What is wrong with fiat currency?

[Orwell]

Well? Is there anything wrong, in principle, with fiat currency? Is there any reason why some alternate scheme, such as a gold standard, would be any better?

[SiLVa]

Well, in principle, would you have any problem with me using these to buy something from you?


If so... why?

Fiat money as defined by the Merriam Webster Online Dictionary: money (as paper currency) not convertible into coin or specie of equivalent value

Sounds like monopoly money to me. I rather have this...


Wouldnt you rather be paid in something with real value? as opposed to something thats given a certain value that it is not actually worth?

I sure would.

[Orwell]

I wouldn't want you to pay me with Monopoly Money because Monopoly Money is not regarded as valuable and other people would not accept it as money from me. I would accept US Dollars from you if you wanted to buy something from me, because I know other people will let me trade those US Dollars for things I want from them.

How are coins or bits of gold valuable? Because humans ascribe value to these things. It doesn't matter much what we use as money, so long as we all agree it is valuable and are willing to consider it money. Gold has no inherent value.

[Hans Olo]

Quote:Gold has no inherent value.

That's where you're wrong. It's like saying oil has no inherent value. If gold has no inherent value, then nothing does. Is that where we going? If that's NOT where we are going, then tell me one thing that has inherent value.

A cow? No, since it has only the value of what somebody is willing to trade the cow for.

So, please define 'inherent value' as you understand it (no wiki-crapia) for a non-native speaker like me, if you'd be so kind:)

[SiLVa]

Quote:Gold has no inherent value.

Its kinda funny. I always seem to hear this from the same people that defend the FED and the fiat money system...but is there inherent value in paper money? Especially when its not my personal property and the actual value is controlled and manipulated.

What is the value in that?
Unless of course your the one lending it, therefore collecting interest.

One could say that "gold has no inherent value", just as one could say "supercalifragilisticexpialidocious"...its nonsense either way.

I know one thing. Gold & Silver hardly lose its value over time, so its a step up from Federal Notes already imo.

[Orwell]

Quote:

Quote:Gold has no inherent value.

That's where you're wrong. It's like saying oil has no inherent value. If gold has no inherent value, then nothing does. Is that where we going? If that's NOT where we are going, then tell me one thing that has inherent value.

Yes, that is exactly where I'm going. A subjectivist theory of value is the best one put forward thus far- things are valuable because people regard them as valuable. This is why $100 bills are more valuable than $1 bills, despite having roughly equivalent material content. And if you disagree on that count, I'd gladly trade you two $1 bills for one $100 bill.

Quote:A cow? No, since it has only the value of what somebody is willing to trade the cow for.

Exactly. Of course, some might argue that a cow has more practical value than gold, since you can eat a cow and gold has very few practical uses.

Quote:So, please define 'inherent value' as you understand it (no wiki-crapia) for a non-native speaker like me, if you'd be so kind:)

I think notions of "inherent value" are mostly bullshit.

Quote:

Quote:Gold has no inherent value.

Its kinda funny. I always seem to hear this from the same people that defend the FED and the fiat money system...but is there inherent value in paper money?

Nope. Paper money has no inherent value. The $20 notes in my wallet are only money because everyone around me agrees that they are money. If people did not think they were money, they would just be worthless scraps of paper. Similarly, if people did not think your gold coins were money, they would just be useless pieces of shiny metal.

[SiLVa]

Quote:Nope. Paper money has no inherent value. The $20 notes in my wallet are only money because everyone around me agrees that they are money. If people did not think they were money, they would just be worthless scraps of paper.

I agree totally with this point. I used to say this all the time even before I understood the monetary system. And we could talk all day about "what ifs", but the reality is that certain things have had a given value in society for centuries(Gold & Silver) while some things are attributed value(fiat money) that is for all intents and purposes, made up.

[Orwell]

You're missing the point, silva.

[---]

Quote:Of course, some might argue that a cow has more practical value than gold, since you can eat a cow and gold has very few practical uses.

