Posted on 04/29/2002 5:14:43 PM PDT by shrinkermd
By monopolizing this commodity the moneyed classes have got Nature by the throat and the community under their heels... Compared with this process, usury is mere child's play. -Alexander Del Mar in The Science of Money.
Advocacy of gold or gold "backed" money rests on dubious foundations. The discussion that follows will reveal some of the semantic deception, half-truths, doublespeak, self-interest pleading, and historical errors employed in gold advocacy polemics.
The Pope admitted in 1992 that Galileo had been right. This has nothing to do with gold money, but it is offered to show that neither antiquity nor authority makes a phony idea anything but phony.
There is a strong belief among gold money advocates that little bits of gold, especially if they are stamped with the image of some authority and numbers make better price counters than numbered pieces of paper or computer bytes. The belief involves a perception of what money is. The person who holds that belief perceives money to be something real and apparently needs to see and hold in his hand a physical manifestation of it. Gold is heavy, and refined gold is bright and shiny. It satisfies an emotional need however meaningless it is to the function of money. Money is a product of human mental fabrication. It always has been; it always will be. It is a tool that facilitates exchange. Modern society could not run without it or some equivalent accounting system.
A rational business decision would require that monetary symbols cost the least possible to manufacture. Presently, (1998), it costs around $280 to mine and refine an ounce of gold. Mining decades of tons of ore per ounce of gold has left holes in the ground measured by cubic miles. The ore is leached by toxic chemicals that have produced environmental pollution. Banks create money in any amount with the touching of computer buttons.
Abstract numbers, meaningless in and of themselves, that count quantities of amperes, wheat, gasoline, volume, distance, area, force, or any measurable, quantifiable thing, suffice in commerce, science, and technics without the clumsy inconvenience of metal counters. Why should it be different with money?
A pseudo-legal argument is sometimes advanced by advocates of gold money that a debt cannot be paid with another debt. This is semantic deception. A debt can be paid with anything that is acceptable to the payee. In addition, as long as debt in the form of deposit entries in bank accounts or Federal Reserve Notes can be exchanged for real goods and services, the payee is just as well off as if he had received little lumps of metal. Further, the multi-trillion dollar world economy runs almost exclusively on exchange of debt-money which only consists of numbers in deposit accounts at banks.
A common argument for gold money that accompanies the pseudo-legal sophistry is that gold has "intrinsic value," another semantic deception. Gold has interesting intrinsic properties such as chemical stability and excellent electrical conductivity, but "intrinsic value" is a semantic error if not outright doublespeak. Value(1) is a subjective judgment and cannot be rationally thought of as intrinsic. Subjectivity is exclusively a product of human minds. "Intrinsic value" is a deceptive euphemism for price.
If people were stranded in some remote location without food, water, and shelter, a mountain of gold would serve no more purpose than so much sand. It would have no price. Gold has no intrinsic value. It merely has a price which is the result of complex factors associated with its subjective price value compared to other commodities. Industrial usefulness of gold as well as human subjectivity that desires gold for personal adornment, etc., does assure that gold will fetch a price in a modern market. But what price?
Gold pricing in the United States, today, 1998, is denominated in Federal Reserve Accounting Unit Dollars.(2) The commodity price of gold has fluctuated wildly in the last half of the 20th Century, mostly remaining in the $300 to $400 per ounce range in the last decade. Price fluctuation was not due to variations of the Federal Reserve Dollar. The U. S. monetary price of gold is $42.22 per ounce. Artifact (jewelry, etc.) and numismatic prices of gold are what the market will pay. The value of gold as denominated by price is highly variable.
Historically, the commodity price of gold has been subject to fluctuation caused by normal supply and demand influences. Supply and demand infuences are in turn affected by the vagaries of mining and shipping, speculation, hoarding, political action, industrial demand, wars, central bank manipulations, and fads.
When governments or private banks have attempted to use gold as money, or for the last yea many centuries the fraud perpetrated as gold "backing" or reserves, it has been necessary to establish a monetary price of gold by fiat in an attempt to isolate money from inevitable price fluctuations of commodity gold.
The U. S. Constitution writers anticipated the instability of commodity prices and included the phrase, regulate the value, in the coinage clause.(3) In 1792 after the ratification of the Constitution, the Congress, consistent with the Constitutional mandate, defined specific amounts of gold, silver, and copper as representing dollars. They regulated the value and established a monetary price by fiat.(4)
Historically, monetary prices have been set higher than market prices, the ludicrous present U. S. monetary price notwithstanding. It would make no sense to issue money that had an equal or lower monetary value than the price of acquiring the metal. This mark-up is known as seignorage. It is profit that accrued to goldsmiths, kings, banks, and governments that issued gold money. When the monetary price of gold was too low, coins were melted and turned into artifacts that could be sold for more money than the original coins. When the monetary price was too high, artifacts were melted and turned into counterfeit coins. This was another cause of monetary and price instability when gold was used as money.
The relative scarcity of gold and the demand for gold for other uses than money should raise questions about the efficacy of trying to use consumable and losable gold as money or as monetary reserves.
The inherent instability of a scarce commodity subject to all the influences enumerated above have inevitably led to financial instability which instigates human suffering, social unrest, political instability, totalitarianism, fraud, counterfeiting, theft, war, and abandonment of gold monetary policy.
A mantra of gold money advocates is that alternative money systems, particularly "paper money," always fail. Historically, it is true; but it is also a case of selective historical facts, half-truth, and errant semantics. There is archaeological evidence that accounting systems existed before paper was invented. For example, clay tablets written in cuneiform that show evidence of debt accounting. Paper, per se, merely represented another more economical way of accounting. What is never admitted is that all money systems including gold money systems have failed. Today, "paper money" as bank notes is substantially irrelevant. Overwhelmingly, transactions are carried on via computer accounting where money is nothing more than numbers transferred from account to account by computers.
Arguments about the substance of money will never address the problem of why all monetary systems have failed .
In fact, historically, not only has no money system survived indefinitely; but also, no civilization, empire, or political system has survived indefinitely. Systematic monetary manipulation has played a part in their demise. It is not a question of gold or paper; it is a question of human culture. Is it possible to maintain a political system or nation that is founded in myth, intellectual error, and financial fraud?
