Split from Bush Stomps Rights: Fiat Money

[Doug]

This thread has been split from here. Please continue the fiat money discussion in this thread.

--Savonarola, Politics Moderator

But Sav, I hypothesized hyperinflation. I suspect people's attitudes will change considerably when their money becomes worthless.

DOUG
Whereas Ozarkia stash will always maintain its value...

[Guest]

He's figuring on a barter system like they used (with tobacco instead of dope) back pre-Revolutionary War days. The one that was so cumbersome, they decided to use money instead.

[Doug]

He's figuring on a barter system like they used (with tobacco instead of dope) back pre-Revolutionary War days. The one that was so cumbersome, they decided to use money instead.

DOUG
Right. Cumbersome. I still can't figure out how to get a goat on the back of my bicycle...

[Hogeye]

Two words: silver rounds.

http://www.ozarkia.net/bill/money/silverrounds.html

[Doug]

Two words: silver rounds.

http://www.ozarkia.net/bill/money/silverrounds.html

DOUG
Why should I expect that people will want silver? If the US collapses, the state of the former nation would probably be such that people would be after food instead of silver.

[Barbara Fitzpatrick]

Much more likely that people will want food - and the basis of all those "Mad Max" type movies.

[Hogeye]

People will want silver as a medium of exchange. It is better for this purpose than using food (say, peanut butter and jelly sandwiches or chickens) because of 1) high unit value, 2) homogeneity, 3) divisibility, and 4) durability.

The ease and duration of the transition will, to a large extent, depend on how fast people come up with a new medium of exchange. Where successful, people will enjoy the benefits of division of labor and resulting prosperity. Where unsuccessful, they will suffer under Mad Max conditions.

[Barbara Fitzpatrick]

The ease and duration of transition depends on how fast some bright "leader" comes up with enough followers to subdue the rest and then can set up a monetary system. Silver is one possibility, since it is familiar, as well as durable - but has no other intrinsic value and in fact its value is only what common agreement says it is. To use it as a medium of exchange that "common agreement" has to be between all persons in all communities attempting to interact/trade. As long as everything stays small, market forces work fine - but NYC by itself is large enough to require government to deal with setting value of money.

[Hogeye]

Your statements are counter-historical. Money is a social thing that precedes governments; money was common in all cultures and societies long before fiat money with values set by governments. Other than a short ancient experiment in China, fiat money was "invented" by John Law circa 1718. The American colonies used Spanish minted silver among other things.

Contrary to your post, there need be no unanimous agreement "between all persons in all communities attempting to interact/trade." Only the two traders need agree. Money is simply (by definition) the most liquid commodity. This is determined by the free play of the market, not by government decree.

Government got into money production as an attempt to plunder. Before fiat money, before modern taxation, kings plundered society through seignorage - the clipping and debasing of coins. In modern times, inflating the fiat money supply has become a favorite of governments, since it is a much more subtle way to plunder than direct taxation.

[Doug]

Your statements are counter-historical. Money is a social thing that precedes governments; money was common in all cultures and societies long before fiat money with values set by governments. Other than a short ancient experiment in China, fiat money was "invented" by John Law circa 1718. The American colonies used Spanish minted silver among other things.

DOUG
What is "fiat money," and how does it differ from silver and gold?

And don't try to pull any "intrinsic value" nonsense here.

[Barbara Fitzpatrick]

The American colonies used Spanish minted silver and any other recognized government's official coinage because they were forbidden by colonial law to mint their own and England was perfectly happy to keep them working on a barter basis - it kept them economically suppressed. They had so little coinage they actually cut the coins up to make change (where "pieces of eight" comes from and 2 "bits" make a quarter). After a while some of the colonies started "illegally" coining their own money, but it wasn't recognized outside the colony that coined it (the New England colonies mostly - the Southern colonies used bales of tobacco as their medium of exchange, the value of which was set by the London Exchange). One of the first rights the U.S. took upon itself as a sovreign nation was to coin money to be used domestically across state lines, so folks would no longer have to depend on barter or whatever coinage trickled in from whatever foreign nationals "illegally" trading with them. Now the U.S. prints money as well as coins it - big deal (printing is cheaper in the short run, but coining is cheaper in the long run, as coins cost twice as much but last 7 times as long as paper).

