IRC log started Fri Jun 27 22:02 Welcome to #GeekSpeak. Before we begin, I'd like to remind you that all channel logs are the copyright of the channel owners: Pankaj Saxena and Tom Wright. Logs may not be redistributed in any form without the prior consent of the channel owners. Tonight's discussion is on "Commodity Currency: When, Whether and How," and will be moderated by Brad Aisa. As usual, the discussion will be conducted in keyword-protected mode. If you see someone off-channel whom you think would like to join the discussion and would not be disruptive, please message me or Wright. Go ahead, Brad. Thanks Subetai. Good evening. Tonight we will be discussing money... ...in particular, commodity money, which is free market money. Before we get to money as it applies to our age, I thought we could start by reviewing the economic principles of money. Let's start by defining money. What is money? A medium for exchanging goods and services and for storing wealth. Subetai: That's correct. What are the three primary functions of money? More convenient than bartering rarity K-Part: That is more an attribute -- we'll get to that. Storing 'work' or value in a portable medium.. Chris: Yes -- more technically, it is an intermediate medium of exchange. Capital accumulation. Yardstick for objectifying value Briaeros: Correct: a store of value gautam gets the third important function: a standard of value. BradA: It has to be dividable, keep it's value over the long run, and be somewhat rare (compared to other commodities). storing, exchanging, and measuring value chris: succinctly put. So how did money arise? Did someone invent it? Yeah. I think the first money as we understand it was invented by the Phoenicians. The summerians... arised out of their barter record keeping? They had "money" before that, but it wasn't freely exchangeable for everything else. The first time three clay tablets didn't trade evenly for two sheep, they had to be able to make change. So money was invented. If you look at the nature of money, and the nature of advancing division of labor economies, you see that money is an almost inextricable outgrowth. Barter trade can suffice in small, tribal communities, that are self-contained and socially homogeneous. Money came about when one commodity was accepted more than any other commodity in exchanges of wealth. Money is what *made* the intensification of the division of labor possible. But the advent of agriculture, and trade make bartering increasingly inconvenient. Chris: Partially right. Corn is hard to keep.. At least cows can walk to the barter place. a need for a 'common' standard necessitates that almost all larger scale ecoomies would have invented money TomM: Right. Tom: Yes -- what happens, is that people trade something they have, for something of greater use to them, or of greater marketability. This can be of the form of goods of greater durability, greater divisibility, greater transportability. And one couldn't always know if the particular commodity one had to offer could be exchanged for the goods one needed/desired. At the beginning, it could have been wine, or some other difficult to make commodity. Tomm: Most likely metal.. Which would then become coinage. Several of you are making good points about the attributes of money, and the conditions which engender it. not only dificult to make but something that would be accepted by all traders now and in the 'future' This leads us to examine the requirements of a monetary commodity. What are the major attributes of a monetary commodity? (We'll soon discuss some particular ones.) Tad: sure, and it had to be easy to transport and to keep. The Spartans used to have pig iron as money, just to make it difficult for anyone to amass wealth ;) :) Briaeros: Actually, metals typically become money later in the cycle. Pig iron has an advantage over corn or cattle, though. It's portable, durable and relatively uniform. Relative scarcity, durability. Rarity. Easily divisible and transportable. our wallets would weigh more than our Chevies Recognizability, portability, and rarity segelbe: However, it's has so little value, that the coins were so large as to be impossible to transport readily. Trust would have to be high that the thing which passes for money is tough to counterfeit Tad: true, but would you rather worry about feeding your monay and watching for disease or pests? money According to Carl Menger, one of the earliest commodities used like money was cattle. High apparent value, either inherent, or accepted (paper money). Right -- you guys have covered all of them: divisible, (relatively) imperishable, durable, (relatively) scarce, homogeneous segelbe ? pig iron is a type of metal no ? Are divisible and homogeneous the same attribute? Jim: Good point -- I was just going to discuss the cattle standard. TomBowden: Yes, gold is gold. And gold can be subdivided. Live stock is still used in very primitive tribes. "Youc an marry my daughter if you give me five cows." ;) Tad: yes, pig iron is a heavy metal. But it's still an improvement over cattle as money. Tom: No -- divisible means can be divided, homogeneous, means all of one. Is there anything homogeneous that isn't divisible? Brad: i agree, but I was adding to the live stock as money thread. Tom: Gemstones, I think. It's more usually "I'll give you 5 cows