The Gold "Backing" Fraud
A sacrosanct dogma of modern economic superstition is that money derives its value from scarcity. It is nowhere scientifically proven or successfully argued. It is accepted dogma; and, once again, the semantic trick of substituting value for price is used.
Scarcity does play a role in prices of goods and services, but it is only one factor; there are many other factors in price.
What is provable is that the scarcity of gold provided an opportunity for fraud that has become modern banking custom and practice.
Exactly how the fraud started is not matters of facts, but that it started is not in question.
Legend with perhaps more than a little truth in it has been related many times, including Congressional testimony.(5)
In brief, goldsmiths built vaults to secure their gold which was used in artifact manufacture and lending. The security of the vault attracted others who deposited their gold with the goldsmith for safe keeping. The goldsmith noticed that depositors never claimed all their gold at once. This provided him the opportunity to lend their gold at interest for his profit.
The custom developed that depositors would write notes which could be redeemed by the goldsmith to pay their bills. Eventually, the security of the goldsmith s vault and convenience of the notes induced more and more people to leave gold with the goldsmith and pay their bills with notes.
The common use of notes provided the goldsmith with the opportunity to write notes for making loans. In fact, it enabled him to write notes for more gold than there was gold in his vault. He created money! Eventually, it was found that as much as ten times the value of gold in the vault could be circulated as notes. He only needed enough gold in "reserves" to redeem the few notes that were presented for redemption.
This fraudulent practice has become modern banking custom and practice. Today, it is called fractional reserve banking.(6) Of course, gold is not presently used as reserves; banks just create money out of nothing without any pretense of gold reserves.
Gold advocates lament that money is no longer "redeemable." This is doublespeak that is tantamount to a lie. Since the initiation of the goldsmith s trick in banking, bank notes or "paper money" have never been fully redeemable in gold money. It must also be remembered most money created by banks by checks and deposit entry was never printed as banknotes. While deposit money, Federal Reserve Bank Notes, and U. S. coins cannot be exchanged for any form of gold money at the U. S. Treasury or Federal Reserve Banks, anyone is free to spend as much current money purchasing gold as they please; and the gold can be sold for current money. Furthermore, current money is exchangeable, fully redeemable, for all necessary and desirable goods and services which is the only real purpose gold money could serve. Satisfaction of superstitious beliefs and greed of investors are not considered real purposes.
The growth of national and world economies has rendered even the gold "backing" pretense of using gold as money absurd, but the greedy wishful thinking is that gold will be re-monetized at some astronomical price that will provide a windfall to gold investors. It is more likely that gold will be confiscated, as happened in the United States in 1933, before central banks attempt to re-monetize gold.
Attempts to re-monetize gold in the early 20th Century were accompanied by disaster in national economies and were quickly abandoned.
The Gold (un)Standard
"... the disastrous inefficiency which the international gold standard has worked since its restoration five years ago (fulfilling the worst fears and gloomiest prognostications of its opponents) and the economic losses, second only to those of a great war, which it has brought upon the world..."--J. M. Keynes(7)
What is generally referred to as "the gold standard" is a set of variable monetary and economic goals that involve manipulation of currency, balance of trade, internal commerce, and prices by use of variable gold policies. Different countries have tried different gold policies depending upon the desired goal. Whether it was to achieve balance of international trade, stable currency, stable internal commerce, or stable prices determined the policy. Balancing international trade may, and usually does, interfere with internal commerce. Stable prices may require juggling currency. Different countries with different goals pursuing different policies may conflict. What is called "the" gold standard is not a unique and well defined system.
There is a common conception of "the" gold standard that ties the value of the currency unit to a legally determined amount of gold. It is believed that such a policy would stabilize currency. It may be possible to stabilize currency using gold in monetary policy decisions but with disastrous other results.
For example, five methods used to manage a gold standard by the Bank of England from 1925 to 1931 follow:(8)
i. The bank rate.
ii. Open market operations (that is purchase and sale of securities) undertaken to influence the amount of reserves of the commercial banks, and their power of creating bankers money.
iii. Open market operations, undertaken to influence the London Money Market.
iv. Gold exchange methods dealings in foreign exchanges and in forward exchange, and variations in the price of gold within the narrow limits permitted.
v. Personal influence or advice such as the so-called embargo on foreign loans.
Anyone familiar with Federal Reserve operations will note amazing similarity. Just as the present Federal Reserve Open Market Committee engages in a variety of open market transactions to control the dollar, the Bank of England tried to manage the pound ostensibly based on gold. The results also have an amazing similarity to the Federal Reserve s policies, particularly the "soft landing" announced by Alan Greenspan that was the 1990 recession.
... the operations of currency management conferred upon the Bank of England the power to restrict credit, to postpone new enterprises, to lessen the demand for constructional materials, and other capital goods, to create unemployment, to diminish the demand for consumable goods, to cause difficulty in renewing loans, to confront manufacturers with the prospect of falling prices, to force dealers to press their goods on a weak market, and to cause a decline in general prices on the home market. In brief, the stability of the international exchanges was accomplished by a process which deliberately caused universal depression in industry, created unemployment, and forced manufacturers to produce, and merchants to sell, at a loss.(9)
The operations of the Bank of England under the administration of Montagu Norman critiqued above is a classical example of what happens when monetary policy is carried out in the abstract. Human needs and human suffering be damned, trade will be balanced to control the outflow of gold or silver or inflation will be controlled to maintain prices regardless of how it affects employment, hunger, or any other form of human stress.
The errant buzz-word of monetary policy administered by Federal Reserve gurus personified by Alan Greenspan is inflation. Low unemployment motivates the gurus to "slow down an overheating economy." In other words, needful humans must be made to suffer to accomplish abstract monetary goals.
The above critique of Bank of England policies exposes, more than anything else, the fallacious thinking that gold will automatically regulate currency and prices. Not only the above critiqued policies, but also, other history confirms the fallacies.