Large populations require governmental structure. What works for a population of a few hundred or less most assuredly does not work for a population of a few million or so. Hogeye's solution is to divide and subdivide until all populations are small enough to be run by Town Meetings - but the Town Meetings only work within a governmental structure - they deal nicely with local (small town and maybe county level) politics, but even a single burrough in NYC has more people in it than Town Meetings can handle, and then representative government is as close to democrasy as possible. Certain things need to be handled across the board - transportation, communication, etc. We've all had the experience of driving down a 4-lane or more divided highway that all the sudden becomes a 2-lane meanderer when crossing the state line. It was one heck of a lot worse prior to federal funding. Some places have more money than others. That's life. But services are needed by all. Call it a cooperative, where monies from everyone are combined to accomplish a common good. Since you will have use of the "good" you will pay your share, even if you'd prefer not to. (Sounds like the current administration's attitude towards wealth - the wealthy don't have to pay their share because they don't want to - a traditon we need to break right now.) It's really as simple as that. Small can use less formal governmental structure. Large must have formal governmental structure. Mythological America of the late 18th century is not the actual American of the 21st century. In the real late 18th century our "founders" were perfectly well aware of this fact (growing populations need governmental structure) and developed a flexible framework (wrote a constitution) that has worked well for over 2 centuries, with a relatively minor number of amendments, all but one (to this point - and that one was repealed) progressively enlarging the freedoms guaranteed by it. I'll take reality over mythology in governance any day.

[Hogeye]

From Die.net
fiat money
n : money that the government declares to be legal tender
although it cannot be converted into standard specie

In other words, the value of fiat money is declared by government decree (fiat) rather that the subjective value determined by the market (aka supply and demand, aka marginal utility.) The US$ is fiat money, since it cannot be exchanged for a commodity.


Barbara, I agree that large populations require "governmental" structure. I just don't happen to think that large populations require a monopoly structure. I think firms and voluntary organizations and mutual aid groups and individuals can develop "structures" without the use of "legitimized" aggression. As far as I can tell, you still don't see the difference between certain services presently provided by government with that peculiar institution known as "the State." You write about these services as if only a State is capable of providing them. This is where we disagree. The current example of such a service is provision of a medium of exchange. You seem to think that only a State can do it, when in fact for thousands of years gold, silver (salt, cattle, tobacco...) were used without State instigation or oversight. (Though States do horn in on the action as a way to plunder.) I found it amusing that you apparently think that American colonists used Spanish silver, not because silver was a well-known valuable time-tested commodity, but because some dead Spanish king coined it!

[Doug]

From Die.net
fiat money
n : money that the government declares to be legal tender
although it cannot be converted into standard specie

In other words, the value of fiat money is declared by government decree (fiat) rather that the subjective value determined by the market (aka supply and demand, aka marginal utility.) The US$ is fiat money, since it cannot be exchanged for a commodity.

DOUG
a. The value of the dollar is related to the currency market. Its value is not simply declared by the government.
b. Any U.S. dollar can be exchanged for a commodity. It's called "buying."

[Barbara Fitzpatrick]

For a large part of the history of this country the government set the value of gold and silver, which backed the "greenbacks". It's only been in my adult lifetime that Federal Reserve notes replaced the Silver Certificates that were dollar bills. It's also been only in my adult lifetime that gold and silver were set at "market" value.

American custom puts dead leaders on money - most cultures put the current leader on their coins or bills. Official money - coined by authority of some government or another - was a guarantee of what was in the coin. If you judge the value of a coin by how much silver is in it, you want some guarantee that it really is composed of that much silver. Clipping and shaving (and cutting) meant there weren't enough smaller coins in circulation - it was a way of making change without any change. In those days, a half dollar really was half a dollar!

