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Fractional Reserve Creation of New Money

by Tony M.

We have had a lively discussion of usury here, and the question has come up as to just how it is that fractional reserve banking (FRB for short, hereafter) creates new money. Or, “creates new money”, if you would prefer. Part of the problem with that discussion is whether we should call what is generated 'money' or not. Before we delve into that, I think it would be beneficial to lay out in great detail just what we understand by the term FRB. Here is a short, pithy, fairly direct explanation of the skeleton of the animal:

How Fractional Reserve Banking Works

When you put your money into a bank, the bank is required to keep a certain percentage, a fraction, of that money on reserve at the bank, but the bank can lend the rest out. For instance, if you deposit $100,000 at the bank and the bank has a reserve requirement of 10 percent, the bank must keep $10,000 of your money on reserve and can lend out the $90,000.

In essence, the bank has taken $100,000 and has turned it into $190,000 by giving you a $100,000 credit on your deposits and then lending the additional $90,000 out to someone else.

Now, if you take this out a little further, you will see that your original $100,000 can become $1,000,000 by the time it is all over. Here’s how:
- You deposit $100,000 Your bank loans someone else $90,000
- That person deposits $90,000 Their bank loans someone else $81,000
- That person deposits $81,000 Their bank loans someone else $72,900
- That person deposits $72,900 Their bank loans someone else $65,610
- That person deposits $65,610 Their bank loans someone else $59,049
- That person deposits $59,049 Their bank loans someone else $53,144
- That person deposits $53,144 Their bank loans someone else $47,829
- And so on

Ultimately, your initial $100,000 can grow into $1,000,000 with a 10 percent reserve requirement.
To find out exactly how much money the fractional reserve banking system can theoretically create with your initial deposit, you can use the Money Multiplier equation:

– Total Money Created = Initial Deposit x (1 / Reserve Requirement)

For example, with the numbers we have used above, you equation would look like this:

– $1,000,000 = $100,000 x (1 / 0.10)

I would like to flesh out this skeleton with what I understand of what else is going on, so that we can see just what the argument really is all about. I will admit that I am no expert in this stuff, and if others have pertinent additions, I will be glad of it.

First, I am going to take us back to the good ol’ days when money was, generally, gold coins, silver, copper, and sometimes iron coins. There probably never was a time when ALL money was that, there were times and places when other items were used as a medium of exchange, but by the year 1500 most of it was metal coin. (And when I say “coin” I mean ONLY physical coins that you could hold in your hand and test for gold alloy.)

Harkening back to a prior post: Mr. Goldsmith had to have a store of gold on hand to do his smithing work – jewelry work and gold leaf, perhaps along with making coins. Hence he had to have a good locking vault, and maybe a guard or three. Other people had higher risks involved with their holding on to gold, so if they were very worried, they might bring their gold to Goldsmith to store it for them. (It might be gold coin, but it could also be other gold – jewelry, lamps, a cross, etc.) He would (if sensible) charge a fee for the service. And he would give them a receipt which testified to (a) he had received their gold for storage, and (b) they could redeem the gold by presenting his note. The receipt was both proof of the gold deposited and a contract for its return.

By and by with growing trade and wealth, a lot of gold and silver in the form of coin was stored this way. And people would sometimes, instead of going to Goldsmith to get their coin out of storage and buy some big-ticket item, simply draft a note to Goldsmith and hand it to Fred the seller that said “please pay Fred 10 gold coins out of my deposit”, i.e. a draft on the buyer’s account with Goldsmith. Fred could go and do the redeeming for the buyer, Bob, when he actually wanted the gold if he didn’t want to carry the gold off right away.

However, Fred also had an account with Goldsmith, and didn’t want to carry the gold away, and so when he would present the check in Bob’s name, Goldsmith would simply make a change in his accounts book, adding 10 to Fred’s account and subtracting 10 from Bob’s.

But then the question comes up: how much did Fred trust Bob, as to whether he really had the full 10 gold coins on deposit? Sure, Bob had the original receipt on hand that said Goldsmith had received 10 coins on deposit, but maybe Bob had already made checks for some (or all) of the money. And how would that all work if Bob went to another city where nobody knew him and that his tailoring business was “good for it”? Eventually, Goldsmith wrote out generic, unspecified “banker’s notes”, in small (or, sometimes, large) denominations, that simply meant “good for redeeming X gold coins”. These were something like bearer’s bonds, effectively, which Bob could hand to Fred as evidence of the gold on deposit at Goldsmith’s. Whether Fred would accept the note depended less on whether he trusted Bob and more on whether he trusted Goldsmith to have what he claimed in the note: gold on deposit available for redemption, that he would honor the note, etc.

Now let’s go back to the FRB scenario above, and fold it in. John goes out on a trading voyage that is highly successful, and comes back with 10,000 gold coins, which he certainly does not want to store. He takes the money to Goldsmith, and instead of a fully written out receipt for his money he receives 1000 banker’s notes each for 10 gold coins. He accepts the notes as under the same standard as the former receipts: he recognizes that there are risks of putting his money in Goldsmith’s hands, there could be a fire or a theft. Goldsmith could take the money and run. These are the risks he accepts. The notes are a proof of deposit and a contract in the same way the receipt was. However, the notes have fine print on the back that specify a “10 day hold period” that Goldsmith can require between when the note is presented for redemption and when Goldsmith has to fulfill the claim. (Goldsmith explains that he stores larger deposits at an off-site secure location, and it takes time to retrieve them.)

Able comes to Goldsmith and says: I want to buy a house worth 10,000, I have 1,000, but I need to borrow 9,000. Goldsmith offers to hand him 9,000 gold coins as a loan. But Able doesn’t want to carry that much, it’s too heavy and too risky. So Goldsmith hands him a letter of credit testifying to the 9,000 ready on account for Able, and has Able sign a contract. According to the contract, Able must (a) pay off the debt in 10 years; and (b) if Goldsmith asks for the full debt to be repaid, Able has 9 days to cough up the cash: he can get alternate loan funding from another banker, or sell the house, or whatever. (This clause (b) is, of course, just in case John asks for his 10,000 gold coins back – Goldsmith never expects to have to invoke this clause. See * below for a discussion of alternatives to this clause (b).) Naturally Able has to pay interest, and has to initial clause (c) of the contract that provides the house becomes collateral for the debt.

Able buys the house from Baker, by handing over the letter of credit and 1,000 in coin. Baker goes to Goldsmith and has him “remove” the 9,000 from Able’s account and post it to his own account.

Now Baker has been hankering to start a deli, and asks Goldsmith for a loan. He will use his 1,000 coin, 9,000 from his account, and borrow another 8,100 from Goldsmith (call him G). He will convert the bottom floor of his town home to the purpose, and will buy machinery, shelving, and food stock with the money. G has him sign a contract requiring (a) that he repay the loan over 10 years, and (b) if G asks for the money, he has 8 days to cough up the coin. (G explains that he never expects to invoke (b), but it is there “just in case”.) And of course, (c) he has to sign over a subordinate collateral assignment of his home to G to the extent of 1/3 of it (the bottom floor), since another lender is the primary assignee for the home as collateral. G provides Baker with 900 ten-coin (new) bankers notes for the “money” that is “in” his account (the 9,000 that came from Able), and a letter of credit for the other 8,100 that G is lending him.

Now Baker buys all his items from Charlie, the restaurant supplier in town. He provides his 9,000 in banker’s notes and the 8,100 in credit, along with the 1,000 coin. Charlie takes the notes and letter and has G credit HIS account with the 8,100 in credit from Baker.

Charlie has hankered all along to turn his back 40 acres into a truck farm, to provide his own food stuff to sell to restaurants. But he needed an expensive tractor, which he now has money to buy. He gets a letter of credit from G for 7,290 and new banker’s notes for his 8,100 on account. Charlie plans to buy the tractor (plus a storage barn) for 24,390, which is equal to his 17,100 in banker’s notes and 7,290 in credit. G has Charlie sign a contract providing (a) that Charlie has to repay the loan over 10 years, and (b) if G asks for the money, he has 7 days to cough up the coin. (G explains that he naturally never expects to invoke (b), but it is there just in case John comes along asking for his coin.) And, of course, (c), he makes over a primary assignment of collateral on the tractor, and a subordinate assignment on the 40 acre farm.

Charlie buys the tractor from the local John Deere dealer, Dan, and hires Dan’s outfit to build him the barn. Now Dan has 17,100 in banker’s notes, and 7,290 in credit from G. He goes to G to convert the letter of credit and has him credit _his_ account with 7,290.

Dan all along has wanted to expand his showroom so he can show off his latest and best equipment, and now he has the “money”, he has 24,390 available: 17,100 in banker’s notes and 7,290 on account with G. He wants to hire Echo to do the construction, to the tune of 30,951. He get’s a loan from G (i.e. a letter of credit) for 6,561. He naturally has to sign over a contact with the terms (a) that he will repay the loan in 5 years, and (b) if G asks for the money back he has 6 days to cough up the cold gold coin. Dan also pulls out 7,290 from his account, in banker’s notes. And of course, he signs over a subordinate assignment in the dealership’s physical building (supposedly worth 40,000, but he owes Tom 33,000 on it).

Dan pays Echo the 24,390 in banker’s notes and the 7,290 letter of credit.

And so on. At each stage, the seller of the prior stage takes the letter of credit and replaces it for banker’s notes. G started with 10,000 coins, and so far he has written out 24,390 in banker’s notes on them, plus the first 10,000 in notes given to John. (And he isn’t done yet, it will keep going till the total is 100,000, if he keeps to his 10% reserve ratio.)

The parties involved have been using the banker’s notes and letters of credit “as if” they were the gold coin they represent, but of course what they are really is a _promise_ with respect to gold coin. They are, therefore, a risk: that G is not lying about having the gold coin, that he won’t take his gold and skip town, that G’s house won’t burn down or be broken into. That, at least, is the risk that John knowingly accepted in taking HIS banker’s notes as receipt for the coin deposited. (This is aside from the risk, inherent, that the gold itself may change in value. The notes are promises as to being redeemable for gold coin, not promises that the gold will remain valuable.)

But notice, critically, that in Echo’s hands, those banker’s notes now have a heck of a different cast of risk than they did at the start. In Baker’s hands, the notes depended on Able paying his loan, or Able being able to get alternate loan funding, or selling his house within 9 days. In Charlie’s hands they depended on Able and also on Baker paying his loan, or Baker being able to get alternate funding, or being able to sell something worth 8,100 in 8 days…etc down to Dan and then Echo. If Echo tells G that he wants the gold coin, G has 10,000 coins on hand, but has to call in the other notes to get the rest of the 30,951 he claims from G.

Note, please, that this model of FRB does not inherently involve usury. All the loans were with collateral. We can simply assume (since nothing else was written into the contracts) that G’s reach for repayment is limited to the collateral, not to the person of the borrowers. Nor does the FRB inherently involve “fiat money.” At every step of the way, the lending was in terms of gold coins that G actually has on hand, or could have on hand by calling in loans. Nor does the paper "money" inherently mean "sovereign money" - i.e. an obligation of government, at every step the paper items being exchanged were originated by Goldsmith who paid a clerk to make out fancy, difficult-to-copy "notes" that were contracts on an obligation by G. This just clean, pure, unadulterated FRB without other frills like regulatory constraints.

*[ In theory, G could have managed item (b) of his contracts differently. He could have written his banker’s notes with explicit conditions. His notes to Charlie could have read “if Able and Baker do not repay their loans with coin upon recall, this note is redeemable instead for a proportionate share of my loan contract with them rather than in coin”. And his notes to Dan could have said “if Able, Baker, and Charlie, do not repay their loans with coin upon recall, this note is redeemable instead for a proportionate share of ‘my contract with Able, Baker, Charlie’ rather than in coin“. This would be a slightly different arrangement, and would create an explicit difference between the notes given to John and the notes give to Echo. In practice, though, nobody would ever make such conditions an explicit element of banker’s notes, because they would have to alter their notes for each change in total accounts, which is completely impractical.

The other alternative to (b) is for G to never mention clause (b) at all, and not have any fine print on the back of the notes. I would call this an outright fraud perpetrated upon those who receive the notes, though, because G has an obligation to respect the possibility of some of the parties somewhere along the line redeeming the notes, and ignoring that obligation is effectively just handing out promises with no intention of fulfilling them. Eventually G has to assume that John will ask for the gold back. If there is only a possibility of the other parties redeeming a portion of the notes, depending on all the other parties not doing so, then the character of the contract promise inherent in the notes (including John’s) changes: “redeemable for gold coin as long as you get there early enough in the bank run”. A note that means (but does not say) “redeemable for gold coin…but not REALLY if you actually, you, know, ask for the coin, only if you notionally ask for it” isn’t a real contract promise – i.e it’s fraud. This ties in with a later point. Hence my having G use clause (b) is an attempt to avoid purely fraudulent bank notes or purely fraudulent FRB, and to SHOW the real relationships being created.]

Three things to note that are important, I think: First, after this program has been going on for a while, John probably would (or should) know up front what G was going to do with the gold when he put it on deposit, in part because G would be paying John for the privilege of handling the money, rather than John paying G for the storage costs. But when G FIRST STARTED doing this, there could be no presumption on John’s part that he was getting those secondary risk elements for his deposit, and if the contract with G did not explicitly state “G may lend out my coin” then John would not have been buying into that scheme of risk. There’s a big difference between “I am storing my goods with you and accept the risk of damage or theft” and “I am depositing my goods with you for investment and I accept the risk of some of the investments turning bad.” In the scenario, the FIRST time G starts to get into lending, John didn’t deposit the gold coin for further investing.

If John wants to invest in other people’s ventures, he can indeed hire G to do it for him or do it himself. I happen to think that it is a lot more prudent, looking at the view from 30,000 over all of society, for John to do at least some of his own investing, because he is then more likely to have a real understanding of the risks he is buying, instead of a hands-off (and heads-off) attitude of “let someone else have the headaches.” What is patently unreasonable is for G to subject John’s deposit to investment risks that he never had reason to expect because it was a new scheme and not part of the written contract.

Secondly, in theory, G can indeed fulfill a demand by Echo for the full 30,951 in coin if every loan call is successful. But there’s the catch, that conditional statement “If…”. Suppose all of the other borrowers who had other debt (and who had primary collateral on the home, farm, and dealership with someone else) had their loans with one single lender, say Silversmith. And suppose that between them these two effectively hold all the loans in town. You could easily have a situation where a single demand for redemption by Zed (the last guy in line) could not only force Goldsmith and Silversmith to attempt to call all the loans in town, but that there simply are not 100,000 coins in town to redeem the calls. (In fact, if loans constitute enough of the town economy, a call on ALL of the loans in town would always fail, because of the interlocking nature of the businesses.) In practice – even without a call on all loans affecting the entire town - not every loan call is going to be successful. Some of the property won’t be worth what debt they cover. Some of the property cannot be sold in time.

Much more importantly, there is in principle nothing that prevents G from lending out without “adequate” collateral, which does in fact happen if the borrower’s reputation for making money (or business model) is convincing even though there is no sufficient hard object of collateral. My uncle got business loans by convincing the bank he had a great business model without sufficient up front collateral that obviously would succeed in paying off the debt (the increase to the value of his business by expanding would only be WORTH the money put into the plant (and salable for that same amount on the open market) it if the business proposition was correct. If incorrect, nobody else would pay that kind of good money for the building.) Even if G calls in all the loans with collateral, he cannot expect to always make good on loans calls. Or, to put it another way, G’s “balance sheet” holds so-called “assets” that are measured in terms of the notional value of the loans, not the ACTUAL value of the collateral. G does not have to, for example, do a recall on loans whose collateral has dropped in value to restore his target reserve ratio. The reserve ratio is a preferential notion IN HIS HEAD, not a physical or structural limit to the possibility of lending. The standard in the industry has changed over time, with the rate now at about 3% (so I have read.)

In essence, the risks associated with FRB based on notes reflecting gold (and silver, copper, …) coin include not only the risks of each individual loan being paid off, but ALSO the risk that calls for actual, physical coin are “manageable.” Inherently, one of the critical features of managing that risk is making sure your reserve-to-lending ratio is not too low. And one of the risks is a misjudgment about how likely (and large) demands for redemption will occur in relation to the available REAL (as opposed to on paper) options each borrower has when he tries to comply. The risks to this judgment / misjudgment are not obvious. For one thing, it is almost impossible to correctly “measure” the probable rate of calls, demands for pay-off on the loans, withdrawal of cash from deposit accounts, for when “things go rotten.” A system that only works when everything is going right is a system that is inherently unstable. For another thing, since the reserve ratio is a mental CHOICE by the lender, not an inherent given to the system, there is nothing that prevents a banker to decide to change his ratio (unless he promised to keep a certain ratio to his depositors, which normally does NOT happen. Show me a bank account that explicitly states a reserve ratio.) So if investors jump in with deposits under a 10% reserve standard, and their banker decides he likes more risk and changes to 5% reserve, they are suddenly taking more risk than they planned.

Thirdly, all of this picture hangs prettily on notes that refer to a specific physical item of value. It is true that the market value of those coins of gold can (and did) change over time and market fluctuations. But there was a specific, physical CONTENT to the promises that could be pointed to as a base, rooting value of the notes – yes, taking into account the risks implicit in a note versus the gold coin in hand. The value the notes point to at any time is the value of physical gold coins. The value of the notes themselves is the combination of (a) the value of the coins themselves, and (b) the risks inherent in leaving them in play versus physically collecting them in cash. That (b) is somewhat subjectively ascertained. There is something objective that the subjective user’s implicit use hangs on, there is an objective referent to the notes so the notes are a promise ABOUT SOMETHING ELSE. Yes, accepting the promise is, inherently, accepting a risk. That risk is rooted in “what will people choose to value gold (or whatever the external referent is) at?”

When you switch to a system for which there is no root referent for the notes (i.e. fiat money), AND maintain the fractional reserve lending, I believe that the success of the system may depend critically on not paying attention to the inter-related web of relationships of risk, with the conjoined lack of a root referent. The risks of the inter-related loans are then saddled with a new risk: “what will people chose to value the other notes in the system for” against which there is no external referent.

There is a qualitative difference between a system of dollar notes that reflect an external root referent and a system of dollar notes that don’t. I believe that the nature of the latter is insufficiently examined. It is a relatively new experiment, virtually untested in any real sense (the most recent period of history, with the US moving away from the gold standard, is a drop in the bucket in terms of a historical frame of experience). I suspect, also, that our cycles of bubble and burst are, at least with a certain amount of probability, indicators of underlying problems that are not fully recognized.

Comments (174)

"I suspect, also, that our cycles of bubble and burst are, at least with a certain amount of probability, indicators of underlying problems that are not fully recognized."

Recall that we had cycles of bubble and burst since at least the tulip and South Sea things and gold ruled through the Great Depression. In fact there is a correlation between when recovery started during the GD and when a nation abandoned the gold standard. Problems since the end of the Great Moderation likely reflect factors like too many dollars chasing too few productive investments and the growth of the financial sector.

G would likely have correspondents on which he would rely. Of course a general glut or even the failure of a correspondent would result in the house of cards collapsing. That's why, gold or not, a lender of last resort (this means the government or central bank as the days when a Morgan could cope are long over) as well as deposit insurance is necessary. (BTW, a bank deposit is an option only in the sense of being, in effect, a put on the Federal Treasury; any given bank's balance sheet is irrelevant.)

al, it is fair enough to point out the bubbles that happened before the most recent era in which we have unhinged from the gold standard. However, that doesn't automatically imply that the current bubbles / bursts are the same in quality. For example, the 1987 Black Monday, the the 2000-01 dot-com burst, then the 2008 crisis, may indicate a different rate of crises. Or may not - the definition of a crisis is kind of fluid.

I would also be inclined to accept the notion that FRB itself lends itself to periodic crises even without fiat money. For instance, the sub-prime mortgage kind of crisis happen whenever the pressures to accept (indulge in ?) certain forms of collateral lead to undue risk taking across a large swath of the financial sector. Which can happen with tulips or spices, I suppose. I do suspect that FRB constituting a very large portion of the economy tends to increase the risk of destabilization, but I am not wedded to the idea.

Problems since the end of the Great Moderation likely reflect factors like too many dollars chasing too few productive investments and the growth of the financial sector.

This could, I suggest, constitute a charge against the kinds of transactions that made the financial sector so big - like the FRB, and the the factors that led to too many dollars, like FRB and fiat money.

Regarding the Tulip Mania.

https://mises.org/search/site/story%202564

History has a tendency to compress the further we move away from events (not to mention the self-serving nature of the narrative taught by our education system). Often times when one looks at an event in more detail, one comes away with a much different understanding of that event than the purported one or two paragraph "lesson" learned at school.

A system that only works when everything is going right is a system that is inherently unstable.

I strongly agree with this.

For another thing, since the reserve ratio is a mental CHOICE by the lender, not an inherent given to the system, there is nothing that prevents a banker to decide to change his ratio (unless he promised to keep a certain ratio to his depositors, which normally does NOT happen. Show me a bank account that explicitly states a reserve ratio.)

Isn't the reserve ratio set by external law? Does this help at all to stabilize the system?

Thought experiment: How much would it help (or hurt) if, in a given system, value were denominated more explicitly in various kinds of "money"? We already have M1, M2, and so forth, but interestingly, even M1 includes demand deposit accounts. As we have seen in our recent discussion of FRB, even demand deposit accounts are not fully liquid, and the total amount in them in the system can be inflated at will by banks in the act of making loans. Hence, even M1 includes both currency and a kind of "bank fiat money" (not to be confused with government fiat money) or "bank paper," which is a bank's issuance of calls upon its total balance sheet in the form of new deposit accounts. These can be and are created anew by banks making loans, which is why it is said that banks "create money."

Would it make any difference to anybody or anything if there were an explicitly recognized M0 which included only currency and if the "money" in deposit accounts were expressly denominated as "bank tokens" or something instead of "dollars"? Would this inclusion of additional information in transactions help or hurt economically?

Problems since the end of the Great Moderation likely reflect factors like too many dollars chasing too few productive investments and the growth of the financial sector.

I saw a stat not long ago saying that about 1/3 of all corporate profits in the US now are in finance. Profits that high are indicative of an unhealthy relationship with the economy and government, not natural market forces since the industry doesn't actually produce real wealth.

Isn't the reserve ratio set by external law? Does this help at all to stabilize the system?

Well, yes and no.

Remember, the picture I am painting is of "fractional reserve banking" in its pristine, in-principle, untrammeled basic vanilla variety - which (if I understand it correctly), just about HAD to be close to what was practiced in the first instances before government could get around to regulating it. It is perfectly possible to construct FRB without government regulations, and thus it is possible to have FRB that is not constrained by regulation to a certain reserve ratio.