One extreme anecdote from Roman history is the case of a man who had his own image placed on a gold nugget which he presented to a lover. So extreme were Roman concerns with controlling money that it was a death penalty offense under Roman law at that time to affix any image on gold except for official purposes. The law-breaker was executed.
This Roman anecdote is an example of two things: 1. An absurd, extreme policy used in an attempt to make an inherently unstable commodity suitable for monetary use by legal means. 2. The arrogant stupidity of legal absolutism.
Some factions of gold advocates argue that attempted regulation is the problem and that "market forces" should be allowed to follow their course with gold. Aside from the obvious superstitious belief in a fiction in support of a belief, histories of fraud, manipulation, monopolization, gambling, and speculation of commodities(10) left to market forces should overcome the tunnel-vision and doublethink of such an argument as market forces should determine the value of common currency while believing the implausible, self-defeating belief that gold left to speculation and monopolization will, by magic, lend stability to currency in the same market.
One of the sophistries used by gold money advocates is the non sequitur. Byzantium has been offered as an example of how a culture or empire was stabilized by a stable gold currency.(11) In the first place, stable Byzantium can be dismissed with the question: Where is Byzantium now? In the second place, the longevity of Byzantium was not extraordinary for its day. Nor did Byzantium ever achieve extraordinary wealth. The Italian city states built on bankers credit lasted longer and achieved more wealth.(12) Byzantium existed during the "dark ages" of Europe as a near singularity in the Euro-Asian area. It was founded in autocratic theocracy. The annual trade of Byzantium was less than a week of world trade today, perhaps less than a day s trade. Byzantium s relatively stable coinage was a function of its relatively stable society maintained by a severe autocracy. Its relatively stable society was not a function of its coinage; its relatively stable coinage was a function of its relatively stable society.
After the ascendancy of the Italian city states, it could just as well be argued that Byzantium failed to achieve great wealth and eventually succumbed because of the superiority of credit money or Byzantium s stupid, limiting, and inflexible reliance on gold coinage, but that is not the argument presented here. The argument here is that money is a function of culture, not culture is a function of money although selective facts may make it appear so. Certainly, the pathological kleptomania and greed of Capitalism make it seem U. S. culture is a function of money.
The coup de grace of gold standard is that a gold standard applied in recent centuries has not altered the custom and practice of bank issued debt-money. Bankers, such as Alan Greenspan who has advocated a return to a gold standard, are well aware that gold standard is not only no threat to their power and ability to create money out of nothing; but also, it enhances their confiscatory power and control over both the public and private economy. It helps banks realize their superstitious mantra that money derives its value from scarcity. The more scarce the more value, i.e., the more interest banks can charge for the money they create out of nothing.
Ordinary gold standard advocates are either ignorant or disingenuous about bank created money. They usually blame government for the abuses of credit money, but it is banks that create money nearly exclusively. Paranoid, near hysterical arguments such as inflation is caused by "governments printing too much money" are absurd when it is banks that create money. What a silly argument it is to say governments print too much money when, for example, the U. S. government has borrowed more than $5 trillion from banks and other investors in government securities! Every cent of it originally issued by banks! But just as any paranoiac can have real enemies, there is plenty of blame to lay on government. It is government that has given the power to create money to banks(13) then relies on borrowing money from banks and private investors at the additional expense of interest when taxes are inadequate to meet expenses.
A Federal Reserve bankers dogma is that monetary policy must be separated from politics because politicians can t be trusted with it. This dogma has some truth in it; but like any half truth, it obscures a lie. Monetary policy can never be separated from politics, and bankers would loose their golden goose if the government excercised its Constitutional power to issue its own money.
Ostensibly, the people have the power to control politicians with the political process. People have no power to control bankers for whom they cannot vote and do not know.
Criticism of bank created money and how(14) it is done is left to other vehicles. This discussion is about the fallacies of gold money arguments.
Conclusion
What is usually referred to as "the" gold standard or gold backed money is an intellectual and financial fraud. Under gold standard policies, Central banks wrote checks creating money to buy gold to use as reserves, just as Federal Reserve Banks create deposits to buy U. S. Treasury securities, now. A gold standard does not prevent commercial banks from creating money on the basis of fictional reserves and lending it at interest. What has passed as a gold standard in the last few centuries is not theoretically or functionally different than the present bank created credit/debt money system. In both cases, banks create and issue money as debt. Both systems are often properly labeled debt-money systems. Money is nearly exclusively issued by banks as debt at interest in both systems.
A plausible argument can be made that if banks were required to maintain an invariable level of gold reserves, it would limit how much money they could create. It would, but it would also limit how an economy functions as in the disastrous British case cited above.
The Federal Reserve Act was passed in 1913 establishing the Federal Reserve System as the U. S. Central bank. It required 40% gold reserves behind issuance of Federal Reserve Notes. World War I soon followed. It would have been impossible for the United States to finance it s participation in that war with Federal Reserve Banks and commercial banks required to maintain 40% gold reserves. (The argument that it may have forced the U. S. to stay out of the war had the reserve requirement been maintained is irrelevant; the U. S. participated in the war.) Reserve requirements were lowered, and the war was financed with debt-money created by banks.
The first central bank of the U. S. was charted in 1791, and the Coinage Act of 1792 which limited coinage to the haphazard appearance of gold and silver owners at the mint forced seekers of money to use bank credit or debt financing. It is a speculation whether the two cited acts were intended to force money seekers into banks. The central bank has been attributed to the efforts of Alexander Hamilton. There is no doubt of Hamilton s banking connections.
The United States has become the most powerful nation ever in history. It did so mostly on bank credit; nearly exclusively so in the 20th Century.
Winning two world wars, once having the highest now reputed third or fourth average standard of living in the world, and development of spectacular technology including space exploration were all accomplished under bankers debt-money schemes, but this is not a defense of bankers debt-money. It must be repeated that criticism of bankers debt-money is found elsewhere. This is to suggest that the U. S. could not have developed as it did under the restrictions that a gold money system would have imposed.
A credit money system operated for the purpose of serving human needs instead of serving the profit interests of bankers could educate everyone to any desired level, provide medical care for all, end poverty, and finance any socially acceptable and physically possible activity.
