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.
This is laughable. Do you know how many millions of dollars worth of electricity it would take to turn an ounce of any element into an ounce of gold even if we knew how?
Sure our paper money is worth something now because our government and our military say so. As just one example, a Tunguska event over Washington instead of Siberia would have wiped out the value of our paper money. That's what a little 100 foot wide space rock can do. But Americans with a personal cache of gold would still have had value, because there is always a large number of people everywhere willing to pay a high price for it, whether that price would be in surviving currencies, or in food, shelter, and the necesseties of life.
And the value of our paper money would disappear overnight with a well placed meteor strike or nuclear attack. So the question is which has the greater chance of happening...an overnight miracle technology, or the wipe-out of our government. History shows that governments do get wiped out overnight every so often, but overnight miracle technologies have never occured. Technologies take years to develop. If Washington were wiped out and many citizens had personal caches of gold, our economy, and therefore our protection, has a chance of surviving through our state governments because the rest of the world would hold value for our gold...not so with a Washington-based fiat currency.
"The financial policy of the welfare state requires that there be no way for the owner to wealth to protect themselves."
All threads posted prior to 9/04/01 are locked and a correction cannot be posted.
Actually, Wired magazine pointed out recently that blowing up Washington would probably cause a massive INCREASE in the effectiveness of our military--and because Constitutional succession would come into play very quickly, we would have something resembling a government again, but without the same sort of metaphorical inbreeding. Wiping out DC would thus tend to make the government AND military much more efficient (and hence effective), actually INCREASE the value of our money.
1. Some were accompanied by declines in the stock market
2. Some were followed by depressions.
3. Some were ignited by major frauds or swindles
4. All were preceded by rapid growth in the money supply, primarily to finance speculative investments (bought for resale rather than productive gain).
My conclusion: money panics were the natural cure of the preceding financial bubble. To the extent that sometimes ensuing depressions caused hardships on ordinary people, I blame the situation on the banks that created the bubble in the first instance rather than the money panics that cured the bubble. You characterize my synthesis as follows:
That is a simplistic and unsupported claim. The money supply was one causal factor, in some cases a major factor, but never the sole factor.
You seem to acknowledge the role of the money supply and, yet, characterize the conclusion as “simplistic” and “unsupported.”
Why? Do you have evidence to the contrary? If so, what?
I agree with the Austrian School of Economics in this area. Ludwig von Mises states in Human Action, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
With regard to your specifics about the Panic of 1857, I do not dispute them (except, sources I have relied upon set the duration of the Panic at six months rather than 2 years). Furthermore, you only address the spark that ignited the panic, not the building of pressure leading up to it. Among the most prominent of those was the fact that the number of banks had nearly doubled from 1950-1957 (having stayed stable for the entire preceding decade). Over 10,000 different kinds of banknotes (including couterfeit ones from non-existent banks) financed rampant speculation in both railroad stocks and land.
Fact 2: Prior to deregulation, virtually the entire portfolio of S&Ls consisted of long-term fixed mortgages at 7% and lower. Agreed?
Fact 3: So-called deregulation consisted of the Depository Institutions Monetary Control Act of 1980 which, among other things, increased FSLIC and FDIC deposit guarantees from $40,000 to $100,000 (hardly an act of deregulation); a tax gift to S&Ls allowing them to swap loan portfolios with each other in a manner that generated tax benefits for the industry and created the CMO product line for Wall St; and the Garn-St. Germain Act of 1982, which allowed S&Ls to invest in riskier non-traditional projects, in the vain hope that this would rescue the industry. Agreed?
Opinion 1: The industry could not be rescued because Facts 1 and 2, alone, created an untenable situation. Agreed?
Opinion 2: so-called deregulation made things worse. Agreed?
I think we disagree only on Opinion 1, above because you have stated that:
S&Ls were considered a pillar of strength in the banking sector right up until deregulation.
Are you not aware that the deregulation from 1980-1982 was designed specifically to rescue the industry from its distress due to the factual points enumerated above?
You go on to ask:
How do you explain [the S&L industry’s] survival of previous inflationary periods?</I.
