If the government decided that it wanted to stop printing physical paper dollars and enforce 100% reserve banking to prevent the private creation of money (through fiduciary media), would this not be better than the gold standard? I have heard it said many times by Austrians that no increase or decrease in the supply of money has any societal benefits, so a frozen dollar standard would fit this criterion. It would also eliminate the problem of resource costs under a gold standard. After a prolonged period in which inflation has been vanquished under the frozen dollar standard, all the gold that is currently being held as an inflation hedge would be available for whatever markets want to use them. It would also eliminate any addition to the stock of money by gold miners (if we had a gold standard).
One objection to a frozen dollar standard would be that you can't trust the government to not inflate, so therefore we need the gold (or other commodity) standard. But we know from history that governments can subvert any pure gold standard by offering paper currency redeemable in gold, then either printing more paper beyond the stock of gold or by allowing central-bank led fractional-reserve banking to increase the money supply through the credit market. As long as both the physical printing of currency and the fiduciary media of fractional-reserve banks were eliminated, there would be sound money. Any thoughts?
The advantage of a gold standard, is that it can react, albeit slowly, to changes in demand for money. When the price of gold goes up, so do production efforts. When the demand falls, so do production efforts. This would not happen with a frozen dollar, and to the extent it did, there would be constant political pressure to fudge the demand curves to promote a government/bank-friendly inflationary policy. Gold is king because it removes the government from the production of money. Only markets should produce money, and people have primarily chosen gold - but that's not to say, that in the future it may not be some other commodity.
Your "frozen dollar" proposition is interesting, and I think your point holds. You note that you can't trust the government to keep the dollar "frozen," but you can't trust the government to not cheat on the gold standard, either. Therefore, a frozen dollar is roughly equivalent to a gold standard. The commenter above me pointed out that a gold standard does allow for the expansion of the money supply, whereas a frozen dollar would not. This makes it particularly sussptible to government abuse, in my opinion, as the pols would aruge that the money supply needed to be inflated to mimic what a gold standard would do, and then the cat would be out of the bag.
However, it is my belief that a gold standard should only be a transitional phase towards the complete privatization of money. The government doesn't need to print notes backed by gold. Let private banks do that. Take the power away from the government. It cannot be trusted, as you readily admit.
lboettcher:If the government decided that it wanted to stop printing physical paper dollars and enforce 100% reserve banking to prevent the private creation of money (through fiduciary media), would this not be better than the gold standard?
If the government decided that it wanted to stop printing physical paper dollars and enforce 100% reserve banking to prevent the private creation of money (through fiduciary media), would this not be better than the gold standard?
There would be continual price deflation, as goods increase but money stays constant. Though thats not necessarily a bad thing. The gold standard kept prices stable because decreases in prices increased incentives to mine gold.
But you failed to ask a simple question: Why do we need the government involved?
The best currency is whatever the market chooses. Before the US dollar was created, Americans used whatever they liked; often precious metals minted by foreigners.
Destroy the monoply on "legal tender" and you solve your trust issue. If the Fed inflates, people find substitutes. Today people can not retreat to gold because its taxed differently than the Dollar.
Peace
JonBostwick:Today people can not retreat to gold because its taxed differently than the Dollar.
Today people can not retreat to gold because its taxed differently than the Dollar.
Also, it is technically illegal (I'm pretty sure) to transact business in gold. Correct me if I'm wrong.
An insurmountable criticism of a frozen dollar standard is that it still involves government force. Without government forcing us to accept its bills as legal tender, the market would quickly look for alternatives. Gold has traditionally won out, but the market could choose anything. I've heard some argue that platinum would be the new gold in a free market. You could even have bills tied to several different commodities as a hedge against sudden supply shocks. We'll never know until it is tried, but what is near certain is that no one will consider dollars valuable without government enforcing it, and this violates rights.
As a quick example, I remember my grandmother bought a bunch of WWII Deutschmarks for a song. I think she had many tens of thousands of the bills and it hardly cost her anything. The bills were still the same but the government enforcement was gone.
Now, I definitely think that a frozen dollar would be an improvement on what we have now, but it should never be viewed as the ultimate solution.
Every decent man is ashamed of the government he lives under - Mencken
gocrew:An insurmountable criticism of a frozen dollar standard is that it still involves government force.