if you take my daughter", Tom. Tom: Well, a precious gem is homogenous, but not especially divisible. Good point. TomB: It has to be easily dividable. I mean, if money were titanium steal, it would be very difficult to divide it up ;) BradA: There are two Tom's here...please use last initials. Menger mentions the cattle standard, as being a common standard in agricultural communities. Gold is soft, easier to divide than titanium ... But both are homogeneous. The reason, is that cows were relatively durable, easy to keep, relatively scarce, widely valued, and relatively homogeneous, in that a cow is a cow. though not divisible ;-) Brad: they were an improvement over crops, then? The important point here to note, is that monies emerge from the needs and values of the traders in the area. I imagine cows were good because of the many things that they could be used for. Is that correct, Brad? segelbe: I believe a cow would be more valuable than a larger portion of grain, thus the cow had the advantage of greater value. Also, cows transport themselves. :) And they reproduce readily! ;) segelbe: Divisible on a larger scale...you can trade pare of a herd...the heard, in other words, is divisible. BradA: I think that's one reason wine was used as money before metals in the Mediterranean. ah. yes and as travel and trade became possible over long distances , a need arose for an even 'better' medium of exchange pare = part. Jason: Exactly. Everyone needs to eat, and they also provide much needed raw materials for clothing, and can be labor animals. As such, they would always be in demand, if not directly, very close to directly. cows last longer than grain. This is an important attribute of a monetary commodity -- it has to be something that is valued. A pile of gems is divisible, too, but the minimum size is much larger than with gold. Same with cows--minimum size is too large for many trades. BradA: Kinda gives new meaning to "Let your money work for you!" ;) Half a cow doesn't kepp very well :) (As a sidenote, the word "pecuniary" for "related to money" comes from the latin "pecus" meaning "cow") gems aren't really uniform or divisible like metals are. this is why cigaretters often become money in prisons and labor camps, because they are rationed, and there are not many things permitted to be owned. TomB: Hence the need for a better medium as the division of labor began to intensify. Subetai: Interesting. Would sombeody buy something worth half a cow by giving over a cow and getting two pigs in "change"? tom: the problem with gems, is that they make a poor *standard*, since gems are not homogeneous -- they differ in clarity, size, and such, and unlike a metal, the value is not proportional to weight. TomB: Possibly. But the exchange would depend on what was on hand. Say the other guy offered corn, but the man w/cow wanted pigs. tomb: The trade might not work. Briaeros brings up a good point: How do you pay for something that costs 1/4 cow? That could get messy. :) interesting point , that cigarettes are 'owned' even by prisoners If you use money, then it doesn't matter what orignally gave it value. Here we get to the important concept of the difference between the monetary *standard* and the *media of exchange*. Brad: Were the products of livestock ever used as money? BradA: that lack of divisibility is one reason such people remain on a low economic level. Many trades can't be agreed upon. Typically, in any area, there will converge to a single monetary standard (we can discuss why if you want). But that does not mean that all transactions are conducted in the commodity of that standard. It's value to YOU is what you can buy with it, and what you really need. There can exist several media of exchange, of varying popularity and acceptability. brada: Like the currencies in the US after the Rev.. Spanish dablones (sp?) were valued most. So, in the cattle standard, pricing would be in cows or fractions thereof, but smaller payment would be rendered in, say, sheep, or other valuable goods, of a known price in relation to cows. Brada: Of a pricce agreed on by the 2 traders. Jason: What do you mean is a "product of livestock" used as money? Do you mean, cows themselves? Jason: You mean like leather goods? fertilizer? :) Brad: No, I meant the products *derived* from cows, like hides, or meat. Briaeros it may even have been commodities eg tobacco high,y valued, but the standard was gold weight and spanish coins were known for correct weights and divisibility , i thik tad: They also were accepted all over the world. Because of some sort of rep. Now, the cattle standard worked fine for people who could keep cattle. But Menger points out that growing urbanization started rendering the cattle standard cumbersome. Jason: trading with hides is still extremely common in many places. The point Brad's making is that there's no reason why there shouldn't be more than one standard of value, although some commodities will be more popular than others since they better satisfy the properties of money. People in cities can't easily keep cattle, so the factor that made it a useful standard in one context, starts rendering it marginal in another. I suppose meat would be quite impractical, considering how quickly it spoils. I think hides of beaver, for instance, were used as money in the Territories of the