I am aware of no such previous inflationary period since the beginning of the industry. What years do you have in mind?
You go on:
S&Ls have a lot more assets than just their outstanding mortgages. They own land, income-producing properties (office building and shopping malls), stocks and other securities, etc.
Simply untrue…prior to deregulation that allowed some of these investments (I don’t think they are allowed to invest in stock even after deregulation).
Not a chance. Our military needs supplies to operate and thus a solid form of value must survive a catastrophy. Green ink and cotton paper wouldn't do.
OK, let's suppose we went to a gold standard and stored the stuff in the Fort Knox Bullion Depository...and then a Tunguska event hits Fort Knox. Then we're REALLY hosed.
As for supplies, they aren't kept in DC, and the value of any currency is a measure of the confidence of its users. How much more confident would most Americans be without little Tommy Daschle trying to raise their taxes?
I didn't say government reserves would save the country, I said personal, private reserves would save the country. A person that owned $10,000 worth of gold before a Tunguska event over Washington would still get at least $10,000 worth of necessities from anyone for that gold and so there would be a semblance of an economy, and therefore protection from the National Guard. A person that that had dollars wouldn't, and couldn't participate in that protection. I do believe that the states and Washington should keep gold on hand though, of course.
As for supplies, they aren't kept in DC, and the value of any currency is a measure of the confidence of its users.
But the ditribution of those supplies depend on a stable monetary system. Gold is the most stable in catastrophic situations because rarely if ever has the entire world gone through a catastrophy at the same time. Paper fiat money almost always would fail even in a localized catastrophy. That confidence in cotton paper and green ink would evaporate immediately with the the leveling of Washington.
How much more confident would most Americans be without little Tommy Daschle trying to raise their taxes?
There's more to the government than Little Tommy.
Not true. There will always be a great number of prople on the earth willing to pay a good price for gold. The gold price has been high throughout all falls of all empires and all catastrophies affecting great nations throughout history. You overestimate the importance of America to the survival of the world. Even Iraq survived our sanctions with a semblance of an economy. While an American catastrophy would certainly mean economic depression throughout the world, it would not mean the utter collapse of all economies, especially if the people of the American states had a dependable store of value that gold has always been.
In that event, the standard unit of currency will be a copper-jacketed lead slug.
No, it would be gold, as it has always been and what the founders intended. Even in the worst wars, only a small percentage of the population die by violence.
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You seem to want to divert attention from the subject of the debate, and focus on the S&L crisis. I will first dispose of that ancillary issue, then move on to the main subject.
Your point about the pre-deregulation assets of S&Ls may or may not be correct. I won't contest it because it's irrelevant. Up to the point in time that the deregulation bill passed into law, there is no doubt that S&Ls had been hurt by the rampant inflation of the late '70s and early '80s. However, they remained solvent. There weren't huge numbers of S&Ls failing. If inflation destroyed the S&Ls, as you hypothesize, then they would have all failed in or shortly after the period of highest inflation. They did not. They still remained solvent. The moment they were deregulated, these S&Ls began buying huge amounts of bad loans and investing in risky speculative land deals. How could make these investments if inflation had destroyed all their assets? They could not have. This disproves your entire hypothesis, as clearly all that inflation did not wipe them out, any more than previous recessions and inflationary periods had wiped them out.
The failures began well after the peak period of inflation, after deregulation, after S&Ls bought up huge amount of land, after the S&Ls had engaged in rampant speculation. The failure began when land values crashed. Then, and only then did we have S&Ls dropping like flies. The real cause of the failures was that enforcement provisions in the deregulation legislation were stripped out by corrupt politicians. Even then, with their extremely limited power, the fedgov S&L regulators tried to take action against the dangerous investment practices of many large S&Ls. The federal regulators were stopped cold in their tracks by strong pressure from influence-peddling congressvermin, the most notable being the Keating Five. All planned punative regulatory actions against S&Ls were cancelled. The rampant and stupid speculative investment, especially in land deals, enabled by political corruption, went on until the bottom fell out of land prices. Then the massacre started. Thus, that is the main cause of the S&L failures. I fully recognize that inflation was a contributing factor, but the timeline of events clearly shows it was not the main, much less the sole cause, as you are claiming. Strong inflation never destroyed the S&Ls before deregulation, and it wouldn't have afterwards if oversight remained intact and vigorous. The regulators saw the looming disaster, they tried to act, but they were hog-tied by bought-and-paid-for Democrats. You are simply wrong on this point, and facts undeniably prove that.