Certainly regulating the reserve ratio does help stabilize things - to an extent. The regulation forbids ratios that are egregiously too low, even for the stomachs of the regulators. It remains possible, though that the regulators' stomachs are themselves too strong for reality. If they have set 3% as the limit, but REALITY would say that 6% should be the limit, or 10%, or perhaps 50%, then possibly regulating is going to be damaging to the economy in the long run. Also, if there is no government regulation of the matter, maybe different banks would pick different ratios, and investors could choose a ratio that they think makes sense - thus using investor wisdom over the entire market instead of a regulator's wisdom. This might or might not be beneficial market-wide over time. Beneficial, maybe, because investors could "reward" for behavior that is more to their own estimation of reality. Maybe not, because the real damage to the economy is what will occur with and between the many different players in the market, not what will happen to any one bank and its assets.

If the regulators have bought into the same mind-frame, the same template of assumptions, that the bankers themselves would use to set their ratios, it is not clear to me that having the ratio set by regulators is really doing all that much good except the modest good from merely standardizing the industry.

What if we had 4 or 5 different bank co-ops, that is, 4 or 5 different SYSTSEMS of banks, each with its own set of parameters on what constitutes rational behavior about a reserve ratio? And each bank only normally operates with other banks in its own system, going outside its own system with cash-only exchanges? This would mean, at least theoretically, that you could have a crash / crisis in one bank system and leave the others standing. Would this get you a situation where the most aggressive system, the one that set its reserve ratio at the lowest, could collapse, and maybe the next system suffer serious damage, but the other three keep on trucking along? It probably could - if and only if there were a meaning to "cash" that is not wholly bound up in the creation of new money in one of the systems. That is, if there were a cash referent that is INDEPENDENT of all of the bank systems.

I'm not sure that it's helpful to illustrate FRB (assuming a 10:1 reserve ratio) by using the recursive process of issuing subsequent loans based on the size of an initial loan. It's simpler to just say that banks consider the characteristics/risks of each prospective loan/borrower, how this prospective loan will affect their balance sheet in total and decide, or not, to grant the loan. The bank has X amount of currency reserves (includes physical cash on premises but mostly are claims on the Federal Reserve, for all the big banks which net out with each other every night) and 9X in loan assets by market value.

I think the long illustration of the OP shows, not the problems with FRB, but with making gold the medium of exchange. Once you start borrowing and lending in gold denominated debt, then you've introduced paper gold into the system which distorts the true price of actual physical gold. Gold bullion is the ultimate in 'here and now' trade settlement. If you want to lend money, sell your gold for currency and lend the currency, but don't lend the gold itself. Gold should always be unambiguously owned. This problem goes away when exchanges and bankruptcy courts force settlement of all gold contracts in currency, based on the current market price of gold, rather than in gold itself. And this is what will happen when the crack up in bullion banking occurs as the Hunt brothers learned in the silver COMEX markets in 80-81.

Banks are limited in their FRB practices by profit and the fear of bankruptcy (this fear has gone from all the big banks since 2008). Sovereign currency issuers are limited in their ability to issue fiat money by price inflation. This is why banana republics can't print money recklessly for very long. No savers/wealth producers store their wealth in banana republic currency/currency denominated debt, so the money is constantly circulating and price inflation shows up immediately.

The US is different. Savers and wealth producers all over the world, at the indivdual, institutional and national levels, store their surpluses in US currency and currency denominated debts for long periods of time. And official currency pegs means our inflation never hits home. But for this to continue working, given that there is no appropriate global focal point for trade settlement/savings, the system must promise the players something to keep playing. And that thing is even more dollars in the future. This is where derivatives came in and all manner of structure products designed to produce more yield and keep everyone in the game. There is nothing left but to chase yield and equity returns. And this is why the US has gotten away with such large fiscal and trade deficits for so long.

I'm not sure that it's helpful to illustrate FRB (assuming a 10:1 reserve ratio) by using the recursive process of issuing subsequent loans based on the size of an initial loan. It's simpler to just say that banks consider the characteristics/risks of each prospective loan/borrower, how this prospective loan will affect their balance sheet in total and decide, or not, to grant the loan.

Andrew, isn't "their balance sheet in total" the reflection, mainly, of their ability to collect on the other loans they have out to other parties, versus their obligations they owe to other banks?

I was trying to show how their right to collect on loans shows up as the basis for what they lend out. This is, I think, the heart of fractional reserve lending. Whether we call it "creating new money" or "selling options" or "accepting investment in the bank" or something else, whatever words we use have to be tied to the fact that the "assets" the bank is using are other people's debts to the bank.

Tony, sure. But I think people who object to FRB, who think of banks as depository institutions (this was my intuitive understanding as a kid, which made me wonder why the bank was paying me interest rather than vice versa), think that banks lend out the exact same money that is deposited. When instead the currency reserves are a fungible pool, not consisting of the same dollar bills that were deposited. I think the use of the classic recursive loan example reinforces this inaccurate depository image. It's a quibble.

It's simpler to just say that banks consider the characteristics/risks of each prospective loan/borrower, how this prospective loan will affect their balance sheet in total and decide, or not, to grant the loan.

Andrew, would you say, then, that a SPECIFIC RESERVE RATIO is actually an irrelevancy to the lending, what matters is simply whether the bank wants to take on the characteristics of this loan or not?

I would say that the person running a loan book for a bank is looking for good business opportunities and is aware in a general sense how much business he is authorized to take on. But it is someone else who takes a look at the bank's aggregate positions at the end of each business day and arranges the overnight funding to make sure the bank is meeting its reserve requirements.

Andrew, fair enough. That allows me to clarify my illustration above: there is nothing that inherently requires, at each stage from Able to Baker to Charlie to Dan to Echo, that each party wants or intends to acquire the full 90% loan that the banker (G) would be prepared to lend on the prior asset base. It could be, for example that Able only wants $6,000. And some other borrower Adelle wants $3,000.

I would insist on keeping, for the sake of the illustration that is, the flow of new bankers notes as ARISING FROM obligations that hinge on earlier loans in the process. G doesn't simply go out and, on the strength of his 10,000 in seed cash on hand as his only asset, and lend 100,000 in bankers notes to Zed - even if he thinks the collateral is worth 100,000. If the whole basis of the intelligibility of the asset-debit balancing of G's books rests in Zed's collateral, there is absolutely NO limit to how much he can lend on the strength of the 10,000 in coin on hand, it could be 10 billion. But that's not fractional reserve lending, that's some other animal. It's the interplay of earlier loans forming the basis for later loans.

By the way, Andrew, could you clarify what you mean by:

And official currency pegs means our inflation never hits home.

I am not at all sure what you are referring to.

For example, China used to peg their currency to the dollar at 7:1. So if we run a large trade deficit with China, we're flooding China with dollars which drives up the value of yuan currency in China and the Chinese central bank (PBOC) has to print yuan to buy up the dollars if they want to maintain the peg. The PBOC then essentially sterilizes the dollars by storing them in Treasuries. Our inflation becomes their inflation.

But China is slowly de-pegging. The swiss de-pegged from the Euro. The era of the dirty float appears to be over and the US is going to have to rely on private hot money flows to absorb our dollar output.

I saw a stat not long ago saying that about 1/3 of all corporate profits in the US now are in finance. Profits that high are indicative of an unhealthy relationship with the economy and government, not natural market forces since the industry doesn't actually produce real wealth.

Mike, I am wary of such high numbers, but I also doubt that the numbers mean what they say.

I take it that a very substantial portion of the cycle of putting new money into brand new production activities (especially, new FORMS of production activities like invented products and processes) is undertaken by borrowed money, while another large portion is undertaken with what I would call formally invested wealth (not through debt), such as stock in corporations, and partnership contributions. Generally, I would not complain too much if, of the total entrepreneurial new forms of wealth being generated, 1/3 of it were being produced through borrowed funding and 2/3 of it were being generated the other ways.

But of course "1/3 of profits" isn't the same as 1/3 of _new_ wealth production. What about all the OLD production that is just the same old, same old? The old farms producing their same old crops? The old auto manufacturer making the same Toyota parts that it made the last 20 years? The old CPA firm running along on its same old CPAs, with maybe a new secretary or two? I find it difficult to believe that of all the production of wealth, INCLUDING all the firms and processes that are substantially the same as from 20 years ago, 1/3 of them are siphoning off effectively all their profits to service their debt. Doesn't old debt ever get retired, leaving firms making a profit clear of debt service? Doesn't some debt get wiped out in the failure of firms?

And if it really is 1/3, then I agree that is a truly worrisome number.

It's simpler to just say that banks consider the characteristics/risks of each prospective loan/borrower, how this prospective loan will affect their balance sheet in total and decide, or not, to grant the loan. The bank has X amount of currency reserves (includes physical cash on premises but mostly are claims on the Federal Reserve, for all the big banks which net out with each other every night) and 9X in loan assets by market value.

What Andrew says here is significant, and was at least part of what I was trying to draw out: when the bank lends someone (via my "letter of credit", which in today's terms can simply be Bank A "sending" notations of credited account to Bank B), the "money" so lent really rests on a right to call on the "assets of Bank A", which in turn means that it rests on a right to call in the loans of Bank A, because by and large that's what a pretty large share of Bank A's assets really are. That's EXACTLY why I structured clause (b) to explicitly state Goldsmith had the right to call in loans.

The problem is with contracts where the reality of that right - to call in the loans - is not made explicit, but it is the only sound basis for the extension of the credit as new money lent. Transparency is better than subterfuge. The hidden, implicit reality that the new money can only be sound because it is backed by G's right to call in an obligation to him, if it is wholly hidden, leads to the mistaken notion that the new money is JUST LIKE the earlier money that never was based on any right to call in an obligation. People should not be misled into such mistakes.

This mistake is compounded by a second mistake that ALL of the notes thus created could be called in at the same time if they had to be. This isn't really possible. And since it isn't possible, the nature of the notes (and the nature of the secondary uses of these notes by later parties) rests on a usually unstated but necessary attribute of being imperfectly sound: they are sound only in the qualified sense that they can be redeemed by loans called in only if only SOME of the debt obligations are called in, not if all are called in. That is to say, the paper money generated in fractional reserve lending works when enough people agree not to do a large-scale recall.

What kind of contract is it that requires of you that you not implement the redemption built in to the meaning of the money if things get too out of whack?

Tony,

If a bank is diligent in marking its assets to market every day then any one bank of reasonable size shouldn't have any problems liquidating its entire asset portfolio if all its demand deposits faced calls at the same time for some reason. Now, I believe the SEC has allowed the big banks to throw GAAP out the window with respect to certain junk assets so the system isn't working like it should. Plus, Paul has written much on the prudence of limiting the size of banks by requiring them to revert back to privately owned partnerships. Even with these sensible measures restored, without some asset to anchor the financial economy to the real economy imbalances will still build up and destabilize the system. You write about the need for this anchor asset in your OP but this asset must reside outside the financial economy (ie. not be part of the money supply) to give super-producers the ability to withdraw their surpluses from the banking system if desired. And very much preferably, the price of this asset would be independent of the cost structure of most any industrial or commercial process so that its price can float arbitrarily high or low (to reflect the demand of deploying assets to the financial economy) without disrupting the real economy.

We had a system that worked fairly well after WWII up to the 1980s when the memories of the great Depression were a major driver. We also had 70 - 90% marginal tax rates and folks with STEM degrees did science and engineering not finance. The problem with a referent is that it is always going to be subject to political meddling - recall the issues with Europe and the US and silver in the 19th century.

Fractional reserve banking works well enough as long as there is adequate regulation and a political bias towards regulation not deregulation and plutocratic accommodation (cough Summers, derivatives cough). A lender of last resort is always going to be needed in a capitalist system. The only issue is if the political will exists to exact the penalty half of the formula. Otherwise the large number thing should take care of the possibility of everything being called in at once.

http://ftalphaville.ft.com/2015/04/08/2125780/icelands-grand-monetary-experiment/

http://beta.ineteconomics.org/ideas-papers/blog/draghis-doom-loops-more-than-just-the-euthanasia-of-the-rentiers

It's also worth noting that when we had a 70-90% marginal tax rate, the US was the only industrialized country with a fully functional economy since everyone else was shoveling away the rubble from WWII. In fact, one could argue that this period was really bad for the US because it radically altered popular perceptions about the economy and many of the policies we've pursued in the last 30 some years have been aimed at extending that unnatural prosperity.

Even with these sensible measures restored, without some asset to anchor the financial economy to the real economy imbalances will still build up and destabilize the system. You write about the need for this anchor asset in your OP but this asset must reside outside the financial economy (ie. not be part of the money supply) to give super-producers the ability to withdraw their surpluses from the banking system if desired.

Andrew, I am puzzled about what you are proposing. I agree with the notion of an asset to anchor the financial part of the economy to the non-financial part. But I simply cannot come up with an alternative that allows that anchoring to be free of the possibility of "writing paper" on the assets of the real economy, while still allowing fractional reserve lending. If a loan obligation contract is, precisely, a paper-conveyed right to non-paper assets in some form, (and contingent on whether required "payments" are made, when "payments" are denominated in "dollar" money), then the dollars and the debt have been linked. What would your sort of debt system look like?

Unless what you mean is that we should STOP ALLOWING BANKS TO REFER TO DEBT AS AN ASSET. That, I think, would be an extremely interesting idea. Let's start with Paul's suggestion of banks being partnerships where each partner contributes assets - actually conveys over absolute ownership of hard assets or cash money. A bank can lend whatever it wants to lend, to whomever it wants to lend. They lend out 100M to 1000 borrowers. The debt contracts it has are not listed on its balance sheet as assets. The act of lending out to a borrower is an act of "consuming or alienating" the money or other assets of the bank. When they lend, they actually put physical money in the hands of the borrower, or send physical money to the borrower's account with another institution, money that the bank got from its contributing partners.

Of course, that does away with fractional reserve banking as well.

We had a system that worked fairly well after WWII up to the 1980s when the memories of the great Depression were a major driver.

And we had, at least nominally, a gold-based system. More or less. And the memories of the Depression were, in a very important sense, a form of social capital on whose bacj was built the succeeding monetary system.

We also had 70 - 90% marginal tax rates

I for one think that a 90% tax rate is morally unconscionable except in time of war. But aside from that, I would be very, very surprised if the amount of tax collected at the 70 to 90% tax rates was an important driver of the successful economy. Don't know how to ascertain that.

The problem with a referent is that it is always going to be subject to political meddling - recall the issues with Europe and the US and silver in the 19th century.

Any kind of money will be subject to meddling. Surely a fiat money cannot POSSIBLY be LESS subject to meddling - its very existence requires political intrusion into the market. Nearly every aspect of it will depend on politics. How can that possibly be better than an external referent that the government accepts and then layers with its regulatory impositions?

A lender of last resort is always going to be needed in a capitalist system.

I submit the proposal that this is TRUE, precisely because with fractional reserve banking constituting a major portion of the economy, the interlocking layers of debt-based "assets" cannot possibly be as real as they how they are treated because they cannot possibly be redeemed in toto. That is to say, there is a level of denial of reality in treating a debt-instrument that the bank holds as an "asset" and then to treat that asset as if it were just like other direct assets on the balance sheet. The government as "lender of last resort" is needed to get everyone out from under the unreality - at the expense of making money itself imperfectly real.

That, by the way, is not needed in "any capitalist system", for there is nothing about all this that arises because of the notion of pooling ACTUAL, PHYSICAL assets and investing them in a new business venture for profit. What al means is "any modern capitalist system", i.e. any system like the modern one with its multiple layers of folderol that obscures the reality.

Full recourse (usurious) debt is not an actual asset (is not actual property independent of a simple IOU commitment by some person), and referring to it as an asset is a kind of lie. Non recourse debt however is a property interest in the property in which it stakes a claim (perhaps calling it a "loan" at all confuses people and is thus unfortunate terminology). Once again, failing to distinguish between usury and other contracts is fundamental and is (at least one reason) why all modern economic theories are crap.

Higher fiat currency reserves are not necessarily a good thing, unless you want the government more entangled with the real economy not less. Roughly speaking, in a simplified case, in the absence of usury the bank has two kinds of assets which back customer deposits (a.k.a. "electronic money"): the property interests it holds (that is, loans representing claims in factories, houses, etc) and reserve currency (fiat money). Insisting that banks hold proportionally more fiat money means that electronic "money" is backed more by those fiat reserves and less by real assets in the real economy.

Fiat money gets its value from the government's bare promise to accept it to settle tax liabilities ("full faith and credit"), so when the bank's balance sheet has more of that and fewer stakes in real property (non recourse loans), the government has intruded more into the real economy. Folks who insist on higher reserve ratios are concomitantly insisting on more government backing of economic activity and less actual property backing economic activity.

Part of the problem is that people don't want it to be possible for banks to fail. That insistence stems from a usurious mindset: the idea that it should be possible for property to be durable and maintain itself without risk (which in practice becomes the partial solution of enslaving others to bear and compensate for our personal risk: usury and its cognates).

As with all conflicts between human desires and ontological nature, this can ultimately only be resolved by accepting the nature of things. You can't fool Mother Nature, even granting Keynes's points that the market can remain irrational for a lot longer than you can remain solvent and in the long run we are all dead.

Any by the way, all sovereign currency is "fiat money" for the sake of my previous comment. So-called gold-backed fiat money is still fiat money.

Introducing a commodity (e.g. gold, silver) into the picture just distorts and obscures the specific difference which distinguishes sovereign currency from other things: sovereign currency is this thing which the sovereign uses to quantitatively measure and levy tax liabilities and (generally speaking) private debts which arise from violation of the law (that is, tort, crime, negligence, fraud, etc.)

Now there is nothing preventing 'alternative banking systems' from arising where the call options (deposits) are against something other than fiat currency (that is, where a deposit contract entitles the bearer to something-on-demand other than fiat money from the 'bank'). In fact such 'alternative banking systems' actually do exist, e.g. the paper gold market.

But in every case, the balance sheet of the 'bank' includes some combination of reserves and other assets. The ratio of reserves to other assets is - from a cynical point of view - a measure of how much the 'bank' is involved in real economic activity versus how much it is involved in value-destroying navel-gazing.

Full recourse (usurious) debt is not an actual asset (is not actual property independent of a simple IOU commitment by some person), and referring to it as an asset is a kind of lie.

Right. And in addition to usurious full recourse debts not being an actual asset, so also are full recourse debts for no interest, (and therefore not usurious). Those too are not actual assets - not properly speaking. They should not be listed on a balance sheet and added in to real assets for a combined total. The defect in a usurious loan is the demand for interest, not the demand for a return of principal. But listing it on the balance sheet for the principal alone and no interest still involves a flaw. [If we refer to the example in the OP, nowhere does Goldsmith list the future interest he expects to gain as if it were part of the assets he is basing his lending on - the example works without listing the interest anticipated. (The example also assumes none of the agreements are usurious, but that's a side issue.) ] So the difficulty can arise even without usury. Usury of course adds to the ills.

Non recourse debt however is a property interest in the property in which it stakes a claim (perhaps calling it a "loan" at all confuses people and is thus unfortunate terminology).

That's a very good point: using the word "loan" for a debt instrument backed up (say) by the future earning potential of a human being, and using the term for a collateral agreement - ie a security interest in property - as a (qualified) property interest, is indeed one potential way of confusing things. One might also say that a financial contract with a future interest in property and with simply no obligations on the borrower as a person is really just a deferred sales contract.

Fiat money gets its value from the government's bare promise to accept it to settle tax liabilities ("full faith and credit"),

I don't see how that can be right. Some 10 or 15 years ago, I think, Ecuador announced that the American dollar would be the official currency of Ecuador. As of the date of the changeover, the government accepted the US dollar for all tax liabilities. And for all other government liabilities. And for all other liabilities public and private. But it wasn't, on the part of the Ecuadorian government, a fiat money: the existence of that money didn't arise by government say-so, and that money's usefulness in the existing economy was already well-established before the announcement. For all I know, even before the government declared OFFICIALLY that it would accept US dollars for public debts, maybe it was already doing so de-facto. The change from really functioning as money, to being officially recognized as money for all purposes, is not to become "fiat money."

In my lexicon, a fiat money is a money that is declared by authority to be money, and it's being accepted as valuable the way money is valuable stems at root ONLY from that declaration.

The use of a newly specified entity strictly for tax obligations is inherently not "the money system" because so much more of the economy is outside of the paying of taxes. When Henry I demanded tally sticks for the payment of taxes, he in no wise replaced the use of gold and silver coin, which was used widely and continued to be so. All that really happened is that tally sticks began to be traded at a rate of coin, which rate varied according to several factors.

Any by the way, all sovereign currency is "fiat money" for the sake of my previous comment. So-called gold-backed fiat money is still fiat money.

I am still not seeing it. When Augustus Caesar took old silver coins, melted them down, and issued new silver coins with his face on them, they were money. The notion that they were "money" ONLY because he declared they would be accepted for public debts is odd. The silver coins were being used before he put his face on them. The new silver coins were not accepted as money solely because *he* was willing to accept them. Silver coins were accepted as money whether Caesar had his face on them or not.

Other people define "fiat money" differently:

Investopedia: Currency that a government has declared to be legal tender, but is not backed by a physical commodity.
Dictionary.com: paper currency made legal tender by a fiat of the government, but not based on or convertible into coin.

According to these definitions, if the economy is already running on silver coin, and the government makes more silver coin, that coin is not "fiat money". And if the government prints paper money officially exchangeable for silver coin at a declared fixed rate, that is not fiat money either.

Why did Louis XVI call the Estates-General if he could have just printed money and avoided bankruptcy?
Perhaps he was insufficiently sovereign and so were all the kings of Europe. This is a clue that Zippy's notions about sovereignty are as problematic as his notions about fiat money.
Apparently, the sovereign should command and all little people should obey without demur and that is the whole of political theory anybody needs or should worry about.

In reality, fiat money is the way to harness all the nation as a unit. Fiat money is socialism, national socialism even. People unaffected by the fever of nationalism scorn it unless they are financiers, seeking to profit from the public fever.

One sees that the conservatives are entirely wedded to the physiocratic notions about property. These notions were unpopular in 1789, but the alternate theories of property are literally inconceivable to the conservatives, belying the fact the while they rave and rant against the revolution, they are the true and actual heirs of the Revolution.

BI:

Why did Louis XVI call the Estates-General if he could have just printed money and avoided bankruptcy?

Because sovereign currency is (qua currency) only as powerful as the sovereign's power to tax. Corporations can issue stock arbitrarily (just as the sovereign can issue currency arbitrarily); but only a fool thinks that this implies that a corporation or sovereign can conjure limitless wealth from thin air.

It is true enough that sovereign currency has, as a historical matter, been commonly "entangled" with call options on some commodity (usually gold or silver). But in my view that entanglement just manages to distort the economic operation of both the commodity and the sovereign currency. Historical entaglement of distinct things does not make those things ontologically the same.

Fiat money (in the usual sense of the term) is more 'disentangled', which makes it more transparent and honest. Heck, even without throwing a distorting commodity into the mix modern economists conflate call options with the thing itself (thus the myth of banks "creating money").

One sees that the conservatives are entirely wedded to the physiocratic notions about property. These notions were unpopular in 1789, but the alternate theories of property are literally inconceivable to the conservatives, belying the fact the while they rave and rant against the revolution, they are the true and actual heirs of the Revolution.

