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Why would a country want to get away from a fiat currency?

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Cool Receptionist Posted: Tue, Oct 16 2007 5:43 AM

I am relatively new to economics and I haven't been indoctrinated in the Austrian School.  I noticed that most of you here take it for granted that a gold standard is superior to a fiat currency.  I know there is always the possibility of the central bank printing too much money, but what other reasons are there?

For those of you who believe Ron Paul's claim that the US needs to return to the gold standard, why and how would this endeavor be worth pursuing?

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Brett_McS replied on Tue, Oct 16 2007 6:57 AM

The basic position of an economist is that it is not a good idea to force the supply of a commodity into the hands of a monopoly.

 Money provides a service - it is itself a valuable commodity - so it is therefore best if the supply of money is subject to free competition.

That's the main point.  Whether or not a Gold Standard based currency would be better than some other type would therefore be a matter for the market to work out.

In general we know that private suppliers have no trouble at all in providing a better product than government.  There are no episodes of fully free banking, but the partial free banking episodes that did occur in history (in Scotland, Australia and I believe the US) indicate this expectation to be reasonable in the case of money also.

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Brett_McS replied on Tue, Oct 16 2007 7:21 AM

Some references if you are interested:

  • Friedrich Hayek: The Denationalization of Money
  • Lawrence White: Competition and Currency
  • Kevin Dowd: Free Banking
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jdavidb replied on Tue, Oct 16 2007 7:56 AM

Hey, Cool, please go read Murray Rothbard's Money for your briefing, then come back and let us know if you have any questions or disagreements with it. :) 

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DBratton replied on Tue, Oct 16 2007 8:50 AM

There are two general answers to this question, one economic, and one political. The economy is distorted and resources are channeled into less efficient uses by monetary inflation. And it both diminishes our liberty to give the government the ability to fund itself through inflation, and requires that we give up liberty in order for the government to enforce the terms of the fiat mechanism.

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Physiocrat replied on Tue, Oct 16 2007 11:13 AM

Brett_McS:

Some references if you are interested:

  • Friedrich Hayek: The Denationalization of Money
  • Lawrence White: Competition and Currency
  • Kevin Dowd: Free Banking

 

 

Out of interest do you support fractional reserve banking? 

The atoms tell the atoms so, for I never was or will but atoms forevermore be.

Yours sincerely,

Physiocrat

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Brett_McS replied on Tue, Oct 16 2007 4:29 PM

"Out of interest do you support fractional reserve banking?"

I don't "support" a particular type of currency in theory, any more than I support a particular brand of car in theory.  Fractional reserve banking done well would be a Honda, and fully-backed issue would be a Rolls Royce.

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Bostwick replied on Tue, Oct 16 2007 5:10 PM

 A Government would not want to get away from a fiat currency. It wants to be able to spend more than its income, paper money allows it to print the difference.

Citizens want sound money because it protects them. If you have savings of 100 dollars, should the government increases the money supply by 5%, your savings will only buy 95 dollars worth of goods.

Printing money serves no purpose but to redistribute wealth. Someone who counterfeits money consumes but does not produce. He adds nothing to the economy, only reduces how much value it can provide to everyone else. The government does the same thing when its print money. Because money is used to purchase what workers have produced, the government is printing deeds saying it owns your labor. It is an invisible tax.

We want "sound" commodity backed money because it prevents government from acting as a counterfeiter. In order to spend it would need an income.

(Most of us are also against all taxes, because we believe only in mutual consent and voluntary relationships. Taxes are taken through force, they are an elaborate form of robbery and have no place in society. Peaceful trade can produce any of the services provided by government today)

Peace

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I think I understand the position of wanting the government to be out of the banking and currency business.  I've just thought that it wasn't a problem since people store their assets in forms other than dollars.  What sort of limitations are there on currency in the US now?  Can a bank produce its own currency?  Can a US firm pay its employees with precious metals?

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Brett_McS replied on Wed, Oct 17 2007 6:47 AM

All the money in the US seems to be from the same company.  They must be very good to have achieved such an effective monopoly!  Wink

I guess it doesn't directly affect ordinary salary people too much one way or the other what form of currency there is, unless they live in Zimbabwe.  Most of their assets sit idly in bricks and mortar.  Business dealings are a different matter though.  Better currency means better forecasting means longer product cycles means more efficient production.

