To Fiat or Not To Fiat? That is the question!

Very good thread, I think most people have a very deeply ingrained opinion on this that they have never really thought through properly.

Another important point - a main currency in silver does not prevent inflation! If too many silver coins are issued it will occur just as regularly as it would with paper money. Precisely this happened after Trajan sacked Dacia - he coined the vast amounts of silver captured there, creating inflation.

 

Log in or Sign up to hide this ad.

Yes very informative!! Thank You!!

 

Moderns are shinier.

You're missing the original point. Everything is worth what people believe it's worth. This applies especially to money because almost everyone owns and uses it. The government can't assign any value whatsoever to it, they merely issue it. If the money contains its full value in precious metal then it will be stable relative the precious metal. This is exactly what has caused economic upheavals many times in history; a sudden revaluation in peoples' perception of the value of the metal underlying the currency. Such upheavals are extremely dangerous in modsernb times because even food comes from factories which are depenbdent on a solid economic system to function and the economic system is dependent upon money.

Gold has no inherent value or at least it doesn't have to be valued at any given rate. Just look at the price of gold since 2002 for proof. The value of the dollar has dropped only about 25% but gold is up more than 300%!!!

In 1935 the silver value of a brand new 1932-S quarter still being released by the FED was 6c. But guess what; people accepted this coin in payment for even more goods and services than they did similar coins a few years earlier. A 2007 states quarter had nearly 10c worth of metal in it but people didn't and don't value it more highly than a BU '32-S or any other silver quarter (in most cases).

The value of money is the net estimation of those who buy and sell it. Neither the value of the metal nor the will of the issuer have any direct impact on this estimation.

 

Yes, exactly. Inflation is not caused by debasement, debasement is the result of inflation. Inflation is caused by the perception that the money has less value and this is almost always the result of excessive money production caused by spending of the issuer in excess of collections.

Over the milinea governments have invariably debased the money through a series of moves in order to spend more than they tax. When silver circulated in this country there was a continual drop in bank reserve requirements. Banks couldn't have paid out silver and everyone knew it. But they continued to accept both paper and silver interchangeably because the perception was that silver was as good as paper and paper was as good as silver.

This is still true but now the coins are cu/ ni and the currency is multicolored. A hundred dollar bill won't buy what it usede to and will buy less in the future but try spending your 1963 hundred dollar bill and see if you get more for it.

Everything is about perception.

 

The best possible money would be a type of fiat money. It has to be fiat to gaurd against sudden changes in valuations. But it should be a stable currency. Indeed, it should become more valuable over time. This could be done and the government could still strip the money of its value so long as they didn't exceed the increase in productivity plus the interest paid on money.

Essentially this money would work like shares in a corporation but the corporation is the government. New shares are only permitted as the economy grows. Simple productivity gains are split between share holders and the government. Beyond this the government simply has to live within their means. This is where all previous currencies have failed; governments refuse to live within their means. Once they get the taste of deficit spending they are like sharks in a tank with blood in the water. They will spend and spend and as more howls about taxes go up they'll reduce or curtail taxes exascerbating deficit spending. It is government which wrecks money. If you want sound money then you have to vote for sound government but instead we either vote for the guy who promises more pork or the guy who promises lower taxes.

 

I don't fully understand the arguments for this, but the conventional wisdom in economics these days is that slow, steady inflation is more desirable than absolute stability.

One problem is that if money got more valuable over time everyone would sit on it and there'd be little economic activity.

Gold doesn't have the intrinsic value that food does but it's had the extrinsic value that other people want it across many cultures and millenia. That gives it a leg up in the competition with other media of exchange to be generally accepted as money.

Paul Tustain of BullionVault has hinted that there's a tradeoff between being a good store of value and a good medium of exchange. Since money has to be both, there will be endless conflict.

One problem with commodity money is that there has to be enough of it to trade for the rest of the economy's production. In the old days when there was nothing to buy except crops and livestock you didn't need a lot of currency. In a world of steel, cars, iPods, and pharmaceuticals that cost more per gram than diamonds, no one storable commodity will get you very far.

We have very limited experience with it, but so far it seems that if you take control of the money supply away from government and put it in the hands of an independent central bank with a mandate of price stability, then database entries can be a good form of money.

 

Some people CLAIM that our carbon footprint will be the end of the world. They CLAIM that they want to reduce waste and consumption. They CLAIM they want stability and growth.

What could possibly foster such goals more than money which not only gains interest when it's saved but even gains a little value. With more money set aside there is more capital to fund more innovation. Stability of the economic system is assured since there's no reason to shift money around and if fundamentals turn sour people have the resources to make it through.

Inflation is never good even in the tiniest amounts except for the politicians who are buying votes. It might be true that at low levels it's not very harmful though. Inflation tends to eradicate the driftwood and hindmost in an economy. It makes the buggy whip manufacturers go out of business a few years earlier. But what would get rid of buggy whip manufacterers faster than increased innovation made possible by increased capital flows? Rather than wiping out older people on fixed incomes a little increase in the value of money would let them maintain their standard of living longer.

Efficiency gains are large enough that the government can still make money just by issuing more in most years. This would encourage government to seek efficiency gains everywhere since they could take large percentages of the improvements.