At the risk of accidentally seeming to urge Bedarz on, I must object to this topsy turvy comment. It is horribly tangled, irretrievably misformed, a monster - the result of strangulation even before the idea was conceived in a mind.

Some "conservatives" (and I use the scare quotes advisedly) have been involved in a long-running argument about the true nature and foundation of property for hundreds of years, and have come up with many different conceptions of it. Many of those are wrong, but they are conceivable all the same (at least in part). The real revolutionaries don't really care about a real, honest to goodness conception of property as a principled thing, they just take. The ones who are wily enough come up with a red herring of a rationale for the taking, but it is (in their hands) never much more than a superficial artifice on the taking, not a true, deep down principled basis of their acting. The people who buy into those false rationales are nothing more than "useful idiots" to the revolutionaries.

True conservatives are not the "neo-conservative" liberals who support the false-flag economy, the economy of consumerism, usury, and "prosperity" at the cost of morals, family, and church. Nor are true conservatives in even the remotest possible sense "heirs" to the monstrosity of the French Massacre (errr...Revolution).

It is true enough that sovereign currency has, as a historical matter, been commonly "entangled" with call options on some commodity (usually gold or silver).

Going back in history, currency issued by the sovereign wasn't "entagled" with call options on some commodity, IT WAS SOME COMMODITY. The Greeks, the Romans, the Jews, the Egyptians, used metal as commodity-currency.

It would appear that a practice of issuing a sovereign currency in some OTHER form than commodity-currency, as a call option on some commodity-currency, would perforce be a practice that can come about only after the existence of the commodity-currency. So, commodity-currency comes first.

One last whack at the tar baby, then I'm off to the the briar patch for a Scotch and a cigar:

Whatever may be true of multivocal use of the term "money" and the like in various historical periods or by various persons, the following three things are entirely distinct: as different as apples, rocks, and poetry. Failing to treat them as entirely distinct creates confusion rather than dispersing it.

That many people pervasively confuse them with each other is certainly confirmed by experience. Whether this pervasive confusion is a matter of logical necessity (it isn't), historical contingency (most likely), or phases of the moon has no bearing on any point of interest to me.

Here they are:

1) Portable (or portable-ish) commodities (with or without determinate and/or 'official' weights/purities/etc);

2) Government issued credits/vouchers which the sovereign commits to accept to settle tax liabilities ("sovereign currency");

3) On-demand call options for either of the above (or anything else) against the balance sheets of private institutions ("deposits").

Each of these things is essentially unlike the other two, and no contingent historical conflation or assertion of labels can make them the same.

Now light 'em if you got 'em.

sovereign currency has, as a historical matter, been commonly "entangled" with call options on some commodity (usually gold or silver). But in my view that entanglement just manages to distort the economic operation of both the commodity and the sovereign currency. Historical entaglement of distinct things does not make those things ontologically the same.

The voice of rationalism. How does it differ (in tone) from the Rights of Man and Citizen?

The feudal system depended upon taxation in kind and in levee and not specie. Specie was, I believe, relatively uncommon in medieval Europe. It was in 1789 that the feudal levee was abolished and rent was supposed to be instituted in its place.

So, the idea that

Fiat money gets its value from the government's bare promise to accept it to settle tax liabilities

and specie is fiat money as well, these ideas are borne out by the history.

Each of these things is essentially unlike the other two, and no contingent historical conflation or assertion of labels can make them the same.

Fine, Zippy. The terms for "money" as referencing metal coin long pre-date (by many centuries) the introduction of Government issued credits/vouchers which the sovereign commits to accept to settle tax liabilities", as distinct from commodity-units. So if we are going to use the term "money" in a discussion in which we may be talking about coin and about government issued vouchers, then we should be completely clear that the government issued vouchers are not to be confused with "money". Right?

When the Bible and early Church teachers denounce usury on loans of money, they could not well be talking about charging usurious interest on government-issued vouchers, since that did not exist yet.

The feudal system depended upon taxation in kind and in levee and not specie. Specie was, I believe, relatively uncommon in medieval Europe.

Bedarz, as far as I can find evidence for, monetary coin was pretty much around at all times from the Romans onwards throughout Europe, though a significant portion of the economy ran on some form of barter, and a lot of taxes were levied in terms of goods rather than in terms of coin. A serf might not often have actual money in his hands, but traders did, and merchants, and guild crafters, and shippers, and ... lots of people had small amounts of money. And kings borrowed money to pay for soldiers, which means that soldiers had money in hand, which they spent... There was coinage running around persistently and commonly.

I am sorry, but the following comment:

So, the idea that
Fiat money gets its value from the government's bare promise to accept it to settle tax liabilities

and specie is fiat money as well, these ideas are borne out by the history.

doesn't even make sense. There is no sense to "specie is fiat money" at all.

Tony,
Sorry. I have inadvertently omitted a "not". What I meant to write was
"these ideas are not borne out by history". This in referring to Zippy's arguments that money is defined by sovereign taxation. This idea occasionally surfaces in reactionary circles.
I was not saying that coins are a late innovation but I find the idea of money to be defined by taxation to be bizarre.

Tony:

When the Bible and early Church teachers denounce usury on loans of money, they could not well be talking about charging usurious interest on government-issued vouchers, since that did not exist yet.

And that isn't relevant, for reasons I leave as an exercise (hint: question 35).

The problem with any attempt to have a discussion with you - well, one of them at any rate - [...some really stupid, pointless, insulting, and altogether unacceptable comments by a fellow who thinks he gets to insult anyone who disagrees with him - T]

And by the way, on the use of the term "money" your beef isn't with me.

My position all along - which in typical fashion you respond to as if you were talking to someone else with a different position - is that commodity, coin, fiat money, deposits and other call options, etc are essentially different things (none of which are licit to lend under a mutuum for gain, since it isn't licit to lend anything at all under a mutuum for gain), despite economists' sloppy conflation of them all into one category which they label "money" and despite their contingent historical entanglements. If you have a semantic beef about the label "money" it is with economists, not with me. This is typical Tony-projection-onto-Zippy, yet again.

I couldn't care less what labels people settle on to use for these things, and other things besides (e.g. non recourse vs full recourse loans), as long as they are treated as the very different things that they are -- something you fail to do in the OP, by the way.

When the Bible and early Church teachers denounce usury on loans of money, they could not well be talking about charging usurious interest on government-issued vouchers, since that did not exist yet.

If I borrow 3 sheep from you and the price you set is to be repaid 3 sheep + 3 sheep/year I keep your original sheep and your recourse extends beyond the goat I offered as collateral, it's the same thing.

"I for one think that a 90% tax rate is morally unconscionable except in time of war. But aside from that, I would be very, very surprised if the amount of tax collected at the 70 to 90% tax rates was an important driver of the successful economy. Don't know how to ascertain that."

I used to feel that way but experience has changed my mind. The growth of the financial sector and income at the very tip top of the economy turns out to have been quite harmful to the nation as a whole. What high marginal tax rates do is to put an upper limit on incomes. This is necessary because past a certain point earning becomes rent seeking and rent seeking is theft from the rest of us.

http://www.nytimes.com/2015/04/12/upshot/why-a-harvard-professor-has-mixed-feelings-when-students-take-jobs-in-finance.html?partner=rss&emc=rss&_r=0&abt=0002&abg=0

Too harsh on the tip top? Consider this:

https://medium.com/bull-market/digital-locability-and-interocular-trauma-973397192975

Much of the current compensation at the top is due to luck - right place, right time sort of things - starting out with choosing the right parents.


I have deleted most of Zippy's comment of 7:19 am because it is insulting to persons here (me, in particular), to no purpose.

Zippy, if you really thought that discussion with me is pointless, then you SHOULD NOT HAVE COMMENTED HERE. This is my post. You knew that. You are free to just not take up pointless conversations. The fact that you did comment here indicates something at odds with a claim that you think it is pointless.

Zippy, you called me a liar, then you apologized, then you said I was a liar, then you dropped it, and then you characterized my behavior as lying, again. Why do you think I should trust you this time if you say you no longer believe I am a liar? Sorry, it doesn't work that way. Well, for your information, BOTH your behavior in the past of calling me a liar, AND your behavior this time just(?) denigrating my capacity to carry on a conversation, are contrary to good behavior and I am calling you out on them.

YOU DON'T KNOW WHAT GOOD CONVERSATION IS.

The fact that YOU, particularly, find it oppressive to carry on a conversation with me, it is not in the least bit indicative of any actual reality about my discussions, other than the fact that you get mighty uncomfortable when people show you up as having made a mistake - even a tiny one. You might want to check with others on that foible.

It is no part of good behavior to go on someone else's thread and post several paragraphs on why you can't discuss things with them as if the problem is all in them and not in you. Get a grip: my OP does not revolve around Zippy. You highjacked Lydia's thread to make insulting comments about W4 back in August, and now you are trying to highjack my thread to make insulting comments about me and try to change the discussion from what is true about FRACTIONAL RESERVE BANKING, (a subject that was in no way contradictory to your posts on usury), to something else, something personal. Well, not here you won't. Here, you will stick to the point of the discussion or your comments will be deleted.

Here's a good example of HOW NOT TO DEBATE:

And by the way, on the use of the term "money" your beef isn't with me.

My position all along - which in typical fashion you respond to as if you were talking to someone else with a different position - is that commodity, coin, fiat money, deposits and other call options, etc are essentially different things (none of which are licit to lend under a mutuum for gain, since it isn't licit to lend anything at all under a mutuum for gain), despite economists' sloppy conflation of them all into one category which they label "money" and despite their contingent historical entanglements. If you have a semantic beef about the label "money" it is with economists, not with me. This is typical Tony-projection-onto-Zippy, yet again.

I couldn't care less what labels people settle on to use for these things, and other things besides (e.g. non recourse vs full recourse loans), as long as they are treated as the very different things that they are -- something you fail to do in the OP, by the way.

See, this is how not to debate because...

Let's see: sometimes Zippy goes out of his way to name or define things his own peculiar way:

Any by the way, all sovereign currency is "fiat money" for the sake of my previous comment. So-called gold-backed fiat money is still fiat money.

That's just one. Here's another:

“Lending” is a contract where the borrower is personally on the hook for return of the principal amount of the loan to the lender. This is traditionally called a “mutuum”.

And there's his idiosyncratic sense of "recourse", which I won't quote. Suffice it to say that Zippy is sometimes a bit wonky about "what labels" he chooses to settle on. In the above discussion, in particular, he urges a particular kind of "money", namely fiat money:

Fiat money (in the usual sense of the term) is more 'disentangled', which makes it more transparent and honest.
Introducing a commodity (e.g. gold, silver) into the picture just distorts and obscures the specific difference which distinguishes sovereign currency from other things:

But here's the second problem: Zippy is trying to magnify into some "issue" (and a personal issue at that) something that isn't a matter of contention. I agree with him in identifying a distinction between coin-money, and government-issued vouchers, and bank-generated promises. That is, actually, one of my BASIC REASONS for this post on fractional reserve banking - to show that what the bank generates is not the same thing as coin on deposit.

Part of the problem with that discussion is whether we should call what is generated 'money' or not.
The parties involved have been using the banker’s notes and letters of credit “as if” they were the gold coin they represent, but of course what they are really is a _promise_ with respect to gold coin.

And a non-biased observer would read the following comment by me

Fine, Zippy. The terms for "money" as referencing metal coin long pre-date (by many centuries) the introduction of Government issued credits/vouchers which the sovereign commits to accept to settle tax liabilities", as distinct from commodity-units. So if we are going to use the term "money" in a discussion in which we may be talking about coin and about government issued vouchers, then we should be completely clear that the government issued vouchers are not to be confused with "money". Right?

not as a contradiction or contention against Zippy, but a request for agreement on a proposed FURTHER CLARIFICATION, taking his point as correct and drawing it one step further.

What we have here is Zippy misunderstanding the nature of the comments made, and taking umbrage at an attempt to draw out a logical conclusion from what he said. Was this because he didn't like the logical conclusion? Or because he didn't like the prospect of someone else deducing conclusions from his theses? Or some other reason? It doesn't really matter: it doesn't advance the discussion so we are not going to entertain that, what we are going to do is insist that people

STICK TO THE DISCUSSION.

If you dispute the arguments made, dispute the CONTENT of the arguments, or the PREMISES, or the LOGICAL FORM of of the arguments. Or don't dispute them. See, that's a simple rule.

I used to feel that way but experience has changed my mind. The growth of the financial sector and income at the very tip top of the economy turns out to have been quite harmful to the nation as a whole. What high marginal tax rates do is to put an upper limit on incomes. This is necessary because past a certain point earning becomes rent seeking and rent seeking is theft from the rest of us.

Al, I am also disgusted with the growth of outrageously high salaries and bonuses at the top of the financial sector. I also agree that high marginal tax rates tends to put an upper limit on incomes.

What I dispute is that such a 90% tax rate is the RIGHT mechanism. If it is high incomes from finance that's the problem, then attack high incomes IN FINANCE, not high incomes all round.

I dispute, further, that all "high incomes" at the tip top of the economy are inherently bad for the economy. When a new company with a new product is tremendously successful, after the owner invested 100M on the venture (say, the Tesla), the fact that he has a very large pay-off is not a pointer to something defective in the economy. If he then turns around and gives the bulk to charity, or turns it around and invests in 10 more ventures in manufacturing that increase the wealth of the nation, THAT'S NOT A PROBLEM. So, the mere fact of his having received a high income is not the problem. Attack the problem, not proxies for the problem. A high income is a proxy for some OTHER problem.

I dispute, further, that the 90% rate was on "high incomes" in the current sense of high, the "tip top" of the scale. IN 1960 there was a 91% rate on income over $400,000. Even adjusting for inflation, that's something like 91% rate on income over $3.2 Million. That's not the stratospheric income of the Hunt brothers, David Simon, or even the A-Rod types.

But really, Al, is there some way this relates to the fractional reserve banking, or perhaps to the nature of money?

If I borrow 3 sheep from you and the price you set is to be repaid 3 sheep + 3 sheep/year I keep your original sheep and your recourse extends beyond the goat I offered as collateral, it's the same thing.

Oh, hell no, Mike.

First, "borrow 3 sheep from you" is not determinate enough. Are you borrowing them for getting their wool off them and returning them shorn? Are you borrowing them for their grass-clipping labor so you don't have to get a lawn mower? Or are you borrowing them for food? Is it a mutuum loan or something else?

Now, assuming that you meant a mutuum loan all along, let me say right away that I agree - sort of. Yes, it IS the same thing. In the relevant sense. And THAT SENSE is why I made the comment.

Zippy claims that

is that commodity, coin, fiat money, deposits and other call options, etc are essentially different things (none of which are licit to lend under a mutuum for gain, since it isn't licit to lend anything at all under a mutuum for gain),

In the old days, before typical "money" was anything other than coin and similar commodity-money, usury was condemned. And it was condemned as taking gain on the lending of money. But when the Fathers and Doctors treated the subject, they pointed out that the PRINCIPLE of the thing is that it is wrong to take gain on the lending of what is to be consumed in the use. And this applies even if the item isn't money.

If it is true not only of coin money, but bank-option notes, and government vouchers, that they are enough of "like kind" that they are all consumed in use, then they share a characteristic in common. If they are all used in exchange, and banking, and finance, and lending, etc, then they share OTHER things in common. Things that are sufficiently like in kind to share many points in common are, often, either in the same species or at least in the same genus. Zippy says of these three that they are "essentially different things", which would imply that they are NOT in the same species. But that would leave possible that they are in the same genus.

This is also, perhaps, why Zippy was completely ready to say that they are "(none of which are licit to lend under a mutuum for gain" - for things that are in the same genus, one can readily posit of them results and treatment that pertains to everything in the genus without setting forth separately an argument for each one on its own. Things that are true of "triangle" as such are automatically true of all species thereof, including scalene, isosceles, etc.

Now the reason I was doing this was to point to a question: if coin-money, bank-note options, and government vouchers are all together the sort of thing that it is illicit to lend in mutuum for gain, then is it possible that defects and problems and concerns that attend fractional reserve banking that occurs between coin-money and bank-note options ALSO apply to similar banking with government vouchers? That is, is the likeness between them extended to OTHER characteristics too? Even while they retain their distinctness as being in separate species?

Frankly, I haven't examined it fully. I don't know. But it wouldn't surprise me.

I used to feel that way but experience has changed my mind. The growth of the financial sector and income at the very tip top of the economy turns out to have been quite harmful to the nation as a whole. What high marginal tax rates do is to put an upper limit on incomes. This is necessary because past a certain point earning becomes rent seeking and rent seeking is theft from the rest of us.

I don't think marginal rates are the best way to achieve that goal. HFT is rent seeking behavior. The best way to stop it is not with the income tax, but with an excise tax on stock transactions. A $0.05-$0.10/share tax would bring the practice to a halt and badly hurt the income of many rent seekers in finance without hurting companies whose primary business model is real investment in businesses. A tax on trades would also generate revenue from ordinary investors without harming their income. In general, consumption taxes on luxury items is the best way to make the rich pay taxes.

Mike, I have often thought that a tax on trading shares is the way to put a crimp in these harmful behaviors. People who buy stock for a few days, weeks, or even months, planning on unloading in a short time frame, simply are not INVESTING as that term should be used, they are doing something else. Rent-seeking is one way to describe it.

But I also think that the huge incomes from finance alone, usually connected with usury but sometimes not, is an additional problem and may need an additional solution. My initial idea for long-term solution is to rearrange the contractual arrangements so (a) they are transparent and everyone knows the risks they are buying in to, and (b) not make the government the fall-back support for financial raiders choosing to take on risk that is not fundamentally sound. Not sure what this would entail specifically.

Another problem with the financial sector is that criminal and civil penalties are often pennies on the dollar for the profit made. For example, when Wachovia was found to have laundered almost $5B for drug cartels, Wachovia should have been forced to pay several billion in federal fines. When HSBC was caught helping Iran avoid sanctions, among other things, their fine was a few hundred million despite the terrorism angle. If you read federal statutes on related matters like drug charges, the fines can be crippling or outright destroy ordinary drug dealers. There ought to be scaling to a similar level. Wachovia should have been fined into bankruptcy and liquidated at public auction; HSBC's leadership should have been sent to prison and its assets annihilated by the feds and UK.

On top of that, you have the MERS securitization scandal in which assets were fraudulently sold to securities companies by mortgage lenders and the robosigning scandal in which forged documents were introduced in the tens to hundreds of thousands in various states. No prison time either. Crime pays and pays very well because the best we can get is people advocating for higher taxes.

Here's another example of the shenanigans:

Most of the funds’ money — more than 80 percent — is invested in plain vanilla assets like domestic and foreign stocks and bonds. The managers of those “public asset classes” are usually paid based on the amount of money they manage, not the returns they achieve.

Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees, leaving just $40 million for the retirees, it found.

And why did not NYC put a stop to this? Well, of course:

Figuring out just how big a drag the fees were on the expected returns of the funds overall was not easy, Mr. Stringer said.

Scott Evans, the comptroller’s chief investment officer, had to work backward from the footnotes in the reports to estimate just how much had been paid each year to a long list of Wall Street firms that managed investments in the public markets. He then calculated that those fees, combined with the significant underperformance of the investments in private assets like real estate, amount to a whopping negative — a drag of more than $2.5 billion — since the end of 2004.

There is no specific direct tie-in between this practice and FRB, but it is all of a piece. People who put their money into a vehicle ought to be able to demand transparency in telling them what their money is doing and how it is being risked. The general reality is that you don't, and you have to take extra measures to even start to get a handle on what is happening behind the facade.

Zippy is curiously invested in his idea that coins with faces imprinted are fiat money. He writes in his blog

As soon as the first sovereign to do so stamped his face on a gold coin and decreed that he would accept these official coins to settle tax liabilities, fiat money was born

Comments
1) Fiat money, if the word "fiat" is to have any meaning, must mean that the value of the coin is what the king says and not its intrinsic value. Is it the case with ancient coinage?
I merely note that the discussions of coinage are dominated by weight, composition and purity of the coins. Why would a fiat money be bothered with these matters?

2) I should suppose that the kings coined their money to pay their dues, to soldiers' pay or to military suppliers, traders etc and not that the subjects could pay their taxes. How in the world would people have access to these newly minted coins? Would the king just distribute them so that people could pay him back in taxes?

Paul Cella writes in response:

I think you were definitely onto something in my thread when you conjectured that the outsized rhetorical denunciation of fiat money arises in part out of a usurious mindset

entirely ignoring the repeatedly made point that fiat currency is specifically designed to socialize the country and has demanded by communists, and in fact has resulted in actual socialism, not to mention a servile state.

BI:

I should suppose that the kings coined their money to pay their dues, to soldiers' pay or to military suppliers, traders etc and not that the subjects could pay their taxes. How in the world would people have access to these newly minted coins? Would the king just distribute them so that people could pay him back in taxes?

It is surreal to me that you don't see yourself answering your own question.

The sovereign creates official fungible currency and spends it on all the things that governments do. It circulates, and is in demand qua sovereign currency - has value to those the government pays with it - precisely because the sovereign uses it as his measurement units for public commerce, keeps its supply limited (lest it become worthless, like the stock of a company which issues too many shares), and because everyone needs access to some to settle their tax liabilities. This is entirely independent of the medium in which the sovereign issues his currency - gold, zinc, copper, paper, or mere ledger entries in a computer file.

This is similar to (but distinct from) banks issuing deposits. Banks issue deposit accounts as a zero-strike perpetual option to exercise against their assets. Sovereigns issue currency as an option/voucher to settle tax liabilities. Entanglement of the latter with portable commodities of intrinsic value (e.g. gold) is an accident of history, and that entanglement (as I have pointed out many times) actually reduces the transparency of what is taking place.

The deposit accounts issued by banks (and measured in units of sovereign currency) are backed by the bank's assets: the various properties of varying liquidity in which it holds a stake. Actual currency issued by the sovereign (some of which is held in reserve by banks, to meet the demands of depositors) is backed by his power to tax.

That certain kinds of otherwise normally intelligent people are simply incapable of grasping this - not immediately perhaps, but after actually grappling with finance and trying to grasp what is actually taking place - is really quite puzzling, at least to me.

Entanglement of the latter with portable commodities of intrinsic value (e.g. gold) is an accident of history, and that entanglement (as I have pointed out many times) actually reduces the transparency of what is taking place.

I'm not sure it qualifies as an accident of history, rather than being quite intentional. It makes sense to use a material like gold or silver because the quantities are naturally limited so the sovereign has a great degree of control over the supply. It also allows the currency of other sovereigns using the same materials to be fungible in the local economy, gold being gold and all. It also makes counterfeiting intrinsically expensive; a country like North Korea could not counterfeit Gold Eagles in the same quantities they counterfeit Federal Reserve Notes.

Mike T:
Agreed that difficulty of counterfeiting is an important practical consideration for the sovereign when he issues currency. It is critical to be able to reliably tell that the bearer-tokens before you are in fact authentic tokens issued by the sovereign.

