowed tools etc. At the moment the Fed sees secretive deals to be a better way of performing policy. That could easily be changed while still allowing it to broker deals between private institutions that are at risk. Their role could be more focused on stable prices, more similar to the European Central bank. Wrt privatization, what’s the incentive for legitimate private institutions to create their own currencies? This article says they earn interest on the money in circulation from the deposited bonds, which while in part would cover costs, would also require them a certain level of profit out of the process.
Well, the Fed does the same, but returns most of that interest to the Treasury. If it were to be privatized then we get competition (which has some mixed blessings), and lose the interest to the banks. There are a number of externalities in that business which when you get down to, I don’t trust private institutions to deal with well.
You can chalk up some of those problems to the fiscal side of the problem – i.e. government spending rather than the currency itself. Yes, people could save more. I don’t think inflation really affects that with the rates we have – certainly not when it is stable and predictable over time since those inflation effects get passed through directly to nominal interest rates. What we should try to avoid is volatility in inflation.
I see the reason for a higher level of economic growth under a fiat system somewhat differently, obviously! I see the commodity system as imposing larger costs than the fiat system, and reducing the number of mutually beneficial trades that can occur in society. That’s not the same reasoning as the more easily critiqued Fed printing money to give people a short-term feeling of being able to spend more. So I’ll go with an independent arm of the government with a mandate specifically for price stability controlling the money supply.
Verification of assets is done generally badly – particularly with banks. See the problems with setting up the Basel accords for instance. Usually lending institutions require a substantial margin for comfort between the assets and lending amount for that very reason, and even then bankruptcies are quite common.
You can just look at the changes in real gold prices from the late 70’s to now to see huge effects – they’re driven by demand rather than supply for the most part.
Would Government spending under a commodity currency be that much lower? People can be quite creative when it comes to getting financing for the short run. Such government behaviour really needs to be controlled by elections (and maybe campaign finance reform as well) rather than hoping for some monetary panacea
“Put it this way, for individuals to decide whether they want to hold, accept at face value or discount a particular currency in circulation they need to either take it on faith the market is valuing it correctly, have a good knowledge of the assets backing the currency, or have faith in some other organization that is verifying its worth” >> Correct. Whether it’s a gold coin or paper dollar, or some mix. Commodity currencies is faith in the commodity value, fiat is faith in the organization or government.
“there’s no reason the value of these currencies will be consistent throughout the market,” >> This reduces though with increased technology correct? We certainly have a much more consistent currency market now with our modern systems versus 100 years or even 10 years ago. So technology build up (necessitated by capital accumulation) reduces the inefficiencies in the market and thus increases consistency right?
“I haven’t noticed any large numbers of people fleeing the dollar yet. “ >> It doesn’t have to be fleeing however. As the US dollar is the primary reserve currency (with the Yen and Euro playing a secondary role I think), all that would really need to happen for drastic changes in the currency is a loss of that position. We don’t need people fleeing, just a re-adjustment of countries reserves. They don’t need to flee, just reduce US holdings and increase Yen, Euro, Gold. Currently we have a massive currency deficit right? We import more than we export so many dollars leave the country. Any change in US valuation due to a reserve status change would mean more of those dollars coming back home and out of being held in some bank as reserves. Things like this worry me:
I don’t know if the “end is nigh” but I certainly think it will come. Meaning that we lose reserve status and have to deal with the changes that will come of it; not specifically a hyper-inflationary crackup bust or some apocalypse. But will it happen in two years? No clue and doubt it. In my parent’s lifetime? I think it’s very possible. In my life time? Positive enough that I try to incorporate it into my long-term plans. No reserve currency lasts forever and I think we are on the decline rather than rising.
“Yes, people could save more. I don’t think inflation really affects that with the rates we have – certainly not when it is stable and predictable over time since those inflation effects get passed through directly to nominal interest rates. What we should try to avoid is volatility in inflation. “ >> Yet the rates have a direct effect on people’s financial decisions; they affect the time preference of people. Which, if interest rates are manipulated too far from the market interest rate than that is when you have unsustainable booms and busts. That’s the basics of the Austrian Business Cycle Theory: http://mises.org/daily/672 To me that is incredibly important, if not the most important function of financial policy. It’s not the volatility (as it could be responding to actual events), but more the spread between the market and actual interest rates and the difference in money that would have been saved/loaned under the market rate.
” I see the commodity system as imposing larger costs than the fiat system, and reducing the number of mutually beneficial trades that can occur in society.” >> That is certainly a critical issue for you. However, as I am not in the financial industry I don’t see it quite the same as you so it probably isn’t as critical. However, anything that can reduce the aggregate volume of trade is a big deal. So I’d have to prove that either commodity currencies either are similar in cost or make up for the reduction in volume through increased costs by increasing volume by reducing major boom/busts; by steadying the flow of money towards sustainable economic activity so to speak. That will be a challenge if I try. No guarantees. I may try to find an article by an actual economist instead who can give something a little more substantial than my hand waving.
“Verification of assets is done generally badly – particularly with banks. See the problems with setting up the Basel accords for instance. Usually lending institutions require a substantial margin for comfort between the assets and lending amount for that very reason, and even then bankruptcies are quite common.” >> But the question is, why is it so difficult? Corporations apply standards and certifications pretty easily.
I think a chart like this: http://en.wikipedia.org/wiki/File:Publicly_Held_Federal_Debt_1790-2012.png shows at least that monetary creation generally has been worse under a fiat regime rather than a commodity currency. The big spikes in debt under a commodity currency was generally unbacked monetary creation anyways. So without the ability to inflate the money supply (which is really just a form of taxation as it removes a little bit of value from each dollar), the government has to resort to directly collecting taxes to spend. A much harder task. People are less prone to support massive debts (like war) if they have to pay for them directly through taxation. I truthfully think we wouldn’t have an unending Iraq war if American’s had to pay for it by an official war tax (that would theoretically be promised to end once the war ended). But that is a different matter I think.
Oh, and on that free banking article you posted, it’s a bit too long to read on my computer. I’ll throw it on the kindle for bus-time reading.
Just finished the wildcat banking article you sent. Very interesting read. It was interesting to see, analytically, how the discovery process of implementing a new way of doing money (to that society) went. Unfortunately it didn’t last long enough to see how it would evolve as the market changed.