As for the pre-deregulation S&L industry, you say that the fact that it was so damaged by inflation proves that a fiat currency is bad. You haved that completely ass-backwards. It proves the government regulation that defined the operation and limits of the S&Ls was not updated to reflect a floating currency economy. The dead hand of government bureacracy and the morass of fedgov regulations it spawns failing to respond to new economies in the banking sector is not an argument for changing our currency standard. You don't change the basis of our currency simply to respond to a gross failure in government policy. That whole idea is anti-capitalist. The correct answer is to fix the bad governmnet policy, in this case to root out the corruption and remove the socialist strictures placed on banking, allowing the banking industry to respond at will to the demands of a free market.
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Now, on the main debate. Here are the main point of contention thus far:
- Tying the value of the currency to the price of a commodity creates the conditions for a deflationary economic 'death spiral'. This is evidenced by the fact there have been no depressions since the currency was floated.
- The floating currency has been stronger since it was floated. Strength of the currency is measured by the confidence that people have in it.
- Even if we wanted to return to a gold standard, no one has proposed a feasible way to do it without crashing the existing currency and the economy in the process.
- The previous 'gold standard' currency was as much a fiat currency as the one we have now. They printed as many paper notes as they wished, without having the bullion reserves to back it up. The only true difference between the pre-1932 and post-1932 currency systems is that the value of the former was tied to the price of gold, and the latter was not.
- You and others here are hawking a bogus economic theory that all major money supply inflation will lead to economic disaster, and all economic disasters are caused by money supply inflation. Your repeated attempts to wrongly lay the S&L disaster solely at the feet of money supply inflation is a prime example of this. The S&L discussion above shows that is false. The chart and article I posted about the '90 period also puts the lie to that. You are also ignoring the fact that we've had the exact same money supply inflation before and after 1932, yet depression and panics have disappered since we floated the currency. This theory just doesn't fly.
- You claim that scarcity integrity is vital to a solid currency, yet you have made no meaningful case to support this contention. You seem to expect me to take this as a given; I do not.
i:
"You're still speaking in generalities. I guess I'll have to make my question more specific. There doesn't seem to be anything special about "gold" that makes it vulnerable to deflationary cycles. Any fixed quantity of anything that's used as currency can be subject to the exact same pressures, if I'm not mistaken."
A very good point, and true for any commodity the currency is tied to in value.
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i:
"I can't see any way in which this wouldn't happen with paper money, IF the paper money existed in fixed quantity. If the advantage of the current system is that the money doesn't exist in fixed quantity, where is that extra money coming from?"
Currency isn't a commodity, like gold. When there is deflationary pressures on the economy, commodity prices plummet and and will drag down the value of a currency with it, if the currency's value is fixed to a commodity. If a currency is floating, I don't see how a fixed supply will force devaluation of a currency if deflationary commodity prices are present. I see no relationship there.
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i:
"I also want to address something you said to Deuce after you responded to me:
V1, being quoted by i:
"'Are FRNs a 'fraudulent currency?' [a question asked by deuce] They aren't counterfeit in the conventional sense of the world. Much the opposite, we spend a lot of resources to prevent that. They are backed by the full faith and credit of the US government. While you may laugh at that statement, you can't deny that our fedgov goes to great lengths to support public confidence in the US dollar."
i:
"So it sounds like you're saying that you simply trust the government to do what's right.
That is a false inference. Just because I noted what the fegov does, it doesn't follow that I trust them to do this in a competent and honest fashion.