But that has nothing in particular to do with the intrinsic value of a commodity like gold or silver for other uses. That using gold made counterfeiting expensive is true enough as a practical matter; but it also introduced distortions in the entirely distinct economic values of gold-qua-gold and currency-qua-currency.

Zippy,
The word "create" that you use is applicable only to the fiat money. As rejoined to you several times, the non-fiat money derives its value not by sovereign will but by decentralized market evaluation i.e. a free market process.

The sovereigns, I believe, used to care more for the purity and weight of the coins the tax-payer pays rather than their own pictures stamped on the coins.

Again the point you habitually avoid is counterfeiting by the sovereign himself. Gold and other precious metals avoid this problem while the fiat money supported by armed might of the sovereign makes slaves of citizens.

So your power of sovereign to tax its subjects is really an index of the servility of the citizens. If one believes in limited government, then the govt should not need to tax much.
It is not obvious that taxation is an inextricable part of government. We can easily conceive of govts. that generate their own resources, from user fees or sale of natural resources.

BI:

As rejoined to you several times, the non-fiat money derives its value not by sovereign will but by decentralized market evaluation i.e. a free market process.

And you are just wrong about that. Commodity-backed currency is a composite 'product' conflating the 'full faith and credit' of an authenticated tax voucher from the sovereign and a commercial good (e.g. gold, silver, etc), distorting both.

Again the point you habitually avoid is counterfeiting by the sovereign himself.

It isn't possible for the sovereign to counterfeit his own tax vouchers, any more than it is possible for a company to counterfeit its own capital stock. Your statements make manifest your incomprehension of what is actually taking place when the sovereign issues currency (whatever one may think of the sovereign's wisdom in a particular case, the legitimacy of his various powers, etc).

As far as the tax power goes, I've argued myself that is has due limits which are not acknowledged by moderns; e.g. I've made arguments that property taxes are intrinsically unjust, whereas transaction taxes are not.

Debasing the currency is not counterfeiting, but it is a moral issue between the sovereign and the public. Given that the divine sanction of the sovereign rests critically upon the stewarding of public assets and the general welfare of society, a sovereign who debases the currency in ways that impoverish society is acting immorally. A sovereign authority has a moral obligation to govern within the financial means of the society just as a household has the moral duty to live within its means. That may not be a perfect parallel, but they're fundamentally similar.

As soon as the first sovereign to do so stamped his face on a gold coin and decreed that he would accept these official coins to settle tax liabilities, fiat money was born
The sovereign creates official fungible currency and spends it on all the things that governments do. It circulates, and is in demand qua sovereign currency - has value to those the government pays with it - precisely because the sovereign uses it as his measurement units for public commerce, keeps its supply limited (lest it become worthless, like the stock of a company which issues too many shares), and because everyone needs access to some to settle their tax liabilities. This is entirely independent of the medium in which the sovereign issues his currency - gold, zinc, copper, paper, or mere ledger entries in a computer file.

I believe that this significantly mis-represents what happened historically, and as a result misplaces the notions involved in governments making money. As I understand the history of coin:

The first coins were not minted in a vacuum. Before the gold and silver (and electrum - an alloy of the two) were minted into coins, gold and silver were already being used in exchanges. Gold ingots, gold talents, and gold rings were used in trade for several reasons, not least of which is that they packed a lot of value in a small package. Also because they were capable of being weighted readily. Also because they were valued to some degree in similar ways across different buyers, in different marketplaces.

When the first merchants started to take gold and silver and coin them, they did it to further these helpful aspects of using gold and silver in trade, and to add one additional feature not yet present - a kind of standardization of amounts into small, readily carried and counted, packages. The merchants did not use the coins thus crafted as "the only thing we will accept in trade", not at first, they used them to facilitate trade that would otherwise have happened with raw amounts of gold or silver (or processed otherwise than as coin).

When kings followed the practice of making coin, they too used the gold as a standardization of amounts - a standardization of something already being used to facilitate exchange. As a result, they could easily change previous kinds of pay for soldiers (formerly, X amount of salt, Y amount of food, Z amount of leather) into K amount of gold - because K amount of gold ALREADY could be used to buy those other items. At first, kings no more demanded that "taxes be paid in these gold coins" than the merchants demanded "pay me for these goods in my coin." At least early on, kings did not restrict their tax takings to gold because there wasn't enough gold coin at first to cover all tax obligations anyway. Quite commonly, gold and silver coin minted by one sovereign was accepted by another sovereign as long as the weights and purity were matched. Certainly merchants operated so, and the king wasn't a lot more picky than the merchants were.

So, at least a great deal of the time, coin minted by the sovereign simply did not have the status of "this is the only form in which I will accept payment." Yes, the sovereign would indeed accept the coin in payment (not just for tax payments but for all transactions) on the same basis they were accepted in the REST of the economy. But kings would accept other payment forms, including in kind, and in coin made by other parties.

Over time, of course, many parties made the easy and obvious discovery that you can "generate" new wealth by fudging on the weight or purity of the coins. If a standard "penny" weighs one ounce of 90% silver, making pennies 1/50th short of that weight, and 1/20th short of the purity, will increase your "spendable wealth" by a significant amount, without being easily found out, and people will try to trade the new pennies as if they were equal in value to the old pennies. Over time, kings and merchants in desperate need of wealth they didn't have created debased coinage - by which I mean not some silly kind of "intrinsically defective" sort of coin, but rather they attempted to foist off a on unsuspecting people coin, objects of value, that appeared to be just like the old STANDARDIZED objects but were not in fact just like, and relied on the subterfuge of the appearance to benefit thereby (for people would not have given the same amount of goods in exchange had they known the true new weight and purity). The kings could not have benefited by the subterfuge if there had not been, previously, a standardization of amounts into known form of coin.

Only much later, after many sovereigns had made lots of coins that were NOT equal weight and equal purity, did sovereigns get around to trying to "fix" the damage these debased coin did to the economy, by not only generating a standardized coin but by trying to force a LIMIT on the use of other coin other than his own. Thus the concept of restricting the marketplace's use of coin to only the coin issued by the sovereign appeared much, much later than using coin. Thus, saying

It circulates, and is in demand qua sovereign currency - has value to those the government pays with it - precisely because the sovereign uses it as his measurement units for public commerce,

is a bit topsy turvy. The coin the king used, at first, had value precisely because it represented a certain amount of gold or silver JUST LIKE THE COINS MINTED BY MERCHANTS. Later when kings tried to forbid use of debased coin and insist on using new, undebased coin, the value these new coins had were, also, based on the existing market's use of a KNOWN amount of gold as a standard of transaction, and had little or nothing to do with the king's wishes

on what the value of the coin would be. No king succeeded (for long, at least) in instituting a gold-ish coin that he demanded be treated as worth 5 bushels of wheat, when before his attempt the marketplace had valued the 5 bushels as worth 1 ounce true of gold, and where his coin only only had 1/20th of an ounce of gold. He might have been able to force that valuation at the threat of prison and beatings for a while, but eventually such an attempt would fail - the marketplace would impose a correction no matter what he wanted.

"Sovereign money" in the sense of a form of money where the king demanded that only his minted money be used for the economy came long after kings were making money. It did not at first get its value from the determination of the king. And "fiat" attempted valuations of sovereign money never worked for long while money was in the form of precious metal coin.

keeps its supply limited (lest it become worthless, like the stock of a company which issues too many shares)

As long as the money being made was in the form of precious metal coins, kings never had any incentive to "keep its supply limited" because there was virtually never a time when the production of such coin made it become worthless - certainly never a time when gold coin became as worthless as company stock shares sometimes got. Gold supply for coin has always been limited enough, by nature herself, that the finding / mining of new supplies have always been relatively small compared to the total amount in currency, and thus does not severely affect the relative value of the existing amounts in the market - unlike other forms like paper. Thus kings were always entirely happy with their mines producing more and more gold for coin, and making more and more full-weight, full-purity coins to spend.

The only time gold or silver coins became even sort of "worthless" is when they were minted contrary to the previously existing "standardized" weights and purity, or when the king declared by fiat that he would punish anyone trying to use other coin than his version. The "value" under the latter condition comes not primarily from the king's determination of the value he will set a coin at for paying taxes, but from fear of punishment for giving that coin its marketplace value, for paying taxes is always only a portion of the full marketplace of transactions. A sovereign can never completely control the market's valuation of his currency - witness the "official" Communist Russian ruble's black market value under one of the most repressive regimes in history.

Mike T, that is very well-put. However we analyze precisely what fiat currency is, what you have just said there seems irrefutable. It also seems to me obvious to anyone who has been watching that our sovereign in the U.S. has been guilty in precisely these terms.

I would go so far as to say that the way in which our sovereign governs in this area, not only in the debasing of the currency but in the continual increase of deficits and the unhealthy relationship _between_ deficit spending and fiat currency, gives people the very strong impression that something comes from nothing. Yes, of course, that isn't true. Nothing comes from nothing. I totally get that. That is why it is extremely troubling for the sovereign to communicate to the people that something _does_ come from nothing--that "the government" can just _make_ x or y happen, "create new wealth," "create jobs," give everybody a guaranteed income, "provide" a gazillion things, or even "make x free."

If we are to talk about the usurious mindset, I think we should also talk about a different destructive mindset--the mindset that the government can provide something from nothing, through deficit spending if necessary. Many people who, I suppose, are thought to "have a usurious mindset" (because they are allegedly stupid old people who saved their pennies all their lives for their retirement, put them in the bank, avoided debt, and didn't restrict themselves only to "investing in what they know," which would pretty much mean not investing in anything, and who would like the money they worked hard to earn and save and be responsible with to _still be around_ when they need it in their old age) are actually the salt of the earth in this country, and we could stand to have a heck of a lot more of them. Whereas those who spend like there's no tomorrow and expect "someone else" to pick up the slack, though they are the "victims" of usury rather than its perpetrators, are actually bad citizens. Policy should encourage the former more than the latter. If this be endorsement of "a usurious mindset," make the most of it.

I'm just honestly getting a little tired of having the hard workers and thrifty savers being portrayed as the bad guys.

God knows our country has a lot worse problems than an overabundance of the paradox of thrift. As Rev Tevye says, "May God smite us with it."

As far as the tax power goes, I've argued myself that is has due limits which are not acknowledged by moderns; e.g. I've made arguments that property taxes are intrinsically unjust, whereas transaction taxes are not.

I agree with Zippy that the taxing power has due limits, but we are not going to discuss that here. The use of money to pay taxes is not dependent in any significant way on the nature and limits of the power to tax. It is a different issue and not germane to this discussion.

Mike T:

Debasing the currency is not counterfeiting, but it is a moral issue between the sovereign and the public.

Debasing hurts the sovereign himself/itself as much as anyone else. The more he debases his currency, the less he can buy with it himself: the more aggressively he has to employ his tax power merely to maintain his purchasing capacity to fund government operations. It is in the sovereign's best interests to keep the value of his currency relatively stable compared to other asset classes (by managing its supply), and when he fails to do so the first in line to be harmed by that failure is the sovereign himself -- much like a company which debases the value of its own capital stock and thereby loses financial capacity.

If you allow currency debasement to harm your own portfolio though that is on you. If you don't hold onto currency or illiquid dollar-denominated assets for more than a year, the sovereign hurts himself (and people who are foolish enough, in my view, to hold dollar-denominated illiquid assets for long periods of time) more than he hurts you. If you give unto caesar that which is caesar's, and store/grow your own wealth by investing it in actual properties and business ventures that you personally understand, you are personally immune to currency shenanigans for the most part (absent some major financial crisis triggered by those shenanigans -- although if your portfolio is not in dollar denominated assets those crises can represent a buying opportunity as everyone else panics).

There is nothing magical or mystical about sovereign currency: it is just another asset class which has value because the bearer can use it to settle his tax liabilities with the government. Its value can fluctuate relative to other assets like any other financial instrument derived from real properties or powers.

That is what makes gold bug rants so damnably ridiculous: if someone likes gold as an asset class, thinks he understands it, and has his knickers in a twist about the fact that sovereign tax vouchers (currency) no longer use the market-distorting gold standard -- if he thinks that, nobody is stopping him from using gold as his own personal property base to store his own wealth, liquidating bits of that gold-dominated property base only when needed/desired, etc.

I wouldn't do that myself, because gold locked in a box is a crappy asset -- if I owned some I'd liquidate it right away and put that wealth to better use. But if someone disagrees with me about that, nothing - other than his own entitled incomprehension - stops him from literally putting his money where his mouth is.

If we aren't talking about the sovereign's power to tax, we aren't talking about sovereign currency.

The MMT guys are batshit crazy on any number of levels, but they are absolutely right that sovereign currency is intrinsically an expression of the sovereign's tax power: an authenticated fungible token issued by the sovereign which he pledges to accept for settlement of tax liabilities, and which has value for precisely that reason.

A discussion of currency which a priori refuses to take the sovereign tax power into consideration is not really a discussion of sovereign currency: it is a refusal to discuss sovereign currency.

I wrote:

Debasing hurts the sovereign himself/itself as much as anyone else. The more he debases his currency, the less he can buy with it himself: the more aggressively he has to employ his tax power merely to maintain his purchasing capacity to fund government operations.

Y'all really need to grasp this, in order to even be in the conversation at all. Sovereign dollars have value because there is demand for them.

The only thing that we individuals actually need dollars for, is paying taxes. Otherwise they are entirely dispensable. There are all sorts of other highly fungible things which could be (and sometimes are) used for trade. The 'tax interfaces' are where these things have to be valued in dollars, precisely because they are taxed.

So the bedrock source of demand for dollars is tax liabilities; and that is what gives sovereign dollars (as distinct from bank deposits, etc) any actual value that they bear.

In the past, this was all scrambled up with relatively portable commodities (e.g. gold), and then later with call options for these commodities against the balance sheets of private institutions (bank notes). The unscrambling has been beneficial, not detrimental: separating dollars from gold has made both dollars and gold more transparent, not less.

I can't help it if people don't want to hear this, or think that the usurious mindset embedded in our culture is 'salt of the earth'. It is quite common for 'salt of the earth' types to insist on defending the errors and moral atrocities of yesterday, and this frankly gives ammunition to the liberals. I don't know how many times I've had "salt of the earth" people tell me that (e.g.) the Hiroshima bombing was a heroic triumph necessary to bring WWII to an end, just as an example.

But whatever sociological analysis may obtain, as an objective matter sovereign currency gets its value -- demand is generated for it in the economy -- by the sovereign's power to tax.

There are all sorts of other highly fungible things which could be (and sometimes are) used for trade.


But usually aren't. I would not want to try to buy all my groceries without any currency or at least a credit line or debit card connected to an account denominated in currency. I think my grocer would take a dim view of my trying to pay for my groceries in stocks, bonds, real estate, or any other commodity.

Plenty of demand is de facto generated in the economy for sovereign currency by many things other than the sovereign's ability to tax.

I wouldn't do that myself, because gold locked in a box is a crappy asset

Well, that's one of the several reasons I don't invest in gold.

The only thing that we individuals actually need dollars for, is paying taxes. Otherwise they are entirely dispensable. There are all sorts of other highly fungible things which could be (and sometimes are) used for trade.

There have been governments who forbid the formation of money other than the government-issued money. In that case, the "all sorts of other things" is constrained, and the "demand" for the government's money is less a function of being ALLOWED to use it to settle tax obligations than being REQUIRED to use it to trade with if you are going to use any money. The "demand" is thus manufactured at gunpoint, as it were.

Debasing hurts the sovereign himself/itself as much as anyone else. The more he debases his currency, the less he can buy with it himself: the more aggressively he has to employ his tax power merely to maintain his purchasing capacity to fund government operations. It is in the sovereign's best interests to keep the value of his currency relatively stable compared to other asset classes (by managing its supply), and when he fails to do so the first in line to be harmed by that failure is the sovereign himself -- much like a company which debases the value of its own capital stock and thereby loses financial capacity.

Certainly debasing a currency will harm the government. THAT DOESN'T PREVENT GOVERNMENTS FROM DOING IT. It is a well documented feature of history that governments debased their coin for the short-term gain. The fact that the long-term damage is real and severe is not evidence they didn't.

The government that engages in debasing currency is not "the first person to be hurt" in order of time. The dilution of buying power hits the ENTIRE economy more or less evenly in time, and ALWAYS hits after the government has spent the debased money on goods. The government thus normally does get a short-term gain on the project, which is real enough in the short term, and has also been documented as historical. Admittedly, the government then cannot buy as many goods back when the same old _amounts_ of tax dollars are paid as it could have with older dollars, but it can buy just as many goods with the tax dollars as someone else could have bought with those tax dollars as debased. If the tax is charged at a RATE (such as sales tax rates) instead of at a fixed dollar amount, the government will then simply reap more tax dollars automatically per transaction when the debasement hits the economy. Thus the government's gain effects precede the dilutionary effects, and its taxation following the dilutionary effects are not necessarily damaged thereby.

The government that engages in debasing currency is not "the first person to be hurt" in order of time. The dilution of buying power hits the ENTIRE economy more or less evenly in time, and ALWAYS hits after the government has spent the debased money on goods.

Bingo. Moreover, since "the government" is not a personal entity, it may very well be to the advantage of the actual people who make the decisions to debase the currency and also to engage in deficit spending (these are of course different activities but have become intertwined in various ways in our modern world) and let the later chips fall where they may. That sort of short-sighted thinking also dogs the business world. Sometimes it is to the advantage of the present controllers of a company to do things that have short-term gain and long-term harm, because they themselves will not personally have to suffer nearly as much for the long-term harm as they stand to get from the short-term gain.

And you are just wrong about that. Commodity-backed currency is a composite 'product' conflating the 'full faith and credit' of an authenticated tax voucher from the sovereign and a commercial good (e.g. gold, silver, etc), distorting both.

And you are just wrong about that. The first gold and silver coins (which, I think, you will agree are examples of "commodity currency"), were not "conflating a 'full faith and credit' of an authenticated tax voucher from the sovereign. The first coins apparently were made by merchants. And the first coins made by monarchs (soon after the merchants) were designed apparently first to PAY government obligations, not to DESIGNATE amounts of tax obligations. At the time, the tax obligations were ALREADY designated in other terms, and the first coins were insufficient to settle all those obligations. At a time when most people paid their tax obligations other than by coins, the introduction of coins by the king allowed the people to pay by coins but did not require them to pay tax by coins.

If you don't want to call those first coins made by a monarch "sovereign currency" because at the time the monarch did not demand tax in his coin, then you appear to just defining your terms so your desired conclusion will be true by definition. Well, that's one way of getting a true conclusion, but it's usually trivial.

If one thinks of "sovereign currency" as physical sovereign currency, it's perhaps worth noting that Uncle Sam discourages people from sending physical bills through the mail to the IRS. They would rather get an electronic funds transfer or a personal check. If anything, the local convenience store creates more of a demand for physical sovereign currency by accepting it for purchases of potato chips and gasoline than the federal government creates by accepting it for taxes.

If one includes bank account "funds" in one's concept of currency, then Uncle Sam and the people who sell actual stuff that most of us need for daily life are even more similar. Both are very happy to accept bank account funds in payment and hence both create a demand for them. Both refuse (Uncle Sam always and people who sell stuff almost always) to accept, I dunno, beads or unredeemed mutual fund stocks in payment and hence create a situation in which people want to "cash in" their mutual funds stocks or beads or gold or what-not, turning them into either physical or electronic funds denominated in dollars and cents, in order to be able to buy things for their daily needs.

Hence, when Uncle Sam debases the currency by creating either more physical or more electronic funds, it devalues what virtually everybody in the country has to use, in practice, virtually all of the time to buy virtually everything needed for life.

Lydia:

Hence, when Uncle Sam debases the currency by creating either more physical or more electronic funds, it devalues what virtually everybody in the country has to use, in practice, virtually all of the time to buy virtually everything needed for life.

... which does not affect you personally unless you hold onto it for an extended period of time (enough for the debasement to matter): if you attempt to use it, not just for transactions, but to store significant quantities of wealth long term. Which nobody is holding a gun to your head forcing you to do.

(Even granting the "debasement" premise, which could mean all sorts of things).

which does not affect you personally unless you hold onto it for an extended period of time (enough for the debasement to matter)

I disagree, for a number of reasons, one of which is that I probably think the debasement makes a difference to real people faster than you do. There are other reasons, but I'm not sure it would be profitable (no pun intended) for us to debate them.

Tony:

To take just one point where you are completely failing to engage,

The first gold and silver coins (which, I think, you will agree are examples of "commodity currency") ...

Typical sloppy attribution (again). Privately issued coins - or bank notes for that matter - are not and have never been sovereign currency. Beyond that, as long as you keep attempting to address what I am saying with historical claims you will continue to miss the point.

Andrew, I am puzzled about what you are proposing.... What would your sort of debt system look like?...Unless what you mean is that we should STOP ALLOWING BANKS TO REFER TO DEBT AS AN ASSET.

Tony, I've been busy with work but in short what I'm describing is a system with more equity and less debt. But this can and will only come about after a great reset where the global reserve currency hyperinflates and the world's collective perspective on what constitutes wealth and ownership are radically re-aligned to be far more in tune with reality. Currency is not wealth, it is an un-exercised option to acquire wealth. And currency denominated debt is a claim to more un-exercised options in the future. Post-reset, savers will save in far less debt and save in far more real wealth.

Well, that's one of the several reasons I don't invest in gold.

Oh and bullion is savings, pure wealth (a pure equity stake in the productivity of man with thousands of years of assured liquidity). Not an investment. And about the best thing to use to carry wealth through a radical currency reset.

Me:

The first gold and silver coins (which, I think, you will agree are examples of "commodity currency")

Zippy:

Privately issued coins - or bank notes for that matter - are not and have never been sovereign currency.

You're not trying to be serious, are you? Did I actually see you try to foist off the term "sovereign currency" as if that's what I said when I mentioned "commodity currency" after your use of the expression "Commodity-backed currency", and you most definitely _didn't_ qualify it as SOVEREIGN currency?

Commodity-backed currency is a composite 'product' conflating the 'full faith and credit' of an authenticated tax voucher from the sovereign

Well, that's sure what it looks like you tried to do. That's pretty lame.

Let's take it slowly, in words of one syllable or less (metaphorically, of course):

Commodity money is a species of money: it is money formed as money even while it is an object of value and would be traded as an object of value - a commodity - even if it had not been so formed. Gold coin is the example par excellence of the notion "commodity money". In some small circles other items are used: cigarettes (in prisons), etc. I have seen small jewelry items (earrings) used that way in a very limited circle.

"Commodity backed money" is another species of money, it is money that that is used in exchange the way money is typically used, but is not itself an item of value APART from its being formed into money. It is "backed" by commodity because it consists of a promise that the monetary item can be exchanged directly for the commodity. Among the earliest examples of commodity backed money in Europe were the goldsmith's notes that were given as a promise of gold and used for exchange the way money was used.

