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Case for Gold; Debating my Professor

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gfitzy123 Posted: Thu, Nov 8 2007 2:25 PM

So, our class erupted into a gold-standard discussion the other day, and being an Austrian-leaning student myself, couldn't find an rebutal to my professor's arguement against the gold standard.

His arguement, essentially: "we don't have enough gold in the world to back every dollar"

Can someone please refute his statement and explain it in depth?

Can someone please explain in depth how we could transition from our current fiat monetary system to a gold standard?

 

If I am correct, we must first deflate our money supply, and under the gold standard, prices will fall and our purchasing power would increase...

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Harksaw replied on Thu, Nov 8 2007 2:53 PM

 http://mises.com/forums/t/303.aspx

 

I asked a similar question here. Basically the option is to have semi-fiat, semi-gold dollars, starting wtih $1 as 1/3000 of an ounce. Stop printing more money and gradually work to get the dollar on parity with the market value of the gold in our reserves.

And I think that were the US to try to move back to the gold standard, the market value of gold would drastically increase.

 

I was talking with one of the heads of the Libertarian Party the other day, and he told me it wouldn't be feasible to go back to the gold standard because it would make the cost of products that requrie gold (like electronics circuit boards) about five times more expensive. He thought another metal would be better.

  

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Gold can be divided into miniscule increments. The "we don't have enough" argument is absurd on the face of it. Theoretically, one ounce of gold would be "enough." Certainly, 10,000 ounces would be. And there's a lot more than that.

The dollar could be pegged to gold and redeemable in gold, by basing the value of the dollar on the total money supply as it related to the government's gold reserves. It would not have to be $35 to 1 oz of gold.

But ultimately, arguments for a gold standard are weak. Instead, you should argue for a complete separation of economy and state, i.e. a free market in money. The politicians can't be trusted with a printing press, even with a gold standard. 

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Agreed.

We don't need a gold standard, we need no more government mandated currencies.

Peace

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gfitzy123 replied on Thu, Nov 8 2007 10:30 PM

Thanks guys, really helpful. Is there any free literature regarding the theory of competitive currencies? I'd like to learn more about how it would work.

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gfitzy123:

Thanks guys, really helpful. Is there any free literature regarding the theory of competitive currencies? I'd like to learn more about how it would work.

 

I don't know of any literature that specifically talks about how a competetive currency market would work (I'm sure there is some, but I don't know of any), but here are some free full-length books courtesy of Mises.org:

http://www.mises.org/journals/qjae/pdf/qjae6_4_10.pdf

http://www.mises.org/books/goldpeace.pdf

 

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gfitzy123:

Thanks guys, really helpful. Is there any free literature regarding the theory of competitive currencies? I'd like to learn more about how it would work.

 

I'm sure there's some literature out there discussing free-market currencies, but I'm not aware of any. I would recommend you check these out, though.

http://www.mises.org/books/goldpeace.pdf

http://www.mises.org/journals/qjae/pdf/qjae6_4_10.pdf

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gfitzy123:
Is there any free literature regarding the theory of competitive currencies?
 

It's history, not theory, but Rothbard's A History of Money And Banking in the United States has a section on Suffolk Bank, which was a private bank that took on the role of central bank in New England in the 1820's. The bank was created by cooperating merchants and banks to act as a clearing house for the myriad of competing banknotes being issued by banks all over New England. It ended up powerfull enough to impose reserve requirements on all the other banks and brought about a measure of currency stability. The section on "A Free Market Central Bank" starts on page 115.

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Although there would need to be a Constitutional amendment to allow it, couldn't you just select a "basket" of metals, including gold and silver (copper, nickel, etc), and define the currency unit against a fixed weight of these metals?  The relative values would be arbitraged by the market to provide a relatively stable store of value.  Wouldn't it be much easier to "revalue" against the large quantity of precious and semi-precious metals?

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gfitzy123:
Thanks guys, really helpful. Is there any free literature regarding the theory of competitive currencies? I'd like to learn more about how it would work.