The substance of money used for counters whether lumps of yellow metal or computer bytes is unimportant, per se. What is important is monetary policy. Good or bad policy can be made with credit money that makes good or bad results. It is hardly possible to have a good policy under the restrictions and inflexibility that a one hundred percent gold money system would impose. Gold "backing" known as fractional reserves has already been revealed as a banking fraud that differs from the present bankers debt-money system in cosmetics only.
If there is anything that can be classified as a public utility, it is money. Yet, the supposedly democratic U. S. Government has seen fit to endow a select group of greedy bankers with all the power of issuing and regulating the money supply for their own profit. The banking system that issues money as debt holds the government and people hostage to the system. Until the power to issue money is taken from the hands of greedy corporate profiteers, megalomaniac kings, and plundering politicians, there is little hope for a socially kind and peaceful society or a safe and sustainable environment.
The science of how to do it is well known.
They [bankers] viewed national interests from the windows of the bank parlour. From their point of view, industry, commerce, agriculture, wages, employment, were but counters in the skilled game of international finance. They must be regulated to fit in with the monetary scheme. The monetary scheme must not be regulated to fit in with the needs and necessities of the world.(15)
Whose interests are served by "the monetary scheme"?
Until the "cart before the horse" philosophy of financiers revealed in the above quote is righted, no monetary system will serve public interests. A gold monetary system will be just
FOOLS' GOLD!
Notes:
1. See Theoretical Essay on the Nature of Money for a fuller explication of value.return
2. Contrary to popular opinion, the "U.S." dollar in the form of bank notes and commercial bank credit is not issued by the United States Government. It is issued by Federal Reserve Banks and commercial banks mostly in the form of deposits or numbers in deposit accounts. return
3. Article I, Section 8, clause 5. return
4. An Act establishing a Mint and regulating the Coins of the United States, April 2, 1792, specified 24.75 grains of pure gold and 27 grains of standard alloy per dollar. return
5. Robert Hemphill, credit manager in the Federal Reserve Bank of Atlanta, before the Committee on Banking and Currency, House of Representatives, March 22, 1935, re Banking Act of 1935. return
6. See Modern Money Mechanics, published by the Federal Reserve Bank of Chicago for a detailed explanation of how the central bank creates reserves and regulates the money supply and commercial banks create money by fractional reserve lending. return
7. Quoted by Sir Charles Morgan-Webb in The Money Revolution. return
8. Ibid. return
9. Ibid. return
10. See "The Tulipomania" chapter of Extraordinary Popular Delusions and the Madness of Crowds for a charming example of kleptomania, gambling, and greed in an unregulated market. Of course, a free market in tulips is one thing; a free market in common currency is another. The whole book is an entertaining read of collective "delusions" and "madnesses." return
11. See The War on Gold by Antony C. Sutton. return
12. See An Inquiry into the Permanent Causes of the Decline and Fall of Powerful and Wealthy Nations by William Playfair. return
13. See The Federal Reserve Act in the United States Statutes at Large and Title 12 USC for complete texts of current banking law. return
14. For how, see Modern Money Mechanics published by Federal Reserve Bank of Chicago. return
15. The Money Revolution by Sir Charles Morgan-Webb.
1. I suggested we restrict ourselves to financial disasters rather than all economic disasters because the former are more easily attributable to the nature of the currency.
2. You claim on the one hand that all the economic disasters (unnamed) happened while on the gold standard and on the other hand allege that we have never been on a gold standard. I agree with the latter of these two self-contradictory positions of yours. Which one do you really agree with?
3. I believe all the bailouts I mentioned were fiat currency related, you believe my position is “completely false”. I will BEGIN a discussion of this issue below.
4. You claim the US currency has been the strongest fiat currency for 7 decades. Even with the “exorbitant privilege” of being a reserve currency, we have DECLINED versus every other major currency except the pound during this period. This is objective and verifiable.
5. I believe there was MORE scarcity integrity when paper money was recognized as a claim to money rather than money itself. You presumably do not. I believe there was more stability in the system when we went through “cold turkey” withdrawals every 20 years or so, you favor the system where we pretend everything is fine by “sticking another needle in the arm.” I believe there was more stability during the period where a dollar was more or less a dollar with some ups and downs (from 1800-1940) rather than delining to about seven cents (since 1940).
6. You appear to believe that money is issued by government. I believe it is issued by the banking system (about 5% by the unaccountable, secretive Fed and 95% by the rest of the money monopoly cartel).
7. You describe a process under a bona fide gold standard that you conclude “is precisely the same as printing more or less fiat currency, inflating or restricting the money supply, and the currency manipulation has the exact same effect in both cases. Do you get it now” My simple answer, for now, is “you don’t seem to get it.”
8. You claim that since no anti-manipulation system can be fool-proof we shoudn’t try. That’s akin to saying, since men are going to murder anyway, why impose harsh criminal penalties on those who do.
9. You ask “are you in favor of the idea that FDR should have let the currency collapse occur, with the resulting devastation, just as a matter of principle.” This is a loaded phraseology, but my answer is that I would have favored staying on the gold standard and going to “100% money” as Irving Fischer of Yale argued at the time in a book by the same name.
10. You allege that my “whole argument is based on the totally false conception of us having a non-fiat currency before 1932.” My position is based on no such conception (false or otherwise). You also continue to repeat that you equate issuance of notes in excess of gold available for redemption with fiat currency. But you have also said FRNs are not fraudulent but over-issuance is. Are they the same or are they different? I agree only with your last statement and think they differ in many other regards too.
The S&L fiasco was not due to currency problems.