Sovereign-issued commodity-backed money is simply commodity-backed money that is issued by the sovereign. In the early 1900's, US silver-certificate notes were dollar bills that could be exchanged for silver.

It is manifestly obvious that just like "money" in general, the specific type of money that is commodity-backed money can be money issued by a sovereign or money issued by other parties. It is manifestly true that it CAN be so because it HAS BEEN so.

Beyond that, as long as you keep attempting to address what I am saying with historical claims you will continue to miss the point.

Zippy, if we are debating NATURE of some inherently natural object - say "tree" - it might be true that you could successfully argue about the nature of the object without any reference to historical considerations. However, if we are debating the meaning of the WORD "money" you cannot completely avoid the historical connection because words about non-natural objects (things that man constructs) are very much conventions, and the content of a convention cannot be discerned completely apart from historical reality - its usage in society.

If Bedarz were to say "the word 'money' refers specifically to a round red rubber ball which is at least 14 inches in diameter", it would be perfectly legitimate to reject that claim even if he says "well, that's what it means when I use the term." The terms
money
commodity money
fiat money
sovereign money
all had meanings before we started to discuss them, because they were used by society at large in certain ways - and acquired settled meanings in that historical framework. If we want to speak together with _those_ words we either have to use them the way society has ALREADY constructed them, or we have to EXPLAIN why we are using them in a special way, say, a special sense that narrows the society-given meaning to a subset thereof. Just saying - or even just implying - that your peculiar use of a word is normative for everyone here, that a word means what YOU are using it to mean regardless of the way society uses it, is frankly bad manners.

However, I don't need to rely on "history" to prove my point, current usage is clear.

Investopedia: for "commodity money" , "commodity-backed money" , "fiat money", and "sovereign money"

The use of a specific commodity as a form of money. Commodities such as gold and silver have been used for years as a method of payment. Oil has also become a precious resource that is used in this form.
A currency that is issued based on an underlying physical commodity that is widely acknowledged as having intrinsic value. Gold and silver were the most common commodities used to back a currency, although other goods such as tobacco have been used historically.
Currency that a government has declared to be legal tender, but is not backed by a physical commodity.

At About.com:

Commodity money is money that would have value even if it were not being used as money
Commodity-backed money is a slight variation on commodity money. While commodity money uses the commodity itself as currency directly, commodity-backed money is money that can be exchanged on demand for a specific commodity.
Fiat money is money that has no intrinsic value but that has value as money because a government decreed that it has value for that purpose.

at http://www.sovereignmoney.eu

Sovereign money is legal tender issued by a state authority

I've often tried to figure out the exact cash value (this pun is intended) of the status of legal tender. For example: Barter is possible, and not illegal. Well and good. However, there is apparently _some_ meaning to the statement that dollars must be accepted as payment for "private" debts.

My best current guess as to what this means is that, if you have *denominated* what people owe you for goods and services in terms of dollars (e.g., by putting prices in dollars and cents on your advertised goods), then you must accept payment similarly denominated--e.g., funds from bank accounts or credit card payments. You cannot label the butter in your store as "$1.99 a pound" and then state at the cash register that you will accept payment only in the equivalent value in bitcoin, for example.

However, suppose that you had labeled all your prices clearly as being intended to convey an amount of bitcoin? Or stock in Apple? Would the customer's agreeing to purchase then constitute a contract, denominated in terms of bartering x amount of bitcoin or Apple stock for goods and services? Would that contract be enforceable if the customer refused to pay in the chosen barter product?

That part I haven't fully figured out yet.

You owe me $100 and try to pay me in pennies. Can I refuse and continue to hold you in debt? That, as far as I know, is the problem that "legal tender" tries to solve. The answer is: it depends. In the case of pennies, you probably can; at least some jurisdictions do place limits on amounts for which coins can be considered legal tender.

In the case of a store, it depends on when a financial obligation is undertaken. In other words, since I don't have the goods before I pass through the checkout, the store can refuse my payment if (a) they don't like coins, (b) don't want large bills, (c) declared it bitcoin day, (d) only take credit cards, etc. When I try to hand over a bill and the cashier shakes his head, that means he is refusing to treat with me and there is no contract of sale.

This, at least, is my understanding.

I don't understand why tax-paying is to be privileged over all other payments when it comes to defining money. I don't think that tax-collection is an compulsory attribute of sovereign. We can easily conceive of a thrifty sovereign that lives off user fees and loyalties from resource rights etc and does not need to tax its subjects. But it may still need to provide a legal tender that would be acceptable for all private payments in order to ensure a smoothness in private transactions.

Zippy @ 5:17 PM

which does not affect you personally unless you hold onto it for an extended period of time (enough for the debasement to matter)

Are we not allowed to make a political argument? It has to matter personally?
Usually, the argument "how does it personally matter to you?" are made by the progressives trying to pull a fast one over conservatives.

Lydia, I think Jordan is right pretty much. The ability to contract in other forms of payment is not taken away by having a legal tender. And the ability to contract to accept payments only of SOME kinds of legal tender and not others (no hundred dollar bills, say), would also seem to be allowable. So before the contract terms are final, a store owner is free to say anything he wants about form of payment.

However, once a contract is finalized, say a loan contract where I will pay you in 1 year, it seems a little odd to say that even though the contract doesn't have it explicitly, you could reject payment in $100 bills and require smaller denominations instead - what would be the effective meaning of "legal for all debts public and private" mean on the $100 if you were free to say "nope, i want smaller bills than that"?

IN a social setting where payment amounts are almost universally designated in one currency, like dollars, it is immensely EASIER to join everyone else's usage and employ dollars for your transactions also. But if you are willing to take on the burdens of having far fewer likely buyers, you can choose to designate your selling prices in other terms - as long as the law doesn't forbid this directly. It is my understanding that when a country replaces one old currency with a new one, it typically does so more or less forcibly: you are REQUIRED to turn in your old bills and exchange them for new. You are REQUIRED to designate your sales prices in the new currency. I suppose that some transformations were softer, more voluntary - you can keep your old currency, but everyone else is changing so you might as well get on board - but I get the sense that this is not how the Roman emperors did it, for example.

I use the term "sovereign currency" about 25 or 30 times in this discussion to refer to what I am talking about, and indeed in the very comment I made to which everyone is still objecting. But by the time he makes his most recent comment, Tony has simply forgotten what I am talking about: he has forgotten that the thing everyone disagrees with me over is whether sovereign currency has always been (at least in part and in a sense) fiat money. The whole flurry of objections was over my statement that 'by the way, all sovereign currency is "fiat money" for the sake of my previous comment. So-called gold-backed fiat money is still fiat money.'

This is what makes discussion with Tony impossibly tedious. Here I am clarifying for the Nth time that I am discussing sovereign currency, despite having used the phrase 25 or 30 times already in this discussion to refer to what I am talking about.

BI:

I don't understand why tax-paying is to be privileged over all other payments when it comes to defining money.

That is just a matter of defining terms, and I am largely ambivalent about what terms people use as long as we are clear on what they mean. "Money" is a vague term traditionally used to refer to all sorts of radically different things. Money issued by the sovereign is sovereign currency, and what gives it its value is his full faith and credit: the fact that he will use it to assess tax liabilities, accept it to settle those tax liabilities, and will issue fines and enforce other public and private debts using it as the currency for those debts.

The reason dollars are used to denominate most transactions between private individuals is mostly because of convenience, not because of legal requirement. Barter (understood very generally to mean transactions not denominated in dollars) is not forbidden, but you have to comply with tax law which often forces you to denominate in dollars at some point anyway. The largest transactions of which I have been a part personally have been barter transactions, not cash.

But the thing that backs sovereign currency - the thing which has always backed it - is the sovereign's power to tax.

Someone objected that people value dollars for other reasons than the 'full faith and credit' of the sovereign. That is fine and all -- for all I know people like it because it is pretty, they think it is prestigious to have some, because they like to put it in piles and roll in it, etc.

That isn't what I am referring to when I talk about what grounds demand for sovereign currency qua sovereign currency though. If I similarly said that what fundamentally grounds economic demand for food is the need people have to eat, it is no objection to suggest that some people like to cook and treat food as an art form, and others find it convenient to use for barter. Those things may be true enough, and entire industries may even spring up around food as an art form or whatever. But that doesn't undermine the fact that what grounds demand for food is the need people have to eat.

And what grounds demand for sovereign currency is the power of the sovereign to tax.

BI:

Usually, the argument "how does it personally matter to you?" are made by the progressives trying to pull a fast one over conservatives.

That is a fair point. But I don't see how currency debasement should be high on the priority list of anyone who is not in the grips of a usurious mindset. The trap is created by the person himself and his vice: the sovereign can't hurt you with currency debasement (short of it leading to a major financial crisis) if you keep your long term wealth in property other than sovereign currency and financial instruments pegged to sovereign currency.

I don't find fluctuation in currency values to be a big deal. Houses depreciate too, and all property requires maintenance simply to keep from deteriorating to nothing. As classes of property go, US dollars are pretty robust in terms of maintaining their relative buying power vs all sorts of other more perishable things. I don't hold onto currency for the same reason I don't hold onto gold: not because it is especially perishable as assets go in general, but because wealth in a vault creates a cost burden for its maintenance and protection, while ownership in productive things can create enough income to maintain its buying power and even produce a profit.

I use the term "sovereign currency" about 25 or 30 times in this discussion to refer to what I am talking about, and indeed in the very comment I made to which everyone is still objecting.

But you don't use the term the way EVERYBODY ELSE uses the term, which is why everyone else objected.

This is what makes discussion with Tony impossibly tedious.

Yes indeedy, that's because I, like everyone else, expect you to use terms the way the English language developed, not the way you feel like it when that departs from the English language.

Tony has simply forgotten what I am talking about: he has forgotten that the thing everyone disagrees with me over is whether sovereign currency has always been (at least in part and in a sense) fiat money.

Zippy, if you used the terms with the definitions I cited from other sources:

Sovereign money is legal tender issued by a state authority

and

Fiat money is money that has no intrinsic value but that has value as money because a government decreed that it has value for that purpose.

you would have avoided about 3/4 of the stupid part of this discussion and we could have a fruitful development of thought.

Those two definitions are distinct because they have different meanings. If you think ALL sovereign-issued money is actually fiat money, IN THIS STATED SENSE, as well, then you can either prove it, or you can start using the expression "fiat sovereign money" for your term and that will CLEAR UP the confusion you have been sowing. You have repeatedly said

That is just a matter of defining terms, and I am largely ambivalent about what terms people use as long as we are clear on what they mean.

So, for purposes of THIS discussion, the expression FIAT SOVEREIGN MONEY shall mean

Money issued by the sovereign, with no intrinsic value but that has value as money because the government decreed that it has value for a government purpose.

We have not yet heard a term that is specific to the still more developed notion "fiat sovereign money that is the ONLY accepted form for paying taxes", because at least in theory if not in practice a government could issue a fiat legal tender and not DEMAND tax payment in that form. Or a government could demand payment in a specific form that is NOT a money it issued.

And we have not yet bandied about a term for the even MORE constricted notion "fiat money that is the ONLY legal money for all transactions public and private", as that is still more complex an issue.

It might be plausible to suggest that in the modern (post world war) era, all money systems are fiat sovereign money that is the only accepted form for paying taxes, but we have the Ecuadorian counter-example.

Tony:

But you don't use the term the way EVERYBODY ELSE uses the term, which is why everyone else objected.

That depends on who you mean by "EVERYBODY ELSE" [tm]. I mentioned upthread (just once though, rather than the double digit number of times I used the term "sovereign currency" without it managing to stick [because it is not the standard meaning given in ALL the sources. Editor.]) the mainstream school of economic thought, which has been around at least since Keynes was in diapers, which uses the term in more or less this way. [But didn't back up this claim with evidence, because that would be too hard. - Editor.] I leave finding that mention, reading up on that famous economic school of thought, etc. as an exercise. [Because Zippy can't be bothered to look it up. - Ed.]

[Deleted: Zippy again trying to be insulting. He does it too often for it to add value. -Ed.]. Editorial choices are a matter of attempting to use language to help others understand concepts - concepts which correspond to reality. In order for people to understand what I am saying, they have to have most of the conceptual pieces which make up these concepts already in their minds, and although their preexisting concepts may be flawed that nevertheless must drive my editorial choices. [Actually, that's WRITING choices. Editorial choices require having editorial capacity. Like this. Ed.] My editorial choices [read: writing choices -Ed.] are I am sure far from perfect [ well, he got that part right. He could even have said VERY far from perfect. My emphasis -Ed.], but I do attempt to make them clear [As long as everyone agrees that a word means what he says it means and nothing else. -Humpty Dumpty] (indeed I have something of a reputation for clarity [in his own head. -Ed.] and succinctness [says the man, with the utter obliviousness of a hypocrite, wrote 13,000 words to deal with usury when St. Thomas needed only 3,000 and Pope Benedict did it in 2,000. -Ed.] even when it comes to wildly counterintuitive subjects, so I know these attempts are at least somewhat successful in some contexts). As a realist "all the way down" I attempt to make the concepts I attempt to communicate correspond with reality, as opposed to adhering to some historically or currently pervasive misconception or other. [either that or maybe he can't be bothered to look up the history to inform his notions of what is "really" true about money, and relies on just knowing it from intuition -Ed.] And in my defense [deleted - it wasn't in Zippy's defense. It was just an insult. There isn't anything to defend that. -Ed.]

It is [deleted: another stupid, inane comment that contributes nothing to the thread of discussion. -Ed.]

Also on this:

So, for purposes of THIS discussion, the expression FIAT SOVEREIGN MONEY shall mean

Money issued by the sovereign, with no intrinsic value but that has value as money because the government decreed that it has value for a government purpose.

You don't get to dictate other peoples' editorial choices. I'll use the terms I think are most likely to communicate what I mean to those who are capable of understanding and want to understand. You can ban me from your thread - that's your perogative as a blogger - but you can't dictate to me how I must explain the concepts I am attempting to explain, especially when you obviously don't understand them yourself.

Tony, your perseverance is admirable. I doubt I would continue trying to converse with someone who kept telling me I was too dumb to understand their point, and I should quit being so dumb. Maybe if I was one of the super-smarts, then I would understand, but I'm not, so I should shut up.

It's been a while since I read this, but the history of the Roman Empire is illustrative of where these trends can go. If I remember correctly, the state reached a point where the currency was so debased that currency had to be converted into gold at exorbitant prices in order to settle tax debts. In such a case, the sovereign clearly didn't suffer. It also stands to reason that if the sovereign creates a new batch of money and spends it that the inflationary impact on the economy will not hit the sovereign until the next round of transactions between the sovereign and sellers of goods and services. Therefore from a short term perspective, the cost appears to be minimal.

JB:
In Tony's defense, he could be a genius and for his own reasons be [deletion: "refusing to" -Editor] engage with what I actually say. [the rest is deleted nonsense. Comment edited for conciseness and accuracy. -Editor]

Mike T:
Sure. The government is likely to change the rules - if it survives at all - if it destroys itself financially under the current rules. People with large hoards of gold have painted a target on their foreheads in that circumstance.

But I wasn't arguing that point. Re: debasement I was arguing that as long as the apocalypse remains at bay, debasement really only hurts those who hold on to currency for long periods of time -- which nobody is forcing you to do.

Re: debasement I was arguing that as long as the apocalypse remains at bay, debasement really only hurts those who hold on to currency for long periods of time -- which nobody is forcing you to do.

To me this is just so obviously false. Suppose, e.g., that a person purchased an annuity for his retirement. He didn't put cash in his mattress. He didn't even keep it in the bank. The annuity pays a fixed rate of income in his old age. Then the sovereign debases the currency. *Of course* that hurts the guy living on an annuity.

Now I suppose the next step is to say that you're stupid to buy an annuity. But that isn't really the point. The point isn't to debate over, "Anybody who isn't as smart as Zippy in making investments is imprudent and deserves what he gets." The point is that there are _lots_ of ways in which a person who is trying to be careful can be hurt by inflation even though he doesn't just keep his wealth as cash or even as fully liquid deposit account holdings.

The annuity case is just one example.

Lydia:

An annuity is an obvious example because it is a long term asset contractually valued in dollars, which is precisely the sort of thing that someone concerned about currency debasement should never buy. Nobody is forcing anyone to own things long term which are contractually valued in dollars - as if financial instruments valued in fixed quantities of dollars were the only sort of property it were possible to own.

If you are concerned about long term currency debasement, don't buy a bloody annuity. If you do anyway, any losses on your part are on you.

If you like gold better, buy gold or a contract against gold. If you like corporate equity, buy that. If you like real estate, buy that. If you like small businesses, invest in some. If you are worried about currency debasement you have a huge buffet of investments from which to choose which are not set to fixed dollar amounts of principal and interest.

If you just want to invest in something you don't understand, to be guaranteed against any loss of buying power, to earn interest, and feel entitled to have someone else guarantee all that for you -- well, the contracts you enter into may not be usury strictly speaking but you have entered into them with the mindset of a usurer.

Heck, people who think government influence over the economy is outsized really ought to be on my side in this. The fewer private long-term assets which are denominated in dollars, the less influence government policies have over the private economy. The thing to do is to teach people to stop buying this crap, and to own their own property rather than feeling entitled to have other people to provide ironclad guarantees.

See, it's pretty much futile to debate this with you, Zippy, because at bottom it really does come down to, "Anybody who isn't really good at investing deserves what he gets." The sentence I quoted was about the stupidity of "investing in currency." I instanced an annuity, and then it's "things contractually valued in currency." Which means all bank accounts and life insurance policies as well. So the fact that the government's inflation (or for that matter, increased money supply through increased fractional reserve lending) harms the widow lady trying to live on the life insurance she inherited from her husband is also not apparently the fault of the government policy but the fault of the widow lady's husband for investing in the life insurance policy. Too bad, so sad.

This is ridiculous. Government policy and monetary policy more generally have real effects on real people who *aren't doing anything wrong.* Nor, whether you agree or not, anything obviously stupid and imprudent. That they aren't asking WWZD (and answering correctly) in all of their investing decisions does not mean that government is absolved of all obligation to think about the long-term effects of its policies, because it's "people's own fault" if they were "stupid" enough to invest in things that are affected by inflation.

Not to mention the fact that those aren't the only effects of inflation anyway, especially if it is steep enough.

Lydia:

because at bottom it really does come down to, "Anybody who isn't really good at investing deserves what he gets."

No it doesn't. What it comes down to is that the folks who are in the wrong are those who feel entitled to have others fully guarantee the preservation of and growth in the buying power of their property. Today's entitlement mentality was birthed by yesterday's entitlement mentality, and I can always count on my 'conservative' friends to defend the latter.

The sentence I quoted was about the stupidity of "investing in currency." I instanced an annuity, and then it's "things contractually valued in currency."

OK. But in my defense I had already described the category as "dollar-denominated assets" upthread when I wrote:

If you allow currency debasement to harm your own portfolio though that is on you. If you don't hold onto currency or illiquid dollar-denominated assets ...

and

...if your portfolio is not in dollar denominated assets ...

You are right that this affects those kinds of assets across the board: if you are concerned about currency devaluation you should be discouraging people from buying them and encouraging them to hold different kinds of property, and you should be encouraging people who hold them to liquidate them and purchase something which is not dollar-denominated.

Plenty of people are hurt by inflation for whom investing isn't even an issue. People who have to live paycheck-to-paycheck get hurt by inflation if the "information" doesn't get passed around to their corner of the economy in such a way that their pay keeps pace with inflation.

It _seems_ that your position would have the general implication that the government has no particular responsibility to its citizens to curb its own deliberate inflation of the money supply and that anyone hurt by this has only himself to blame--including every retired person, incapable of personally, actively managing productive property "that he understands," who happens to be living on a fixed or semi-fixed income.

That this is an extreme position and needs to be rethought would seem to me to be pretty obvious, but if you cannot be moved by what seem to me to be reductios of the position, I'm probably just going to get agitated if I keep trying to change your mind, so I should really stop.

Lydia:

It _seems_ that your position would have the general implication that the government has no particular responsibility to its citizens to curb its own deliberate inflation of the money supply ...

That isn't my position though. As usual, my position on one thing cannot be extrapolated to assume my position on other things.

Lots of people go on and on about how the government should do this and the government shouldn't do that, when it comes to management of government finances. Usually these people frankly don't know what they are talking about when it comes to basic financial mechanics like the subject of the OP, let alone more complex derivative subjects such as various kinds of currencies.

I have nothing in particular, at this particular moment, beyond anything I've actually said, that I want to add to the pervasive discussion about what government should or should not do financially - nor do I think that anyone would be likely to listen to me if I did. The only definite conclusion which can be drawn from me refraining to discuss something is that I did not say anything about it, though frequently that is because I have nothing particularly productive or educational to add, at least not assembled into something I am prepared to attempt to present coherently to a sometimes hostile audience on line.

But nobody on earth, of which I am aware, is pointing out the entitlement mentality that I am pointing out here, connecting it to the sin of usury properly understood, identifying this entitlement mentality as the 'parent' of Sandra Fluke style entitlement, and encouraging property owners to repent of their usurious mindsets and own their own sh*t. Because it isn't something that anyone else is saying at all, and it needs to be said, I am saying it.

All I really have to say here about various government shenanigans is that if property owners were not slaves to their own usurious mindsets they would be far less enslaved by government shenanigans. So we should encourage them to become less enslaved by government shenanigans, primarily by repenting of their usurious mindsets and looking at themselves, qua property owners, in a new light.

I cannot buy bread with non-currency property. Perhaps some people can, somehow, but most of us can't. Even if one is fortunate or smart enough to pick very productive enterprises in which to invest, one has to live at a daily level using currency-denominated property. Zippy, I quite honestly cannot see how the pulverizingly important economic fact that one needs currency-denominated property (bank account funds, etc.) to purchase pretty much everything one needs or wants, because that is what the sellers demand, is even *taken account of* in your approach. This is scarcely a weird idea such as "some people think money is pretty." It is a central fact about how money functions, every day, in the economy for pretty much everybody. It would seem that acknowledging this fact would cause one to give a far higher importance to the issue of inflation and would count strongly against a statement such as

as long as the apocalypse remains at bay, debasement really only hurts those who hold on to currency for long periods of time -- which nobody is forcing you to do.

Lydia:
I am not giving advice here, just answering your questions.

I cannot buy bread with non-currency property.

You can, actually, but lets grant that it is rare enough and difficult enough to pull off to be effectively the case that you cannot.

If you need cash for transactions, it means that you have to keep enough around to spend for long enough to spend it. And it means you need to be able to get more when you need it: you need enough liquidity in your portfolio, if you are retired and not working, to be able to sell something and use the proceeds to meet your budgeted needs.

But it doesn't mean that you need to hold any cash or dollar-denominated property long term. And if inflation gets to the point where holding what accountants call "cash and cash equivalents" for a year or so loses you significant buying power on that cash, the fact that almost all of your portfolio is not pegged to dollars will actually help you.