Cows aren't as useful when it comes to building spaceships. :offtopic:

[Orwell]

Quote:Cows aren't as useful when it comes to building spaceships. :offtopic:

You make spaceships out of gold? Who do you think you are, Zaphod Beeblebrox?

[---]

Quote:

Quote:Cows aren't as useful when it comes to building spaceships. :offtopic:

You make spaceships out of gold? Who do you think you are, Zaphod Beeblebrox?

I didn't say spaceships are 'made of Gold', I said 'when it comes to building spaceships' - an entirely different inflection..

[---]

Quote:In short, although more consumer
goods or capital goods will increase the general standard of
living, all that an increase in M accomplishes is to dilute the purchasing
power of each dollar. One hundred fifty billion dollars is
no better at performing monetary functions than $100 billion. No
overall social benefit has been accomplished by increasing the
money supply by $50 billion; all that has happened is the dilution
of the purchasing power of each of the $100 billion. The increase
of the money supply was socially useless; any M is as good at performing
monetary functions as any other.3
To show why an increase in the money supply confers no
social benefits, let us picture to ourselves what I call the “Angel
The Supply of Money 45
1A minor exception for small transactions is the eroding of coins after
lengthy use, although this can be guarded against by mixing small parts of
an alloy with gold.


2See Ludwig von Mises, The Theory of Money and Credit (Indianapolis:
Liberty Classics, 1981), p. 165 and passim.
3Similarly, the fall in M depicted in Figure 3.4 also confers no overall
social benefit.

All that happens is that each dollar now increases in purchasing
power to compensate for the smaller number of dollars. There is no
need to stress this point, however, since there are no social pressures agitating
for declines in the supply of money.
Gabriel” model.4 The Angel Gabriel is a benevolent spirit who
wishes only the best for mankind, but unfortunately knows nothing
about economics. He hears mankind constantly complaining
about a lack of money, so he decides to intervene and do something
about it. And so overnight, while all of us are sleeping, the
Angel Gabriel descends and magically doubles everyone’s stock of
money. In the morning, when we all wake up, we find that the
amount of money we had in our wallets, purses, safes, and bank
accounts has doubled.
What will be the reaction? Everyone knows it will be instant
hoopla and joyous bewilderment. Every person will consider that
he is now twice as well off, since his money stock has doubled. In
terms of our Figure 3.4, everyone’s cash balance, and therefore
total M, has doubled to $200 billion. Everyone rushes out to
spend their new surplus cash balances. But, as they rush to spend
the money, all that happens is that demand curves for all goods
and services rise. Society is no better off than before, since real
resources, labor, capital, goods, natural resources, productivity,
have not changed at all. And so prices will, overall, approximately
double, and people will find that they are not really any better off
than they were before. Their cash balances have doubled, but so
have prices, and so their purchasing power remains the same.
Because he knew no economics, the Angel Gabriel’s gift to
mankind has turned to ashes.
But let us note something important for our later analysis of
the real world processes of inflation and monetary expansion. It
is not true that no one is better off from the Angel Gabriel’s doubling
of the supply of money. Those lucky folks who rushed out
the next morning, just as the stores were opening, managed to
spend their increased cash before prices had a chance to rise; they
certainly benefited. Those people, on the other hand, who
decided to wait a few days or weeks before they spent their
money, lost by the deal, for they found that their buying prices
46 The Mystery of Banking
4With apologies to David Hume and Ludwig von Mises, who employed
similar models, though without using this name.
rose before they had the chance to spend the increased amounts
of money. In short, society did not gain overall, but the early
spenders benefited at the expense of the late spenders. The profligate
gained at the expense of the cautious and thrifty: another
joke at the expense of the good Angel.5
The fact that every supply of M is equally optimal has some
startling implications. First, it means that no one—whether government
official or economist—need concern himself with the
money supply or worry about its optimal amount. Like shoes,
butter, or hi-fi sets, the supply of money can readily be left to the
marketplace. There is no need to have the government as an
allegedly benevolent uncle, standing ready to pump in more
money for allegedly beneficial economic purposes. The market is
perfectly able to decide on its own money supply.

