Fiat money

[soothsayer]

Let's open a discussion of the governmental practice of creating "fiat" money.
Fiat money - Wikipedia, the free encyclopedia

The Austrian School of Economics has long held that no sound economy can long endure under fiat money, with prominent Austrian Economist Ludwig von Mises arguing in his book, Human Action, that, "What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse."

Fiat currency was anathema to American President Andrew Jackson. Jackson went so far as to pass the Specie Circular in 1836, which required all payment for government lands to be in gold or silver coin. The Austrian School of Economics has long held that no sound economy can long endure under fiat money, with prominent Austrian Economist Ludwig von Mises arguing in his book, Human Action, that, "What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse."
Alan Greenspan, Federal Reserve Chairman from 1987 to 2006, was a critic of fiat money in his early career, arguing in his essay, Gold and Economic Freedom, that,

This is the shabby secret of the welfare statists' tirades against gold.
Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.
It stands as a protector of property rights.
If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Fiat currency has also been criticized by some, such as G. Edward Griffin[/COLOR], Congressman , and Peter Schiff, the president of Euro-Pacific Capital Inc., for increasing the number and severity of boom-bust economic cycles, causing inflation, and allowing nations to initiate or prolong war.


For those among us who have not had more than one (questionable) course on economics, let us examine the question of fiat money in this way ( hence the topic posting under "Society and Rights" rather than "Government and Politics) :

Understanding how inflation successively, progressively, in time, exponentially cheapens the labor, indeed, the life's blood of those who work for a living---how is there justice in permitting any regime the privilege of possessing the power to bestow infinitely astronomical sums of money to those it chooses by decree...
with far-reaching negative economic repercussions to all outside this privileged realm?

[Night]

It seems to me even many leading economists don't understand that gold has little more intrinsic value than a paper currency note. Gold itself represents value, but does not contain it...same as a paper note.

It would be impossible to get back on the gold standard. Inflation isn't always a bad thing either...

[Diogenes]

It seems to me even many leading economists don't understand that gold has little more intrinsic value than a paper currency note. Gold itself represents value, but does not contain it...same as a paper note.

Sorry Night but that is wrong...

gold is a commodity just like any other commodity be it wheat, rice, silver, copper, oil, or even pork...as such it has value according to various market trends and availability...

paper currency has no value of it's own...it's value is determined by economics/the economy...if the economy is good it will go up, if bad it will be devalued...instead of having value in itself it's value is weighed against the overall condition of the economy.

Unlike a commodity which has value that is not generally weighed against other things, for instance if there is a drought that affects the production of coffee beans in Columbia that drought will not affect the price of gold...but it could influence the value of various affected currencies.

[Night]

I misspoke.

I should have said this:

Gold certainly does possess an intrinsic value as a commodity. However, the price of gold is sky-high compared to what it should be. If tons of gold were not locked up at Fort Knox or other reserves around the world, the price of gold would probably only reach 10% of it's current value.

Furthermore, world production of gold far exceeds it's practical use in electronics and jewelry.

Gold would not be a practical currency in our modern economy for many, many reasons. And gold is still subject to dramatic changes in value which would jerk the economy up and down...

[SmirkingMan]

Gold is an extremely volatile commodity, so it would probably be unwise to try and return to the gold standard. In fact, gold seems to me to be a perfectly arbitrary standard, why not some other precious metal, or something completely different?

Fiat money 'works' because it facilitates trade and the OP states, the true value of labour decreases continuously with inflation. Die-hard capitalists will argue that inflation is compensated by pay rises. This is of course not the case, as all of us who have to work for a living know very well.

I have no ready answer, but this site DollarCollapse.com - Getting Started is an interesting, albeit a little doomsday, read and contains some good links.

Perhaps an avenue to explore would be a Tobin tax?

[grandpa]

Quote by: SmirkingMan Gold is an extremely volatile commodity, so it would probably be unwise to try and return to the gold standard. In fact, gold seems to me to be a perfectly arbitrary standard, why not some other precious metal, or something completely different?

An important step to social freedom, I think, is to free ourselves from monetary indoctrination. Then we will begin to think for ourselves. Once this is done, we can begin to adequately address economic questions.

Grandpa h.

[RickSp]

Fiat money? That is what was used to bail out Chrysler, wasn't it?

The Austrian critique of fiat money has not held up. They are obviously correct that capital goods are the basis of economic strenght but they haven't made the case that money, the unit of transaction, needs to be tied directly to a commodity.

[soothsayer]

Gold is not a "volatile" commodity.
The false currency practices of governments is what affects peoples responses to their deficit spending.
For those who purport to be "for the poor" inflation most certainly is the greatest evil of all for it perpetually devalues the mediumof exchange for theri labor, indeed, their very lives on this earth.

The reason for strictly adhering to a gold standard is to make an essentially finite (or very slowly accumulating) commodity the measure of currency to prevent governments from the crime of having a "magic hat" from which they can pull infinite amounts of money.

Gold is the essence of fairness and principle and equality because it is as difficult for the poor to conjure up as it should be for those in power.