It's history, not theory, but Rothbard's A History of Money and Banking in the United States has a section on Suffolk Bank, which was a private bank that took on the role of central bank in the 1820's. Suffolk bank was founded by cooperating merchants as a clearing house for the myriad of banknotes that were circulating. It eventually became powerfull enough to begin imposing reserve requirements on other banks and brought about currency stability in New England. The section "A Free-Market Central Bank" begins on page 115.

This post might get duplicated. I tried submitting it a little while ago and it got intercepted by the spam filter. Don't know why. ^shrug^ 

 

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couldn't you just select a "basket" of metals, including gold and silver (copper, nickel, etc), and define the currency unit against a fixed weight of these metals?  The relative values would be arbitraged by the market to provide a relatively stable store of value.

Wouldn't Gresham's Law make short work of such a system?
Would it be possible to know that the relative values of those metals have changed on the market, before people started getting rid of the overvalued metal and buying the undervalued one?

As for returning to the gold standard, I think I like the idea Ron Paul pushes - to make gold a parallel currency.

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Dangerous Ideas For Men:

Although there would need to be a Constitutional amendment to allow it, couldn't you just select a "basket" of metals, including gold and silver (copper, nickel, etc), and define the currency unit against a fixed weight of these metals?  The relative values would be arbitraged by the market to provide a relatively stable store of value.  Wouldn't it be much easier to "revalue" against the large quantity of precious and semi-precious metals?

 

This is central planning. Money should exist without government interference. It should simply be, as it was, the most commonly accepted medium of exchange. But if the government is to be involved (and if it is, it will always cheat), why a "basket"? Define the dollar in terms of gold. Silver certificates, non-dollar-denominated, could also be issued, as well as platinum certificates (and coins), etc.

Also, as the commenter above me said, I don't understand how a basket would work without a price fixing mechanism. The bimetallic standard ushered in by the silver fusionists was a government boondoggle that ultimately led to the Fed. 

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On the issue of 'central planning': 

A civil government has to define what 'store of value' it accepts as legal payment for taxes/fines/etc, so it has to be involved at least that far.   It wouldn't need to be involved in any 'planning', but only in enforcing contractual obligations and misrepresentations of value on the part of private banks.  The U.S. consitution already defines gold and silver as viable metallic stores of value.  An amendment would be required to allow anything else.

On the issue of Gresham's law: 

If a 'dollar' were defined as a particular weight of gold plus a particular weight of silver plus a particular weight of platinum, etc.,  it seems that these metals could all vary on the markets due to mining, hoarding, etc. but the overall value of the 'dollar' would be more stable than any of the individual metals themselves.

I don't see how Gresham's law even applies here (although I could stand corrected).  Please explain why.

I can understand wanting other currencies (gold only) and I'm not opposed to that, but I am trying to come up with a plausible alternative to convince people who have objections on the grounds of value stability and market manipulation.  If one can propose a plausible solution to these problems, one can rebut arguments which nitpick at details like this. 

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If a 'dollar' were defined as a particular weight of gold plus a particular weight of silver plus a particular weight of platinum, etc.,
 

Oh, sorry I misunderstood.
I thought you wanted something resembling bimetalism where a dollar was defined as a certain weight of gold OR a certain weight of silver.
I think you're right, Gresham's Law wouldn't apply to what you suggest.

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Torsten replied on Sun, Nov 11 2007 9:13 AM

JonBostwick:

We don't need a gold standard, we need no more government mandated currencies.

Do you mean something like this: http://www.systemfehler.de/en/neo/
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gfitzy123:

So, our class erupted into a gold-standard discussion the other day, and being an Austrian-leaning student myself, couldn't find an rebutal to my professor's arguement against the gold standard.