'The Mystery of Banking' Chapter 4 'supply of Money.' Murray N. Rothbard

You may well say this doesn't directly indict a fiat system but then one only has to consider how it behaved on the ground in the last 200 years for the relevance of the quote to become apparent.

[---]

Quote:THE ORIGINS OF CENTRAL BANKING
1. THE BANK OF ENGLAND
How did this momentous and fateful institution of central
banking appear and take hold in the modern world? Fittingly,
the institution began in late seventeenth century
England, as a crooked deal between a near-bankrupt government
and a corrupt clique of financial promoters.
Banking in England, in the 1690s, consisted of scriveners—
loan bankers who loaned out borrowed money, and goldsmiths,
who had accepted gold on deposit and were beginning to make
loans. The harrowing and expensive Civil Wars had finally concluded,
in 1688, with the deposition of James II and the installation
of William and Mary on the throne of Great Britain. The
Tory party, which had been in favor, now lost its dominance, and
was replaced by the Whig party of noble landlords and merchant
companies enjoying monopoly privileges from the government.
Whig foreign policy was mercantilist and imperialist, with colonies
sought and grabbed for the greater glory of the Crown, trading
advantages, investments in raw material, and markets for shipping
177
and exports. England’s great rival was the mighty French Empire,
and England set out in a successful half-century-long effort to
attack and eventually conquer that rival empire.
A policy of war and militarism is expensive, and the British
government found, in the 1690s, that it was short of money and
its credit poor. It seemed impossible after a half-century of civil
wars and a poor record of repayment for the government to tap
sufficient savings by inducing people to buy its bonds. The British
government would have loved to levy higher taxes, but England
had just emerged from a half-century of civil wars, much of which
had been waged over the king’s attempt to extend his taxing
power. The taxing route was therefore politically unfeasible.
A committee of the House of Commons was therefore formed
in early 1693 to figure out how to raise money for the war effort.
There came to the committee the ambitious Scottish promoter,
William Paterson, who, on behalf of his financial group, proposed
a remarkable new scheme to Parliament. In return for a set of
important special privileges from the State, Paterson and his
clique would form the Bank of England, which would issue new
notes, much of which would be used to finance the English
deficit. In short, since there were not enough private savers willing
to finance the deficit, Paterson and his group were graciously
willing to buy government bonds, provided they could do so with
newly-created out-of-thin-air bank notes carrying a raft of special
privileges with them. This was a splendid deal for Paterson and
company, and the government benefited from the flimflam of a
seemingly legitimate bank’s financing their debts. (Remember that
the device of open government paper money had only just been
invented in Massachusetts in 1690.) As soon as the Bank of England
was chartered by Parliament in 1694, King William himself
and various members of Parliament rushed to become shareholders
of the new money factory they had just created.
From the beginning, the Bank of England invested itself, aided
and abetted by the government, with an impressive aura of mystery—
to enhance its prestige and the public’s confidence in its
operations. As one historian perceptively writes:
178 The Mystery of Banking
From 27 July 1694, when the books were opened with the
words “Laus Deo in London,” the Bank was surrounded
with an aura of prestige and mystery which has never
entirely evaporated—a sense that it was not as other businesses,
yet as businesslike as any. It was like some great ship,
with its watch of directors always on duty during its business
hours, and its studied display of operational efficiency.
The un-English title of “director,” the Italianate contraction
“Compa” on its notes, were deliberate touches of the exotic
and modern, showing those who handled the new currency
or dealt with the Bank that, though this was something new
in England, it had borrowed its tradition from the glorious
banks of Genoa and Amsterdam. And although the Bank
had grown from, and continued as the preserve of, a particular
business syndicate who as a group and as individuals
had many other interests, it bred and drew a particular type
of man, capable of sustaining its gravity.1
William Paterson urged that the English government grant his
Bank notes legal tender power, which would have meant that
everyone would be compelled to accept them in payment of
money debt, much as Bank of England or Federal Reserve notes
are legal tender today. The British government refused, believing
that this was going too far, but Parliament did give the new Bank
the advantage of holding all government deposits, as well as the
power to issue new notes to pay for the government debt.
The Bank of England promptly issued the enormous sum of
£760,000, most of which was used to buy government debt. This
had an immediate and considerable inflationary effect, and in the
short span of two years, the Bank of England was insolvent after
a bank run, an insolvency gleefully abetted by its competitors, the
private goldsmiths, who were happy to return to it the swollen
Bank of England notes for redemption in specie.
It was at this point that a fateful decision was made, one
which set a grave and mischievous precedent for both British and
The Origins of Central Banking 179
1John Carswell, The South Sea Bubble (Stanford, Calif.: Stanford University
Press, 1960), pp. 27–28.
American banking. In May 1696, the English government simply
allowed the Bank of England to “suspend specie payment”—that
is, to refuse to pay its contractual obligations of redeeming its
notes in gold—yet to continue in operation, issuing notes and