United States before it got greatly settled. So for a while, you would have a mixed standard: measurements in cows, but exchange in another media. However, after awhile, a more convenient media, more universally used, would come to predominate. And that media is METAL. You mean, the medium would represent a claim on cows? brada: On some pacific islands, it was stone/shells IN the american West (california) it was shells. But they represented value greater than their appearences. I wouldn't be surprised of animal hides being money. In fact, Greenspan and others who have written on money cite lengthy lists of commodities that have served as monies over the years. The thing they have in common though, is a *contextual* value, and the attributes we discussed earlier, durability, divisibility, transportability, etc. brada: yes Jason: Exactly. meat, especially prior to refrigeration, is virtually useless as money. Completely useless in fact. and acceptance as a medium by traders BradA: Are you saying it's a separate step to have a medium of exchange, that "stands for" cows? Even after refrigeration, meat is of very short-lived value. tom: The cattle standard is only one amongst many. I am discussing universals of money, only using some examples to concretize. Is everyone very clear so far, on the important services money performs? Intermediary commodity of exchange, standard of value, and store of value? TomB: I think the point is that those communities that had several means of uiniversal exchange, found a way to translate from one to the other. Yeah. Let's move on. BradA: But does the universal consist of a change from actually using cows (or whatever) to using a medium that "stands for" the whatever? Without these three things, division of labor and long term production is almost impossible. YOu need a place to temporarily 'park' value, to carry yourself over a full scale of production, say from planting to harvest then over winter. TomB: I think so. Henry Hazlitt's "Time Will Run Back" illustrates your point well. People need to be able to comprehend the relation between various things they produce, and want to acquire. A standard provides a common measure. That is, to separate buying from selling. Doing those two together is barter. It is an epistemological necessity. I would think the next "stage" would be, the medium no longer stands for just cows (or whatever) but for *any wealth*. Tom: No. TomB: compare it to writing a check today. The check is a seperate medium based on the value of a dollar. where economies are free, people will always exchange something of widespread usage and value. tomb: Yes, for when the area where money = wine meets money = cows. What does it equal then? Just wealth. As opposed to semi-free or socialist countries, which *impose* the standard on everyone. Now, I just want to mention the purpose for discussing all this: it is to tie our understanding of money, to the context and facts of producing men, like Peikoff's 'cement truck' 'standard of a dollar' I meant to say. brada: What? Let's talk about metallic money for a few moments. yeah 'cement truck '? To summarize the process - first there's barter - then comes the concept of a universal standard of exchange, such as a cow, which although useful of itself, is also used to measure the value of other products. From there, the .... concept "standard of value" is retained and people move from cows to something more easily divisible and transportable and durable. In recent recorded history, many, many societies have employed metals for money. Why metals? Why not keep using cattle? Or sea shells? Is the choice of monetary commodity *arbitrary* -- or, is there some *objective* reason for the evolution to metals? The cement truck refers to the fact that concepts need to be concretized in such a way as to "hit you like a truck coming down the street." gotcha The purity of metals, therefore the real value, can be easily determined. One can't as easily determine the value of a gem or a cow (disease, etc) Tad: Peikoff says that unless an idea is as clear and immediate to you as a cement truck barelling down on you at 90 mph, then you need to do more 'chewing' :) BradA ok subetai: Metals are hard to purify and obtain. Thus their inital value. Cows may have initially been traded for brass. Metals, once purified, tend to be very durable. The reason metals make good money, is because metals possess the attributes desirable in a monetary commodity, qua monetary commodity, to a greater degree than basically any other commodity. The cowman would then take his brass to a blacksmith to make a farm tool out of it, and pay with the rest of the brass. Let's compare metals and cows and shells. Eventually brass had value independent of its use in tools? Briaeros: The value doesn't come from it being difficult to create, but from it having utility of some sort. Jim_N but gold has NO utility It is rare. Durability? Metals are more durable than cows and shells (which can be broken and chipped) Metals are of greater value. Iron was harder to make than brass, and valued higher. Metals are superbly divisible. Metals are extremely homogenous. Briareros: Gold is used in jewelry, and computer parts. Metals are, because of their relative value weight, easy to transport. a blacksmith existence presupposes a level of technology and