An insurmountable criticism of a frozen dollar standard is that it still involves government force.
Agreed, but I think he was posing the question in a purely economic sense, i.e. a fixed money supply of paper dollars (with no associated mining costs) vs. a relatively fixed money supply via gold. As has been discussed, gold has the advantage of not being truly fixed to accomodate some economic expansion, but as you have pointed out, the best system is not a "gold standard," but a simple free market in monetary options.
Thanks for the thoughts, here are my counter-thoughts:
1. Rhys: "The advantage of a gold standard, is that it can react, albeit slowly, to changes in demand for money. When the price of gold goes up, so do production efforts. When the demand falls, so do production efforts. This would not happen with a frozen dollar..." -- The frozen dollar standard does react to changes in the demand for money through price deflation. The same stock of money can buy an increased amount of goods by gaining in value, meaning that the real supply of money increased even though the nominal amount stayed the same. Same goes for the increased demand due to wanting to hold larger cash balances. Since more cash is being withheld from spending, consumer prices will have to fall to accomodate the lower level of 'spending' dollars. This price mechanism for adjusting the real supply of money is just as valid as the gold miners bringing more supply; it's just the other side of the equation, demand, doing the adjusting.
2. Gocrew: "Without government forcing us to accept its bills as legal tender, the market would quickly look for alternatives. Gold has traditionally won out, but the market could choose anything. I've heard some argue that platinum would be the new gold in a free market. You could even have bills tied to several different commodities as a hedge against sudden supply shocks." -- Well, yes, the market can choose anything, but the market always seems to choose commodity standards, as you would predict. The problem is that the unfettered market will never choose the commodity with the smallest resource cost; in fact, Austrians often ridicule fiat moneys by saying "Who would want to accept a piece of paper instead of a nice shiny gold coin?" The platinum standard would drive platinum out of the economy, the gold standard would drive gold out, and a commodity basket standard would drive that much in commodities out of the market. Any good that is monetized necessarily will cease to be used as an end to a consumer's want. Near worthless paper is better than gold because taking the necessary amount of paper out of the economy for monetization is a fraction of the cost of taking out the necessary amount of gold, platinum, or silver. So, why does the market not choose the most economical route of providing paper money? Ironically, it's because of the paper's cheapness. I think some French economist had said that he would let everyone have the right to print paper money so it could return to its intrisic value: zero. Competition in money thus works in the opposite direction of competition of other goods: the market will tend towards the commodities that have a higher cost of supply expansion and a higher value rather than towards a cheaper cost. Markets work best because they always strive to cut costs. But the market for the medium of exchange searches for ways to increase costs because a decreasing cost of obtaining the medium eventually will lead to its devaluation and ultimate destruction.
To me, a government monopoly on providing a medium of exchange is the only way to solve the commodity-resource cost/paper-devaluation conundrum, but only given certain rules. Rule 1: Provide enough dollars at the outset to avoid inflating later, i.e. don't try to represent a $10 trillion economy with a $10 bill. Rule 2: Do not print any more new money. If money comes in unusable from a bank or person, replace it only. Rule 3: Either enforce 100% reserve banking or do not bail out banks that fail on their fractional reserves. I prefer the former because it will prevent the private creation of money titles that lead to the boom/bust cycle, but at the very least do not create a central bank to bail out its member banks. If these rules are not to be followed, I would rather have the more costly commodity standard than the inherently unstable "ajustable paper standard" (as opposed to the frozen paper standard).
You are positing a system of rules for the government to follow that you know it will not; cannot. You wish to empower the state with the authority to force individuals to accept worthless paper, and yet expect that same state to not abuse the privelage of printing money -- when throughout history, this has never been the case. You are positing a central-planning scheme. Furthermore, you err in the suggestion that all gold is currently "used" in some fashion other than as a store of wealth. The vast bulk of gold is held as an investment, not used in circuit boards or as jewelry, etc. Money is the most commonly accepted means of exchange. It is only pieces of paper when imposed by gunpoint. I don't think that's very moral, even if we were ruled by the Philosopher Kings that would be needed to not abuse the frozen-dollar standard. I enjoyed considering your question from a hypothetical, purely economic standpoint, but the actual imposition of it would be tyrannous and doomed to fail because man's nature is not perfect, and power is corrupting.