enforcing payments upon its own debtors. The Bank of England
suspended specie payment, and its notes promptly fell to a 20 percent
discount against specie, since no one knew if the Bank would
ever resume payment in gold.
The straits of the Bank of England were shown in an account
submitted at the end of 1696, when its notes outstanding were
£765,000, backed by only £36,000 in cash. In those days, few
noteholders were willing to sit still and hold notes when there
was such a low fraction of cash.
Specie payments resumed two years later, but the rest of the
early history of the Bank of England was a shameful record of
periodic suspensions of specie payment, despite an ever-increasing
set of special privileges conferred upon it by the British government.
In 1696, for example, the Whig magnates who ran the Bank
of England had a scare: the specter of competition. The Tories
tried to establish a competing National Land Bank, and almost
succeeded in doing so. As one historian writes, “Free trade in
banking seemed a possibility. Bank of England stock fell on the
market.”2
Though the Land Bank failed, the Bank of England moved
quickly. The following year, it induced Parliament to pass a law
prohibiting any new corporate bank from being established in
England. Furthermore, counterfeiting of Bank of England notes
was now made punishable by death. As Sir John Clapham, in his
180 The Mystery of Banking
2Marvin Rosen, “The Dictatorship of the Bourgeoisie: England, 1688–
1721,” Science and Society XLV (Spring 1981): 44. This is an illuminating
article, though written from a Marxist perspective.
sycophantic history of the Bank of England, put it, “Bank notes
were not yet King’s money, but they were getting near to it.”3
In 1708, Parliament followed up this privilege with a further
one: It was now unlawful for any corporate body other than the
Bank of England to issue demand notes, and added a similar prohibition
for any partnership of more than six persons. Not only
could such bodies not issue notes redeemable on demand, but
they also could not make short-term loans under six months. In
this way, the Bank of England was enormously privileged by Parliament
by being the only corporation or even moderately sized
institution allowed to issue bank notes; its only competitors could
now be very small banks with fewer than seven partners.
Despite these provisions, the Bank soon suffered the competition
of powerful Tory-connected rivals, launched during a brief
Tory ascendancy during the reign of Queen Anne. The South Sea
Company, created in 1711 and headed by Prime Minister Robert
Harley, was a formidable rival to the Bank, but it collapsed nine
years later after a bout of inflationary monetary expansion and
stock speculation. In the wake of the South Sea collapse, the Bank
of England was itself subject to a bank run and was again allowed
to suspend specie payments indefinitely. Still, the ignominious
end of the “South Sea Bubble” left the Bank of England striding
like a colossus, unchallenged, over the English banking system.4
A similar run on the Bank of England was precipitated in
1745, by the rising of Bonnie Prince Charlie in Scotland, and once
more the Bank was permitted to suspend payments for a while.
During the late eighteenth century, the Bank of England’s policy
of monetary expansion formed the base of a pyramid for a
flood of small, private partnerships in note issue banks. These
The Origins of Central Banking 181
3John Clapham, The Bank of England (Cambridge: Cambridge University
Press, 1958), pp. 1, 50.
4On the South Sea Bubble, see Carswell, The South Sea Bubble. For
more on the early history of the Bank of England, in addition to Clapham,
see J. Milnes Holden, The History of Negotiable Instruments in English Law
(London: The Athlone Press, 1955), pp. 87–94, 191–98.
182 The Mystery of Banking
“country banks” increasingly used Bank of England notes as
reserves and pyramided their own notes on top of them. By 1793,
there were nearly 400 fractional reserve banks of issue in England.
Inflationary financing of the lengthy, generations-long wars
with France, beginning in the 1790s, led to the suspension of
specie payment by one-third of English banks in 1793, followed
by the Bank of England’s suspension of specie payments in 1797.
That suspension was joined in by the other banks, who then had
to redeem their obligations in Bank of England notes.
This time, the suspension of specie payments by the Bank
lasted 24 years, until 1821, after the end of the wars with France.
During that period, the Bank of England’s notes, in fact though
not in law, served as legal money for England, and after 1812
until the end of the period, was de jure legal tender as well. As
might be expected, this period proved to be a bonanza for inflationary
bank credit and for creation of new, unsound banks. In
1797, there were 280 country banks in England and Wales. By
1813, the total number of banks was over 900. These banks pyramided
on top of a swiftly rising total of Bank of England notes.
Total bank notes outstanding in 1797 were £11 million. By 1816,
the total had more than doubled, to £24 million.5
The fiat money period proved a bonanza for the Bank of England
as well. The Bank’s profits zoomed, and when specie payments
finally resumed, Bank stocks fell by a substantial 16 percent.6
In 1826, banking was liberalized in England, since all corporations
and partnerships were now permitted to issue demand
notes; however, the effect of the liberalization was minuscule,
since the new freedom was restricted to outside a 65-mile radius
from London. Furthermore, in contrast to the Bank of England,
the new bank corporations were subjected to unlimited liability.
Thus, the monopoly of the Bank was kept inside London and its
environs, limiting competition to country banking.
5Estimated total of country bank notes, in 1810, was £22 million.
6See Vera C. Smith, The Rationale of Central Banking (London: E.S.
King & Son, 1936), p. 13.