A good source about gold is the article Gold and Economic Freedom by none other than Alan Greenspan, former chairman of the Federal Reserve. It is contained in the book CAPITALISM: THE UNKNOWN IDEAL by Ayn Rand. Another good source to understand about gold is the movie Treasure of the Sierra Madre with Humphrey Bogart, and Walter Housten.Since gold is an element, and infinitesimally divisible, until you get to the atom, but that would be too small to coin, it can be coined to any size. Jason Dean points this out. For instance, gold is around $800 per ounce so you could mint 1/800 ounce coins, and 1/15 ounce silver coins. (These are approximate exchange rates made for easy calculations.)The problem is the $. It has no intrinsic value. The beginning of the Federal Reserve Act says, “An Act To provide for the establishment of Federal reserve banks, to furnish an elastic currency, …” An elastic currency is what we have now. Its value is tied to the faith that people have that they can use this currency and purchase something commensurate with their labor to get that currency. The numbers on an elastic currency are a variable. Suppose we divided everything by 10. DeGaulle did this in France after World War II. So gasoline would be $.30 a gallon instead of $3.00 a gallon. A $30,000 car would be $3,000. Wages of $2,000 a month would become $200 a month. You can purchase the same commodities with the same labor. Incidentally That is what gasoline, and cars, and wages were 35 to 40 years ago. That will bring gold down to $80 an ounce, and silver to $1.50 an ounce. Let’s divide through by 1.5. That would bring gasoline to $.20 per gallon, a $3,000 car to $2,000, and $200 per month to $133.33, gold to $53.33, and silver to $1.00 per ounce. Through all of this the amount of gold and silver has remained constant, the only thing that changed was the numbers on the paper.35 to 40 years ago gold was $35 an ounce. We would have to divide 800 by 23 to get 35, approximately. This would bring an ounce of silver to .65 dollars. The rules which govern the value of goods in relationship to money are the same rules which govern the value of gold in relationship to silver. As there is more of one or the other in the marketplace will dictate what each can buy.The whole of life is to labor to provide food, clothing, shelter, and entertainment for ourselves. We exchange our labor for these things, either directly, by growing food, weaving cloth, chopping trees, and learning to play the banjo, or indirectly by exchanging our labor for money, then exchanging that money for food, clothing, shelter, and entertainment. Money is merely a medium.One of the things you want from money is a store of value, i.e. it will purchase the same amount of goods when you use it, as it did when you received it, even if it is forty years later. This does not happen with elastic currency, obviously.Inflation, or rather money devaluation, is a form of taxation, very well hidden. The value of a Federal Reserve Note is slowly being diminished by the government continually borrowing money, because it cannot tax enough to do all the activities in which it has become involved.A marketplace is filled with commodities. Gold and silver are commodities, even when used as the money of circulation. Men dig gold and silver from the ground. For this labor they are given coined gold and silver which is easier to use in the marketplace. The gold and silver is refined and minted to pay the next prospector. The coins are spent into circulation, and there they remain. They do not have to be returned to the ground with interest, as Federal Reserve Notes do, returned to the bank I mean. All Federal Reserve Notes in circulation, got into circulation by being borrowed.In physics, many theories are testes by plugging values approaching zero, and infinity to see if it will explode. Let’s try some extremes.Suppose tomorrow someone discover a gold mine that increase the world’s gold supply by a thousand fold. As more gold showed up on the market, the prices would begin to dwindle. As everyone’s coffers were filled and the demand declined, the miner would have to drop his price to sell it. This stuff takes room to store, and the more of it you have the more someone will want to take it away from you. The miner does not want to keep it around. He needs to move it.So in the natural marketplace as gold and silver increase in relationship the amount of goods and services available, it will take a little more gold and silver to get the goods and services. Gold and silver mining will decrease as the same labor will not get the same amount of goods and services. When the amount of goods and services available in the marketplace increase in relationship to the amount of gold and silver, then prices will decrease making the metals more valuable. This will then lead to an increase in mining gold and silver again.It is all about what you can get for your labor. The problem with paper money is that it does not cost any more to print a $100 note than a $1 note. It does require more labor to mine 100 ounces of silver than it does 1 ounce.If we are indeed on the paper standard, then the $100 note should be one hundred times the size of a $1 note. It would take more labor to print them. That would help to keep prices down. A couple of fives and tens would give you a pretty fat wallet. You would probably leave the $100 notes at the bank and carry receipts for them to trade in the marketplace. Then the recipient could take his receipt down to the bank and get his $100 note, or maybe just trade the receipt. This is the reason gold and silver certificates were printed. They were warehouse receipts.Paper money is negotiable paper. It is a legal document. A warehouse receipt is a legal document. It states what is stored, and where it is stored. A One Dollar silver certificate states: THIS CERTIFIES THAT THERE IS ON DEPOSIT IN THE TREASURY OF THE UNITED STATES OF AMERICA ONE DOLLAR IN SILVER PAYABLE TO THE BEARER ON DEMAND.The 1914 series Federal Reserve Note said it was redeemable in gold and lawful money. It did not say there was gold or lawful money on deposit for this note. When someone used a Federal Reserve Note to get gold then someone had a gold certificate for which he could not get his gold. Gold and silver were the money, not the certificates. The difference in the amount of gold in store and the certificates grew to such a point that Roosevelt had to shut down the banks, to prevent a run on them, people wanting their money. The he called in all the gold, and gold certificates, and basically made gold illegal as a medium of exchange in the marketplace. You could still own gold in jewelry, or numismatic coins, but the common gold coin used in circulation became illegal.The 1934 series Federal Reserve Note said it was redeemable in lawful money. Pay attention here. If it is redeemable in lawful, what can it not possibly be? Lawful money, or there would be no need to redeem it. As the number of Federal Reserve Note in circulation increased beyond the amount of silver in store, the limitation was removed, and finally the Federal Reserve Note only said it was legal tender, no notice about it being redeemable in anything.So now that gold and silver have been removed from circulation, the value of the U.S. Dollar is measured against for what it can be redeemed. The amount of U.S. Dollars compared to the amount of goods and services the U.S. offers in the marketplace is quite large.Since the money is printed, it makes you wonder why the government does not print its own money, and not have to borrow it. It did once. The paper would just say U.S. Note instead of Federal Reserve Note. At least we would save the interest payment.Due to the war, large amounts of money are being borrowed by the government and spent on the production of goods that will not be available in the marketplace, well maybe the black market. The wages of the workers of these productions will be spent in the marketplace. Also for a good number of years much of our manufacturing has closed down in this country, so the amount of goods we produce has decreased. Our currency is tied to our production. A lot of money, and few goods, and prices are high. Go figure.