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i:
"But earlier you were saying that government couldn't be trusted with a gold standard, when the gold standard has a built-in mechanism to help keep the government more honest. This is perhaps the biggest incongruity of yours that I'm trying to figure out."
No problem there. Your confusion is merely a result of the wrong conclusion you jumped to about what I said.
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V1:
"That's fine, I don't want to get into another meaningless semantics debate. Call it what you please, it still has exactly the same effect as a price-fixing scheme."
i:
"It's not a semantics debate, it's far from meaningless, and the gold-standard does not have anything close to the same effect as a price-fixing scheme."
It is a semantics debate, nothing more. It is meaningless and irrelevant to the main subject of this debate about the 'gold standard'. It is effective a price-fixing scheme, regardless of your denial of that fact.
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i:
"A price-fixing scheme (when imposed by government) forces producers to give people something in exchange for less than its fair price. The gold standard does no such thing. All it does is provide definitions, no different than the dollar and four quarters."
If we have a 'gold standard':
- Is the price of gold allowed to float to whatever price market forces set? No, it is not.
- Is the price of gold fixed? Yes, it is.
- Is this price-fixing a result of a government edict? Yes, it is.
Yet you insist it's not in any way, shape or form a price-fixing scheme. Clearly, you are wrong here. Call it what you wish, the result is price-fixing by government edict, and the economic effect is the same as any price-fixing scheme.
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V1:
"No, the currency markets that determine the strength of the dollar are global markets, and bank holding of US dollars worldwide are factored into the total worldwide money supply."
i:
"This is a bit difficult to reconcile with your earlier statement: "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)." But according to what you're saying now, even if it is taken out of circulation for any length of time, it still wouldn't have an effect on the value of the dollar, because that money, as you say, would be "factored into the total worldwide money supply." Which is it, pray tell?"
Banks holdings are not the same as banks or governments physically storing money and taking it out of circulation. Money deposited in bank accounts is loaned out, and goes right back into circulation. That is the very basis of the banking business, using your assets to make more money. Any banker will tell you that money that sits there and isn't "put to work" isn't earning the bank income, and is thus just an overhead expense, a wasted asset. FRN notes physically stored in vaults are taken out of circulation, are not loaned out, are not "put to work" and are not part of the current in-circulation money supply. Sorry, I should have made that distinction clear.
Now it looks as though it is you who is engaging in a semantics debate. I don't see any meaningful difference between paper bills and gold, as items in and of themselves. Both are used as economic record-keepers, and neither has much use for any other purpose (though it's true that gold in recent years has had some electronics application, but that certainly wasn't the case in 1932). What makes one a "commodity" and the other not? What would make one subject to deflationary pressures and the other not?
Banks holdings are not the same as banks or governments physically storing money and taking it out of circulation....Sorry, I should have made that distinction clear.
That's quite alright. I just wanted to clear that up before we went any further. So let me go back to what we were talking about before. You said, "The amount in global circulation determines the money supply." So if I understand correctly, that means that the roughly $1.3 trillion that seems to be the money supply ($600 billion in paper plus a little more than that amount in electronic money, if I'm reading your data right) includes money in circulation throughout the world. That would mean that even less than that amount is here in America. If we've been sending $300-400 billion a year overseas, how is it we have any money left at all?
And I'm not convinced that all that money that we're sending overseas is remaining in circulation. If it was, we'd be seeing it coming home, because like I said, dollars would be useless to foreigners unless they use them to buy something back from us.
You attribute S&L insolvencies to deregulation, but common sense alone should demonstrate to you that deregulation only made a hopeless situation more costly. Why don’t you understand the explanation: financing 6% fixed rate mortgages with 14% deposits leads---without question--- to insolvency. Period. The two arguments you put forth are flawed.
Your Argument #1: No insolvencies occurred until after deregulation, therefore deregulation caused them.
Actually, no insolvencies “were declared” but many had occurred. You fail to recognize that insolvent institutions can and do continue to operate as long as no one calls attention to the fact. Your argument is equivalent to saying birth is not cause by egg fertilization but by labor pains because babies are not born immediately after fertilization but do immediately follow labor pains.