It's a shame there's no commodity that would make an ideal moneyt since ideally money would be based on a commodity. I've toyed with the idea of wheat based money and such things but they are all subject to the same failures that would lead to very similar disasters. I don't see any alternative but to using all commodities simultaneously as the basis of currency. Of course it's impossible to use all commodities so the solution is using the GDP which is really closely correlated with the combined value of all real assets.

 

In effect, that's what you get with a mandate of price stability. If money is controlled so that prices of a basket of consumables stays the same, then it's as though the money was backed by that basket of consumables.

If money grows in value while it's hoarded, that's different from being able to invest it and have it grow as a result of being out in the economy doing work.

 

I'd agree it's essentially the same thing. There are two important differences however. Price changes can be difficult to measure. How much has the price of fish increased when they add 50% water and 1% chemical to make it retain more water? How much have meat prices really increased if beef triples and everyone is eating chicken. How much does the price of caviar affectr things if no one can afford or the market collapses. How about when things go out of style and aren't made at all. Inflation is very difficult to gauge even under the most stable of conditions but in real life can be impossible and the reported change manipulated. How do you include the value of a commodity like the Hoover Dam. What is the current value of real estate compared to some other time. How do you measure the value of all the silver if you don't even know how much silver there is.

All these things are ultimately reflected in GDP and recessions and boom times are self correcting as money changes value.

The other problem is perception. It is perception which forms the basis of the value of money. It might take little more than a calamity in CA or a freeze in FL affecting grocery prices to have a huge impact on perception of the value of money as curtailed supplies pushed up the price of a few key commodities. So long as everyone knows that money is the result of wealth and productivity then changing prices will have relatively little impact on perceptions.

It is saved money that IS the basis of capitalism. Why shouldn't the owners of this profitn thereby. It is capital that IS the basis of employment. Why shouldn't those who support a sound economy be rewarded. If inflation continues too high too long capital will simply evaporate. As an example the Hungarian economy was worth more than four quadrillion Pengo at it's peak inflationary price. The exchange rate made the entire economy worth less than $30. If you could find the sellers and force them to sell you could have bought the country for $30. How do you raise capital for needed infrastructure and industry in such an enviroment?

Capitalists, stakeholders, workers, and investors are supposed to be rewarded rather than only bankers and government.

 

This post keep,s running, Again great info!! Definitley will write down
For later

 

We're in general agreement but let me expand a little on my concept of "perspective".

People act on their beliefs. It's really the only driver of actions ultimately. We believe what we want to believe then our actions are constrained by these beliefs. To a very large extent our perspective is the result of these actions; what we see is determined by what we do. Money is at the root of many peoples' motivations. It's a means to keep score and it represents security and sometimes one's self worth. It's only a means to an end to others.

But to all of us the value is dependent on the collective estimation of its value. If one doesn't value the currency he'll trade it for German Marks or land in Dallas. We try to keep our wealth in forms that are most able to maximize that wealth based on our beliefs or perspective. It is this constant buying and selling of assets and money which defines the (monetary) value of all things.

The nature of money is critical to this estimation of value and the belief of most individuals to its value. I believe the big reason for the rampant waste in our system is that people don't value money and this goes many times over for other people's money. Huge amounts of money flow to boondoggles in government and industry so employees see little point in efficiency. Why save a dime on a dozen eggs when the stores just jack their prices up and down endlessly and you get a paycheck every week anyway. If you get a big government grant to study muon particals then money mmust be cheap. When you buy a defective product you become more likely to just throw it away rather than get your money back.

There are lots of reasons for treating money this way but among them is the knowledge that it's going to be worth a lot less eventually anyway.

These things don't necessarily foster waste on the individual level but they certainly do on the societal level.

You're obviously correct that just changing the nature of money won't change a thing. So long as politicians can gut the currency through deficit spending, they will. This requires that we vote for better politicians and this is really tied in with the nature of money since we've all been trained to vote for the guy who will lower taxes or the guy who offers the most to more people. Both of these actions will damage the money if the promises are kept.

So it always comes down to education. Untill we teach people to read and write again there seems little chance to have sound money because we'll be voting for promises and the status quo rather than efficiency and innovation.

 

imaginary money! seriously. nowadays, people have direct deposit and pay for everything with a debit card. (most people do anyway. i still use cash for EVERYTHING) a computer screen in some bank somewhere says you have x dollars, but how much of that do people physically see anymore??

of course, this is all just my opinion.

 

So will Money leave the realm of physical altogether and just become credits in an account such as banks and credit unions?

 

It practically already has. If you ask me (and this is merely an opinion), the only reason cash still exists is for illicit transactions.

 

Money serves a very real purpose. It is simply a system of valuation and exchange and what ever flawed form it takes, it has to be there for society to exist. Wanting more often goes hand and hand with great achievements. Its the difference of existing/surviving and thriving/advancement.

As for the Original topic of fiat money. To be honest, I believe fiat money (while the concept is a bit nebulous) has often been used simply to denote what, in a given system of exchange, would be considered a debasement of the medium of exchange. Possibly during times of emergency and decline.

I have always seen Notgeld as a representation of where fiat would be applicable. They were on a standard of exchange based on precious metals combined with valuation of resources. There came a time when they had little precious metals and most output of their resources and work were spoken for. So they had to simply go fiat. Not only was the money no longer precious metal, but even the money being printed or minted on base metal had nothing to back it. Its worth only had the promise of either a broke government or some local authority. It was truly money only back by 'say so'

I think part of the term derives from not only what the medium of exchange is but what very real resources back it.