I think the reason we went into Iraq was not over the oil, gas is nearly three times the price, but for the gold. The two countries still on the gold standard were Iraq, and Iran. Soon after W did his little charade in a flight suit to announce the war was over, it was announced on the news that Iraq was now a member of the International Monetary Fund. We got Iraq in the usury monetary system. We attacked Iraq and Afghanistan first because they were pretty much helpless, no weapons of mass destruction, and they are on opposite sides of Iran. How convenient.

gfitzy123:

Can someone please explain in depth how we could transition from our current fiat monetary system to a gold standard?

The first step in the transition from fiat currency to any standard is to get rid of the Federal Reserve Bank, since it is the source of the fiat money.

 

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Although there would need to be a Constitutional amendment to allow it, couldn't you just select a "basket" of metals, including gold and silver (copper, nickel, etc), and define the currency unit against a fixed weight of these metals?  The relative values would be arbitraged by the market to provide a relatively stable store of value.  Wouldn't it be much easier to "revalue" against the large quantity of precious and semi-precious metals?

The Constitution for the United States of America

Article 1

  Section 8

The Congress shall have the power To coin money, regulate the value thereof, and of foreign coin, and fix the Standard of Weights and Measure;

  Section 10

No State shall make any Thing but gold and silver Coin a Tender in Payment of Debts;

 

You see, Dangerous Ideas for Men, we do not need an amendment, it is in the body of he Constitution. No body seems to pay attention to this, why would they pay attention to an amendment?

 

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Ed D. replied on Sun, Nov 11 2007 11:24 PM

I suspect that what your professor meant was that since the supply of gold is limited there is not enough gold to back an infinite number of printed , worthless paper fiat dollars thus not allowing for an infinite , unaccountable governmental spending spree.  He's right. However , his desire to continue just such a system , as we now have , is wrong.