Jason Dean:
I never believe I said that all gold is used in a purely non-monetary or non-hedged use. Some is used for consumer products and some is used as a hedge against inflation. What I said (or meant) was that a frozen paper standard would free up all gold used as an inflation hedge for consumer use. As for not being able to follow the rules, government can follow simple rules when given simply. If a constitutional amendment stating that the amount of Federal Reserve Notes (or dollars) as of the date of the amendment's adoption will remain frozen and cannot be printed except for replacement purposes and no emergency measure could be invoked to print more, then it would be easy for the government to follow that rule. Also, include a provision that says that the Secretary of the Treasury has to personally sign all printing orders for replacement and that any holder of a dollar has standing to sue the Secretary if they believe there is unauthorized money printing. As I said, the imposition of a frozen paper standard would have to invoke clear language and not allow any wiggle room. I would vote yes on a clear amendment, but no on any amendment that, say, includes the printing of money for "emergency" purposes. In the meantime, the gold standard is second-best in my eyes.
Second-best? To what? A frozen dollar?
First most dollars today are in digital form, which is even cheaper than printing paper. So, if you really want cheap, you only have money in encrypted chip format. Then you sell storage devices, like flash memory chips embedded in cards for digital currency transactions. Then the government only needs a desktop to create all the currency you could want.
Second, the government is not like a machine, it is like a non-binding oral agreement. It doesn't matter how simple the instructions. The Constitution is pretty simple, and Ron Paul (money bomb November 5) and maybe only 2/3 of Supreme Court Justices have ever even read it. So, even if you could make it simple enough, which I doubt, someone somewhere would convince someone somewhere that the rule was anachronistic or ill-informed or unecessary. Then you would be in the position of of trying to convince the government bureaurocrats that you know better than them what the rule is and how it should be interpreted, which always works really well since the government has a vested interest in siding with the governed.
But, like I said. The supply of money should fluctuate with demand as well as with the interest rate. Why are you so opposed to a currency that has a production cost? Why is it so important for the government to regulate the money supply? I'm not implying anything, but I think if you can answer these questions, the debate would be furthered.
lboetcher, it's not that the government finds it difficult to follow rules due to their complexity; very often it simply does not want to follow them because they hinder its activities.
Here's a nice little rule though; freeze the nominal wages of all bankers, and see then if they engage in inflationary activities.
Jason Dean: JonBostwick:Today people can not retreat to gold because its taxed differently than the Dollar. Also, it is technically illegal (I'm pretty sure) to transact business in gold. Correct me if I'm wrong.
brianewart: I am rather sure that this is incorrect. The Dollar is a Federal Reserve note, meaning it is the only currency that is backed by the government and that you can be FORCED to accept as payment (essentially). If you sue someone, you cannot request that your damages be paid in gold dubloons, for example. However, you are free to contract to exchange gold for goods and services as you see fit. You will be taxed based on the dollar-value of the gold, and will prob. need to hire a good tax attorney if you intend to do this on a large scale. It is in no way illegal. The gold isn't "currency," as far as the government is concerned, your transaction would essentially be a barter -- one good (gold) for another.
I am rather sure that this is incorrect. The Dollar is a Federal Reserve note, meaning it is the only currency that is backed by the government and that you can be FORCED to accept as payment (essentially). If you sue someone, you cannot request that your damages be paid in gold dubloons, for example. However, you are free to contract to exchange gold for goods and services as you see fit. You will be taxed based on the dollar-value of the gold, and will prob. need to hire a good tax attorney if you intend to do this on a large scale. It is in no way illegal. The gold isn't "currency," as far as the government is concerned, your transaction would essentially be a barter -- one good (gold) for another.
Unfortunately, I'm fairly certain that the above is incorrect.
On December 31, 1974, Public Law 93-373 removed restrictions on a person "purchasing, holding, selling, or otherwise dealing with gold." However, the the Treasury secretary at that time opined that the law "did not repeal or alter the so-called Gold Clause Resolution of 1933 (31 U.S.C. 463). The Resolution prohibits any contractual provision which purports to give the obligee the option of requiring payment of the obligation in money or a specified amount of gold. Deposit contracts which purport to give the bank's customer such an option are therefore rendered legally unenforceable by the terms of the Gold Clause Resolution."