You blame the S&L fiasco on "deregulation" and Democrats in the 1980s. Let’s back up to the 1970s. Until the 1970s, the S&L marched happily along paying 3% for short term deposits and investing the money in 7% mortgages. They could have done that forever. In the 1970s, we had double digit inflation of our fiat currency (Unlike any we had ever before experienced except to finance wars, which were subsequently reversed after the war). All of a sudden, banks had to pay 14% to raise money that was already committed for 30 yrs to earn 7%. One does not need to be a rocket scientist to realize the S&Ls were up that proverbial body of water with no visible means of locomotion as of the late 1970s. It’s true that the sh*t didn’t hit the fan for 10 years while BOTH DEMOCRAT AND REPUBLICAN politicians bestowed “gift legislation” on a bevy of campaign contributors wanting to enrich themselves in the process while pretending to be rescuing the situation (that you lay the blame only on the Democrats is telling).
The same double-digit fiat inflation of the 70s required money center banks to find borrowers who were willing to pay 20% interest so they could pay 14% and still make money. Other than the consumer, no other domestic borrowers were willing for a variety of reasons. They began throwing money at any foreign borrower they could find. Since, then, the Ponzi scheme has been to pretend nothing is wrong and rescue the banks with bailouts when necessary. Again, the UNPRECEDENTED fiat explosion in the 1970s was the proximate cause.
I’ll stop for now and look for the link to my prior discussion of a fiat based system with scarcity integrity.
I disagree, but you are, of course, free to make whatever arguments you wish.
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d:
"2. You claim on the one hand that all the economic disasters (unnamed) happened while on the gold standard and on the other hand allege that we have never been on a gold standard. I agree with the latter of these two self-contradictory positions of yours. Which one do you really agree with?"
These positions are not self-contradictory. When I use the term 'gold standard' and 'gold-backed currency' in a post, it's almost always in quotes to denote that it is a false term. While the currency notes were supposedly backed by gold, there was never really nearly enough to cover them. The real problem with the pre-1932 currency was that its value was tied to gold, making it extremely vunerable to deflation. But then, we've been over that.
As for the economic disasters in American history being 'unnamed'.... ask and ye shall receive.
- Postwar Decline of 1784 (severe, lasted two years)
- The Decline of 1809 (moderate, due to British embargo)
- The Depression of 1819 (severe, lasted until 1822)
- The Recession of 1833 (moderate, lasted two years)
- The Depression of 1837 (severe, lasted until 1842)
- The Panic of 1857 (severe, lasted two years)
- The Post-Civil-War Recession of 1866 (moderate, lasted two years)
- The Panic of 1873 (severe, lasted until 1878)
- The Panic of 1893, aka The Silver Panic (severe, lasted two years)
- The Panic of 1907 (severe, lasted two years)
- The Recession of 1910 (moderate and short)
- The Recession of 1913 (moderate and short)
- The Panic of 1914 (moderate, lasted one year)
- The Postwar Recession of 1920 (Severe, lasted two years)
- The Great Depression of 1929 (Extremely severe, lasted until WWII)
The recessions were much like the early '80s one, with high inflation, unemployment and some bankruptcies. The panics and depressions were marked by major corporate loan defaults, runs on banks, bank closings, very high unemployment, lots of major bankruptcies, speculators being wiped out, investment capital drying up completely, forclosures, very low levels of economic activity, etc.. Since we dumped the phony gold standard, we've had four recessions in the post-WWII era; a moderate one in 1957, a severe one in 1981, a moderate one in 1991, and a minor one now (thus far). No depressions or panics at all. We're too spoiled to realize how good we've had it compared to the pre-1932 period.
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d:
"3. I believe all the bailouts I mentioned were fiat currency related, you believe my position is “completely false”. I will BEGIN a discussion of this issue below."
Okay.
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d:
"4. You claim the US currency has been the strongest fiat currency for 7 decades. Even with the “exorbitant privilege” of being a reserve currency, we have DECLINED versus every other major currency except the pound during this period. This is objective and verifiable."
There has been a low, but steady rate of inflation in US currency, with the exception of a few periods like the early '80s. What does that have to do with it's strength? The strength of a currency is measured by the confidence people have in it, and the US dollar has been and remains the most desired currency on the planet because people have more confidence in it than any other currency.
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d:
"5. I believe there was MORE scarcity integrity when paper money was recognized as a claim to money rather than money itself. You presumably do not."
This is a false assumption. I simply don't put the importance on scarcity integrity that you do. A dollar is worth only what someone is willing to trade you for it, and scarcity integrity is pretty much irrelevant to that. If the people believe in the currency, it will remain strong. If people don't believe in the currency, it will collapse regardless of scarcity integrity. If scarcity integrity was such a vital factor, our currency couldn't have possibly survived without it this long. That puts the lie to your claim.
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d:
"I believe there was more stability in the system when we went through “cold turkey” withdrawals every 20 years or so, you favor the system where we pretend everything is fine by “sticking another needle in the arm.” I believe there was more stability during the period where a dollar was more or less a dollar with some ups and downs (from 1800-1940) rather than delining to about seven cents (since 1940)."
Too bad your beliefs don't coincide with the historical record. The whole goal of a realistic person is a stable economy that prevents economic disaster and keeps people from suffering. You seem to prefer that people suffer regularly just so your ideal can be achieved.
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d:
"6. You appear to believe that money is issued by government. I believe it is issued by the banking system (about 5% by the unaccountable, secretive Fed and 95% by the rest of the money monopoly cartel)."
Technically, you are correct. However, although the Federal Reserve Bank is supposed to be a private corporation, anyone who seriously believes that it is independant of the government is quite naive. You might look at how Federal Reserve Board members are appointed, and how involved the government is in the process of minting, regulating and guaranteeing the integrity of US currency, as well as regulating the banks.
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d:
"7. You describe a process under a bona fide gold standard that you conclude “is precisely the same as printing more or less fiat currency, inflating or restricting the money supply, and the currency manipulation has the exact same effect in both cases. Do you get it now” My simple answer, for now, is “you don’t seem to get it.”"
I have heard estimates that historically, the government bullions reserves have been adequate to redeem as little as 10% of issued currency. Thus, 90% of the notes are backed by nothing. They kept printing more of them at will without increasing bullion reserves. Are you still trying to tell me that this 'gold-backed' currency is not a fiat currency, when most of it is backed by virtually nothing, and they printed as much money as they wanted ??? If you believe that, you are lying to yourself.
