Economics Questions

Re: Gold Standard versus Frozen Dollar Standard

Sweet Mercury — Wed, 09 Jan 2008 08:21:15 GMT

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?

Re: Gold Standard versus Frozen Dollar Standard

Jonas — Wed, 09 Jan 2008 00:14:11 GMT

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.

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.

Re: Gold Standard versus Frozen Dollar Standard

Jonas — Wed, 09 Jan 2008 00:10:08 GMT

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?

Re: Gold Standard versus Frozen Dollar Standard

Paul — Sun, 04 Nov 2007 06:44:28 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

Bostwick — Sat, 03 Nov 2007 00:57:28 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

lboettcher — Fri, 02 Nov 2007 17:19:08 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

lboettcher — Fri, 02 Nov 2007 17:15:04 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

DBratton — Fri, 02 Nov 2007 04:26:28 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

Paul — Fri, 02 Nov 2007 02:41:50 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

rhys — Thu, 01 Nov 2007 23:22:40 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

lboettcher — Thu, 01 Nov 2007 22:33:27 GMT

"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.

Re: Gold Standard versus Frozen Dollar Standard

DBratton — Thu, 01 Nov 2007 07:27:59 GMT

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.

Re: Gold Standard versus Frozen Dollar Standard

rhys — Thu, 01 Nov 2007 06:02:21 GMT

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).

Re: Gold Standard versus Frozen Dollar Standard

leonidia — Thu, 01 Nov 2007 05:14:51 GMT

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.

You're wrong. Go to goldmoney.com.

Re: Gold Standard versus Frozen Dollar Standard

DBratton — Thu, 01 Nov 2007 04:40:49 GMT

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.