capital accumulation above tht of a hunter gatherer or purely agrarian society Metals are also easy to measure, via weight. TomM: but if you are poor, you can't farm with a hoe made from gold! Briareros: I don't think gold is suitible for that anyhow, it's too soft ;) Bri: sell it for eight iron hoes. Briaeros: Gold would have no value, and not be in demant unless SOMEONE found it useful. That you have no utility for it, doesn't mean it's value doesn't stem from the utility others place in it. In fact, you would be hard pressed to identify any commodity, either historically, or today, that is superior to a metal. Tad: In that case, gold would be ideal, the first traded metal. It was rare, andf could be found in a pure state. Gold's value is it's rarity. Actually, gold as money was not used initially -- it was *too* valuable. The first metal money was probably brass, a combination of copper and tin. The monetarization of metal roughly followed the metallurgical developments and mining developments. Or copper nuggets. Briaeros: Rarity isn't what made it valuable. This is one of the problems about talking about exchange values without an understanding of Marginal Utility theory. I believe iron was first used. Copper came later. Then silver, and only later gold. The first metal money we know of was gold and silver. Briaeros i was saying that the cow as money only lasts as long as the particular cow, it is not a long term store of value( the cow) you can not kep it for a number of years and have it retain initial value Brada: Iron was used last. It is very hard to find a pure state, except from say. meteors... If copper and brass or bronze were used before that, it's conjecture. Subetai: No, i think the Phonecians used brass or copper ingots. Subetai: Really? I know copper was used in Europe. Tom: The first money we know of came from Asia Minor. 4000 years ago. It was made of electrum, an alloy of gold and silver. But let's move on. ok It came from Lydia, in what is today Anatolia. Once money develops, several problems naturally arise, relating to the exchange, transport and storage of money. Money takes on a status of its own, as a separate entity above and beyond its status as commodity. Subetai: wasn't electrum much later than that, after 1000BC, in Syracuse, Sicily? Oh, one other important factor for money is that it can't be faked. You can't fake a cow, and you can't fake the primary metals. Legendre: nope. 2000 BC, Lydia. Brada: Yes, above it's utility in tools and weapons. Out of these problems, arise various devices that can be put under the heading of 'banking' Now, 'banking', as used here, refers to the facilitation of money, not to investment. Facilitation of money means making the process of using money easier? BradA: You mean coinage? TomM: But you can dilute a metal by alloying. hello :) but it is important to remember, as many moderns try to deny, that a commodity will only *remain* a money, as long as it valuable also qua commodity. gautum: yes, but it's specific gravity (it's weight in water) can't be faked. gautam: That can be easily detected. banking as warehousing and accounting for 'deposits' and their associated costs , no ? Such as when the Romans began debasing their currency. It was physically lighter. An example I use, is to posit a prison in which everyone or most everyone stopped smoking. Obviously, cigaretters would cease having monetary value, since they had become useless. Tad: Yes. BradA: Sure, if someone found lots of gold -- I mean tons more over night -- gold's value as moeny would drop. Hafta go.. I'll be back goodnight all. :) Under banking, we get developments such as: minting, which solves the problems of assay and weight; and then, later, notes and other bills of credit, which separates the *physical* exchange, from the *legal* transfer of ownership. Fiduciary paper. Tom i think that 'prices' rendered in gold standard would can , but not the value of gold as a menium of exchange qua medium can=change Tad: qua money, gold is both. It is in this area, that the looters make their attack. One development, which I don't want to discuss too much, is fractional reserve banking. Going from fiduciary paper to fiat paper? tad: If gold was as readily available as, say sand, it's value qua commodity would drop like a rock. Tom but in your example of overnight increase in the quantity of gold , the value of gold as medium would not change This is where you put a sum of the monetary commodity into a bank, and receive a receipt. The receipts are then traded, as if they were the commodity. This is no problem, since it is... just the same as the physical vs. logical transference I mentioned. The twist though, is that the warehousing starts printing extra receipts, since only a fraction of the holders ever actually demand payment in specie (the commodity). TAd: Sand has all the good attributes of gold, but there's so much of it that it is nearly valueless as a medium of exchange. BradA: Fraud on a grand scale. Let's put the sand versus gold argument aside for the time folks and focus on where Brad is. Now, I want to discuss the supply and demand for money, then inflation. What is the supply side of the money equation? Brad: This isn't the same as "time deposits" though, is it? let's say money=gold Jason: No, deposits are something different. OK. The supply of