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d:
"8. You claim that since no anti-manipulation system can be fool-proof we shoudn’t try. That's akin to saying, since men are going to murder anyway, why impose harsh criminal penalties on those who do."
False. I made no such claim; you wrongly inferred it. I merely put the lie to the standard claim that a 'gold-backed' currency couldn't be manipulated.
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d:
"9. You ask “are you in favor of the idea that FDR should have let the currency collapse occur, with the resulting devastation, just as a matter of principle.” This is a loaded phraseology, but my answer is that I would have favored staying on the gold standard and going to “100% money” as Irving Fischer of Yale argued at the time in a book by the same name."
As I said, you seem to favor sacrificing the savings, possessions and dreams of Americans on the altar of your 'hard currency' ideology. You would have Americans suffer terrible cyclical depressions, as we did in the past, in the name of scarcity integrity. Out of courtesy to the forum rules, I won't plainly express my opinion of your views. I will just say that I'm glad you don't have the power to make economic human scarifies of us all to your demigod of scarcity integrity.
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d:
"10. You allege that my “whole argument is based on the totally false conception of us having a non-fiat currency before 1932.” My position is based on no such conception (false or otherwise)."
You could have fooled me. Almost all of your examples defending you position involve references to pre-1932 America.
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d:
"You also continue to repeat that you equate issuance of notes in excess of gold available for redemption with fiat currency. But you have also said FRNs are not fraudulent but over-issuance is. Are they the same or are they different? I agree only with your last statement and think they differ in many other regards too."
Please cut & paste from any of my posts where I said that "FRNs are not fraudulent". I don't believe I've ever said any such thing. I'm not sure what you mean by "fraudulent". Do you mean "fiat" ??? FRNs are a fiat currency, obviously. I've said that repeatedly. Please clarify what you're trying to say here.
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V1:
"The S&L fiasco was not due to currency problems."
d:
"You blame the S&L fiasco on "deregulation" and Democrats in the 1980s. Let’s back up to the 1970s. Until the 1970s, the S&L marched happily along paying 3% for short term deposits and investing the money in 7% mortgages. They could have done that forever. In the 1970s, we had double digit inflation of our fiat currency (Unlike any we had ever before experienced except to finance wars, which were subsequently reversed after the war). All of a sudden, banks had to pay 14% to raise money that was already committed for 30 yrs to earn 7%. One does not need to be a rocket scientist to realize the S&Ls were up that proverbial body of water with no visible means of locomotion as of the late 1970s. It’s true that the sh*t didn’t hit the fan for 10 years while BOTH DEMOCRAT AND REPUBLICAN politicians bestowed “gift legislation” on a bevy of campaign contributors wanting to enrich themselves in the process while pretending to be rescuing the situation (that you lay the blame only on the Democrats is telling)."
As I said, the S&Ls were considered a pillar of strength in the banking sector right up until deregulation. I recall no stories of imminent S&L failures previous to deregulation, and the financial press makes its living on ferreting out and reporting such bad news. You will have to provide evidence of your claim if you expect me to accept it.
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d:
"The same double-digit fiat inflation of the 70s required money center banks to find borrowers who were willing to pay 20% interest so they could pay 14% and still make money. Other than the consumer, no other domestic borrowers were willing for a variety of reasons. They began throwing money at any foreign borrower they could find. Since, then, the Ponzi scheme has been to pretend nothing is wrong and rescue the banks with bailouts when necessary. Again, the UNPRECEDENTED fiat explosion in the 1970s was the proximate cause."
You seem to believe that only increasing the money supply can cause inflation, which is false. Increasing wages, caused by a tight labor market, will cause increased prices, and thus inflation. Price increases caused by a restriction of supply of commodities are also inflationary, and usually lead to wage hikes. In either case, the dollar, although it may still be fixed to the price of gold, will still buy less, and will some like to engage in semantic hairsplitting, as far as I am concerned, when your dollar buys you less, that's inflation. Likewise, huge deflation can and has occured with no significant change in the currency supply. To address your specific example, the inflation of the late '70s was in large part caused by the oil embargo, and the resulting huge energy price increases. To lay that all at the foot of monetary policy is wrong.
And you still have not been able to dispute the fact that economic hardships were much greater with the 'gold standard' currency than with the fiat currency.
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d:
"I’ll stop for now and look for the link to my prior discussion of a fiat based system with scarcity integrity."
I'll keep an eye out for the link.
I said just that in my post. I was showing that your claim that the fedgov solved all their financial crisises by merely printing more money was wrong.
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i:
"My question to you was how the fiat system itself has contributed to smoothing out the panic cycles; which you have yet to answer."
You didn't read my response, then. From my response to i's earlier post:
V1:
"As for the 'gold standard', when you have tied the value of the currency to the value of gold, that creates a big problem in a depression. As all us capitalists know, government price fixing schemes never overcome real-world market forces in the end. So regardless of the fact that the government had fixed the price of gold by edict, when there was a depression there was the typical massive price deflation that characterizes such an event. The value of gold and the currency that was tied to it deflated, plummeting rapidly, as did the confidence of the people in that currency. When people knew even their gold wouldn't buy them nearly as much in real market, it's pretty obvious how their attitude toward the supposedly gold-backed currency changed."
I thought I was quite clear in making the point that tying the value of the dollar to the value of gold make the currency extremely vunerable to massive deflation. Since massive deflation occured cyclically while we were on the 'gold standard', and hasn't occured at all since we got off it, I'd say history's lesson is undeniable.
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i:
"You also made a rather artful sleight-of-hand when you likened the gold standard to a "price-fixing" scheme. In your response to Deuce, you said, "Since the price of gold was fixed by government edict...," in reference to the Coinage Act of 1792. That is totally bass-ackwards. The purpose of that act was to define the value of the dollar, not "fix" the price of anything. By way of analogy in physics, the speed of light is defined as 299,792,458 meters per second, exactly. No, that doesn't mean their "fixing" the speed of light at any value, heedless of what reality tells them; they're just defining the meter as the distance light travels in 1/299,792,458 of a second."