[Hogeye]

When the US would exchange a dollar for 1/32 troy oz. of gold, it was not fiat money. Now the US will not exchange dollars for anything except other dollars. Doug, the fact that dollars have a market value does not preclude it from being fiat money. Note that since the US reneged on its 1/32 oz of gold definition, the dollar has lost over 95% of its value wrt gold. Also keep in mind that "legal tender" laws allow people to pay debt with cheap paper money rather than the specie value borrowed.

The history you gave is correct, Barbara, although it has been longer than you indicate since US citizens could exchange paper for specie. FDR stopped cashing dollars to anyone but foreign central banks in the 1930s. Nixon stopped even those exchanges in the 1970s, making the dollar a pure fiat currency. The silver certificates you remember could not be cashed in for silver unless you were a foreign central bank.

[Doug]

When the US would exchange a dollar for 1/32 troy oz. of gold, it was not fiat money. Now the US will not exchange dollars for anything except other dollars. Doug, the fact that dollars have a market value does not preclude it from being fiat money.

DOUG
Why not? Where is the explanation that it is fiat money?

You defined fiat money in a way that is not consistent with the way the U.S. dollar has value.

fiat money
n : money that the government declares to be legal tender
although it cannot be converted into standard specie

In other words, the value of fiat money is declared by government decree (fiat) rather that the subjective value determined by the market (aka supply and demand, aka marginal utility.)

The value of the dollar is partly determined by currency markets.

Factors affecting exchange rates
Four factors are identified as fundamental determinants of the real euro to dollar exchange rate:

The international real interest rate differential
Relative prices in the traded and non-traded goods sectors
The real oil price
The relative fiscal position

...The basic theories underlying the dollar to euro exchange rate:
Law of One Price: In competitive markets free of transportation cost barriers to trade, identical products sold in different countries must sell at the same price when the prices are stated in terms of the same currency.

Interest rate effects: If capital is allowed to flow freely, exchange rates become stable at a point where equality of interest is established.

The dual forces of supply and demand determine euro vs. dollar exchange rates. Various factors affect these two forces, which in turn affect the exchange rates:

The business environment: Positive indications (in terms of government policy, competitive advantages, market size, etc.) increase the demand for the currency, as more and more enterprises want to invest there.

Stock market: The major stock indices also have a correlation with the currency rates.

Political factors: All exchange rates are susceptible to political instability and anticipations about the new government. For example, political or financial instability in Russia is also a flag for the euro to US dollar exchange because of the substantial amount of German investments directed to Russia.

Economic data: Economic data such as labor reports (payrolls, unemployment rate and average hourly earnings), consumer price indices (CPI), producer price indices (PPI), gross domestic product (GDP), international trade, productivity, industrial production, consumer confidence etc., also affect fluctuations in currency exchange rates.

Confidence in a currency is the greatest determinant of the real euro-dollar exchange rate. Decisions are made based on expected future developments that may affect the currency. A EUR/USD exchange can operate under one of four main types of exchange rate systems...

http://www.easy-forex.com/en/Forex.dollareuro.aspx

Hogeye, you are giving the impression that governments just arbitrarily declare some paper to be worth something and somehow everyone goes along with it. To some extent, this is true--in the same way that it is true of gold, silver, diamonds, etc. Yet you propose "silver rounds" as an alternative monetary unit (along with Ozarkia stash).

Silver rounds are just as much "fiat money" as dollars, it seems.

Note that since the US reneged on its 1/32 oz of gold definition, the dollar has lost over 95% of its value wrt gold.

DOUG
So? The price of silver fluctuates in relation to gold. Does that mean that silver is fiat money too?

Also keep in mind that "legal tender" laws allow people to pay debt with cheap paper money rather than the specie value borrowed.

DOUG
I have yet to see evidence that the dollar is fiat money.