gold is the amount of gold available for transactions. Whatever gold people have plus whatever's being mined right now. A loan doesn't change the supply of money, whereas issuing extras receipts does Subetai: Minus jewelry, which isn't moeny in this example. money Subetai: Correct. The supply is: the current monetary stock; the current convertible stock (say, melting down gold jewellry), and the current mining output. What is the demand side? this is trickier -- it was Ludwig Von Mises who straightened this all out. Whatever commodities or services people want that they can pay for with gold? I would say the demand side is production, since it is things produced that are exchanged for gold. One crucial thing to recognize, is that there is a complete difference between assets, and money. Money is a commodity itself, for which exists a demand. Every person or organization, has a requirement for money, which can and does fluctuate over time. Then it'd be the hours people put in at work or the business they transact in order to make money? For instance, your demand for money is different one week before rent is due, than after. You may need hundreds of dollars of money near rent time, but much less after. An asset, such as your house, might be difficult to transact (sell), but an equal value in gold would be far easier to move. So what's the demand side? If you are a business, you have to keep a certain amount of money, on average to meet your cash flow. a gold bar has an exchange value, but a milling machine can produce wealth If you were hunting for a new PC, and wanted to have cash available to buy a deal, your money requirements are higher than normal. The whole point Von Mises made, is that money itself is a commodity, has a demand and supply relation, like any other. The value of money is mediated by this relation, and also affected by it. Ok, so what is the demand? Tom: The need for money, to spend. BradA: Ok, basically what I said? production? Since you produce to earn a living? How about saying "whatever time or resources people are willing to invest for money"? One example of how conditions can affect the demand for money, is when there is a crackup inflation. Is this where the idea of individuals "demanding" the inflation of a currency comes from? In that circumstance, money becomes universally vilified, since it loses value so quickly. So the demand for money quickly drops. However, the authorities keep pumping more in, to try to keep up. It is a negative feedback loop, and the crackup eventually destroys the value altogether. The need for money is why people are willing to pay interest to get a loan. They need it now, but don't have it, and borrow on future production capabilites. BradA: I think you need to explain how that works. the cost of capital , no ? Subetai: No, the demand for money is a strictly economic measurement. It is the same as the demand for soap or movies or gasoline. Let's move on. tom: People need money to effect trades. BradA: tie it in with your ealier statement about drafts representing moeny. Or receipts. The demand for money is related to people's need to effect transactions which require payment in money. BradA: Sure. ok The crucial point, is that there *is* a market relation controlling the value of money, with supply and demand elements. BradA: meaning the value of money is not intrinsic. Tom: Partly, but most crucially, that the value of money is not determined directly by its value qua commodity. In other words, you can't look just at how people value gold, qua commodity for jewellry, industry, etc. and expect to be able to explain its fluctuation in value qua money. That was Von I think you need to elaborate on that. That makes sense. Mises brilliant contribution to monetary theory. Tom: Unfortunately, I can't go further into that. Read Mises. BradA: You already elaborated on what I thought you needed to do ;) I just want to discuss briefly how the government subverted the entire commodity money system. I recommend "The Theory of Money and Credit" to anyone interested enough. He's saying that it's not just the supply of money versus how much commodities there are in the market for the money to buy that determines the value of gold. There's also the factor that the demand for money fluctuates like that for any other commodity. Consider that today, money is a piece of paper that is a receipt for... the piece of paper. How this happened, was that governments got their hands on the crucial process of notes. Remember, that notes (receipts for the commodity) trade as readily as the commodity -- sometimes even more readily, as they are easier to transport, etc. "legal tender laws" BradA: Yes, that is what I wanted you to say earlier when you first brought up inflation. Thanks. What happened, at least in the States, was the government basically nationalized the currency process, and arrogated to itself the right of issuing notes. It started off in France in the 1700's. Eventually, it cut all connection between the commodity and the notes. but enforced its legal monopoly on the notes. So what we have now, is a highly unstable system, maintained by coercion. The notes have the attribute of scarcity, since the govt has the monopoly on producing them. Legal tender laws enforce their use as money. Without legal tender laws, there would be no "incentive" for people to accept fiat money. Jason: It wouldn't be worth the paper it's printed on. ;) Now, to a crucial question. Has inflation been beat? Why shouldn't we use govt paper? Isn't the current system 'practical'? Have the hard money theorists just been hollowly propagandizing? These are the hard questions, we need to address now. TomM: Actually that's *exactly* what it would be worth! First -- inflation -- what is it, and is it beaten? Inflation hasn't been beat, since the gov could issue many more notes tomorrow with nothing to stop them. Tom: But that is not the question. It seems to be beaten now, doesn't it? inflation = growth of money supply without increase in production. Jason: it might be worth a bit more, if the pictures were pretty ;) BradA: Not as far as I understand it! The answer comes from the monetary relation. It is *intrinsicism* to postulate that money necessarily has to have some particular value that remains stable over time. It's not beaten at all. Prices go up every month on most items. A 3% inflation, which is about what we have now, cancels out the rate of production, which is also about 3%. TomM: A note with Ayn Rand's picture *would* be worth quite a bit. In fact, since the value of money is itself mediated by a supply-demand relation, there is no reason to suppose it must remain stable. Normally, the value of any money would fluctuate. Go up and down. However, when it consistently goes down for decades, never up, that's inflation. TomM: by 3% inflation, do you mean a 3% increase in the money supply? there's a BIIIG difference there. inflation means an increase in the money supply without an increase in production. In fact, the amount of the monetary commodity is irrelevant -- prices simply rise or fall to bring the demand and supply of money into equilibrium. BradA: Good point. And mining towns had very high inflation, since gold was relatively easy to come by. So in fact, today, when the govt is expanding the money supply by, on average, somewhere between 10 and 20 % a year, I believe, ... midas: i meant a 3% increase in the notes floating around out there. TomM: But still nowhere near as easy as the printing press. it is probably the case that a corresponding free market money would be resulting in dropping prices. there is a difference between price inflation and the the increase of money supply to the production of an economy , no ? Therefore, stable prices, with respect to paper money, is probably inflation, with respect to commodity moeny. TomM: well that aint inflation. so, say money supply nexttime. Tad: No, the relation is the same. BradA: How can a 10-20% increase in money supply result in only 3% inflation? Shouldn't the numbers be identical? TomM: *and*, they can't be equal, because the value of the dollar has dropped ... every item is going up in price. Gautam: No, because the economy itself is growing. midas is correct -- but not just a direct relationship between production and money supply, since there is no necessary absolute relation between production and the demand for money. Brad: supply equals demand. For example, if a new kind of clearing system is introduced, that permits businesses to perform synchronized clearing of debts, then their need for money would drop. I was taking the position of everything else being equal. an increase in the amount of the money commodity would bring higher prices overall. but a demand for money is on the meduim of exchange side, not with respect to standard of value The rapid introduction of such a system into an economy, would result in a marked drop in the demand for money, and thus a relative drop in its value. So *this* kind of analysis is how you attack the 'inflation is beat' crowd. BradA: maybe you ought to explain what you mean by price clearing. But more importantly, is the *moral* issue of fiat money. In a gold-based economy, if there was a somewhat limited amount of gold and a growing economy, gold would be worth more. Your money would buy more products. In a paper economy, there's been inflation even if your dollar's value remains constant while the economy is growing. Subetai: and that is what happened in this country during it's first 100 years. Right. In commodity money, since money is a valuable commodity, people have to work to produce it, and it is property. So the system obeys a sort of 'conservation of rights' principle. However in a fiat system, the central bank simply creates the new money out of thin air. Therefore, whoever gets it first, is the recipient of an injustice against all in the economy. In essence the central bank is a permanent, licensed counterfeiter. And who gets the money first? Who are the recipients of the counterfeiting? Subetai: You mean the extra amount of paper dollars chasing goods cancels out higher production, even if price per se does not reflect that. The government, I would assume. That's the result, yeah. A "debt clearing house" is a form of extending credit, so the emergence of such an institurion or mechanism would have no more influence on the value of comodity money than other forms of credit (paper money, credit cards, checks, etc.) Tom: If I can arrange to get paid by my employer and pay my rent on exactly the same days, then I don't need to keep the rent in money at all -- it goes directly from one to another. My overall integral