[grandpa]

Quote by: soothsayer Gold is not a "volatile" commodity. The false currency practices of governments is what affects peoples responses to their deficit spending.

The problem is taxes of all kinds -- or any imposed fee that is ultimately taxlike. It's the belief system behind the global economy. It can't be blamed on the lack of gold, or a particular agency.

Grandpa h.

[Vee]

Correct me if I'm wrong but you wish us to define fiat money in the same context as Austrian economics? That is a rather limited view and one predisposed to come out in favour of the Austrians.

I would much prefer to discuss fiat money in its broader context and include many schools of economic thought, particularly modern monetary theory (MMT) in my case.

[soothsayer]

Everyone arguing about politics today should give the following some thought:

Property rights are the foundation of money, Mises argued. Property rights provide the legal setting for voluntary exchange. He argued that the development of money was an unplanned outcome of the decisions of individuals who sought to increase their wealth by increasing their productivity.

Individuals have always sought to specialize in those areas of production in which they have a competitive advantage. This advantage may be due to personal skills. It may be due to geographical location. Whatever the origin of the advantage, the individual seeks to exploit this advantage. He specializes in one area of economic production, so that he will have an increased quantity of goods and services to exchange with other individuals, who specialize in those areas in which they have a competitive advantage. Mises argued that out of the barter system came money. A monetary commodity was originally valued for something other than exchange. It may have been sought because it was beautiful. It may have been sought because it had religious significance. Whatever the reasons that people sought to accumulate a particular commodity, this led to the discovery that this particular commodity could be used to facilitate voluntary exchange.

Instead of having to find a buyer for the particular commodity or service that an individual produced, he could exchange his output for a commodity that was widely desired by other members of society. As these exchanges grew in number, this commodity began to attain value as a result of its ability to serve in the process of exchange. What had originally been a commodity valued for some other characteristic increasingly was valued for the purpose of facilitating exchange. In other words, this commodity became money.

As a free-market economist, Mises did not attribute the origin of money to the decision of a civil government. It was not that a particular king or group of nobles decided that it would be convenient if a particular commodity were adopted as money. On the contrary, governments began to extend their control over money because they recognized that they could increase their extraction of wealth from private citizens with greater efficiency if they taxed people's monetary income rather than taxing their individual output. It was easier to collect money and spend it for the purposes of civil government than it was to collect hundreds or even thousands of goods. It was not that the state was the origin of money; it was that money became a tool of the expansion of the state. The state claimed sovereignty over money because it was convenient for the state to gain control over this most central of economic assets.

In short, Mises argued that the free-market social order possesses original sovereignty over money. Any claim by the civil government that it exercises sovereignty over money is not grounded in economic theory or the law of contracts. It is grounded in the desire of civil rulers to extract greater wealth from those under their authority.

Here is Mises' central point: the monetary system is the product of human action, but not human design. This is what is denied by all schools of economic opinion except the Austrian School. All the schools of opinion believe that, for the proper functioning of money, the civil government, because of its inherent sovereignty, must exercise control over money. So, it must have legal authority over money. This means that the law of money, as an extension of the law civil government, is different from the laws governing voluntary economic exchange.



What Is Money? by Gary North


Ask yourself this question:
If your labor, if your efforts, if your ingenuity, if your skill, even your good fortune or reward from those who appreciate you for whatever reason is worth something today.... and that value is expressed in money, and you save that money to some future time, when suddenly that amount you saved is no longer exchangeable for the same thing it was when you saved it---- and this devaluation of the intrinsic value your labor occurred because some elite dispensed or created money out of thin air to reap its benefits which cheapens the value of yours for which you strove---- how is that "fair" ? how is that "equal" ? how is that "justice" ?

All monetary policies that inflate currency are false and doomed to fail... its just that those supporting them are gambling that the fall does not occur during their lifetimes.
International socialists strive to uniformly spread this monetary policy around the whole world because by expanding it, extending it, it delays the time when it wil collapse.
Socialists adopt and exploit the culturally prevalent "christian" ideals of "loving one's neighbor" found in all people, "religious or not" because it is innate to a "survival mechanism" of the species----when in fact, they convince these "college propagandized" pseudo-sophisticate voters their crusades to westernize the African Bushman or Central American jungle dweller or peasant are merely "humanitarian efforts" to improve their material well-being, when actually, they are spreading their economic motives to enslave ever more in a debt cycle of consumerism to prop up their false monetary sytem (of course skimming ever more for their own dynasties along the way)

the hoax of global warming serves the same purpose: Exploit the humanitarian instinct of preservation of the species by demanding through various means an acceptance of a lower std of energy use (std of living) under the guise of "fairness" and "redistribution" of wealth (read: suppression of wealth, uniform extention of poverty) when really, what the ruling elite are accomplishing is that you you use less, yet what you do use will cost you a greater portion of your productive lives than it does now.

Healthcare is the same thing. Once a govt can become the sole purveyor of your very health, indeed, the very air you breathe.. then it has insurmountable advantage and power over you. The effect" extract more of your productivity in exchange for less.

Money is not the "root of all evil" FALSE money is the root of all evil.