Source: http://www.fdic.gov/regulations/laws/rules/5000-200.html
So unless this has been overturned since, it seems that making contracts in the alterantive currency of real money (gold) is illegal in the U.S., or, more accurately, the contracts are unenforceable.
There is a humorous account in Rothbard's Conceived in Liberty of an attempt by Massachusetts to implement something like your frozen dollar. It's humorous because they actually printed the pledge not to print anymore notes on the face of the notes. Of course they broke it after only a few months.
After giving it some more thought after some cogent criticisms, I believe that the frozen paper standard would be superior, yet no government would really ever try it for any period of time, as per DBratton's anecdote. The problem is that government does have the power to enforce legal tender laws and to tax, so any inefficiencies in production and security of the notes and excess inflation over other possible competing currencies are not detrimental to anyone in the government. The best way to proceed with monetary reform would be to first abolish the legal tender laws and all laws that currently forbid contracting in other currencies/goods, esp. gold. This would put the dollar in direct competition with commodity monies, probably starting with big companies who could handle large contracts and proceeding to the rest of the population if the dollar couldn't be competitive. Second, if anyone wanted to buy it, the US government should sell the copyright to the US dollar to the highest bidder. If Dollar Corp. were to buy the copyright, they would most likely print enough money per year to cover expenses for production/counterfeit detection and whatever they could get away with for profit. For example, if the average growth in the monetary gold stock is 2% per year, then Dollar Corp. would need to print less than 2% of their dollar stock per year to maintain a competitive advantage. Also, any other company that wanted to offer competing paper dollars or electronic credit systems could enter the market armed with their own copyrights. Then we would see if paper money were truly competitive against commodity money. It might be that the resource cost of gold is more competitive relative to the costs incurred by paper money/electronic credit money producers and government paper dollars.
lboettcher:Second, if anyone wanted to buy it, the US government should sell the copyright to the US dollar to the highest bidder.
Banks would stop accepting the dollar if it's not backed by anything. And if private banks are printing their own banknotes - which they would be - then there would be no need for the dollar.
The government could try to back the dollar with its own gold; but banks that receive dollars will immediately present them for redemption rather than recirculate them, so the government's gold reserve will disappear quickly. Banks will be wanting to get into the fractional reserve game and you can only do that with notes you print.
It is fascinating that, except for your idea about selling the rights to the dollar, you have come up with the exactl method of currency competition that was used in the beginning of our Republic as well as Dr. Ron Paul's ideas for wresting control of our money supply from the grips of the Federal Reserve Bank. You are in essence suggesting that we legalize currency competition a.k.a. free market money. While I am 100% for it, I would be willing to bet federal reserve notes to gold that within 5 years we end up predominantly trading in currencies primarily backed by gold and/or silver (then if I lose, I can pay you in federal reserve notes, and if I win, you can pay me in gold and/or silver).
leonidia:You're wrong. Go to goldmoney.com.
It has already been mentioned on this thread that the problem with gold at this time is that you cannot legally enforce a contract that requires payment in gold. Contractees (typically banks) can simply hand you dollars instead of gold if they want to and there is nothing you can do about it.
I suppose you could do business on a cash only basis and require gold from your trading partners. Doesn't sound like a winning business strategy though.
"Banks would stop accepting the dollar if it's not backed by anything."
Money doesn't need backing of a certain commodity. All that is needed is the belief that I can use the dollar that I get for my goods and/or services to obtain other goods and services. After all, gold has nothing backing it up. People during the gold standard accepted gold coins with different engravings on it because they felt they could exchange that shiny coin for something else; they did not obtain it for its own sake. Banks will continue taking dollars after currency competition because they will still believe that they can use that money to obtain what they need to run the business. As for the fractional reserve part of your response, that is the second, but separate, piece to the monetary reform puzzle.
Another note on money needing backing. Let's say that I go into a village with 100 people who have 3 different commodities: corn, berries and cattle. They live in a barter economy where 10 bushels of berries = 1 cow and 5 bushels of corn = 1 cow. I tell the villagers that I have this paper money that they can use to simplify their lives. I tell them that $1,000 = 1 cow = 10 bushels of berries = 5 bushels of corn. Some villagers have all three commodities present at the time, some only two and some only one. I then distribute my dollars according to their basket of commodities and leave. Now, what is backing these notes? I officially said 1 cow = $1,000, but I gave it to people without cows based on the current exchange rates. So the money is not backed by any single commodity; it is backed by all commodities. In fact, it merely represents the ratio of commodities one has at any point. With a economy as advanced as ours, a certain amount of dollars can represent any basket of goods, just like $2000 in the barter economy can represent 2 cows, 1 cow and 5 bushels of corn, or 20 bushels of berries. What the villagers have now is a way to more efficiently calculate their transactions. And yes, all because I conjured paper fiat money out of thin air and established just one exchange rate for it.
