Thursday, January 19, 2012

Which is based on which?

Say, if the dollar were to be totally backed by the gold standard, which is based on which?

So a man one day says, "Damn it, I want the real thing! Only gold for me! None of this fake money baloney! Gold is gold through all the ages!"

So he buys a gold bar.

"Say you, what's that gold bar worth?"

"I say, it's worth 25, 000 smackers - yeehaw!"

"25, 000 smackers of that fake money baloney?"

"Wait, what?"

So how can the gold be said to back the dollar? Which is backing which?

The only way Joe can buy some farm equipment with his gold coins is that the seller trusts he can exchange those gold coins for...dollars! How about that!

That's all well and good. Gold is nice. You can do so much with it; it never corrodes. But clearly gold is not what truly backs the currency, nor can it truly ever - that is, if one wants a healthy economy.


christopher said...

I've held off on commenting but it seems you are really looking into it. So... "That's all well and good. Gold is nice. You can do so much with it; it never corrodes. But clearly gold is not what truly backs the currency, nor can it truly ever - that is, if one wants a healthy economy." What is it that exactly backs a stable currency in your view (if stability is even desirable)?

Paul Stilwell said...

Yes, first off, this is completely post-as-I-go. I know mostly nothing about the economy, and what I am going on has been mostly gleaned from the Bill Still documentary.

I would have to say, as far as I know anything right now (this could very easily change), is simply that nothing should back the dollar than that the government, and *only* the government and not the banks, creates the country's money, and then - and this is the important part - the government spends that money into existence.

Roads, sewers, water, etc. infrastructure is the money becoming money. The government starts by using its own money to produce, and the resulting production becomes the good, the proof, the stability that backs the dollar (the government right now spends but with borrowed money); both legal tender and valuable production for the common good become intertwined - like a micro-economy to be mirrored and expnaded on - and the only way for this intertwining to remain is to continue flourishing.

Both the people and the government would want to see it succeed, because people want to buy and sell. And the government who creates the money also controls the quantity of dollars issued. And the banks are outlawed from lending money they do not have. And the government does not borrow money (which is money-as-debt that the government then gives back to the banks to issue out as loans); rather the government, again, is the body that creates it, debt-free (which it can do), in the public interest, and as such, is answerable to the common people and not to the banks.

Maybe one could say it is the nation itself then that backs the dollar.

Maybe this means that it is more about what is in front of the dollar than what is behind it.

cyurkanin said...

I understand when you say that only the government should "create" a nation's money and not the banks. What you mean by create is still a bit foggy to me. It seems you are saying that "money" is whatever "the governement" says it is in which case I'd ask that you show me a single example of a nation that ever survived through a fiat economy and why whenever there's been a bust or a crash throughout history, the only way that has EVER worked to get out of it was through commodity-backed currency, usually gold or silver (since they aren't perishable like say, a cow LOL)

Those successes stories last only until the economies forget the lessons they've learned and go back to the same things they did to get themselves into such trouble in the first place, making money out of thin air and inflating themselves toward oblivion.

A government can't simply create money. "More" money doesn't mean anything if the money isn't "worth" something. As soon as you make "more" money that money almost immediately loses its worth. The law of supply and demand applies. Deficit spending is nonexistant under a gold standard - this means that the welfare state is also nonexistant under a gold standard; financial policy of a welfare state requires that owners of wealth have no way to protect themselves from confiscation through inflation. It's because that inflation is just another way for the government to tax you without telling you to your face that you're being taxed.

As far as gold being the standard to back paper currency with, you could use silver or platinum or anything but it's as near a perfect example as can be come up with. It's not perishable, it can be measured to exact amounts, it has intrinsic value and also has other specific uses such in the scientific, medical, and artistic fields. It's accepted and has been since before the bronze age.

Why do you think the value of gold is skyrocketing right now? Gold has been an unchangable standard and will buy the exact quantity of goods today as it did a hundred years ago or 2000 years ago. You can't say that for the dollar (or any currency that has since abandoned itself to whimsy and "planning"). Anyone who tells you different is selling you something...

Belfry Bat said...

There are a couple of issues likely to get tangled here; one is that of how a society communicates indebtedness among persons (as something distinct from gratitude), and the other is that of how a human individuals actually handle tradegoods. One might call the second issue "practical economics"; and that's where such questions as inflation and recession arise, interact, dissipate, etc. The question of how, when, where, and why a State will issue or destroy currency ("create money" is just the Banking phrase for "issue currency") ought to be considered from both sides, especially from the first (in which terms we don't usually hear anyone speak, of course), and I think the first is what Paul is chiefly driving at.

As it happens, metal-backed paper (or even notionally-metal-backed-paper) isn't really a good protection against inflation/recession; Imperial Rome was often troubled with inflation, even though metal was the currency, and they had various schemes from time to time to guarantee the gold content of various coins; Constantine accidentally managed to create a relative scarcity of valid coins and so staved off inflation for a time. He thought he was just going back to almost-all-gold coins, struck using the disused gold vessels from various pagan temples, but that meant there couldn't be too many coins!

Another tale: during the American Revolution, the first issue of American currency was supposed to be backed by the Spanish silver dollar, but everybody knew they didn't have enough silver to redeem all the bills they issued, and so even silver-standard American bills suffered enormous inflation.

I like Paul's notion (or is there more credit available?) of State currency being backed by useable infrastructure; but there's some trouble about whether this means we should put tolls on all the roads and meters on the water drains, because the things suffer with use and need replacing from time to time.

For myself, I'm inclined to think that the State should principally issue currency at hospitals --- where, presumably, people are born and life is looked-after --- and collect it again from farmers and mines and oil wells and such after allowing them to live in comfort and dignity. But maybe I'll have to rethink that.

(do you get the sense that I like the word "various"?)