Your Argument #2: No insolvencies occurred during prior bouts of inflaltion.
There were no such bouts of inflation since the inception of the S&L industry in the 1930s. Also, the critical combination in the 70s went beyond inflation. It was inflation + fixed rate mortgages + competition from money market funds. Tomorrow, if we were to relive the 1970s inflation, the insolvencies would not occur because they now use adjustable rate mortgages and/or trade off interest rate risks using derivatives.
“deflationary economic death spiral” is hyperbolic, imprecise, inaccurate mumbo-jumbo not to mention inconsistent with your prior observation that our currency has NEVER been tied to a commodity.
The floating currency has been stronger since it was floated.
relative to what? The Mexican peso?
Strength of the currency is measured by the confidence that people have in it.
And how is that measured?
Even if we wanted to return to a gold standard, no one has proposed a feasible way to do it without crashing the existing currency and the economy in the process.
Unsupported hyperbole.
You and others here are hawking a bogus economic theory that all major money supply inflation will lead to economic disaster, and all economic disasters are caused by money supply inflation.
This is not an accurate statement of my pov.
We've had the exact same money supply inflation before and after 1932
This is not even close to accurate.
depression and panics have disappered since we floated the currency.
We’ve replaced them with inflation, bailouts, and phony accounting.
You claim that scarcity integrity is vital to a solid currency, yet you have made no meaningful case to support this contention. You seem to expect me to take this as a given; I do not.
I don’t know what you mean by “solid.” I’d express it as “scarcity integrity is vital to an honest, reliable, free enterprise monetary standard.” Giving central planners and/or specially privileged banks the right to expand the money supply by whim is guaranteed to end in disaster.
d:
"'deflationary economic death spiral' is hyperbolic, imprecise, inaccurate mumbo-jumbo....
Really ?!? How would you describe the cessation of most business activity in the nation, and even the entire world, and all the effects that go with it? We've been fortunate enough to not personally experience a depression. We cry like babies when we experience a mild recession, like the one we appear to be coming out of now. We don't know what real economic disaster is. My description is quite apt, and your cavalier dismissal means nothing, other to indicate you need to do a closer reading of the history of such economic events and the impacts they had on regular peoples' lives.
Regardless of that side debate, you beg the point here. I believe I have pretty clearly defined the relationship between tying a currency to a commodity, and that currency being vunerable to extreme deflation pressures. I've drawn a clear correlation with the historical timeline. Do you disagree with this point, and if so, what evidence to you offer to refute it?
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d:
".... not to mention inconsistent with your prior observation that our currency has NEVER been tied to a commodity."
Perhaps you should try actually reading my posts before responding to them. I have consistently maintained two points in all my posts; that the 'gold standard' was phoney because the currency wasn't really backed by gold; and that the value of the pre-1932 currency was tied to the value of gold (a commodity), which made it vunerable to deflationary pressures.
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V1:
"The floating currency has been stronger since it was floated."
d:
"relative to what? The Mexican peso?"
You are being disingenuous here, as you know full well that I meant in relation to the pre-1932 currency. You can't deny this historical fact, which is evidence by the fact that you're attempting not-so-clever evasions, instead of actually addressing my point.
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V1:
"Strength of the currency is measured by the confidence that people have in it."
d:
"And how is that measured?"
Several ways. If people dump dollars and rush to put their liquid funds into other currencies or physical assets out of fear, that is a vote of 'no confidence' in the dollar. If people started to refuse to accept it as a medium of exchange, that would be the harbinger of a total currency collapse. This is what happened early in the Great Depression, people fearing that the 'gold-backed' currency would become worthless. Many people were smart enough to know that in extreme circumstances, promises of currency redemption for specie by the fedgov couldn't be trusted, so they wisely cashed theirs out before redemption was suspended.
Since the Great Depression, the confidence in the dollar has remained high. While we have currency speculators jumping their funds back and forth to take advantage of small natural market variations in the relative value of currencies, there has never been a real run on the dollar since the Great Depression, with everyone desperate to dump their dollars. It remains the most desirable currency in the world today. By contrast, the Euro was released at a relative value of $1.20 US, and it steadily dropped to $0.80 US, losing a full third of its value. Now it's regained some ground and is back up to $0.91 US, but that's not a great showing for the 'newest superpower', the EU.