[Barbara Fitzpatrick]

Hogeye - I said the silver certificates disappeared in my adult life time. I guess I must be older than you think I am (and maybe nobody told the banks in TX to stop cashing silver certificates in the 1930 or they didn't pay any attention because they most certainly did exchange silver certificates for silver in my (admittelyjust barely) adult lifetime).

When the US stopped its 1 oz gold = $32, the dollar didn't lose value, gold gained it. The US had been artificially holding down the value of gold in the market to $32 per oz. When released to a free market, I remember well, gold ran up to $500 an oz within the first week. The dollar, of course, remained a dollar. The US was holding the price of silver at $2 an oz at the same time (16-1 ratio with gold). When we went off specie, we freed the metals to market forces for valuation.

[Hogeye]

Doug, I am growing impatient with your feigning an inability to understand the definition of fiat money. Ask any economist in the world whether the dollar is fiat money. It's a simple definition. Dollars are declared valuable by government decree; gold is valuable due to supply and demand, regardless of any government decrees. One more attempt, Socratic style:

Q: Has the United States declared the dollar to be legal tender?

Q: Can you turn in your dollars to the United States and receive a specified amount of specie in return?

If you answer "yes" to the first and "no" to the second, then the dollar is fiat money by the definition cited above.


Barbara, I think you are old enough to remember when Nixon closed the gold window. I am. That is when they stopped making silver certificates. From the 30s to the 70s they were semi-fraudulent, since citizens could not turn them in for silver.

When the US stopped its 1 oz gold = $32, the dollar didn't lose value, gold gained it.

Those are two ways of saying the same thing. The dollar lost value in terms of gold, and gold gained value in terms of USdollars. Similarly when Euros gain wrt US$, the US$ loses wrt Euros. It is the same meaning regardless of which measuring stick you choose.

[Dardedar]

Now the US will not exchange dollars for anything except other dollars.

DAR
That's false of course. People buy gold all the time by exchanging it for American dollars.

Doug, I am growing impatient with your feigning an inability to understand the definition of fiat money. Ask any economist in the world whether the dollar is fiat money. It's a simple definition.

DAR
The only people I have seen referring to paper currency as "fiat" money are objectivist, libertarian, anarcho types.

Dollars are declared valuable by government decree; gold is valuable due to supply and demand, regardless of any government decrees.

DAR
You are changing what you said. Earlier:

"...the value of fiat money is declared by government decree (fiat) rather that the subjective value determined by the market (aka supply and demand, aka marginal utility.) The US$ is fiat money, since it cannot be exchanged for a commodity." --Hogeye

Both sentences are false as Doug said. Governments, usually representing the will of the people, do declare what certain piece of paper will be used as common currency but they do not set the value. Often market forces will make them worthless, or nearly worthless as in the anarcho paradise of Somolia. Obviously US currency can and is regularly exchanged for commodities. That's the one thing it is supposed to do. If it couldn't do that it wouldn't be a much of a currency would it?

Q: Has the United States declared the dollar to be legal tender?

DAR
Yes, but they don't declare the value, contrary to what you said above.

Q: Can you turn in your dollars to the United States and receive a specified amount of specie in return?

DAR
There isn't enough gold or silver on the planet to have it all backed up anymore (nor is there remotely enough paper currency but we can make more). Nor is there a need since gold or silver would just be another variation of your "fiat", needing to be agreed upon as a currency and an agreed upon value. Might as well use paper.

The US has more than double the reserves (8,133.5 tonnes) of the next country (Germany) but only about 180 billion worth. A pitance.

And consider:

"In 2001, it was estimated that all the gold ever mined totalled 145,000 tonnes [7]. As one metric tonne equals 1,000 kilograms (or 32,150 troy ounces), this equated to a value of $3 trillion in April 2006 [8]. For comparison, the global market capitalization for all stock markets was $43.6 trillion in March 2006 [9]

LINK

Another comparison: three trillion, all the gold ever mined, is about 1/3 of just the US's debt, or about 1/4th of just the US's yearly GDP (about 13 trillion). That is, all of the gold ever mined is exceed by 2.8 months of the US's GDP. People who pretend we should be on a "gold standard" or currency should be backed up with gold are living in the past. Those days are long gone, and with good reason.

