Economics Questions

Re: Advantages of Fiat Currency?

Autolykos — Thu, 20 Jan 2011 12:53:41 GMT

Bump. Kaz, I'd still like you to respond to this post.

Re: Advantages of Fiat Currency?

Isaac "Izzy" Marmolejo — Sat, 15 Jan 2011 06:28:00 GMT

Robert Murphy is pretty much an Austrian Economist... end of story...I do not see how people could debate that... If you look at his sources in his articles he has sources from Hayek, Mises, Rothbard, Hazlitt, Bastiat... And Murphy did get asked about his definition of sound money in his book in one of the online lectures he did and he replied that when major countries were on a gold standard, gold didnt behave like it does now and the only reason why gold is booming in market value is because people are afraid of the Fed's money printing

Re: Advantages of Fiat Currency?

Caley McKibbin — Fri, 14 Jan 2011 23:27:34 GMT

I would never argue that "store value" is important. However, that chart, whatever is measuring against, nonetheless shows gold having more "store value" than any fiat currency. Not only does fiat currency decline with rare interruptions, it declines unstably. Now subtract counterfeit law and time on a stopwatch how many seconds until toilet paper company stocks hit $0.

Re: Advantages of Fiat Currency?

Autolykos — Fri, 14 Jan 2011 19:54:18 GMT

Kaz, what is your source for that chart, and what is being denoted on the vertical axis?

Re: Advantages of Fiat Currency?

Kaz — Fri, 14 Jan 2011 19:41:13 GMT

Note the years of fluxuation. Gold is terrible money except when it is money.

Exactly like Murphy's chart in the article I mentioned, yours is meaningless fallacy, and nobody with a grain of intellectual honesty should use it:

You are listing the price of gold IN DOLLARS...when dollars were fixed to the price of gold, by definition.

No matter how wildly the value of gold fluctuated from 1780-1974, its price in dollars was going to chart as a flat line, because the dollar was DEFINED as a certain weight of gold.

Re: Advantages of Fiat Currency?

Kaz — Fri, 14 Jan 2011 19:37:55 GMT

Part of gold's instability is due to its use as an inflation hedge for worried money men. If it were commonly used as geld, its price would likely be much more stable, since it would depend mostly on how much was in a given area at a time(much like the idea of the dollar's value fluctuating rapidly is absurd). The fact that there's only one known bubble under a (more or less?)true gold standard and that can be traced to a huge amount of gold entering the Netherlands at once attests to its stabilizing influence. Not to say commodity money's infallible, but it's better than paper by a long shot.

When gold WAS used as currency, its value fluctuated even more. There were far more than one gold value bubble in history...in fact, they may have been the rule, not the exception. The Civil War was triggered (though not caused) by the economic trauma of a series of gold and silver price bubbles and collapses in the 1840s and 1850s. The Crime of '73, the Cross of Gold, was caused by another such pair of bubbles/collapses in gold versus silver. The Spanish Empire was brought down TWICE by a collapse in gold's value. Its fluctuation also contributed to the setting of the debate over Scottish free banking in the early 19th century.

Look at this chart of the value of gold over the past 700 years:

Even if we take the effort to quantify the value of gold with an increasing grain of salt as we go back farther into history, it's clear that it's not been a storehouse of stable value.

Note that Robert Murphy's chart in "defend the gold standard" is absolute fallacy, as it charts the price of gold IN DOLLARS over the past century, and of course the price of gold was TIED to the dollar for 70% of that time, so the wild fluctuations of its price are hidden by first the gold standard, then breton woods, rendering his chart meaningless.

Re: Advantages of Fiat Currency?

Caley McKibbin — Fri, 14 Jan 2011 06:36:15 GMT

As I have said in every past thread about paper money, the "advantages" of fiat currency are always given with the assumption that existing problems do not exist. The supposed disadvantages of commodity are necessary features of market money. That cost of extraction and transaction is what allows it to be used without counterfeit to oblivion or planned wealth redistribution. To deem that a disadvantage is like deeming it a disadvantage to have to borrow money at 5% to buy something with a return of 10%. 5% return is better than 0%. The "advantage" of low cost creation of electronic money is only an advantage for those gaining net over depreciated purchasing power.

As for price stability, here's a no-brainer...

Note the years of fluxuation. Gold is terrible money except when it is money.

Re: Advantages of Fiat Currency?