And if inflation gets to the point where holding what accountants call "cash and cash equivalents" for a year or so loses you significant buying power on that cash, the fact that almost all of your portfolio is not pegged to dollars will actually help you.

I see that that could be true (depending on what else the portfolio was invested in and how lucky, brilliant, etc., those investments happened to be), but it does not follow that

as long as the apocalypse remains at bay, debasement really only hurts those who hold on to currency for long periods of time

Which is a _very_ strong statement.

Think about what happens to cash holders and property owners when there is inflation: in dollar terms, the property becomes worth more comparatively speaking. In property terms, dollars become worth less comparatively speaking. That is what "inflation" means: that it takes more dollars to buy equivalent property.

So if inflation is your worry, hold property which is not denominated in units of currency. Sell some of that property when you need cash for transactions.

But whatever the consequences of the decisions you make qua property owner, take responsibility for them -- because you quite literally own them.

As I have already pointed out, people who are not fortunate enough to have a portfolio can easily be harmed by currency debasement. Hence, the statement I quoted is too strong, an overstatement, for that reason alone.

For those fortunate enough to have investments, the strategy of keeping as few as possible in currency-denominated form and liquidating on an asset-needed basis is quite cumbersome. Far from un-enslaving one to the government, it requires fairly complex record-keeping and accounting activities for regulatory and capital gains purposes. At a minimum one would need to hire the services of an accountant, and beyond that one would have to be educated in what records to keep and how to keep them in an orderly fashion so that the accountant could use them. (Unless one is also rich enough to hire a confidential secretary to do _that_ work.) All of this erodes the extra financial value one was hoping to get from owning real estate, stocks, objects d'art, business ventures, or whatever one's preferred non-currency properties happen to be.

A large majority of people are *quite understandably* not capable of carrying out those activities of personal management and that complex record-keeping. Moreover, the statement that if only all the middle-class (and lower) savers could do so they would be extremely likely to beat inflation is a highly contingent and controversial claim. Finally, I find it frankly fairly odious to imply that if someone incapable of such active management and complex record-keeping (or unable to hire someone to do it for him) keeps his money in the bank, any effects of the debasement of currency are his problem. All the more so as such people constitute a large majority of ordinary Americans, many of whom are excellent citizens, hard workers, and basically the kind of people that any economy should welcome. I'm not even just talking about the dumb and helpless here.

Social Security means that many of the non-wealthy elderly are perforce on a fixed income and had no choice in the investment of the money that was taken from them in the form of payroll taxes throughout their working lives. These people, too, are harmed by inflation, so once again, the statement that "debasement really only hurts those who hold on to currency for long periods of time" is incorrect. The same is true of those who were forced to contribute union dues during their working years and whose return on investment for those dues comes in the form of a fixed pension payment.

Hey, I gave it a shot.

Everyone who owns property has a portfolio. And everyone who buys property has a responsibility to understand what he is buying, including its risks and benefits -- or, if he chooses to purchase in ignorance, to own the consequences. Someone has to own the consequences of the owners choices of what he does with his property. The entitled - whether Sandra Fluke or the buyer of an annuity - always try to make other people pay for the consequence of their own choices, rather than owning them themselves.

In addition to the strange sense of entitlement, another surreal parallel to modern leftism about these kinds of discussions is a kind utopian belief in what government can accomplish, along with moral outrage that government has not accomplished it. It is supposed to be a terrible injustice that government does not keep the relative value of some basket of goods (gold, bread) and sovereign currency exactly the same. The unspoken assumption seems to be that this is even possible; an assumption born out neither by any historical examples of this actually being accomplished nor by any reason to believe it is possible in the nature of things as they are.

But even if sovereign currency were simply abolished and (say) gold - actual physical gold - was declared to be legal tender for tax liabilities and other debts arising from legal proceedings, the market value of gold (in addition to being distorted by this political move) would still fluctuate relative to other goods.

None of that is to suggest that particular actions by our government are responsible or even sane. But the basic view of things which gives rise to in-principle moral outrage over things like inflation of prices denominated in fiat currency doesn't seem to be any more rooted in reality than today's leftism.

People with large hoards of gold have painted a target on their foreheads in that circumstance.

Assuming Obama is not deliberately aiming to bring about martial law and WWIII (something I would have thought ridiculous 15 months ago but now, not so much) there will be no gold confiscation during a 21st century dollar hyperinflation. (If the Obama regime does want WWIII then all bets are off on everything)

In 1933 the dollar was gold so when the currency had to be devalued the gold needed to be called in, at least officially. Today, the dollar and gold are two different things, unentangled. Governments value a currency they can print far more than a horde of gold bullion. Governments are consumers not savers, they want to be able to spend on a continuous basis.

The hyperinflation will come about because the dollar will have failed to facilitate trade, global savers will have refused to save in our currency/debt. They will reject it. The government will want to resume trade as quickly as possible which means they need a currency that works. A functional currency must be able to price gold bullion (among other things for other reasons, food etc.) so savers can exchange dollars for wealth. Zippy does not save in gold but, for instance, oil has to. There are only so many worthwhile emerging market investments one can make (only so many mansions and paintings and tanks and jet planes one can buy) when they have billions of surplus income coming in every month, every year without end. Few have truly experienced declining marginal utility but those who do are the ones who determine the global focal point for savings.

Far from confiscation the government will encourage the establishment of an official market in bullion, shorn from all paper, so gold will move and trade will resume. The Fed will get its new currency but they and the government will be disciplined unlike before and this will allow the widow to feel safe with her annuity since widows and other unsophisticated investors won't be enough to fund trillion dollar deficits.

It is supposed to be a terrible injustice that government does not keep the relative value of some basket of goods (gold, bread) and sovereign currency exactly the same. The unspoken assumption seems to be that this is even possible; an assumption born out neither by any historical examples of this actually being accomplished nor by any reason to believe it is possible in the nature of things as they are. But even if sovereign currency were simply abolished and (say) gold - actual physical gold - was declared to be legal tender for tax liabilities and other debts arising from legal proceedings, the market value of gold (in addition to being distorted by this political move) would still fluctuate relative to other goods.

It would be nice if they just weren't willfully doing things that *definitely do inflate* the fiat money supply and hence reduce the value of sovereign currency. And it would also be nice if they didn't keep raising the deficit while counting on God knows what (maybe their ability to inflate the money supply!) to make that all come out right in the end. When one knows for a fact that gov. is doing those things and one says that they shouldn't, y'know, that isn't the same thing as saying that they have the magical power to guarantee that the value of currency stays the same relative to, I dunno, the Euro, or gold, or anything else. "First, do no harm" isn't just a rule in medicine.

No it doesn't. What it comes down to is that the folks who are in the wrong are those who feel entitled to have others fully guarantee the preservation of and growth in the buying power of their property. Today's entitlement mentality was birthed by yesterday's entitlement mentality, and I can always count on my 'conservative' friends to defend the latter.

There is an almost strawman aspect of how you are arguing here when you use statements like "fully guarantee." A great many people actually don't expect a full guarantee because they know it's not possible. What they are outraged about is the fact that most of the debasement is happening for no particularly good reason.

None of that is to suggest that particular actions by our government are responsible or even sane.

And that is the crux of the issue here. Most debasement of the currency is from irresponsible and/or insane public policy. One should be able to create a six month emergency fund in 2015 and assume that, should their expenses remain more or less the same, it'll be a six month emergency fund in 2025. That's simply not the case and that's not right.

Lydia writes:

It would be nice if they just weren't willfully doing things that *definitely do inflate* the fiat money supply and hence reduce the value of sovereign currency. And it would also be nice if they didn't keep raising the deficit while counting on God knows what ...

and Mike T writes:

And that is the crux of the issue here. Most debasement of the currency is from irresponsible and/or insane public policy...

Here is the thing. In my view the situation is actually significantly worse than either of you suppose, and that is the reason that neither of you can possibly know what you are talking about.

I've said for many years - I believe Paul, Jeff Martin and I discussed this as far back as the Enchiridion Militis blog, it has been my view since before blogs existed, and I have seen nothing in the interim to change my mind - that the kind of accounting necessary to make those kinds of judgments does not exist. It isn't just that the accounting would be possible if only the government would do it: it is that the kind of accounting necessary to make those judgments has not even been invented.

I say this as someone who knows how to evaluate the business model and financial operations of organizations pretty well. Plenty of bad ideas have come across my desk to be put out of their misery over the years, and they occasionally still do.

As best as I can tell, the management accounting which would be required to evaluate the financial health of government operations does not exist. Therefore whenever someone claims that what the government is doing financially is crazy and stupid, or is perfectly fine and no problem, it is the case that it is not possible for them to really know what they are talking about.

So in my view the first order of business in responsible government economic and fiscal policy would be to get to work on figuring out just what the Hell is going on. Nobody really knows, because it isn't possible for anyone to really know. Preemptively deciding that there is too much currency in circulation or whatever is just putting dart-throwing monkeys in charge.

---

Mike T:

One should be able to create a six month emergency fund in 2015 and assume that, should their expenses remain more or less the same, it'll be a six month emergency fund in 2025. That's simply not the case and that's not right.

Wrong. The idea that the government should be responsible for preserving your personal wealth over the course of a decade is exactly the entitlement mentality and magical thinking that I am talking about.

I stated that the government is inflating the money supply and raising the deficit. It is not necessary to do a full governmental accounting to tell whether that statement is true or false. That those statements are true is not just a matter of common knowledge but of full governmental admission. We know what the budget deficit is. We know that it goes up and even the rate at which it goes up. We know when quantitative easing takes place, because everybody and his uncle hears about it, because the whole point of the Fed's doing it is to have an effect (to no small extent, a psychological effect) upon the market, so they don't do it without saying they are doing it, in the hopes of "getting things moving" or whatever they want to call it.

What I think you mean to say is that we lack the information to know whether this is wise or foolish for them to do. I disagree with you there as well. But to say that I don't know what I'm talking about to say _that_ the government raises the money supply or the deficit is absurd. I don't know if it was just carelessly stated or an example of your penchant for overstatement, but *of course* the information exists to know *that* the budget deficit is growing and *that* the money supply is growing. Indeed, in the latter case there is even a little cute debate about where all of that QE is going, because not as much _visible_ inflation (in terms of prices going up of the kind that the budget gurus measure, not counting food prices of course, but I digress, in terms of the "economy heating up" and what-not) is taking place as would be expected with that amount of QE. But _that_ the QE is being done is out there in plain view.

Lydia:

I stated that the government is inflating the money supply and raising the deficit. It is not necessary to do a full governmental accounting to tell whether that statement is true or false.

In my view it is impossible to know what those statements really mean financially, so whether they are 'true' or not for values of 'true' does not matter: it is just jabberwocky.

I mean, sure, it is a fact that they are doing the rain dance, and the vestal virgins look on with wonder and throw flowers.

But what does that actually mean financially?

You don't get to dictate other peoples' editorial choices. I'll use the terms I think are most likely to communicate what I mean to those who are capable of understanding and want to understand.

Zippy, you also don't seem to know what "editorial" means either. A writer is not an editor. Making editorial choices requires having editorial authority. You have (for the moment) the capacity to write here at this thread because the editors of this blog allow you to. You do not have the editorial capacity to CONTROL what is accepted of what you write, or to control what is done with your writing after you submit it. That kind of editorial control requires being an editor. Which you are not, here.

If I say that on my thread a word means X, your trying to flout that editorial determination can get what you say edited on you.

Zippy,

it is impossible to know what those statements really mean financially,

Perhaps but we know very well what these statements mean politically---co-aggrandizement of the State and the well-connected financiers.

Zippy's sovereign is remarkably unconcerned with the common good. The unsupported assertion of superiority of unbacked fiat money (and superior how since all govt accounts are jabberworcky), how is Zippy able to say that fiat money is superior? One needs to ask, superior for whom? Not for the common, stupid, little people surely.

Why is that fiat money must never be questioned and it is practically a sin ("usurious mindset") to do so? Why is that a thing that is inextricably associated with the growth of totalitarian govts must not be questioned lest its questioning hinder continuing aggrandizement of the financiers?

Wrong. The idea that the government should be responsible for preserving your personal wealth over the course of a decade is exactly the entitlement mentality and magical thinking that I am talking about.

And once again, you make a beeline to the extreme interpretation to exclude the moderate view. I'm not expecting the government to be responsible for preserving wealth. What I am expecting is the government to not take actions that are intentionally and consistently destructive such as making policy that results in a massive influx of new money over the course of a decade simply because legislators and the President don't want to make hard budget choices. Inflation is part of life; this particular inflationary policy is willful and the result of a total callousness toward savers to buy support from those who draw from the public funds.

In my view it is impossible to know what those statements really mean financially, so whether they are 'true' or not for values of 'true' does not matter: it is just jabberwocky.

Oh for goodness sake! Next we'll have Zippy saying what is 'truth', anyway?

We know that the dollars in supply generally don't buy the same goods they bought a year or two ago. We don't need a complete accounting to see that. We know that the government sells debt obligations and that the total amount (denominated in dollars) goes up. We don't need a complete accounting to say that much. We don't need to resort to positivism and malarkey like "values of 'true' " here.

Here is the thing. In my view the situation is actually significantly worse than either of you suppose, and that is the reason that neither of you can possibly know what you are talking about.

I've said for many years - I believe Paul, Jeff Martin and I discussed this as far back as the Enchiridion Militis blog, it has been my view since before blogs existed, and I have seen nothing in the interim to change my mind - that the kind of accounting necessary to make those kinds of judgments does not exist. It isn't just that the accounting would be possible if only the government would do it: it is that the kind of accounting necessary to make those judgments has not even been invented.

Then the government people who choose to saddle us with a system of such financial complexity that they don't understand and can't figure out are doing something wrong - they are playing with matches in a hay barn. Forecasting the probability of getting the whole barn burned down doesn't require doing a perfect accounting on the total amount of hay, nor on understanding chemically how fire changes air and fuel into flame and ash.

It's been a while since I read this, but the history of the Roman Empire is illustrative of where these trends can go. If I remember correctly, the state reached a point where the currency was so debased that currency had to be converted into gold at exorbitant prices in order to settle tax debts.

--Mike, history is stupid. The history of money all those centuries ago - before Keynes was even in diapers!!!! - is irrelevant because that historical [commodity] money is an intrinsically different thing than [fiat] sovereign money. Let those who hang on to gold coins marked with Caesar's head suffer the consequences of their savings.-- [sarcasm]

I think you are right. A financial policy and structure that actively attacks the virtues of frugality - which is what "savings" implies - thereby actively attacks the mindset of investment and productivity (which require savings as a prerequisite - see Rerum Novarum on frugality). It thus actively courts stagnation, profligacy, and irresponsibility, leading inevitably to destruction and collapse. The mindset of usury is only one small piece of the whole, the more encompassing mindset is "let someone else produce what I choose to consume". No system can long endure having more consumption than production. A financial system designed to hide the defects while conferring rights of consumption on those choosing to be irresponsible cannot endure.

Zippy is right to this extent: when the collapse comes, those who had gold will become targets. But he is wrong to think it will be limited to that. Those who "owned" other property will become targets, too. Those who had titles to property registered on paper will find that paper doesn't count all that much to people who are hungry and mad. So those who invested in "stock" (i.e. pieces of paper detailing ownership of a "corporation") may find their property going up in smoke - literally. Those who owned property (actual commodities) that is not under their direct supervision with enough guns and guard dogs may find their claim to ownership not supported by "society" anymore, and that ownership may well go defunct.

Saying that society will turn on those who have X (so save something other than X) is not a defense of "the right kind of savings as opposed to poor investing", it is an attack on frugality and planning and responsible ownership of ALL kinds. It ends up being an attack on property ownership.

And saying that

debasement I was arguing that as long as the apocalypse remains at bay, debasement really only hurts those who hold on to currency for long periods of time

while ignoring that the debasement contributes to the encroaching apocalypse is just adding fuel to the fire.

Zippy, it's not IMO that none of your ideas has any point or value to it. It is indeed good to remind people that there are no guarantees in this life and that their money in the bank is not absolutely guaranteed to retain its value or not to be lost. It would probably be good if more people who save could find a way to invest more of their money in productive enterprises and ownership. To that end simplifying the regulatory and tax structure would be a good policy objective, by the way, rather than simply excoriating people who don't wade into the morass as foolish savers. It would be good for the economy if more money could be employed in productive ways. In general people should recognize risk in investing and saving.

All of these things are true. But you take them all _way_ too far, make vast over-generalizations, such as your generalization about who is hurt by inflation (to which I have provided clear counterexamples to which as far as I can tell you have no answer), and then refuse to dial it back even a notch. You could say, "Okay, you're right. Poor people who are forced to contribute to Social Security or pensions and then have those fixed amounts to live on in old age are also hurt by inflation through no fault of their own. So are people whose wages don't happen to keep up with inflation. And you're right that the complexity of government policy and the capital gains tax structure tends to discourage entry into productive investing. I overstated and made it sound like nobody is hurt by inflation unless he willingly and foolishly chooses to make investment choices that expose him. But I still think I have a good point that *to the extent that people have a choice in the matter* they should take more responsibility themselves for investing in productive enterprises that protect them from inflation rather than counting on someone else to do it."

Something like that. But instead you prefer to double down and compare everybody who saves money and doesn't want it eroded by willful govt. inflation to Sandra Fluke. Well, at least no one will ever call you bourgeois!

But I think what is valuable in your ideas would be more effective if you admitted the limitations on them and didn't overstate them.

BI:

... how is Zippy able to say that fiat money is superior?

Again, because (whatever their history of entanglement) government 'full faith and credit' tax vouchers are an entirely different thing from (e.g.) gold, and entangling them distorts the market forces on both and makes it impossible to evaluate the value of either.

Lydia:

... compare everybody who saves money and doesn't want it eroded by willful govt. inflation to Sandra Fluke.

I am not proposing a comparison. I am suggesting that entitled children are often the children of entitled parents, and that the entitlement mentality of Sandra Fluke and her generation is congenitally quite directly connected to the entitlement mentality of people who break out the pitchforks and torches when the value of their freely made investment choices decline.

And I don't condemn "saving money" any more than I condemn hoarding gold or buying a house. What I condemn is entitled people choosing to do that with a usurious mindset - especially in the context of the embarrassing number of options in terms of property that it is possible to buy - and then breaking out the pitchforks and torches when their buying power erodes. It isn't as if inflation is some sort of securities fraud. It would be securities fraud if people were given dollars with the promise that there would be no inflation, but that currency buys less bread over time has been a pervasively known fact about that kind of security for generations. Some people don't like to buy real estate because houses deteriorate and require heavy maintenance. Inflation is frankly small potatoes compared to the constant fight against entropy involved in owning in a house. People want currency to be a 'special' kind of asset which sustains constant buying power, view themselves as having been morally wronged when it does not, and they need to be slapped out of their entitled delusions.

The argument that I am being too hard on nice people on Social Security is similar to the argument one of the Supreme Court justices made that, now that abortion has been the 'law of the land' and so many people have planned their lives around access to it, it cannot be reversed. As in that case, there is a need for a fundamental re-orientation of the attitude of the culture. The rot runs so deep that it would be almost impossible to overstate it.

Does this mean that women who get pregnant and old people living off of annuities should be tossed out in the street? Of course not. But I disagree with the notion that the call to repentance should be toned down.

Again, because (whatever their history of entanglement) government 'full faith and credit' tax vouchers are an entirely different thing from (e.g.) gold, and entangling them distorts the market forces on both and makes it impossible to evaluate the value of either.

It is true that making a commodity into money, such as gold coin, does CHANGE the effective valuation of the commodity, gold in this case.

This happens with ALL uses of a commodity. If a new use is undertaken that hadn't before been common, that new use will change the desirability of the commodity. It will grow in demand, thus changing its valuation compared to other goods.

Making gold into coin is a use of gold. If people earlier did not make gold coin, making it into coin will be a new use that increases its desirability. That will change its market valuation against other goods.

This change, in and of itself, is NOT A DISTORTION of the value of gold. To call it a distortion is to simply misunderstand the nature of commodity pricing. If the gold coin is and remains just one form of money available, where there are several other forms people can preferentially choose if gold coin valuation gets distorted, the valuation typically will NOT GET distorted - unless other distorting influences occur.

The obvious notable distorting cause is creating commodity-backed paper money, AND THEN CREATING MORE paper money than there is commodity to back it, giving the name and appearance and treatment of the non-backed money the same name, appearance, and treatment as the commodity-backed paper money for which there really was actual, physical commodity to back it. This will, of a certainty, distort the market valuations of the commodity itself.

Another cause of distortion is making the commodity money (or its backed up paper vouchers) a monopolistic enterprise, wherein virtually all of the economy must resort to it directly or indirectly. We all know that monopolies tend to distort pricing. Does that with money too, apparently.

The third important cause would be economic forces leading to transferring almost the entire supply of a commodity into money. This is the "other side of the coin" of a monopolistic arrangement with the commodity. Using every available piece of a commodity on one possible use will tend to distort the market on that item. So laws that forbid private ownership of the commodity would be distorting. (Also smacks of socialism, of course, which is a whole other ball of distortions.)

Where commodity money of gold, silver, and copper (and some other metals and other hardy commodities!) are readily available in many denominations and from many different sources (including that of other countries' mints), and where there is no strong monopolistic force (such as requiring payment of taxes or "all debts" in only ONE of the forms available, from only ONE of the sources making it), and where most of the supply of these commodities remained not as money, the pricing of gold etc. would tend NOT to get gravely changed by their being used as money. Were there gold-, silver-, etc. backed paper money which could ALWAYS be exchanged for the commodity itself by any and _all_ parties asking - even if that meant all parties holding the paper because there was no more paper generated than there was commodity on hand at the mint (always a one-for-one relationship between the paper and the physical commodity on hand), the paper money too would not distort the values of the commodities.

global savers will have refused to save in our currency/debt. They will reject it. The government will want to resume trade as quickly as possible which means they need a currency that works.

Far from confiscation the government will encourage the establishment of an official market in bullion, shorn from all paper, so gold will move and trade will resume. The Fed will get its new currency but they and the government will be disciplined unlike before and this will allow the widow to feel safe with her annuity since widows and other unsophisticated investors won't be enough to fund trillion dollar deficits.

Andrew, I would love to hear you talk about what that new currency will (or should) look like. I have been reading about proposals such as forbidding banks to create "account money" (i.e. the kind of money they create in fractional reserve banking), and leave only the central bank with the authority to generate account money. I have read some other, even stronger proposals, relating to proposals on limiting "sovereign money", both some form of fiat money and others of commodity money (or commodity backed money).

People want currency to be a 'special' kind of asset which sustains constant buying power, view themselves as having been morally wronged when it does not, and they need to be slapped out of their entitled delusions.