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Torsten replied on Mon, Nov 12 2007 12:28 PM

Ed D.:
I suspect that what your professor meant was that since the supply of gold is limited there is not enough gold to back an infinite number of printed , worthless paper fiat dollars thus not allowing for an infinite , unaccountable governmental spending spree.  He's right.
Now that sounds like an excellent responseWink. Now I wonder, whether there would be enough paper for doing something like that....

Perhaps one should take this further and ask, what the results of "creating more money" is and the government spending spree by that... Any scenarios.

 

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Jason,

 How would 1 ounce of gold be enough on the gold standard? If 300 million people all wanted to exchange their money for the gold we wouldn't be able to break in small enough pieces. You would have to give everyone a speck of gold dust which would be rediculous. 

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Trianglechoke7:

Jason,

 How would 1 ounce of gold be enough on the gold standard? If 300 million people all wanted to exchange their money for the gold we wouldn't be able to break in small enough pieces. You would have to give everyone a speck of gold dust which would be rediculous. 

 

Yeah. I was being a bit hyperbolic. But 261.6 million ounces of gold is more than enough. That's what the Treasury has on hand. Even if this is an outright lie, and they only have 1/10 of that, or even 1/100, it's enough.

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 Sorry I wasn't clear.  I meant an amendment that allowed backing a currency by other metals than "gold and silver".  I hope that we all return to paying attention to the Constitution.  That's an important part of the overall argument. 

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Torsten replied on Tue, Nov 13 2007 4:38 AM
What else then preciouse metals could be used as currency?
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Torsten:
What else then preciouse metals could be used as currency.
 

Other metals which have widely recognized value could be combined into a multiple-metal currency unit.  Please read my other posts to understand the context. 

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Paul replied on Tue, Nov 13 2007 6:17 AM

Trianglechoke7:
How would 1 ounce of gold be enough on the gold standard? If 300 million people all wanted to exchange their money for the gold we wouldn't be able to break in small enough pieces. You would have to give everyone a speck of gold dust which would be rediculous.

Yes, about 12.8 billion atoms of gold per dollar Smile - it would be ridiculous, but it is possible.   Though maybe you could encapsulate the gold in some sort of nanotech container (e.g., inside a Buckyball) to make coins without losing it, and the "tiny speck of gold dust" wouldn't be so ridiculous after all.

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Jason Dean replied on Tue, Nov 13 2007 10:22 AM

Dangerous Ideas For Men:

Other metals which have widely recognized value could be combined into a multiple-metal currency unit.  Please read my other posts to understand the context. 

 

But why? Why not have a free market in money? Why not revert to money's origins as the most commonly accepted means of exchange? If the government must exist, and it must be funded, then it can accept gold, or silver, or gold or silver, or whatever. But I think history shows that a government-controlled or defined currency cannot avoid abuse, debasement, and ultimate destruction. 

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SR8216 replied on Tue, Nov 13 2007 11:35 AM

Good afternoon,

 I dont know if this has been offered as a solution yet but, Rothbards book, The Case for the 100% Gold Dollar does show how to convert all the current dollars into gold.

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AC_Chu replied on Tue, Jul 21 2009 7:07 PM

Really?  That's the argument your professor raised against gold as money?  What kind of school do you go to? 

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Torsten replied on Wed, Jul 22 2009 9:34 AM

Jason Dean:
But why? Why not have a free market in money? Why not revert to money's origins as the most commonly accepted means of exchange? If the government must exist, and it must be funded, then it can accept gold, or silver, or gold or silver, or whatever.
Why not start trading in with gold as currency? Something

I'am offering Mercedes 200D - Price: 3990 grams of Gold.

Why bother about paper money printed by others?

 

 

 

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Bostwick replied on Fri, Jul 24 2009 8:20 PM

Torsten:

Jason Dean:
But why? Why not have a free market in money? Why not revert to money's origins as the most commonly accepted means of exchange? If the government must exist, and it must be funded, then it can accept gold, or silver, or gold or silver, or whatever.
Why not start trading in with gold as currency? Something

I'am offering Mercedes 200D - Price: 3990 grams of Gold.