need of money diminished. Jason: It is a combination. The banks get the money, but through a complicated scam, in which government bonds are prominently involved, as collateral. So basically, the banks and the government. The discount window comes into play here, right? Now, there is an important relation between fiat money and government debt/spending -- can anyone identify it? Brad paid by your employer in what currency and is it the same as the one accepted by your landlord ? BradL sure. without the fiat, debt spending is impossible. Jason: Right -- the Fed or other central bank, as appropriate, lends money to the major banks. midas: Not impossible, but much more delimited. Reisman is very clear on that issue. BradA: I don't quite buy that. What you say implies the value of money would go down (less demand) and yet, the rental owners would get their money faster...oh, with no need to borrow? When the government goes into debt it prints more money? Fiat money gives the government vastly more credit worthiness, than without. Brad: only through force Without, their ability to amass debt would be limited to the level of taxation they could reach. Taxes can only be raised so much -- people either revolt, or they cheat so much, that you can't extract any more. In other words, it doesn't need to borrow from the citizens, it simply "creates" the money itself. But with a printing press in the basement, they can virtually spend whatever they want. Of course people recognize inflation and such - there are still limits, but they are much, much higher. But often masks it as 'borrowing' so this is one important reason why fiat money should be opposed. It can issue government bonds, backed by the full power of the government to tax and print money. Government bonds are the highest rated, simply because the government's the strongest debtor. Which makes the link between needing money and printing more of it one step removed. Sube: accomplished only through force Sure. Tom: If I get paid on Monday, and need to pay rent on Friday, I need money all those days. If My landlord were paid synchronously with my paycheque, I need much less money*days. fiat money = force Subetai: The government issues bonds to finance debt. Bonds are used as collateral by major banks to borrow money from the fed. It is indirect, but fuels the printing of money. Brad: yeah, that's what I said. BradA: I understand that part of it, but I'm not sure what it would do to the value of money per se. I'd still need money, it just wouldn't be tied up as long...is that the point? What does that do to the value of moeny? And since the govt debt issue gets the fresh cash first, they get the benefit of the new money, prior to its inflationary effects. It is doubly pernicious. Just like the counterfeiter who is the one to benefit from his scam. Tom: I can't discuss this narrow point further now -- it was just an example of how a commercial development can affect the monetary supply/demand ratio. BradA: Yes, they "loan" the new bills to the banks as if it was worth the face value printed on it. the rest of us get hit with a less valuable currency. BradA: Ok. TomM: In the form of rising prices. One point, which is most important, but I don't have time for, is something I hope everyone agrees and understands: The profound *moral* meaning of free money, as expressed by Francisco. BradA: Sure, money represents production. It also represents productiveness. A human virtue. Inflation means my production is rendered worth less than it would otherwise be. money represents the voluntary action of traders, value for value Subetai tells me the formal part is out of time. But we're ready to continue informally. However, I'd still like to continue informally, and discuss two final points: Guess we ran a little over, huh? A bit. It's an interesting topic. 1) the crucial importance of fighting for free money 2) what it should be First -- I hold that free money is crucial. In fact, I consider there to be only two basic issues worth fighting for: free money, and free education. Mind and body. BradA: Please continue. BradA: I'm all for skipping the so called "gold standard" and going straight for gold bullion based currency. Where private individuals can hold their money in either bills (currency) or actual gold, at their discretion. Tom that maybe the 'gold exchange standard" and not the 'gold standard' Brad said he might ping out but he'd be back. besides in a free economy banks would issue their own 'currencies' the concept of legal tender wouldn't exist. sorry: to recap > Those two things are important to fight for, because the represent the essence of the evil we are fighting... > and it is no coincidence that our enemies hold these two issues to be the most imporant. > There is a reason why there does not exist, to my knowledge, a free market currency anywhere, in any country. At least not in any major industrial country. > A free currency is the symbol and essence of individualism and objectivity. It's a clever distinction, and one that Hazlitt explained well. > If a free currency can be regained, everything else is peanuts, in my view. With gold bullion as legal tender, banks could print all the fiduciary paper they held assets for. There wouldn't be legal tender per se, but there would be a "universal" recognition of one type of currency