This is mere semnatics. Whether you call it valuation of the dollar or price fixing of gold, either way the price of a commodity, namely gold, is fixed by government edict in relaton to the dollar. Your 'speed of light' analogy in inapplicable, as the speed of light is a constant, and gold is a commodity who's value fluctuates with supply and demand.
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V1:
"The amount of physical US currency in circulation, FRNs and coins, circa 2000, as per the Federal Reserve website is $600 billion$. The US trade deficit, circa 2000, as per the Department of Commerce, Bureau of Economic Analysis website was about $370 billion$. And yet, the GDP for America in 2000 (again from the DoC, BoEA website) was $10.2 trillion$. So how is that possible?"
i:
"How is it possible? Because it's the same money sloshing around and around. Nobody cares if the same dollar gets counted several times if it's used in several transactions. How has McDonald's served over 35 billion when there's only 6 billion people in existence?"
Wrong. I already pointed out that the vast majority of the large transactions were electronic, and didn't involve the $600 billion$ in physical currency in circulation at all. You do read my posts before responding to them, don't you ???
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V1:
"Almost all of the large financial transactions and many small ones (checks, debit card, credit card transactions) don't involve US currency, paper FRNs or coins, they are purely electronic funds transfers."
i:
"I think that statement deserves a little scrutiny. True, electronic transactions don't involve physically handing cash over, but they're still going to be based on money that's located somewhere. The fact that the money doesn't change physical location doesn't mean that it isn't changing hands, and therefore not in circulation. And likewise, it doesn't really matter if a physical dollar flies across the ocean; if it's owned by a foreigner, then it's effectively "out of the country", regardless of its physical location.
You didn't check out the links on electronic currency I posted, did you? If you had, you would know that the statement you made above is false. More than half of the US currency in circulation today is purely electronic, and has no physical existence. This is not electronic credits representing bills in a vault somewhere, it is pure electronic money, issued originally as electronic money (not paper bills) by the Fed.
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i:
"The point I'm making is that we're hemorrhaging money (in whatever form) out of the country at a yearly rate that's at least comparable to the money supply within the country (again, in whatever form). There's no way that could be happening unless there's something here to renew the money that gets lost - otherwise we'd be experiencing massive deflation. And there's going to come a time - I don't know when, but I don't see how it can't happen - when the foreign owners of these overseas dollars are going to want to do something with them. Otherwise, what would they be collecting them for? Hood ornaments?"
Again, this is based on your false idea about the total amount of currency in curculation being paper money. In spite of this, I agree that the trade deficit problem is real. However, we would be hemmoraging money regardless of whether we had a specie-backed or fiat currency. That's what happened during the Revolutionary War, we hemmorraged just about every bit of gold we had out of the country to pay for the war.
Inquest:
The purpose of [The Coinage Act of 1792] was to define the value of the dollar, not "fix" the price of anything.
Vigilant1:
This is mere semnatics. Whether you call it valuation of the dollar or price fixing of gold, either way the price of a commodity, namely gold, is fixed by government edict in relaton to the dollar.
This is central to the differences in our povs. The dollar is a standard of value like feet or hours. Therefore, it must be defined (certainly you will acknowledge that the Founding Fathers felt that way even if you don’t). The Act defined what a dollar is so that it could be used as a unit of measurement. A fiat standard has no unit of measurement. A fiat system with scarcity integrity, however, could still be used and could be consistent with the principles of democracy and free enterprise. This requires either rigidly fixing the number of units or by growing the number of units by a pre-specified percentage in a pre-specified way. The current system has zero scarcity integrity. A handful of un-elected people acting in secret, together with the banking cartel, has been give the very undemocratic un free enterprise special privilege of changing the amount of this precious construct by whim.
On a minor note, in another post to Inquest you state:
you seemed to be proposing that if money leaves the country and is held by foreigners, the money supply in the US shrinks and dollars should change in value. 'Taint so.
Actually, ‘Tis so. If it is not recorded on the books of a domestic commercial bank (even if it is on the books of a foreign subsidiary of a US bank) it IS NOT counted in the money supply. Now if all you meant is that it should be counted, then you are agreeing with what Inquest is saying.
You have said FRNs are not fraudulent but over-issuance is…I agree.
You said:
Please cut & paste from any of my posts where I said that "FRNs are not fraudulent". I don't believe I've ever said any such thing.
In post 152 you state (and I concur):
A suspension of redemption is…a criminal fraud, as the notes claim right on them that they all can be redeemed at any time, which is a lie under such circumstances. At least FRNs make no such fraudulent claim.
Where shall I deliver the crow you ordered for dinner?
But that's not answering my question. I asked you how (i.e. by what mechanism) fiat money has been able to eliminate these deflationary cycles. When you see the answer to that question, you just might see a certain amount of "deniability" in history's lesson after all.
Your 'speed of light' analogy in inapplicable, as the speed of light is a constant, and gold is a commodity who's value fluctuates with supply and demand.
And the value of the dollar, under the Act, was to fluctuate right along with it. You seemed to be implying that the Act was somehow mandating that this fixed quantity called a "dollar" was to be used to tie down the value of gold regardless of what the market tries to do (which the essential element of a "price-fixing scheme"), and I was simply pointing out that you were putting the cart before the horse. It's no more a price-fixing scheme than saying that a dollar is worth four quarters is a price-fixing scheme.
You didn't check out the links on electronic currency I posted, did you? If you had, you would know that the statement you made above is false. More than half of the US currency in circulation today is purely electronic, and has no physical existence.
I didn't check all the links, no. But that's fine. So what does that raise the total money supply to, 1.3 tril? 370 billion (or more) leaving the country every year is still a lot in comparison. (and that's why I chose my words the way I did: that the money we're sending out is "at least comparable" to the money that's in circulation here, "in whatever form". That statement stil holds true)
However, we would be hemmoraging money regardless of whether we had a specie-backed or fiat currency. That's what happened during the Revolutionary War, we hemmorraged just about every bit of gold we had out of the country to pay for the war.
