Money and Banking
In this post I show that fractional reserve banking does not cause inflation and does not "create money out of thin air" as suggested by the Austrian (Austrian Economics)
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"Currency" is a token of "work". Just like Bitcoins, when a bitcoin is mined there is "proof of work" to its existence.
Gold, is proof of itself, it had to be physically mined for it to come into existence.
I trade my labor of raising beef, for your labor of making bread - both proof of work.
We can assign value to each, and use the other as a means exchange.
"Dollars", exist because the Federal Reserve wills its. When they print more, backed by nothing, it devalues/dilutes our labor.
There is no "asset" the federal reserve backs the dollar with (other than faith and credit).
When the Federal Reserve creates new dollars, they are tokenizing future labor, not realized labor.
If I have no one to trade with, you don't need a means of exchange.
Currency doesn't exist for my sole use. I think the deserted island analogy isn't valid.
Who is to say what anything is worth?
I have thought a lot about the SHTF condition and what I would be able to carry. It keeps going right back to guns and ammo. I think every body and his brother are going to want what ever you have, gold, money, water, food and shelter so you better have a gun and some ammo to protect it. No one here is still alive who has ever seen it in this country but put yourself with your family in the middle of Aleppo and then think about what you really need.
I dig some gold out of my mine. I take the gold to a private coiner, who turns it into gold coins, keeping a small portion of the gold as a coining fee. I then take the coins to a merchant and exchange them for goods and services. Where’s the debt? Who owes who what? The fact that the gold coins can now be traded by the merchant for other goods and services doesn’t make them a claim against anyone for anything.
I know I am going to regret posting this.
Money came about in two phases. Initially the idea of having something that was a store of value for later trade drove people to collect that store of value until such time as there was something needed. Dale’s example of the rancher, baker, and butcher etc. show the need for something that could facilitate trade (a medium of exchange) that also would serve as a store of value because you might not want all your bread right now. The third function of money, being a unit of account, happens because people come to agree that so many sea shells are worth a loaf of bread and if a loaf of bread is worth 1/300th of a cow, we can figure how many sea shells it would take to exchange for the cow.
People gradually began to use gold as money because of its scarcity. It took actual work to bring gold to the market and that is quantifiable. I do not mean to imply that everyone figured out that 40 hours of digging would produce 1 oz of gold so 1 oz of gold was worth 100 loafs of bread – those sort of valuations evolved over time based on people’s preferences.
If we used gold as money we would still have to account for both fractional reserve banking and velocity. There was fractional reserve banking even when gold was money. The amount of money in circulation is also nudged along by the velocity with which it changes hands. If you keep yours under your mattress there is less circulating then if you spend it as soon as you get it.
Where it goes wrong now is the government issues paper receipts instead of gold and there is no practical limit to the supply of paper. Until Nixon took us off the gold standard completely, paper currency used to say it was redeemable for legally defined money (i.e. gold or silver). If you can find a silver certificate or an old Federal Reserve note you will see an explicit statement of its redeem-ability. Pre Nixon, Federal Reserve Notes had this statement in the upper left, just above the designator of which bank issued the note:
“THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE AND IS REDEEMABLE IN LAWFUL MONEY AT THE UNTIED STATES TREASURY, OR AT ANY FEDERAL RESERVE BANK.”
Post Nixon the text was enlarged so as to occupy the same space on the note and a period was placed after private. i.e.
“ THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE.”
This is when paper money became an IOU without a claim on anybody – the “I” was the Treasury or the FED, but now there is no “I” so you really can not say the paper in your wallet is an IOU. The redeemers of paper currency are the stores, service providers, etc. who accept it in exchange for their goods and services. In other words, our government has perpetrated the greatest Ponzi scheme of all. It works because we need something to make the everyday exchanges we need to survive and the transition was accomplished so stealthily that only a small percentage of us are aware it happened. So keep this to yourself. If everybody figures it out people will start demanding something of real value!
If the person who is alone on an island spends twenty years mining gold and stockpiling it, it is only wasted effort in the mind of someone else if he could not eventually trade that wealth with someone else. What you overlook is that there are some simple joys that come merely in the expenditure of effort without necessarily anyone else exchanging value for such. I take the example of one who enjoys gardening and caring for plants. It is unquestionably less efficient than the production of a professional farmer. Art is another such example. I would venture to say that nearly every human being has a hobby or diversion of some sort out of which they derive little or no pecuniary satisfaction yet which they would not give up because of the personal satisfaction they derive from such!
When we have an exchange, we come to an agreement about the value equivalency of some past effort. We may weight that value according to the sunk costs involved and assign some moderating factor as to the expediency of acquisition (or retention). We see such in the after-holiday sales of candy at the local supermarkets: they have gauged the stocking costs of maintaining the inventory past a given day to devalue the actual production cost. We also see consumers (often called "early adopters") willing to pay huge premiums for something that is "new" or "novel" regardless of its true value - for example in clothing (especially shoes) but also in technology with smartphones. Are these people universally foolish for paying premiums or foregoing revenue? I think the issue is nowhere as clear-cut as you contend.
In your example of the rancher who pays the doctor with the baker’s IOU, the baker’s IOU is in this instance a medium of exchange. But this does not lead to the conclusion that all media of exchange are IOUs. The fact that gold and IOUs can both be used as money does not mean that gold is a type of IOU. Most people accept money because they believe it can be exchanged for other goods and services, not redeemed for them. Exchange and redemption have some attributes in common – redemption is a form of exchange – but they are not equivalent concepts.
“Gold money is a tangible value in itself and a token of wealth actually produced. When you accept a gold coin in payment for your goods, you actually deliver the goods to the buyer; the transaction is as safe as simple barter.” -- Ayn Rand, “Egalitarianism and Inflation”.
My late friend noted that it seems that we understand the value of something in that the cost of things does not change much when compared to how much gold would be needed for the purchase, but we fail completely to understand how fiat currency is manipulated and used to steal our labor and efforts away.