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Bostwick replied on Wed, Oct 17 2007 5:19 PM

Brett_McS:

I guess it doesn't directly affect ordinary salary people too much one way or the other what form of currency there is, unless they live in Zimbabwe.

 

Not true at all. Through inflation government has transfered wealth away from the middle class. Americans are paying mortgage to banks who only have the money to lend because it was printed by the Fed.

The system is EVIL. 

You can imagine why communism might start looking like a good idea to the economically ignorant.

Peace

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Brett_McS replied on Wed, Oct 17 2007 7:06 PM

Well yes, but there are Zimbabwean levels of evil and US levels of evil. I know which I would rather have if the choice was between those two. It's a question of nuance, you know.

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It's entirely possible that there is a form of currency that would function better than precious metals. It just hasn't been discovered yet.

The standard argument against gold (and for fiat money) by statists and narrow-minded economists is that its "too scarce" or not "elastic." But this assertion is rooted in either ignorance or outright deception. Its precisely the scarce nature of gold that makes it such a great commodity for use as money.

Money serves as a unit of measure. The actual amount of a commodity that is used as money doesn't affect its ability to serve as money, only how valuable any given amount of that commodity is in relation to all other goods and services. If I measure something in inches, feet, or yards, it doesn't change the real size of whatever I'm measuring; only the value of each individual unit of whichever method I choose.

Besides, a non-perishable commodity such as gold that has been produced in the amounts it has over the centuries can hardly be described as being of "inadequate amount."

The beauty of a gold currency is that humans, acting for no other reason but for their own self-interest, would regulate the supply of money infinitely better than any central bank or government central planners. When the economy grows, and goods and services grow significantly in relation to the amount of gold, the currency will increase in value. Thus it would be profitable to mine and produce gold, because the cost and labor necessary to produce gold coins will be lesser than the cost and labor necessary to produce the goods those coins can be traded for. Eventually, an equilibrium will be reached again, and people will no longer put forth the cost and effort to mine and produce gold coins, because they could just sell their labor or services in the market and get the same amount of money for less effort.

"The only idea they have ever manifested as to what is a government of consent, is this–that it is one to which everybody must consent, or be shot."
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measles replied on Fri, Oct 26 2007 11:31 PM

 While the Federal Reserve system (fiat system) was allegedly created in order to stabilize the value of the dollar it does the opposite because it means the Fed can manipulate the amount of money in circulation at any given time. Essentially, it wouldn't be beneficial for the system, but for the people. When you borrow money from a bank, in essence you are borrowing from the central bank, which can print money out of thin air. Yet to pay it back, you don't have the ability to just create it, so you have to work for it. Therefore your labor is going towards paying the bank back for money they didn't have to work to create for you. 

Secondly, the constitution states that only the Congress can mint money. They handed that power over to the Federal Reserve (a central bank owned by its shareholders) in 1913. Now it has to borrow money from the Fed and pay it back with interest, creating unneccesary debt. The income tax is collected to help pay this interest. So, a significant portion of your is used to pay interest on loans that the country wouldn't have to take out if it printed its own money.

 Before the creation of the Reserve, if my understanding is correct, the gold in the treasury actually belonged to the American people and paper money was a receipt for a certain amount of gold and could be cashed in at any time (this was true until the gold seizure which took place after the depression). The gold, the wealth of the nation, no longer truly belongs to the people and the value of the dollar is unstable. Returning the gold to the people essentially means returning the economic power to the people. This is why political and economic liberty are so closely linked. And why we should all vote for Ron Paul. A return to the gold standard would not just be an economic revolution (devolution?), but a social and political one as well. 

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measles replied on Fri, Oct 26 2007 11:36 PM

Taxes are taken by coercion, i.e. threat of force. Then, if you don't pay them, the government retaliates with force. Do some research on the tax truth movement, and you'll find that there is no law that states we have to pay an income tax (the sixteenth amendment grants no new powers of taxation, according to Supreme Court rulings), and it's allegedly voluntary. Key word: allegedly.

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