Think about it. talk about GREED ! Socialism is GREED personified.

[grandpa]

Quote by: soothsayer Everyone arguing about politics today should give the following some thought: Property rights are the foundation of money, Mises argued. Property rights provide the legal setting for voluntary exchange.

"Legal" means, of course, the "public" setting. So the public pays for privatization.

Grandpa h.

[soothsayer]

"Legal" means, of course, the "public" setting. So the public pays for privatization.

My point in posting this was to have people consider the evolution of economic systems.
Does not "privatization" pre-exist anything else? The individual was the originator of economic activity. Individual contracts pre-existed "laws" and the primary reason for govts to exist was to provide a court to settle private contract disputes.

[Dan_77]

Quote by: Night It seems to me even many leading economists don't understand that gold has little more intrinsic value than a paper currency note. Gold itself represents value, but does not contain it...same as a paper note. It would be impossible to get back on the gold standard. Inflation isn't always a bad thing either...

Quote by: Night I misspoke. I should have said this: Gold certainly does possess an intrinsic value as a commodity. However, the price of gold is sky-high compared to what it should be. If tons of gold were not locked up at Fort Knox or other reserves around the world, the price of gold would probably only reach 10% of it's current value. Furthermore, world production of gold far exceeds it's practical use in electronics and jewelry. Gold would not be a practical currency in our modern economy for many, many reasons. And gold is still subject to dramatic changes in value which would jerk the economy up and down...

This. Until the OP understands this, the discussion is going nowhere.

Furthermore, anyone who seeks a return to the gold standard is kidding themselves if they think that such a standard will be subject to any less tinkering than today's standard. Explain to me why notes backed in gold are any more stable than anything else, when the Congress (or their appointees, in whatever would replace the Fed) can say that $1 is worth one ounce of gold one day, and half an ounce of gold the next day.

It would solve nothing. Absolutely no difference whatsoever.

[Thanatos]

As soon as you said Austrian school I stopped reading.

The thing is basically everything they believe is wrong. Societies can use fiat money and stay stable for extended periods of time. When a country crashes it's money supply like that it's either because of a war or a corrupt dictator. .

Boom-bust cycles are not caused by fiat money. We had them before fiat currency. Boom-bust is a feature of capitalism itself or anything that remotely resembles capitalism; ecosystems develop periodic oscillations as well.

Oh, but I have bad news. Or good news. Production is way down and demand for electronics continues to be high.

Barrick shuts hedge book as world gold supply runs out - Telegraph

Tying our economy to fluctuations in production would have been an interesting decision a few years ago. Our economy would be really deflated which has it's positives and negatives. The tech industry would be even more miserable.

As I recall the other thing that pissed me off about the Austrians is they assume production is predictable. Lies.

[grandpa]

Quote by: soothsayer My point in posting this was to have people consider the evolution of economic systems. Does not "privatization" pre-exist anything else?

No, the natural world "pre-existed" everything else. Decisions over what to do with it by man came later on, along with largely imaginary distinctions between the "economic," the "political" and the "social." In fact, the idea of "infringing on one's rights" ultimately harks back to the natural -- what it takes for one to survive. If any individual or institution is restricting my ability to survive, I will more than likely say "Hey, my rights are being violated!" I've always found this rather simple to explain, but people are capable of some pretty impressive mental gymnastics.

Grandpa h.

[grandpa]

Quote by: Thanatos As soon as you said Austrian school I stopped reading. The thing is basically everything they believe is wrong.

Placing much faith in any economic theory is no better than saying "Jesus rose from the grave."

Grandpa h.

[soothsayer]

Societies can use fiat money and stay stable for extended periods of time. When a country crashes it's money supply like that it's either because of a war or a corrupt dictator. .

Right now, we happen to have both... hence the current rise in gold prices.

I agree that the "Austrian" school is largely academic because even with Obama's deficits, and govt usurpation of the medical industry, increased international war spending, bogus "environmentally-justified" energy price hikes along with energy taxation, a homeland police state and whatever else is in the pipeline, its entirely possible the economy and the US dollar could continue "for an extended period of time" without collapse, although you can bet that it will be divided among fewer major international players, fewer entrepreneurs and small to medium businesses and business owners, ( meaning less social mobility ) and that much more of the productive lives of people will be taken in the form of taxes and much more of their disposable income will be spent on rising energy prices plus energy taxes.

[WindWip]

Quote by: Night It seems to me even many leading economists don't understand that gold has little more intrinsic value than a paper currency note. Gold itself represents value, but does not contain it...same as a paper note.

Well said. The value of a thing is it's perceived value

Inflation isn't always a bad thing either...

A small level of inflation is a great thing - it encourages people to spend money instead of hoarding it.

[Vee]

Modern Monetary Theory of a flexible floating fiat currency says that if the government is in surplus than the private sector is in deficit.

There can be no net savings of money by the non-government sector without the government going into deficit.

In more laymen terms, if the government is in surplus, the private sector is losing purchasing power - have less money than they otherwise would (and that can be fine if the economy is going along swimmingly)