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V1:
"Even if we wanted to return to a gold standard, no one has proposed a feasible way to do it without crashing the existing currency and the economy in the process."
d:
"Unsupported hyperbole."
There's a very simple proof here. Provide a detailed plan by which the change to a gold standard could be accomplished today without crashing the economy. If you can't, my statement stands unrefuted, and your characterization of it is proven to be utter BS. I would be interested to hear such a plan, as in decades of debates on this subject, I haven't heard one yet.
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d:
"You and others here are hawking a bogus economic theory that all major money supply inflation will lead to economic disaster, and all economic disasters are caused by money supply inflation."
d:
"This is not an accurate statement of my pov."
Perhaps I misunderstood this statment of yours, from post # 168:
d:
"Furthermore, the cause of every single money panic of the 19th century was the unbridled creation of money for speculative purposes."
Okay, then please correct me on your view of the relationship between money supply inflation and economic disasters, such as depressions, panics and recessions.
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V1:
"We've had the exact same money supply inflation before and after 1932."
d:
"This is not even close to accurate."
You said that previous money panics were caused by major money supply inflation. You also said modern inflation and recession is caused by major money supply inflation. I agree that we had the same money supply inflation in both cases, the government printing money at will, yet now you disagree when I say this. You appear to contradict yourself here. If I'm mistaken, then please explain to me the specific differences between the money supply inflation of the pre- and post-1932 periods.
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V1:
".... depression and panics have disappered since we floated the currency."
d:
"We’ve replaced them with inflation, bailouts, and phony accounting."
But you said we had money supply inflation (which is the sole definition of inflation in your terminology) previous to 1932, and that it allowed excessive speculation and caused money panics. Now you seem to suggest inflation is something new that has replaced depressions and panics. Am I misunderstanding you again here? Please clarify.
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V1:
"You claim that scarcity integrity is vital to a solid currency, yet you have made no meaningful case to support this contention. You seem to expect me to take this as a given; I do not."
d:
"I don’t know what you mean by “solid.” I’d express it as “scarcity integrity is vital to an honest, reliable, free enterprise monetary standard.” Giving central planners and/or specially privileged banks the right to expand the money supply by whim is guaranteed to end in disaster."
Since the Federal Reserve printed money at will, without adding bullion to the reserves to back it before 1932, do you then agree that the pre-1932 currency had no more scarcity integrity than our modern currency does? If you say that our pre-1932 currency did have scarcity integrity, then how do reconcile that with your claim that money supply inflation caused the panics in the 19th Century? Bottom line, was unbacked money being printed at will before 1932, or not?
And BTW, inquest made the point that a fixed money supply may cause problems of its own. I don't see it causing a deflationary spiral, but since we've never had a fixed currency supply in this country that I'm aware of, this would be entering uncharted territory. What are you thoughts on the possible dangers of such a situation? Do you see any at all? I wonder if an economy could expand quickly with a fixed currency supply, or if it would be forced to stagnate? Where does new capital for investment come from with a fixed money supply? Or does that force deflation, with prices dropping so the same fixed amount of currency can represent the larger pool of good and services in the expanded economy?
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And just to reiterate and expand a little on a point made earlier on this thread; if we go to a gold standard for the dollar, the gold-producing nations would suddenly become like the oil shiekdoms, immensely wealth at our expense. That would be Russia and South Africa. Do we want to be tranferring our wealth to these countries to aquire gold, and continue to do so in the long run?
I would also point out that while many have tried to dismiss it, no one has addressed the problem of a technological breakthrough in gold mining and/or production, and the resulting collapse of a gold standard currency. With technology advancing at the speed it is, this isn't a question of 'if', but only a question of 'when'. Remember, before the late 1800s, steel was a semi-precious metal and aluminum was equally as valuable as silver (by weight, no less).
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