Zippy, I doubt that anyone would be complaining if the issue were one of mice nibbling some guy's hoarded dollar bills, as if he should be guaranteed against such a loss. But devaluation carried out willfully by the government is an entirely different matter, as Mike T. has tried to point out to you repeatedly. I cannot see that you have presented a *single* argument to the effect that people have no right to object to that. Indeed, it is a relevant point in all of this that Dante condemned counterfeiters similarly to his condemnation of usurers, judging by their place in hell. (To be precise, counterfeiters are in a _lower_ circle than usurers.) Debasing the currency has _traditionally_ been taken to be a very bad thing indeed. And, no, it wasn't just that, hey, they're counterfeiters, so they're not the government, but the government gets a free pass. Rather, it was understood that it was *harming people* to deliberately debase the currency. Counterfeiting was bad not just for some legalistic reason ("You're not the sovereign, buddy") but for the harm it did to the economy and to the innocent. You have been concerned to emphasize the evil of usury and to try to explain it as traditionally understood. Well and good. But you have too much of a tendency to try to "bend the stick back" and downplay other evils to emphasize the evil you clearly see and that you think others don't see clearly enough. This is a fault of intellect. It's better to see both clearly, or at least try harder to do so.

I won't even try to disentangle another of your tangled metaphors concerning the elderly on Social Security and what I have said. You multiply tangled metaphors rather than dealing with straightforward counterexamples to your vast overstatements. You _stated_ that the _only_ people hurt by inflation are those who _willingly_ ("nobody is forcing you," etc.) invested in currency-denominated assets. I have counterexampled that. Repeatedly. You refuse to acknowledge that and instead spin another complicated metaphor. Whatever. That's your prerogative. But it would be more seemly in a person of your undeniable intelligence to be able and willing to say, "Okay, yeah, I overcalled it and you counterexampled me. Fair tag."

Lydia

You _stated_ that the _only_ people hurt by inflation are those who _willingly_ ("nobody is forcing you," etc.) invested in currency-denominated assets.

How about this: generally speaking, everyone hurt by inflation incurs that harm because of their own choices about what property to own, how to plan for their retirement, etc.

And again, the connection between the entitlement mentality of granny and the entitlement mentality of little Sandra is not a metaphor or analogy.

I was in the middle of editing my previous comment when I accidentally posted it. "Everyone hurt by inflation" should read "everyone who loses value in their property because of inflation".

Using gold coins as the medium for sovereign currency is like using gold coins as the medium for Google stock or any other security: it distorts the value and transparency of both the gold and the security.

The ideal medium for a security (setting aside Mike T's perfectly valid point about counterfeiting) costs nothing at all, and/or is useless for any other purpose. Practically speaking this means that the value of the token should be as small as possible compared to the value of the security. Paper is vastly better than gold, and ledger entries in computer memory are better still.

Therefore, fiat money is better than gold coins as the bearer of the sovereign's "full faith and credit". It is better in at least two senses: it is more transparent, and it produces less market distortion in both gold and sovereign currency.

But devaluation carried out willfully by the government is an entirely different matter, as Mike T. has tried to point out to you repeatedly. I cannot see that you have presented a *single* argument to the effect that people have no right to object to that.

Zippy has been attacking the more extreme, more ignorant viewpoint while all but saying that we ought to ignore the more rational middle ground here. That is we should focus entirely on scorning the pig ignorant who truly believe that a bank can simultaneously lend out deposits and then make good on demand all deposits. That completely ignores the reasonable expectations of people who have a basic, even non-usurious understanding of how the system works and just want a responsible monetary policy that ensures that inflation will be tightly controlled within the limits of the government's ability. Again, with the six month emergency fund, it is unreasonable to expect funds in 2015 to be just as good in 2065 as they are in 2015. It is not, however, unreasonable to expect that in the space of 10 years, the buying power of six months of currency will diminish to 4.5 or fewer months assuming expenses remain more or less constant.

From where I stand, Zippy is damn near saying that currency is the sovereign's play thing to mess with as it sees fit. Sure, the sovereign should be responsible, but the sovereign appears to have a minor moral obligation to not destroy the value and inflict the host of harms that come with that.

That should read it should not be considered unreasonable to expect that the buying power will not diminish to 4.5 or fewer months.

Like a lot of people, I can accept a moderate amount of natural fluctuation and inflation. What I cannot accept is the inflation being inflicted by elected officials borrowing and printing insane levels of money. As a matter of fact, my investment strategy is not that far from Zippy's suggestions, but I object to the idea that my reserves should be eaten away in buying power not by natural fluctuations but due to the bovine excrement on Capitol Hill.

Mike T:

That completely ignores the reasonable expectations of people who have a basic, even non-usurious understanding of how the system works and just want a responsible monetary policy that ensures that inflation will be tightly controlled within the limits of the government's ability.

Wanting that is all well and good. Convincing yourself that you know how to accomplish it is deluded. And moral outrage that the government isn't doing it for you is breathtakingly entitled.

Zippy is damn near saying that currency is the sovereign's play thing to mess with as it sees fit.

To approximately the same extent and with the same fiduciary and moral responsibilities toward all stakeholders as a company's stock is its "play thing", yes.

"everyone who loses value in their property because of inflation"

I _think_ this is meant, then, to exclude counterexamples in which people do not own property but are nonetheless hurt by inflation. e.g., The person who was forced to contribute to Social Security does not own property that loses value because of inflation, the person whose wages don't keep up doesn't lose value in property because of inflation, etc.

However, at that point, inflation becomes a much bigger deal, doesn't it? Or should be admitted to be. Because even if one grants that somehow all of one's investment decisions about property and all of one's losses are one's own problem (which I don't necessarily grant), there are a lot of people who are "innocent" of such "bad" (on Zippy's view) decision-making who are harmed thereby. Which means that the sovereign's deliberate inflation of the money supply cannot be shaken off or treated as unimportant.

...incurs that harm because of their own choices about what property to own, how to plan for their retirement, etc.

Even this is still somewhat too strong when finishing the previous sentence, because, if the government has engaged in rounds of QE, then that is _partly causal_ of the resulting loss of value. Hence, these people's choices are only _partly_ causal. Nor could they have looked into a crystal ball and have foreseen all the QE that would be done. I frankly cannot see any argument for treating their choices as _wholly_ causal when, in fact, the government has control of the supply of its own sovereign currency, has deliberately inflated it, and that is partly causal of the loss of value in property. Is deliberately ignoring that part of the causal chain really helpful in seeing reality accurately?

Lydia:

However, at that point, inflation becomes a much bigger deal, doesn't it?

Inflation is one factor among countless factors which affect the fortunes of individuals. I have never stated that inflation is nothing to worry about at all. But it does not justify moral outrage any more than thousands of other things, and precisely because it is a well known phenomenon that every property owner, wage earner, etc ought to take into account when making financial choices it ought to be way down on the list of things sparking moral outrage about government finance.

Lydia:

Hence, these people's choices are only _partly_ causal.

Our choices are always only partly causal, so I'm not sure what bearing that has on the discussion. There would be fraud taking place if people were being lied to and told that inflation doesn't happen. But the fact that inflation occurs is approximately as widely known as the fact that sex leads to pregnancy, and has been for generations. Someone who isn't aware of inflation happening really ought to be a ward of someone who does, at least when it comes to property ownership. Someone who has never heard of inflation needs a family custodian or trustee for her property more than she needs inflation to be held in check. As with many things, the modern autonomous individual gives rise to an entitlement mentality about things which can only really be provided by families and extended families.

So no human choice is in itself a fully sufficient cause of anything. But the choice of what property to buy (including things like annuities, insurance policies, etc) is about as free and autonomous a choice as there is: as free and autonomous as a choice to engage in sex. The choice to own that particular property is a necessary cause of any losses in buying power which occur when that property deteriorates in value.

It isn't like the person was raped into buying an annuity: if she were, I'd be as morally outraged as you. Though I'd still be against usury - and the mindset behind it - as a solution.

I'd agree by the way that Social Security is not property like a private annuity or insurance policy. The government can change SS inflows and outflows at will, and you can't sell your stake in social security to someone else to liquidate it. It is also the case though that SS is affected by inflation only to the extent that the government chooses for it to be so, since the government has the power to arbitrarily increase payments and/or taxes. SS is really just a government wealth transfer program, not any sort of private property interest. Individuals are purely passive as taxpayers and recipients, not owners.

You do realize that union workers in states that are not right-to-work states _do_ have to contribute dues that _do_ in many cases return as a benefit something very much like an annuity, right? It's a pension plan. Some of these are extremely cushy and (as I recall) are inflation-indexed. (Those are the ones that are beggaring the states and cities that have them.) Others are not inflation indexed, are a pittance, and come in at a fixed rate per month. Either way, a great many workers have had little choice but to contribute those dues to get work, especially fifty years ago when right to work was not a "thing."

As for Social Security, indeed it is not an ownership interest, but it is treated as a retirement plan by the government, benefits come in as fixed income (which causes the person in question to be _harmed by_ inflation), contributing is mandatory, and (here's the kicker) it leaves poor people in their working years with a lot less money to invest in the ways that you (and I, and a lot of people) would like them to be able to invest for their own future.

"Everybody knows about inflation" is simply glib. There have been, in human history, times when it has occurred extremely sharply, and that is harmful and, yes, a legitimate cause of moral outrage against those who have brought it about. Even those who know about it as a phenomenon should not be subject to its occurrence in a sharp and whimsical fashion. The round after round of QE of the last few years have left us in a situation where the chickens could come home to roost very sharply and very harmfully, and that isn't something that ordinary folk can just "prepare for" by asking WWZD.

Also, as a purely rhetorical fact, Zippy, you should realize that when you throw around a term like "usurious mindset" with an incredibly broad brush like a Berserker, tarring the most careful, responsible, non-entitlement-minded workers and savers with it, in what appears to be a love of paradox that would be extreme even in GKC (on drugs), you _devalue_ other people's appreciation for your ideas. It is itself a form of rhetorical inflation. It's like a feminist yelling that everybody is an oppressive patriarch. After a little while of that, one just doesn't bother caring anymore whether someone would fall under that category, because the person using the phrase just sounds like an ideologue.

Lydia:

[Deleted. A bunch of self-aggrandizement that doesn't actually say anything useful about the subject of this thread, it's just about Zippy. -Editor]

The deleted comment was a direct response to Lydia's criticism of my rhetorical style and the effects she proposes that it has. It is true that that isn't the subject of the thread, but if comments on the subject of my rhetorical style are OT and should be deleted then Lydia's should be too.

That is, they should be if the stated reason is actually legit.

How about this: generally speaking, everyone hurt by inflation incurs that harm because of their own choices about what property to own, how to plan for their retirement, etc.

The "generally" is a squishy weasel word here. There are LOTS AND LOTS of people who have been hurt more than trivially by inflation. Even if we leave off the table the paradigm instances of it (China in 1948, Germany in 1923) there have been times and places with high but not catastrophic inflation. Argentina from 1975 and into the 1980s experienced often 10% per month. My brother, there at the time, recounted stories of shop keepers who were reticent to set prices for selling goods because they could not successfully price out the goods in such a way as to be able to replace them. Venezuela, in recent years, has averaged over 20% per year, sometimes hitting 60%. Over time, around the world, the number of people hurt by inflation is significant.

because of their own choices about what property to own

Generally, people have more choices about what form of payment and what form of money and what form of property they will have, the richer they are. Which has an obverse: people have less choice the poorer they are.

People at the almost the lowest rung of poverty, who have only enough money for a few days food, do not have a lot of choice about how to manage their wealth. If they hold hold on to cash and it devalues, they cannot buy the food they needed. If they buy the food too early, it will spoil.

Anyone who moves from that level of poverty to the lowest ranks of the middle class can only do so by conserving and reserving savings, and they have VERY FEW choices on how to save that. They cannot buy a house until after they have saved up the down payment. (Or a car, for that matter, though the down payment is less). Someone who wants to put out his shingle to run a lawn care business, but needs a good lawn mower, will be very significantly hurt if in the 9 months it takes him to save up that money there is 30% inflation. He has no really viable choices on how to store his wealth for the period that won't be damaged by the inflation. Poor people cannot sink their savings of a few hundred dollars into stocks and bonds. They cannot open a new business that will support them on that few hundred dollars.

how to plan for their retirement

That just adds insult to injury. The poorest 1/10, unskilled blue collar laborers, have very little way of planning for their retirement, because the VERY SAME GOVERNMENT involved in injuring them with inflation is taking away 7% of their income for ITS retirement planning - denominated in dollars. I.E., something they have no choice about. Telling them they didn't "plan well" for retirement, given inflation, is just about poking like them in the eye.

From where I stand, Zippy is damn near saying that currency is the sovereign's play thing to mess with as it sees fit.

Well, no, Mike. It is the government's play thing to destroy as it wishes - as long as it does not engage in usury! For, after all, usury is slavery and contraception! And we all know that slavery and contraception are intrinsically immoral - so usury is too! Because, after all, fiat sovereign money simply belongs to the sovereign, so he can do anything he wants with it (other than the intrinsically immoral stuff like fornication). The government has no special obligation to look after the welfare of citizens for whom that government has made their welfare an impossible thing for them to look after. Anybody with sense - e.g. anybody who has made millions on a dot.com bubble gamble - will put their wealth in things neither moth nor rust destroys, like a large, well-balanced portfolio of real estate, stock, bonds, movable wealth (paintings and gems), and plastic cracker jacks box toy collectibles. That's what anyone with sense is doing. Not taking note of how government intentionally damages their wealth holdings and trying to prevent that.

[comment deleted for stupidity. -Editor']

but if comments on the subject of my rhetorical style are OT and should be deleted then Lydia's should be too.

Lydia doesn't try my editorial mettle by posts that continually denigrate the intelligence of our readers, and the moral sense of our valued commenters, instead of simply responding to point out intellectual errors in their comments. Lydia doesn't puff up her image with recounting her qualifications for speaking on the issue. Lydia doesn't spend effort on self-justifying pretenses. In short, Lydia isn't you. For which I thank the good Lord.

was a direct response to Lydia's criticism of my rhetorical style

The fact that your rhetorical style (denigrating, belittling, and unnecessarily confrontational and overblown) comes from your heart doesn't make it something we need to see a JUSTIFICATION for. People saying rude things because that's the way they see it are still rude people, even if they are honest rude people. This is not the "what does Zippy think and why does he say it that way" blog, this thread was written to investigate fractional reserve banking. The fact that you would even BOTHER to complain to ME, the guy you rhetorically tried to riddle with bullets time and time again, both here and at your own blog, leaves me flabbergasted at the density of your ego.

Zippy, you have worn out your welcome at this thread. You are not invited to respond, so don't bother.

For the moment I am leaving this thread open for the further pursuit of welcome contributors and commentors, including Lydia (always, of course) but also including Mike, Andrew, JB, Al, and anyone else who didn't want to be confronted by Zippy's name-calling. This was a perfectly fine thread before Zippy interjected his corrosive rhetoric.

I apologize for introducing rhetorical advice. That was my error.

anyone else who didn't want to be confronted by Zippy's name-calling

FWIW, I don't particularly care about Zippy's name-calling.

I think one of Zippy's problems is that he is enamored of the big interconnection of ideas. That's why he tried to make connections between Sandra Fluke's views on contraception and my view that the federal government has a moral duty to live within its means and no engage in deliberate inflationary behavior except in times of crisis. By that logic, anyone who expects the police to show up in a timely manner all things being equal is entitled. Anyone who expects a good value from any government service they use is entitled. Anyone who expects the government to actually effectively utilize and manage its power and property for the general good is entitled.

Again, this is not about Zippy. So let's talk truth and reality.

Mike, I really agree with you about government. There is a big difference between having a civil right to the government getting its prudential judgments right (the right tax rate, the right way to promote education, etc), and government "doing what's right." It is in no way foolish to be objecting to when the government is not doing right, including living beyond its means. And setting up muddled financial structures so that it is impossible for an ordinary citizen to readily recognize the fact that government is living beyond its means is not "doing right."

Mike T,

deliberate inflationary behavior

I think they do not actually want inflation; what they want is power and they are willing to spend (fiat) money to hold on to the power. Secondarily, they may be wanting to degrade certain things such as independence of the states or localities.


The view expressed by Zippy that makes analogy of fiat money to a corporation selling it stock

Corporations can issue stock arbitrarily (just as the sovereign can issue currency arbitrarily)

and
To approximately the same extent and with the same fiduciary and moral responsibilities toward all stakeholders as a company's stock is its "play thing"

is occasionally to be met with in reactionary circles esp secular neo-reaction that pride themselves on their clarity and hard-headedness. How this view can be reconciled with classical and Catholic views on politics and sovereignty, I can not conceive.

It's unfortunate since most of what Zippy said was correct and hardly grounds for disagreement. I even agree with him that at this point in our day and age, anyone who puts money anywhere without understanding (as best they can) is a fool. In fact, I would even go so far as to say that anyone who maintains a business-as-usual mentality after two massive stock market corrections in under a decade quite literally deserves their losses if they refuse to even acknowledge that they might need to bone up on what they've been doing.

But as I said on Zippy's blog, if my view on banks is entitled, then is the view of everyone who expects the police to make a good effort to consistently obey the law categorically and foreign policy leaders to refrain from unnecessary aggression abroad. Heck, if expecting the sovereign to do its part to not destroy our savings (and I emphatically say it can only do it's part) is entitled, then that opens up Pandora's Box with respect to all of the imperfect rights and obligations that form the foundation of society and its relationship with the state.

One thing overlooked here is that inflation hits the poor hardest not just in their wages, but also because many of them never reach enough cash to safely buy property that is less affected according to Zippy. Someone making 125% minimum wage is not going to be able to have a family and a stock portfolio, much less invest in small businesses or any meaningful amount of valuable physical property. Precious metals, aside from a handful of silver rounds from a small name mint, are likewise out of the picture (he that can't afford $1k of stocks sure can't buy a gold or platinum eagle).

For them, inflationary policies do them particular harm. It's like having a car stuck in the mud and some jerk comes along with a hose and continues pouring water on the ground. How are they supposed to even try building something when their modest savings are being eroded continuously? 10% inflation hits a balance of $10k much harder than a balance of $1m. Same problem as the currency "progressive income tax" which uses big rate jumps instead of a smooth sliding scale. 15% on 75k is a much bigger hit than 35% on $500k in terms of lost buying power.

Right. Usury has its role to play in what's wrong with the economic system and what will be wrong in the future. But there is no doubt that willful inflation of fiat currency also has a role. Indeed, if we had a more stable currency, this would make usury less attractive by creating less of a worry about "protecting against inflation." Conversely, if loans were non-usurious (I believe Tony suggested denominating loans in terms of returning the then-value of a concrete quantity of goods) the concerns about _deflation_ would not be urgent for borrowers. Those who borrow wouldn't have to worry about being stuck returning an amount of _money_ in a deflationary situation. This, in turn, would make it more feasible to live with a currency that is difficult to inflate.

Another thing is that people who try to scrape together and save their money in a bank account are generally _not_ "entitlement-minded" even if they are somewhat ignorant about how savings, interest, and inflation work. As Mike T. and I have both said, it is _reasonable_ for them to feel (if they ever even learn about it) that a government that willfully inflates and thus lessens the value of their hard-earned savings has, in a sense, stolen from them.

As a purely factual matter, in many cases these are people who are not asking for hand-outs, are not expecting something for nothing, and are trying to avoid imprudent borrowing (hence not making themselves victims of usurious lending practices). And in the old days (e.g., Great Generation) they often also had traditional sexual ethics, if that is of interest to anyone. So those are the attitudes we want to encourage, not discourage by presenting them with unrealistic expectations about their investing brilliance which will protect them from inflation if only they know how to do it right.

It is true that we went through a time (in the 80's and 90's) when financial advisers were raising unreasonable expectations about the ease with which one could make a hefty return on investment. "Unrealistic" not for those time periods (since, in fact, people did make those return rates at those times) but in the expectation that it would continue. But by this time everyone has presumably noticed that those halcyon days of 8% interest on a bank CD are long gone and has recalibrated.

One policy suggestion that I think both the federal and state legislators should consider, if we want to encourage people to invest in productive enterprises rather than hoarding currency equivalents, is protecting capital gains that are rolled over. Right now mutual fund investing gets hit incredibly hard when the fund is required to report amounts as capital gains to the individual shareholders even if they shareholder has chosen an auto-reinvest option. An investor can therefore get socked with a very large tax bill (especially at the state level in states that have simplified their tax codes and allow no slack for long-term capital gains) for money he never actually sees. This motivates investors to cancel their auto-reinvest selection and have the money sent to them as a check so that they can consider how to reinvest it more cautiously. After all, they are being taxed as if that is what they are doing anyway. Treating auto-reinvests as not being capital gains income would motivate people to keep this money in the mutual fund system and hence in the enterprises in which the fund invests.

I'm waiting for Zippy to provide some answers to his assertions about government finances. No, I don't mean waiting in a sarcastic sense; I'm genuinely curious to see how he expects to show that government finances are such that what we want is wishful thinking. There are well-known issues with procurement and the structure of the civil service that are more to blame than anything else IMO. I suspect that much of the government's budget could be shaved right off if the system were greatly streamlined (both procurement and the civil service).

Y'know, Mike, I don't want to speak for Tony (and haven't spoken with him about this), and this is his thread, but I know that on my own threads I don't really want someone else running back and forth and talking about what someone else is saying on a different blog. All the less so if that other person has been banned from my own thread. It's, to my mind, a kind of trouble-making to do that, and unfair to all parties involved.

Hey, I said some interesting things in my last substantive comment that might deserve discussion. (Hint.)

Yeah, we are not waiting for Zippy to do anything. We are developing our own thoughts and working out the truth without fighting over formless nonsense.

Another thing is that people who try to scrape together and save their money in a bank account are generally _not_ "entitlement-minded" even if they are somewhat ignorant about how savings, interest, and inflation work.

Quite right. There was a time when everyone expected even their checking account to pay interest. That's pretty much out the window. The amount of interest being paid on an ordinary savings account is so negligible that people have stopped bothering about it - so they are not "counting on it" or "expecting to be paid for 'nothing' " in that regard. It is pretty much the case (and has been for a few years) that if you want a return worth mentioning you have to make a positive effort to invest in a specific vehicle, not just have money on deposit at the bank.

not discourage by presenting them with unrealistic expectations about their investing brilliance which will protect them from inflation if only they know how to do it right.

Well, I think the accusation is even worse than that: even having investing brilliance - as measured by every measure except just long-term matching the market itself - is no guarantee of (a) actually understanding the reality of high finance, or (b) successfully investing to preserve your assets. The world of active management is CHOCK FULL of so-called "successful" portfolio managers whose success is great, until you are convinced, you put your money in their hands, and they lose you 35%. The requisite brilliance cannot be established before the fact, only after.

The reality is that as long as the Fed and the Government and the big banks are playing with fire, nobody with plenty of assets can realistically EXPECT to avoid financial disaster regarding those assets when the implosion comes, so brilliance just doesn't do it. And they ARE playing with fire.

One policy suggestion that I think both the federal and state legislators should consider, if we want to encourage people to invest in productive enterprises rather than hoarding currency equivalents, is protecting capital gains that are rolled over. Right now mutual fund investing gets hit incredibly hard when the fund is required to report amounts as capital gains to the individual shareholders even if they shareholder has chosen an auto-reinvest option.