Lawrence H. White, “Free Banking in Scotland Prior to 1845” (unpublished
essay, 1979), p. 1.
In 1833, banking was liberalized further, but only slightly:
deposit but not note issue corporate banking was allowed within
London. More significantly, however, the Bank of England now
received the permanent privilege of its notes functioning as legal
tender. Furthermore, country banks, which previously were
required to redeem their notes in specie, now had the option of
redeeming them in Bank of England notes. These actions
strengthened the Bank’s position immeasurably and from that
point on, it functioned as a full central bank, since country banks
now took to keeping virtually all of their reserves at the Bank of
England, demanding cash, or gold, from the Bank as necessary.
2. FREE BANKING IN SCOTLAND
After the founding of the Bank of England, English banking,
during the eighteenth and first half of the nineteenth centuries,
was riven by inflation, periodic crises and panics, and numerous—
and in one case, lengthy—suspensions of specie payment. In
contrast, neighboring Scottish banking, not subject to Bank of
England control and, indeed, living in a regime of free banking,
enjoyed a far more peaceful and crisis-free existence. Yet the Scottish
experience has been curiously neglected by economists and
historians. As the leading student of the Scottish free banking system
concludes:
Scotland, an industrialized nation with highly developed
monetary, credit, and banking institutions, enjoyed remarkable
macroeconomic stability through the eighteenth and
early nineteenth centuries. During this time, Scotland had
no monetary policy, no central bank, and virtually no political
regulation of the banking industry. Entry was completely
free and the right of note-issue universal. If the conjunction
of these facts seems curious by today’s light, it is
because central banking has come to be taken for granted in
this century, while the theory of competitive banking and
note-issue has been neglected.7

Scotland enjoyed a developing, freely competitive banking
system from 1727 to 1845. During that period, Scottish bank
notes were never legal tender, yet they circulated freely throughout
the country. Individual banks were kept from overissue by a
flourishing note exchange clearinghouse system. Since each bank
was forced to toe the mark by being called upon for redemption,
each bank would ordinarily accept each other’s notes.8
Whereas English country banks were kept weak and unreliable
by their limitation to partnerships of six or fewer, free Scottish
banks were allowed to be corporate and grew large and
nationwide, and therefore enjoyed much more public confidence.
An important evidence of the relative soundness of Scottish banks
is that Scottish notes circulated widely in the northern counties of
England, while English bank notes never traveled northward
across the border.