First you imply that money doesn't need to be backed by anything, then you imply that it needs to be backed with a belief that it can be used as a medium of exchange. Both of these implications can't be correct.
In fact your second implication is more correct. Money needs to be backed by something. That is because money represents wealth. So it must be backed by wealth. Even in you small villiage example - money represented something. And as soon as you left, and calculation was more accurate, I would guess that the relative demand for those commodities and the money floated relative to each other. Sometimes cows were up, sometimes down, sometimes berries were up, sometimes down, sometimes corn was up, sometimes down, and sometimes all prices were up, sometimes down.
The part of your villiage model you left out is why would you give them currency? Were you claiming to play the part of the benevolent Fed? Certainly, if they found value in what you were giving them, they would buy that currency from you - and you would sell it to them. But regardless - a currency without backing is no currency. Gold is backed by 2000 years of belief that others will be willing to trade for it. This does not prove future value, but it represents some degree of backing that at least someone else will want it when you are ready to trade in the future.
lboettcher:Let's say that I go into a village with 100 people who have 3 different commodities: corn, berries and cattle. They live in a barter economy where 10 bushels of berries = 1 cow and 5 bushels of corn = 1 cow. I tell the villagers that I have this paper money that they can use to simplify their lives. I tell them that $1,000 = 1 cow = 10 bushels of berries = 5 bushels of corn. Some villagers have all three commodities present at the time, some only two and some only one. I then distribute my dollars according to their basket of commodities and leave.
Not sure what you mean by this. Do you show up with some paper, tell them that the piece marked "$1000" is worth a cow, and then try to exchange it for a cow? If so, why would the cow owner not laugh in your face?
You can't just "conjure money out of thin air". Google for Mises' regression theorem.
lboettcher:Money doesn't need backing of a certain commodity.
It does if you want banks to accept it.
Banks will be wanting to exchange any bank notes they get payable on other banks for gold from those banks so that they can print two or three times that amount of their own notes. This means unbacked notes won't be accepted by merchants either because the merchants' banks won't accept them. So employees won't want the unbacked notes for wages. And so on.
I said that money does not need to be backed by a "certain commodity," just by the belief that it can be exchanged for any commodity/service. Paper money is not just a certain amount of gold. It is also a certain amount of wheat, janitor's services and tvs. But my whole point was that a frozen paper standard was superior to the gold standard because it's a fraction of the resource cost. But gold and silver emerged as money because man, in its 2000 years of practice, has not found a way to monetize a cheaper commodity such as paper because of the fear that paper notes would be increased ad nauseum and their value destroyed. As for playing the benevolent Fed, the Fed is not a benevolent institution. It's goal was not to provide a cheaply made currency, fix an exchange rate so it represented wealth and leave the masses alone. It's goal was to inflate the currency deliberately under the guise of monetary policy, which is a redistributionist and immoral policy.
No, I'm not exchanging it. I'm providing the money to the villagers based on their wealth at the moment so they can get out of barter. As for Mises's regression theorem, I did not violate it because I set an exchange rate for the fiat dollars and distributed the fiat dollars according to the exchange rates that were present in the economy. People knew what a dollar was worth because they knew what a cow was worth relative to other goods.
lboettcher:I said that money does not need to be backed by a "certain commodity," just by the belief that it can be exchanged for any commodity/service. Paper money is not just a certain amount of gold. It is also a certain amount of wheat, janitor's services and tvs. But my whole point was that a frozen paper standard was superior to the gold standard because it's a fraction of the resource cost. But gold and silver emerged as money because man, in its 2000 years of practice, has not found a way to monetize a cheaper commodity such as paper because of the fear that paper notes would be increased ad nauseum and their value destroyed. As for playing the benevolent Fed, the Fed is not a benevolent institution. It's goal was not to provide a cheaply made currency, fix an exchange rate so it represented wealth and leave the masses alone. It's goal was to inflate the currency deliberately under the guise of monetary policy, which is a redistributionist and immoral policy.