Lydia, I have sympathy for this point, but ONLY if some other changes are made too. What I don't have ANY sympathy at all for is a fund, whether mutual or hedge or anything else, whose trading model includes, as a regular practice, buying stock or bonds or X and "turning it" a few weeks or months later because they successfully noted either an "undervalued stock" or successfully guessed there would come along a 'greater fool' because the 'buzz' out there said to buy. In both of these, the actual source of the gain in the fund's coffers is someone out there who is losing money because they are not as good a guesser. I don't call that INVESTING at all, it is speculating, gambling, or deceit / dissembling. Or maybe we need a different term.

Real investing is otherwise: you see a person, or a company, poised to generate brand new wealth, but cannot because of lack of capital. You put your money with them, and share in a portion of the new wealth generated. Typically, the time from investing to seeing REAL profits (rather than finding a greater fool) is a good deal more than a year, often more than a couple years. So, all other things being equal, short-term capital gains are a pretty poor representative of real investment profit, and should not get the benefit of being treated like they were. Currently, even so-called "long term capital gains" in a mutual fund need not be based on much more than a year's holding.

If I had a way to distinguish mutual (or other) funds that ONLY engaged in investing properly understood, I would be happy to say don't tax the rolled over gains. That seems fair enough. It would indeed encourage real, good investing and discourage the nonsense.

I am sensitive to the fact that the average Joe is unable to plausibly search out real investment opportunities and winnow through the ones that are junk from the ones that are reasonable, time and time again. So putting your money into the hands of a wise professional can make sense - if their moral sense matches their financial sense. I am not trying to say close down mutual funds or anything like that, just that they need to be corrected to properly grasp a REAL role between the little investor and the marketplace of capital needs.

Yeah, we are not waiting for Zippy to do anything. We are developing our own thoughts and working out the truth without fighting over formless nonsense.

The point I referenced was probably the most audacious claim he made on this thread.

Tony,  my conception of how currency works is not really any different than Zippy's though I disagree with him on the magnitude of the role usury has in destabilizing the current economic and financial order. For me, a good starting point would probably be the 1922 monetary conference in Genoa.  It was here where paper gold (US dollars and UK pounds, redeemable for fixed amounts of gold) was first introduced into the banking system as reserves equal to bullion itself.  This allowed for a larger reserve base on which to achieve a more rapid expansion of credit as economies were beginning to recover from the destruction of WWI. For 500 years leading up to this conference international trade was settled in bullion, even during times when there was no classical gold standard in place.  When it came to banking reserves bullion was needed to expand credit.  This ended in 1922 and the new system was formalized again with Bretton Woods in 1944 with the US dollar and bullion as official currency reserves. 

So gold has been mispriced for at least 100 years.  When gold cannot move at its true price then trading zones producing too much don't get the price signals to produce less and consume more and zones consuming too much don't get the price signals to consume less and produce more.  And since the US dollar is the reserve currency the US ends up consuming more and producing less (until the whole system eventually snaps back to equilibrium -- this is the collapse which hasn't happened yet).

An example to illustrate would be the years leading up to the end of Bretton Woods in 1971.  The US had been running large trade deficits with Europe since around 1958 which meant the US sending large amounts of US currency to European banks.  Europe began redeeming this currency at the Federal Reserve for bullion and we sent thousands of tons of gold to Europe during the late 50’s and 60’s. But the price of gold was fixed and couldn't adjust to reflect this enormous change in global production and the US didn't experience any shortage of currency reserves because we could replace the lost gold reserves with paper gold reserves almost effortlessly. All we needed was savers to absorb the debt created by the newly printed money and there were no shortage of takers.  The US never experienced the need to scale back credit, consume less and start producing again (guns and butter). And as we all know any semblance of gold backing was ended in 1971.  Up until then the imbalances could be settled temporarily by shipping gold to Europe but the system never reached equilibrium and the imbalances returned and grew bigger over time. If you want all of this with fancier language and more detail then Jacques Reuff is the reference, especially his Age of Inflation.

Once the dollar eliminated gold backing it was revealed the extent to which the dollar had really failed as a global currency. The oil nations started seeing demand go exponential and they needed someplace to put their enormous surplus incomes (since the dollar was not redeemable for gold). First they tried Zippy’s way and flooded the international banks with tens of billions to invest around the world but the banks couldn’t handle it all. The money was coming in too large and too fast so oil was forced to raise prices and we got the first oil crisis of the 70’s. Then as oil surpluses continued to grow even more they attempted to buy bullion directly from the open market but this just ran the price of gold straight up which showed how weak the dollar really was and threatened the whole system — enter the second oil crisis. And as I’ve written here before this was the point when the Euro project began and it required trillions in institutional support (central bank commitments to buy US debt) for 30 years to keep the dollar from collapsing (hyperinflating). Under this view, with institutional support gone from both Europe (late 90's) and China (c. 2010) we are in the end stages.

Now, it’s at this point that I should say I’m open to the possibility that Dr. Stanley Montieth was right all the way down. And that there were a few elites at the very top of the global hierarchy back around Genoa, in regular communion with Lucifer himself, who were pulling the strings of the more gullible immediately below them. And who, with their access to supernatural knowledge, knew that 100 years on this was the surest way of hollowing out the American economy as a necessary precursor to installing the New World Order and shortly thereafter the rule of the Son of Perdition. In which case there isn’t much for us to do as individuals and families aside from prepare spiritually.

But assuming good intentions through and through from monetary authorities who felt the need to do something to get the global economy re-started after two devastating global wars the mechanisms are in place to restore the old order. I don’t believe that currency reform is necessary. A hyperinflation is necessary to clear away the enormous amounts of paper and debt that are fake capital and cannot represent real claims on the real economy. After which gold needs to be restored to its currency reserve status at its true market price and this is what the Euro was created to do.

Andrew, thank you very much for your response.

I am just a poor little church mouse and sometimes don't always get the gist of high-falutin terminology. I thought I understood this phrase:

It was here where paper gold (US dollars and UK pounds, redeemable for fixed amounts of gold)

until I got to the end of it:

was first introduced into the banking system as reserves equal to bullion itself.

What puzzles me here is the "reserves equal to bullion itself". Wait, I thought the reserves consisted of the bullion. Are you saying there was a form of PAPER that is somehow a reserve stand in for bullion? How would such paper be any different from, say, standard "gold-backed dollars" that were backed by gold in the reserve?

Anndrew E,

my conception of how currency works is not really any different than Zippy's

Do you agree with his statement that

Fiat money (in the usual sense of the term) is more 'disentangled', which makes it more transparent and honest.

Although as he later insisted on the essential opaqueness of the Govt finances, I do wonder what does this transparency of the fiat money comprise of?

Andrew E.
Thanks for an interesting history of the fiat money. However, I am not seeing how you square off your agreement with Zippy regarding how money works with statements like

A hyperinflation is necessary to clear away the enormous amounts of paper and debt that are fake capital and cannot represent real claims on the real economy.

Isn't the central claim of Zippy is that the fiat money obtains its value from the tax power of the sovereign? How is it "fake capital"? Surely the sovereign power of USA very real and not in any danger of slipping away?

You say that the Genoa conference

allowed for a larger reserve base on which to achieve a more rapid expansion of credit as economies were beginning to recover from the destruction of WWI.

Would an Austrian economist agree with you? And how do we interpret this politically?
Is it about economy recovery or mobilizing the nations under Govt control?

Bedarz, I really wish that you would approach conversation here without assuming a whole host of cultural/political premises that others here would have trouble understanding much less automatically agree with, and trying to inject them into the conversation without even trying to explain them. You could, for example, set forth the specific Austrian concept that you think might possibly be at odds with what Andrew said (and, even better, tie it to the specific Austrian who said it and where), so that your question is concrete enough for anyone to entertain a willingness to answer forthrightly. I have read more than just a bit here and there about the Austrian school, but I have no clue WHICH of their theses you might have in mind for this comment. And the Austrians are not by any means monolithic in their views, there is considerable disagreement about some fairly basic tenets, so "the Austrians" can be a bit of a mish-mash.

Same with "interpret this politically" - this thread is not centrally about politics, (though of course politics is important to carrying out a vision of monetary policy), and it is not obvious on the face of it how, for example, "interpreting this politically" refers to (or even helps understand) the correctness of what Andrew said.

I believe your conversation would prosper more if you took it in smaller chunks, with more attention to finding and expressing premises / points of view / terminology that you think others here hold in common (or closely, at least) so that your thoughts don't seem to be dropping out of outer space.

Isn't the central claim of Zippy is that the fiat money obtains its value from the tax power of the sovereign?

I was thinking about this last night and am of the opinion that it cannot be true because it doesn't match the observed behavior of most users of currency. It doesn't even match the government's own behavior. The system is designed to take the assets out there that are not dollars and make them so fungible with dollars that everything seems to be dollars or so tied to the dollar that the dollar is inseparable.

All of the government's property is valued in dollars. Even things which ordinarily cannot be sold on the market because even just the cost of acquisition and maintenance is contracted out in dollars. The government's employees are paid in dollars or things that are denominated in dollars that everyone thinks of as dollars. If and when the foreign purchase of our debt ends and GSA sells property at fire sale prices to the public, the federal government's property will be valued in dollars.

A direct comparison to company stock doesn't hold up since dollars are medium of exchange whereas stock is a claim of ownership interest. Holding dollars and holding stock simply don't confer the same rights and privileges thus the moral and fiduciary responsibilities must be different accordingly.

Zippy may be correct to the extent that fiat money derives its core value from taxation, but that is clearly not the extent of it. The government accepts tax payments from banks even though they are just "call options on the balance sheet" in place of showing up at an IRS facility with a brick of cash. In fact, the vast majority of revenue that the government takes in is not sovereign currency, but directed payments from the banking sector via payroll deductions.

The government accepts tax payments from banks even though they are just "call options on the balance sheet" in place of showing up at an IRS facility with a brick of cash.

I made this point earlier in the thread. There is more of a demand for physical currency for buying potato chips than for paying taxes. And if one includes bank e-funds in "currency," then the resemblance between the government's medium in which it accepts taxes and everybody else in the whole economy is extremely close. Both the grocer and the federal government accept *and demand* dollar equivalents for payment. So do the butcher, the baker, and the candlestick maker, and everybody in between. Obviously the demand for currency equivalents (such as bank funds) is driven by the economy as a whole. Which is one reason why (to tie this back to the main post) it is said that banks "create money" in the fractional reserve banking system. The banks really do increase the supply of that-which-can-be-readily-exchanged-for-goods-and-services. And that which is in demand for goods and services.

to the extent that fiat money derives its core value from taxation

It would be interesting to see, if anyone has the time to do this, as to the actual, historical examples of introductions of new sovereign fiat money into system that previously had either commodity money or true commodity-backed paper money, and note the reliance of the fiat money from the first moment on the power to tax. I, for one, doubt that the correlation is very strong.

Where the tax power argument breaks down completely is with state and local governments. Your state needs dollars for the same reason you do. Even if there is a lot of truth to the tax argument, it applies only to the feds.

Tony,

Some history. Not exactly kind to purely paper fiat currency...

Mike, the funniest comment over there was

Those devious Mongolian Jews.

And as to your insightful comment

Where the tax power argument breaks down completely is with state and local governments. Your state needs dollars for the same reason you do. Even if there is a lot of truth to the tax argument, it applies only to the feds.

you beat me to it. The issue isn't JUST "who has the power to tax" but also "who has the monopoly on issuing money"? Well, if you tell us that the feds have the power to tax and that gives the dollar its value, what happens when you take away the monopoly on issuing dollars? Or what happens when you take away the power of the fed and state governments to require ALL OTHER payments be in dollars? What if the federal government required tax payments in dollars, but was precluded by Constitution from requiring that for any other payments? And if the states all enforced contracts at currently trading prices for Canadian $, and Australian $, and gold coin, and silver coin, and...? If there is no monopoly in effect, the power to tax will greatly reduce the capacity of the feds to make the value of the US $ a constant - you will get black market variations like the Russian rubles.

Obviously the demand for currency equivalents (such as bank funds) is driven by the economy as a whole. Which is one reason why (to tie this back to the main post) it is said that banks "create money" in the fractional reserve banking system.

Quite right, Lydia. When I was researching fractional reserve banking to write the OP, it took me quite a few articles before I finally found even a few that made it clear that the THING GENERATED is distinct in kind from "money" as that term is otherwise normally understood. The good articles - of which there are not that many - refer to bank generated stuff as "money of account" and try to keep that term clearly in the forefront of the discussion. It is, frankly, why I found it necessary to drag out my example at length, instead of just citing the quote at the beginning: people lose sight of the fact that the banks are creating something that is CALLED money by the careless but whose referent is accounts of debt liabilities.

And, as you say, after a round of lending "money of account", that "money" enters the ordinary structure of the current economy as electronic transfers to the grocery store, the doctor, the repair man, AND the tax man, all on the same basis as if they were all being paid the same thing as when I hand $5 cash to a homeless person: money. And that's a false picture.

What puzzles me here is the "reserves equal to bullion itself". Wait, I thought the reserves consisted of the bullion. Are you saying there was a form of PAPER that is somehow a reserve stand in for bullion? How would such paper be any different from, say, standard "gold-backed dollars" that were backed by gold in the reserve?

Tony, I'm saying that metal and paper claims on metal (paper gold) were treated as the same for reserve purposes as a result of 1922 conference. But metal and paper claims on metal are two different things. This gets back to Zippy's "entanglement" of paper currency with physical gold, with which I agree.

Do you agree with his statement that..."Fiat money (in the usual sense of the term) is more 'disentangled', which makes it more transparent and honest."

BI, Paper fiat currency is more intuitively a medium of exchange and not a store of value. And since currency is not wealth, this is more transparent.

Isn't the central claim of Zippy is that the fiat money obtains its value from the tax power of the sovereign? How is it "fake capital"? Surely the sovereign power of USA very real and not in any danger of slipping away?

BI, the paper and debt are fake capital at current prices. There are practically untold amounts of dollars stored away to signify deferred consumption from decades of savers and hundreds of billions more dollars are added each year. If even a trickle of this enormous pool of stored savings mobilized and tried to claim real assets prices would explode. This is what happened in the 70's with the oil nations trying to buy gold. The financial plane is not at all reflective of the physical plane.

Would an Austrian economist agree with you?

Depends on the Austrian economist I suppose, there are differences. I had a long Austrian phase but am not drawn to them anymore and only the early ones are worth reading -- Menger (value), Bohm von Bawerk (production) and Mises's theory of money and credit but not necessarily his later stuff. But Jacques Reuff is the one who wrote the book on this, literally. And he had the advantage of being a practitioner and not just a theorist.

And how do we interpret this politically?

Assuming good intentions -- pragmatism.

this thread is not centrally about politics

I may be mistaken but wasn't the major disagreement in this thread was on the very political question of the attitude of sovereign to the fiat money--plaything of the sovereign etc etc.

As I see it, Zippy would only admit perspective of an investor towards currency and banking questions and all efforts to validate the perspective of a citizen were dismissed by him.

Andrew E,
Isn't it somewhat contradictory to extol fiat currency for transparency and honesty and then talk of govt finances as essentially opaque.

Are govt finances essentially opaque or is their opacity a function of fiat money?
Or is opacity a function of the complex nature of modern economy?

Lydia and others pointed about that fiat money allows sovereign to commit fraud on the citizens and to redistribute the wealth away to more connected first receivers of the newly created money.
Does it look like honesty?

Currency is how a currency does. If fiat money promotes dishonesty and opacity in govt. in addition to inflation and systemic crises, we must be meaning very different things by the terms honesty and transparency .

Intuition alone would not seem to be a reliable guide, any more than pure reason.

Paper fiat currency is more intuitively a medium of exchange and not a store of value. And since currency is not wealth, this is more transparent.

Andrew, let us, for the moment, accept that paper-backed currency obscures something. How is actual metal coin less transparent than fiat money?

When you say "currency is not wealth" that obviously true for fiat money. It obviously WAS NOT true of coin money in gold and silver - at least, it was not true of coin money when coin money was first used, by definition. Are you suggesting that coin money started out as wealth and along the way stopped being wealth?

I may be mistaken but wasn't the major disagreement in this thread was on the very political question of the attitude of sovereign to the fiat money--plaything of the sovereign etc etc.

Bedarz, in spite of the knuckleheaded insistence of certain parties to mold the discussion on topics they wanted to discuss whether this thread was about that or not, the CENTRAL topic of this thread is fractional reserve banking (FRB), and what follows from that. I am willing to let side issues come in, but not at the expense of everything else. Politics is indeed a player in FRB, but mainly as to how and whether the state legally permits FRB.

There are already 167 comments on this page. No one has pointed out that Tony's original post fails to distinguish between a bailment and a loan and that bank deposits are not bailments, but loans to the bank. (This is why, incidentally, banks call it a "credit," rather than a "debit," when money goes into your account, since it's money they owe you, not your money they're holding for you. The terminology is looking at it from their perspective, not yours.) At least, nobody has pointed it out using the correct term: I can't read all of this, especially not with the pointless vituperation mixed in.

Bankers discovered during the middle ages that they could lend without retaining the full value of deposits on reserve. It's not a new concept, nor is it inherently tied to the use of paper money or bills of exchange. Nor does this look like it is a productive forum in which to discuss it.

It's not a new concept, but when they make a loan, they do create a new deposit account without your making a deposit. That new deposit account is a requirement for the bank to render up funds when called upon. The "funds" newly created and placed in that account can be used to buy whatever you have been authorized to buy. If it's a home mortgage, they go right out to the seller of the house. If it's a HELOC, you progressively use them to buy whatever you want. HELOCs even come with a stack of checks to allow you to write checks on the line of credit, just as if it were money in the bank. In return, the bank gets either the promise of your collateral if you default or your agreement to repay with interest; sometimes some of both.

But the funds are really that-with-which-you-can-purchase-stuff and really do get put out there in the system and treated as new money from that point onward.

This is very weird, and it does mean that the banks can, in an important sense, increase the functional money supply at will when they decide to make a loan to someone else. Notice that in that case the depositor has _not_ made a loan to the bank. On the contrary. The bank has made a loan to the borrower and has created the deposit account as a vehicle through which to disburse the loaned funds.

Mind you, I do understand that the bank doesn't strictly do this "at will," because the bank is now "on the hook" for the new funds created, which may at some point be demanded in currency--e.g., by another bank. This is why banks don't just lend out money willy-nilly and are not strictly speaking creating ex nihilo. They are putting a potential burden on their own resources by creating/lending these funds. But the fact remains that, in the act of lending while maintaining their obligations to the original depositors, banks do create new units of that-which-can-be-spent, which is what most people call "money."

Andrew, let us, for the moment, accept that paper-backed currency obscures something. How is actual metal coin less transparent than fiat money?

When you say "currency is not wealth" that obviously true for fiat money. It obviously WAS NOT true of coin money in gold and silver - at least, it was not true of coin money when coin money was first used, by definition. Are you suggesting that coin money started out as wealth and along the way stopped being wealth?

Yes, my view is that gold coin for most of the history of gold coin was used as tradeable wealth, not as medium of exchange or currency. If you think of a spectrum with pure medium of exchange on one end (the left end) and pure wealth asset on the other end (the right end) then as you move along the spectrum from left to right you're able to store value for progressively longer periods of time. Bullion sits on the far right and un-backed, fiat paper currency sits on the far left. You can coin bullion and distribute it for exchange and thus try and move gold down the spectrum to the left but it's always going to be wealth so this is difficult and clouds its true purpose. You can back paper money with gold and try to move it down the spectrum to the right but this also clouds its true purpose. Best to keep them seperate on their own sides of the spectrum. Now if a currency is well disciplined by gold wealth (as I've attempted to explain upthread) then you can hold onto currency over the short and even medium term without worrying too much about its value.

Think of those old medieval markets that took place over several days. Merchants and farmers from all over would converge on the marketplace bringing their wares and their harvests as well as some gold coin. They'd arrive, sell some of their gold for market-issued scrip which was used to facilitate exchange when direct barter was uneven. It was understood that you were not depositing your gold for safekeeping or lending it out. You were selling your gold, transferring ownership. When the market closed down everyone would take their leftover scrip (trade balances) and buy back gold from the market maker at the going price (usually the same price as when the market began). This is how gold is meant to be used in trade. Even when trade was one-on-one and coin was used I would still call this gold acting as tradeable wealth, effecting final settlement on the spot. Currency is meant to be borrowed and lent to push consumption forward and backwards in time. When you start doing this with a wealth asset you get paper gold and its distorting effects.

Titus, I would love it if you would spell out details that we need to refine the picture of fractional reserve lending. There are, obviously, different varieties and species of bailment, so maybe you could expand on that?

However, in reading through a large number of sites and articles describing loans, lending, banking, and fractional reserve banking, I did not come across the explicit term "bailment", so I did not know the term was being used. However, I am very familiar with the CONCEPT, as I deal with trusts all the time, and a trust is, simply, an example of a bailment. Also, handing over / assignment of collateral as a security interest is another example of a bailment, I think. And, finally, while I did not use the TERM bailment, I did actually spell out rather explicitly the difference between John putting his gold into Goldsmith's hands for storage and security, and the person putting his gold into G's hands for investment / USE. Those are obviously different kinds of handing over.

So, please help us out by completing what we need to see how it is that fractional reserve lending handles property, deposits, credits, accounts, etc.

Yes, my view is that gold coin for most of the history of gold coin was used as tradeable wealth, not as medium of exchange or currency.

Andrew, I would debate this point. It seems to me that for a large part of the historical record, until about 700 BC, gold in the form of ingots and rings and bracelets and such were "tradeable wealth". When the Lydians invented coinage, though, is when I think a switch was flipped. When you have gold packaged into small, uniform, labeled (as it were) amounts, you start to have something more than just tradeable wealth, you have currency. That's my sense.

If you think of a spectrum with pure medium of exchange on one end (the left end) and pure wealth asset on the other end (the right end) then as you move along the spectrum from left to right you're able to store value for progressively longer periods of time.

And I think it is debatable whether this is a good way to analyze money / currency. There are some assumptions built into this framework that I am just not comfortable with as being true or necessarily true. I don't know that we should think of "money" as a continuous variation sort of reality. And I don't know that "pure medium of exchange" rightly can be set as IN CONTRAST to "pure wealth asset" as if they were the two contraries of a contrariety.

But I am really glad, Andrew, that you brought up the medieval market scrip example. I had heard of that ages ago, but had forgotten all about it and I think it is an enlightening instantiation of non-sovereign, non-fiat commodity-backed money. I would suppose that if, at the beginning of the market, the maker was handing out 10 units scrip for an ounce of gold, and at the end of the market 1 week later he tried to convert back at a rate of 15 units scrip for an ounce of gold, (even if he claimed "the 'going rate' has changed") he probably would have been ripped limb from limb. And then tried after the fact to put a sheen of justice on the result.

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