BioTube — Fri, 14 Jan 2011 04:30:29 GMT

Part of gold's instability is due to its use as an inflation hedge for worried money men. If it were commonly used as geld, its price would likely be much more stable, since it would depend mostly on how much was in a given area at a time(much like the idea of the dollar's value fluctuating rapidly is absurd). The fact that there's only one known bubble under a (more or less?)true gold standard and that can be traced to a huge amount of gold entering the Netherlands at once attests to its stabilizing influence. Not to say commodity money's infallible, but it's better than paper by a long shot.

Re: Advantages of Fiat Currency?

Kaz — Thu, 13 Jan 2011 22:42:56 GMT

Having a sound money—meaning a money for which the value doesn’t bounce around erratically, and doesn’t lose its purchasing power over time—makes all of these activities much more orderly.

And what money, precisely, are you imagining this to be?

Gold fluctuates wildly in price and value...as do most commodities. It's not magically exempt. It also tends to lose its value over time, as does every other commodity.

Paper money, in fact, tends to retain its value longer than gold, and to be more stable in value than gold. In the past decade, the dollar rose declined3% per year in value for the first five or six years, then stabilized in value, actually increasing slightly in value for the past three. Meanwhile, gold doubled in value, fell by half of that, shot up even higher, fell back...a roller coaster of MULTIPLES of its price of ten years ago.

Imagine if you were trying to deal with buying bread, or investing in something expensive like a house, car, or stocks, when you had to worry about the price not only multiplying over the course of a few months, but even changing dramatically between when you last checked and when you sign the papers for the investment.

-Robert Murphy

He's just a Rothbardian, not a real Austrian. I'd take him seriously on pretty much anything but monetary theory, based on fallacies like the above.

Re: Advantages of Fiat Currency?

Bogart — Thu, 13 Jan 2011 15:28:14 GMT

The lack of alternative uses of fiat money is a disadvantage. The alternate uses of a currency tend to help regulate the value of commodity money. For example,gold is commonly used in jewerly and dentistry. As the price of gold (The buying power of gold currency) goes up then less will be used for these alternate uses thus helping to drive the price back down. The same is true for a drop in the price of gold or it buying power, the folks with alternate uses could bid back up the price by using more of it. Contrast this with a fiat currency, as the creator makes more thus decreasing its purchasing power, there are no alternate uses keeping the price up. So the purchasing power drops more rapidly. The same is true on the other side, without alternate usese the fiat currency can as in our most recent "Great Recession" suddeny increase and have no alternate uses to add that supply to keep the buying power down.

The issue here is your definition of waste. Waste according to Rothbard is just any product or service that does not satisfy a consumer demand. It has nothing to do with the technical mechanism or byproducts of creating a product or service.

Re: Advantages of Fiat Currency?

AdrianHealey — Thu, 13 Jan 2011 13:23:25 GMT

Isaac "Izzy" Marmolejo:

Having a sound money—meaning a money for which the value doesn’t

bounce around erratically, and doesn’t lose its purchasing power over

time—makes all of these activities much more orderly.

I would change a minor issue: even in a free market with a gold standard the value of money could also change - go up and go down - depending on consumer preference regarding money. Obviously, though, this wouldn't be bad because it's consumer based and probably not as much as with the current monetary system.

Re: Advantages of Fiat Currency?

BioTube — Thu, 13 Jan 2011 05:41:30 GMT

There's one genuine advantage for the masses - fiat currency is infinitely subdivisible, so whenever the money supply began to squeeze trade, all that need happen is that a new subdivision is declared and new coins designed rather than the market needing to come up with a supplemental money(such as silver to gold). Of course, this smashes one of the bigger arguments of the inflationists.

Re: Advantages of Fiat Currency?

bionic mosquito — Thu, 13 Jan 2011 05:33:16 GMT

aelephant:
but few resources that address its advantages

Advantages, for whom?

Spending without taxing

Increased state power

Ease of war

Transfer of wealth by stealth

Incentive to submit to debt, benefiting creditors

Erode savings, requiring continued work and / or dependence on the state

Free raw materials for the banking industry

Is that enough advantages?

Re: Advantages of Fiat Currency?

Caley McKibbin — Thu, 13 Jan 2011 04:43:44 GMT

one tiny advantage of fiat money is that there are no commodities in the economy that are 'wasted' on being used simply as exchange goods.

One tiny advantage to having no legs is no dragging on the ground when you walk.

Re: Advantages of Fiat Currency?

yoshimura — Thu, 13 Jan 2011 04:40:57 GMT

A fiat currency can be more fun because you can gamble your money when you deposit it in a fractional reserve bank.. it could turn out to be a positive investment!