Umm, yeah, it called an EMERGENCY?! When you need supplies, you need supplies. In today's more normal times, if we had a stable money supply, and we were running the trade deficit we're running now, that would mean that somebody, somewhere, on this side of the ocean is losing money without getting any new cash flow to replace it. How long do you suppose he'd be willing to keep that up, unless his supply was being replenished by a particular source for whom, shall we say, money is no object?
One more point. I gave your response a little more thought, and you seemed to be proposing that if money leaves the country and is held by foreigners, the money supply in the US shrinks and dollars should change in value. 'Taint so. The amount in global circulation determines the money supply. Who holds it at any given moment is largely irrelevant to the value of the dollar (as long as they don't take a very large amount of it out of circulation for an extended period of time).
You'll need to explain yourself a little more clearly here. Whether a dollar is being spent by Chinese among themselves, or whether it's being held in a vault by those same Chinese, it still has zero effect on the U.S. economy, unless it makes its way back into the U.S. economy. If it doesn't, that dollar is completely invisible to the U.S. economy, regardless of what's being done to it. The conclusion I would draw is that your parenthetical "as long as" is in fact, largely the case. Otherwise we would be seeing those dollars coming home. Dollars made from selling us stuff are going to be useless to these people unless they use them to buy something back from us.
IOW, it’s just a crap shoot and that is fine with you.
If people don't believe in the currency, it will collapse regardless of scarcity integrity.
Nonsense, name a single currency in history that even approximated maintaining scarcity integrity and collapsed. Not one, of course.
If scarcity integrity was such a vital factor, our currency couldn't have possibly survived without it this long. That puts the lie to your claim.
Again, nonsense. That’s like trying to evaluate whether something is a Ponzi Scheme merely on the basis of whether its failed yet. You don’t have to be a rocket scientist to figure out the end result of a currency without scarcity integrity. The only issue is when.
Are you not aware that 95% of our money supply is created by banks?
I agree with your concern, however, the money isn't all leaving. Much of it is used to buy U.S. securities, stocks, real estate, etc.
What forum rule would you have to violate to express your opinion of my views?
What proof are you looking for? Everyone knew the S&Ls financed long-term assets (30 yr mortgages at 7%) with short-term liabilities (deposits, that they had to pay 14% for). Where’s the mystery to you? To parody Dylan: You don’t have to be a member of the financial press to figure which way the dollars flow. Your belief, in fact, that the financial press is vigilant could not be further from the truth. For example, in early March, 1932, as state after state declared “Bank Holidays,” the NYTimes reported these events on page six under such innocuous headings as “Banks protected in 6 more states.” More recently, during the ENTIRE campaign of 1988, what news were you seeing about the S&L crisis. Bush Sr. (reminiscent of FDR before him) acted, however, in the first week of his Presidency to begin to stop the carnage.
What did you think the (silly) pre-text for “deregulation” was, anyway, if not to “rescue” the industry. Deregulation was a boon to those who feasted on the dying carcass (shady S&L operators, real estate developers, lawyers, accountants, but most of all Wall Street). Unfortunately, it did nothing for the industry: it had long since been declared DOA by anyone who gave it serious thought.
Webster and I disagree with you
My point of view is that the Constituition and Bill of Rights were both full of compromises to get the states to sign on to giving up a fair amount of their freedom and independence (compared to the loose confederation they were under previously). I think that the fact that the founders declared that only silver and gold should be used by the states shows their bias that all currency should be based on these precious metals. Maybe they assumed that everyone knew that all money should be gold and silver (similar to the misinterpretation of the 2nd Ammendment, that the right to bear arms wasn't an individual right but a collective right). Here's what Hamilton said in the Federalist Papers #44 & 12 to explain Article I Section 10:
The right of coining money, which is here taken from the States, was left in their hands by the Confederation, as a concurrent right with that of Congress, under an exception in favor of the exclusive right of Congress to regulate the alloy and value. In this instance, also, the new provision is an improvement on the old. Whilst the alloy and value depended on the general authority, a right of coinage in the particular States could have no other effect than to multiply expensive mints and diversify the forms and weights of the circulating pieces. The latter inconvenience defeats one purpose for which the power was originally submitted to the federal head; and as far as the former might prevent an inconvenient remittance of gold and silver to the central mint for recoinage, the end can be as well attained by local mints established under the general authority...
The extension of the prohibition to bills of credit must give pleasure to every citizen, in proportion to his love of justice and his knowledge of the true springs of public prosperity. The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure, which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it. In addition to these persuasive considerations, it may be observed, that the same reasons which show the necessity of denying to the States the power of regulating coin, prove with equal force that they ought not to be at liberty to substitute a paper medium in the place of coin...
No one of these mischiefs is less incident to a power in the States to emit paper money, than to coin gold or silver. The power to make any thing but gold and silver a tender in payment of debts, is withdrawn from the States, on the same principle with that of issuing a paper currency.
The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares. By multipying the means of gratification, by promoting the introduction and circulation of the precious metals, those darling objects of human avarice and enterprise, it serves to vivify and invigorate the channels of industry, and to make them flow with greater activity and copiousness.
Notice that every mention of money refers to alloy, while this is a subtle point, I interpret it to mean that money should always be metal. My theory is that they didn't want the Federal money to be limited to only silver and gold (to account for changes in the markets of copper, platinum, nickel etc) but that their intention was to have money consist of metals however various they may be.
The Congress addressed the Federal question of money with the Coinage Act of 1792 which fixed the value of a dollar at the same silver content (.7982 oz.) as that of the Spanish 8 reales (known as the Spanish Milled dollar or ‘Pillar’ dollar).
Untrue.
While I have already pointed out to you that the very definition of inflation IS an increase in the money supply, you prefer to use the certain effect of inflation and call it a cause. Very well. I have taken the liberty to compile some statistics for you. The 1960s and the 1990s had very similar statistics: real growth= 28%, monetary growth = 44%, and the cpi up 30% during the two decades. The 1970s and 1980s had far worse stats: lower real growth (24%), much higher monetary growth (96%), and the cpi up 86%. That is stark realism. Source of figures for both cpi and real (i.e. constant dollar) growth was statistical Abstracts of the U.S. (available online) and the Fed was the source of M1 growth (also available online)
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