over another. I think the proper system to fight for is what I call a 'gold bullion standard'. Brad: Because people will have recognized the *moral* meaning of free money. BradA: i just discussed that while you were away. ;) I read your notes over the internet ;) An Objectivist wrote a book arguing for a circulation standard, but I think that makes no sense What's a circulation standard? A circulation standard requires alloy coins. That means the coins have to circulate and have demand, which I think is silly. Who advocated that? A bullion standard on the other hand, is based on the ownership of gold bullion, which is already a commodity in high demand for semi-monetary purposes, and is easily tradeable. Therefore, nothing more is needed to trade it than exists now. All you need is a means of banking it, and that exists now, and can be easily expanded. BradA: Besides, in a free society, the coinage would be determined by individual demands on banks. repeal legal tender laws and the rest 'falls' into place Salsman -- *Gold and Liberty* -- I haven't read it though, however I was told he supports a circulation standard. I didn't get that from reading it. Maybe I should look into it again. BradA: I think he recently argued for a bullion standard. Or, at least that was my understanding of what he was advocating. Tom: I seriously doubt gold coinage would reemerge -- all the ABM's are geared for paper, many transactions are electronic anyways. I can't see there would be any advantage or demand. yeah me neither, i did not see him as advocating a circulation standard And this will never happen overnight anyway -- that is why a bullion standard, with checking and possibly notes, can coexist. BradA: When I go into a store, i don't always want to deduct straight from my bank, as in a debit card. Ready cash at hand is always valuable. Let's say their transaction system goes down. What do you do? not buy anything? I could have been misinformed -- but a bullion standard and circulation standard are night and day. The fact that fewer people hold cash, preferring to use debit cards and the like, might make the transition actually smoother. Do you agree, Brad? BradA: i think he was advocating a coinage system, similar to what we discussed earlier. You can't circulate gold bullion coins -- it is too soft and wears too easily. YOu have to alloy it to make coins. And therefore, the whole value system is different. BradA: Be that as it may, i can't see getting rid of cash altogether. Nothing wrong with banks holding the gold and circulating paper. Subetai: sure. Jason: Well, debit cards are a perfect example of a development that can impact the demand side of the equation. that is how it worked, in the golden days :) Subetai: or coming up with coinage that wears well and retains its value. Brad: Meaning people need to hold less money in their day-to-day lives? Brad not necessarily, if the deductions are from deposit accounts than the bits and bytes must stand for an actual amount of gold If you can pay for almost everything by debit card, then your need for cash falls. Previously, you needed 'carry cash', and 'bank cash' and those are not completely distinct. ONly needing 'bank cash' would lower your overall need for cash. BradA: I still don't see how that would effect the price of money. I mean, it matters little to me if I am using bills, coins, or a debit card. The money in my account is not effected. Tom: Notes are cash. but why would you want to circulate the money itself? the whole idea behind issuing paper currency is tat the issuer (the bank) can issue more than they have gold deposited with them. Case in point: I use my debit card for virtually *all* my purchases. joe with fractional reserve banking, but some banks could operate on a 100% reserve system There is no need to coin or otherwise create gold-based objects of circulation. Notes and cheques and electronic demands are perfectly sufficient. I cannot see much scenario where significant demand would exist to engender coins. Brad: How about the issue of time deposits? Also, coins or whatever physical device, wear, and can be clipped. Those were always problems with a physical system. What is fractional reserve banking? BradA: Personally, I like the "feel' of having ready cash at hand. Gives me a bit more direct control of my money ;) when banks issue more notes than they have actual gold Tad: But that is still based on the amount of gold/money they can get their hands on. Tom actually it isn't At any rate, inflated or not, I'll see you later. :) Tad: think this way. Perform a mathematical integral of a man's carry cash and his bank cash over time. Now, my assertion, which I assert without proof, but with some confidence, is that the summed profile of these two is NOT, I repeat NOT Tad: it has to be back by some actual commodity, or they are engaging in fraud. they operate on the principle that not all the notes will be redeemed at once this is the point I keep making about money ITSELF, qua commodity in and of itself, as having a supply/demand relation. Tad: True, but a bank run is always possible ;) For more information, I can't recommend Mises highly enough. He covers this subject in intimate detail. Thanks again Brad. Tom it is not fraud they make their reserves publicly known , or they should at any rate Night all. Thanks Brad.