I dont go for this longing for a workable fiat system in the name of "efficiency". If we actually had a free market for currency we might have some very interesting commodity money, it would definately not be a free market gold standard. We might trade with electricity coupons, bandwidth, phone time.
lboettcher:No, I'm not exchanging it. I'm providing the money to the villagers based on their wealth at the moment so they can get out of barter. As for Mises's regression theorem, I did not violate it because I set an exchange rate for the fiat dollars and distributed the fiat dollars according to the exchange rates that were present in the economy. People knew what a dollar was worth because they knew what a cow was worth relative to other goods.
So now the guy that had a cow has a cow and a piece of paper marked "$1000"? And when someone comes along and offers him another piece of paper marked "$1000" and asks for his cow in return...again, why would he make that exchange? What you're suggesting makes no sense. At all.
So with the Frozen Dollar Standard you are still using a fiat system, but just enforcing 100% reserve rules? Interesting. One problem I have with a representative currency is that you need to store all that "representative" somewhere. The current amount outstanding of total currency and coin is $1,039,297,466,081.00 according to the "U.S. Currency and Coin Outstanding and in Circulation" report from Dec 2007 (http://www.fms.treas.gov/bulletin/b2007-4uscc.doc). I don't know if that includes foreign investments or not. Gold ended today at $878.05 an ounce. At this price you would need 1183642692.422 ounces, or 33,555.705 metric tons, of gold to back all U.S. currency in circulation.
According to the World Gold Council (www.gold.org) as of 2001 the total amount of gold mined in the world is 145,000 tonnes. According to Wikipedia the US has a total gold reserve of 8,133.5 tonnes as of 2007. So the US would have to find 25422.205 tonnes of gold to add to it's reserves or revalue the US dollar so that $3622.5 equals an ounce of gold.
That's the problem with using a commodity...you have to store all that stuff someplace. Another problem is that the amount of gold, or any other commodity like silver or platinum, that exists on the planet is finite. Someday we will mine all of it out and then there will be no more new gold to add to the reserves.
I've been wondering if there is some way to back the currency with something less "real", like the GDP. The current US GDP is $13,970,500,000,000. Couldn't you say that one US dollar is equal to a percentage of the GDP? I mean sure, you can't walk into a bank and ask to cash out your percentage of GDP...but it still means the currency is backed by a real asset. Can anyone think of anything else that would work besides gold or another commodity?
lboettcher: Another note on money needing backing. Let's say that I go into a village with 100 people who have 3 different commodities: corn, berries and cattle. They live in a barter economy where 10 bushels of berries = 1 cow and 5 bushels of corn = 1 cow. I tell the villagers that I have this paper money that they can use to simplify their lives. I tell them that $1,000 = 1 cow = 10 bushels of berries = 5 bushels of corn........And yes, all because I conjured paper fiat money out of thin air and established just one exchange rate for it.
Another note on money needing backing. Let's say that I go into a village with 100 people who have 3 different commodities: corn, berries and cattle. They live in a barter economy where 10 bushels of berries = 1 cow and 5 bushels of corn = 1 cow. I tell the villagers that I have this paper money that they can use to simplify their lives. I tell them that $1,000 = 1 cow = 10 bushels of berries = 5 bushels of corn........And yes, all because I conjured paper fiat money out of thin air and established just one exchange rate for it.
If you are telling them that the paper money is worth a certain amount of a certain commodity, then you are not using "fiat money"...you are using representative money and just using cows/berries/corn instead of gold/silver. For it to be fiat money you need to give it value based on a "fiat" by the government...the dollar has a certain value because they say it does.
The only real advantage I can see for FDS over Gold (or really, an unregulated "money" market) is that it's easier to explain to non-Austrians and other people who don't know anything about monetary theory. I'm sure every member of these forums has had the experience of saying "gold money" in a conversation and having people look at them as though you annouced that you're the Prince of Jupiter.
The real problem with it is that it relies far too much on the Government, which has been historically mischevious and has failed to even follow it's own rules. A Constitutional amendment wouldn't be enough to force their hands—when was the last time the Constitution was considered when laws were introduced?