Thus, in 1826, the citizens of the northern English
counties of Cumberland and Westmoreland petitioned Parliament
against a proposed outlawing of their use of Scottish bank
notes. The petition noted that Scotland’s freedom from the sixpartner
restriction “gave a degree of strength to the issuers of
notes, and of confidence to the receivers of them, which several
banks established in our counties have not been able to command.
The natural consequence has been, that Scotch notes have formed
the greater part of our circulating medium.” The petitioners
added that, with one exception, they had never suffered any
losses from accepting Scottish notes for the past 50 years, “while
in the same period the failures of banks in the north of England
have been unfortunately numerous, and have occasioned the most
ruinous losses to many who were little able to sustain them.”

The Cumberland and Westmoreland experience well supports Professor
Klein’s argument that, under free banking, “high confidence monies will
drive out low confidence monies.” Klein has stressed the importance of public
confidence under free banking; people will only be disposed to accept the
money of a fully trustworthy issuer, “so that issuers,” as White sums up
Klein’s argument, “must compete to convince the public of their superior
reliability.” In a system of private bank notes redeemable in specie, “the primary
aspect of reliability is the assurance that convertibility will be maintained
by the continued existence of the note-issuing bank.”

In contrast to the English banking system, the Scottish, in its
120 years of freedom from regulation, never evolved into a central
banking structure marked by a pyramiding of commercial
banks on top of a single repository of cash and bank reserves. On
the contrary, each bank maintained its own specie reserves, and
was responsible for its own solvency. The English “one-reserve
system,” in contrast, was not the product of natural market evolution.
On the contrary, it was the result, as Bagehot put it, “of an
accumulation of legal privileges on a single bank.” Bagehot concluded
that “the natural system—that which would have sprung
up if Government had left banking alone—is that of many banks
of equal or not altogether unequal size.” Bagehot, writing in the
mid-nineteenth century, cited Scotland as an example of freedom
of banking where there was “no single bank with any sort of predominance.”
10
Moreover, Scottish banking, in contrast to English, was
notably freer of bank failures, and performed much better and
more stably during bank crises and economic contractions. Thus,
while English banks failed widely during the panic of 1837, a contemporary
writer noted the difference in the Scottish picture:
186 The Mystery of Banking
“While England, during the past year, has suffered in almost every
branch of her national industry, Scotland has passed comparatively
uninjured through the late monetary crisis.”

[SiLVa]

Quote:You're missing the point, silva.

I dont think so. Perhaps its you that is missing the point.
If you can, elaborate for me please.
I think I understand what you mean. I just dont think that same thinking applies to gold or silver.

We're talking about a monetary currency arent we?

Or are we talking about how we assert "value" to whatever it is that is deemed valuable in society.

[Orwell]

Quote:

Quote:You're missing the point, silva.

I dont think so. Perhaps its you that is missing the point.
If you can, elaborate for me please.
I think I understand what you mean. I just dont think that same thinking applies to gold or silver.

We're talking about a monetary currency arent we?

Or are we talking about how we assert "value" to whatever it is that is deemed valuable in society.

My point is that there isn't any fundamental difference in using gold/silver vs fiat money, because ascribing value to gold and silver is completely arbitrary. Why not use osmium and thallium instead? Why isn't lead considered to be valuable? If you have a bunch of gold coins, and I choose not to accept them as money, then what value do they have? None whatsoever. Exactly the same as my paper $20 notes if people decided not to regard them as money. There is no magical property of gold that somehow imparts value onto it.