An overview of this "fiat money" debate can be read here:

http://en.wikipedia.org/wiki/Fiat_currency

It's probably written largely by the objectivist libertarian folks who really get jazzed over this. The last large section "Financial convertibility" seems to debunk the whole notion of the debate meaning anything. Part of it:

"A further illustration of the irrelevance of physical convertibility can be seen by supposing that a bank issues two kinds of paper dollars: one redeemable for one ounce of silver throughout the year and another redeemable for the same amount of silver, but only at the end of a year. If the market interest rate is 5%, and if it is costless to issue paper dollars, then the inconvertible dollar must start the year worth about .95 ounces, rise to about .97 ounces at mid-year, and finish the year worth exactly 1 ounce. Any other values would result in arbitrage opportunities. For example, if the inconvertible dollar started the year worth .96 ounces, then each time the bank received .96 ounces of silver in exchange for a newly-issued dollar, it could lend the .96 ounces at 5% interest, be repaid 1.01 ounces at year-end, pay off the paper dollar with 1 ounce, and earn a free lunch of .01 ounces.

What is the value of the convertible dollar? A little reflection will convince the reader that it too must start the year at .95 ounces, reach .97 ounces at mid-year, and finish the year at exactly 1 ounce. That is, the issuing bank must actually raise the amount of silver it will pay for a dollar over the course of the year, or arbitrage opportunities will result. For example, suppose that at the start of the year, customers can deposit .95 ounces and get one paper dollar in exchange — a physically convertible dollar that can be returned to the bank for .95 ounces if the customer desires. If that dollar remained at .95 ounces over the whole year, then at the end of the year the bank will have received a free lunch of .05 ounces — a free lunch that will attract rival bankers willing to pay 5% interest to the holders of their dollars.

The result of these processes is that a convertible dollar will always be worth the same as an inconvertible dollar, so that if convertibility is suspended at any time, the value of the now inconvertible dollar will be unaffected — thus creating the illusion that the backing of the money was never relevant to begin with."

D.

[Doug]

It's a simple definition. Dollars are declared valuable by government decree; gold is valuable due to supply and demand, regardless of any government decrees.

DOUG
What a load of crap. Government money has become worthless in the past DESPITE what governments have said about it.

Do you recall German marks after WWI?

And I cited a whole list of supply and demand and other factors that determine the value of currency. These things function in ways similar to what determines the value of your precious "silver rounds."

One more attempt, Socratic style:

Q: Has the United States declared the dollar to be legal tender?

DOUG
The Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled "Legal tender," states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

Yes. It has also declared bank checks to be legal tender.

But also note that other things are considered valuable even though they are not even paper, such as electronic bank transfers (drafts). So if someone wired you some money, Hogeye, would you walk away from it because it was not worth something?

Q: Can you turn in your dollars to the United States and receive a specified amount of specie in return?

DOUG
"Specie" is metallic money. Why would I be fool enough to think that coins backed by the U.S. Treasury are worth something but the paper money is not? That is ridiculous.

Gold is just as much "fiat" money as you are making out paper money to be.

Has the U.S. government declared gold to be worth something?
Yes.
Can you turn in your gold and receive a specified amount of paper money in return?
Yes.

So what's the difference? Both paper money and gold (and your "silver rounds") are affected by market forces and other factors with regard to value, but none of them are inherently valuable.

They are all only valuable because of the decision of the people. As are works of art.

To try to make out one type to be objectively valuable while another kind is not is absurd.

If you answer "yes" to the first and "no" to the second, then the dollar is fiat money by the definition cited above.

DOUG
By the way, if you think your dollars are worthless, please by all means bring them to the next freethinker meeting and give them to me. I'll do what I can with the damn things.