Why bother about paper money printed by others?

Gresham's law. The fact that legal tender is declared equal to gold has driven gold from circulation.

 

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Bostwick replied on Fri, Jul 24 2009 8:22 PM

Trianglechoke7:

Jason,

 How would 1 ounce of gold be enough on the gold standard? If 300 million people all wanted to exchange their money for the gold we wouldn't be able to break in small enough pieces. You would have to give everyone a speck of gold dust which would be rediculous.

Easy. Warehouse receipts.

Peace

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Trianglechoke7:

How would 1 ounce of gold be enough on the gold standard? If 300 million people all wanted to exchange their money for the gold we wouldn't be able to break in small enough pieces. You would have to give everyone a speck of gold dust which would be rediculous.

I often wonder why these gold conversations turn into there's only 1 ounce of gold or one dust particle of gold on the planet scenarios.  It seems to be more of a phantasy game than anything for mere entertainment.

"Do not put out the fire of the spirit." 1The 5:19
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ladyattis replied on Fri, Jul 24 2009 8:30 PM

If it hasn't been pointed out yet (or even if it has) the fact is this: the amount of gold is pointless. The fact is that the gold is just another commodity which is so commonly held as currency, that it's priced in relation to other commodities rather than itself because it's supply is relatively fixed at any given moment in time. Compared to unbacked currencies (tally sticks, wooden nickels, paper bills, and etc) it's viable on those grounds. Thus, prices will valuate no different than if we used unbacked analogs as the mechanism is the same (but without the perpetual artificial expansion of credit that accompanies unbacked currencies).

 

<rant> I swear people that are anti-gold are downright idiotic in terms of the theory of money that it makes me wonder if they even know what money *is* in the first place. </rant>

"The power of liberty going forward is in decentralization.  Not in leaders, but in decentralized activism.  In a market process." -- liberty student

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Bostwick replied on Fri, Jul 24 2009 8:33 PM

ladyattis:
<rant> I swear people that are anti-gold are downright idiotic in terms of the theory of money that it makes me wonder if they even know what money *is* in the first place. </rant>

They don't.

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AJ replied on Sat, Jul 25 2009 2:31 AM

gfitzy123:

Is there any free literature regarding the theory of competitive currencies? I'd like to learn more about how it would work.

The simple answer is, without legal tender laws, the free market would determine the best money system to use. In the absence of the government monopoly on money, the free market in money is guaranteed to serve consumer needs better for everything people look to money to do.

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scineram replied on Sun, Jul 26 2009 10:22 AM

JonBostwick:
Easy. Warehouse receipts.

You can hardly use warehouse receipts as cash. How in the world do you pay for the costs?

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scineram:

JonBostwick:
Easy. Warehouse receipts.

You can hardly use warehouse receipts as cash. How in the world do you pay for the costs?

The cost of what? Please be specific.

'Men do not change, they unmask themselves' - Germaine de Stael

 

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gfitzy123:
"we don't have enough gold in the world to back every dollar"

It doesn't work that way.

How much gold is there?

How many dollars are there?

Divide and keep it that way.  Use that ratio to define the dollar in terms of gold, and only create more money as more gold comes into either the government's treasury/mint, or the open market (depending on whether it's the government or the free market that has the power to coin money).

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scineram replied on Sun, Jul 26 2009 10:47 AM

A warehouse has operational costs. It even tries to make profit. Who is supposed to pay for this while the receipts are exchanged?

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malgratloprekindle:
Divide and keep it that way.  Use that ratio to define the dollar in terms of gold, and only create more money as more gold comes into either the government's treasury/mint, or the open market (depending on whether it's the government or the free market that has the power to coin money).

So you want to enact monetarist style inflation with a set percentage? I understand it may be difficult to conceptualize that a monetary supply need not expand because the point is to increase its purchasing power, not its overall abundance.

'Men do not change, they unmask themselves' - Germaine de Stael

 

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