The problem of good money

Every so often one hears or reads complaints about how our current
money is not good. That is to say, it's intrinsic value is less, far
less than the official value. This is especially true of modern paper
currency. The linen currency is worth no more than a few cents and yet
can be redeemed for hundreds of dollars or euros or pretty much any
national currency. Back in the good old days paper money was generally
backed with bullion. Of course the bullion might be paid out based on
the government's assertion of value rather than at a free market rate
but at least there was some intrinsic value tied to the currency. The
same was true when silver coins were the primary money in day to day
transactions. The government took it's seignorage and deducted the
brassage but the value of the coin had a bottom limit.
However, it has now been over thirty years that the world economy has
functioned on fiat money. This time period has seen enormous growth
and the major currencies have been stable, even if some slowly decline
it is usually a steady decline. Inflation is not a grave danger in the
industrial nations. Historically, rulers slowly debased coinage used
locally to extract additional profits; this did not work for trade
coinages that needed to be accepted around the globe. These days
governments leverage their current and future GDP and incoming
obligations rather than using bullion. Does it matter?

"Jorg Lueke" wrote in message
oups.com...
Every so often one hears or reads complaints about how our current
money is not good. That is to say, it's intrinsic value is less, far
less than the official value. This is especially true of modern paper
currency. The linen currency is worth no more than a few cents and yet
can be redeemed for hundreds of dollars or euros or pretty much any
national currency. Back in the good old days paper money was generally
backed with bullion. Of course the bullion might be paid out based on
the government's assertion of value rather than at a free market rate
but at least there was some intrinsic value tied to the currency. The
same was true when silver coins were the primary money in day to day
transactions. The government took it's seignorage and deducted the
brassage but the value of the coin had a bottom limit.
However, it has now been over thirty years that the world economy has
functioned on fiat money. This time period has seen enormous growth
and the major currencies have been stable, even if some slowly decline
it is usually a steady decline. Inflation is not a grave danger in the
industrial nations. Historically, rulers slowly debased coinage used
locally to extract additional profits; this did not work for trade
coinages that needed to be accepted around the globe. These days
governments leverage their current and future GDP and incoming
obligations rather than using bullion. Does it matter?

Sure it matters. If they still backed money with gold or silver you would
not have seen any world wide growth since 1964. The whole reason for
switching was due to the fact that there just wasn't enough gold or silver
available to support the size of economies and populations in a growing
world.
It's like being dependant on oil imports--same thing with mining any kind of
mineral. They have a hard enough time mining silver to meet demand as it is
today with the fiat money.
It's just like a great many other things--it comes down to having faith or
not.

bri wrote:
"Jorg Lueke" wrote in message
oups.com...
Every so often one hears or reads complaints about how our current
money is not good. That is to say, it's intrinsic value is less, far
less than the official value. This is especially true of modern paper
currency. The linen currency is worth no more than a few cents and yet
can be redeemed for hundreds of dollars or euros or pretty much any
national currency. Back in the good old days paper money was generally
backed with bullion. Of course the bullion might be paid out based on
the government's assertion of value rather than at a free market rate
but at least there was some intrinsic value tied to the currency. The
same was true when silver coins were the primary money in day to day
transactions. The government took it's seignorage and deducted the
brassage but the value of the coin had a bottom limit.
However, it has now been over thirty years that the world economy has
functioned on fiat money. This time period has seen enormous growth
and the major currencies have been stable, even if some slowly decline
it is usually a steady decline. Inflation is not a grave danger in the
industrial nations. Historically, rulers slowly debased coinage used
locally to extract additional profits; this did not work for trade
coinages that needed to be accepted around the globe. These days
governments leverage their current and future GDP and incoming
obligations rather than using bullion. Does it matter?

Sure it matters. If they still backed money with gold or silver you would
not have seen any world wide growth since 1964. The whole reason for
switching was due to the fact that there just wasn't enough gold or silver
available to support the size of economies and populations in a growing
world.
It's like being dependant on oil imports--same thing with mining any kind of
mineral. They have a hard enough time mining silver to meet demand as it is
today with the fiat money.
It's just like a great many other things--it comes down to having faith or
not.

I don't see why backing money with gold or silver would prevent
growth. Economic growth stems from human activity. It seems to me that
all that if precious metals were still used for money, one of two
things would happen: 1) The nominal "price" of such metals would go up
(as it has anyway), or 2) The nominal "price" of everything else would
go down or stay about the same. In other words, there would have been
no inflation. Would this have been bad?

John Charles Wilson wrote:
bri wrote:
"Jorg Lueke" wrote in message
oups.com...
Every so often one hears or reads complaints about how our current
money is not good. That is to say, it's intrinsic value is less, far
less than the official value. This is especially true of modern paper
currency. The linen currency is worth no more than a few cents and yet
can be redeemed for hundreds of dollars or euros or pretty much any
national currency. Back in the good old days paper money was generally
backed with bullion. Of course the bullion might be paid out based on
the government's assertion of value rather than at a free market rate
but at least there was some intrinsic value tied to the currency. The
same was true when silver coins were the primary money in day to day
transactions. The government took it's seignorage and deducted the
brassage but the value of the coin had a bottom limit.
However, it has now been over thirty years that the world economy has
functioned on fiat money. This time period has seen enormous growth
and the major currencies have been stable, even if some slowly decline
it is usually a steady decline. Inflation is not a grave danger in the
industrial nations. Historically, rulers slowly debased coinage used
locally to extract additional profits; this did not work for trade
coinages that needed to be accepted around the globe. These days
governments leverage their current and future GDP and incoming
obligations rather than using bullion. Does it matter?

Sure it matters. If they still backed money with gold or silver you would
not have seen any world wide growth since 1964. The whole reason for
switching was due to the fact that there just wasn't enough gold or silver
available to support the size of economies and populations in a growing
world.
It's like being dependant on oil imports--same thing with mining any kind of
mineral. They have a hard enough time mining silver to meet demand as it is
today with the fiat money.
It's just like a great many other things--it comes down to having faith or
not.

I don't see why backing money with gold or silver would prevent
growth. Economic growth stems from human activity. It seems to me that
all that if precious metals were still used for money, one of two
things would happen: 1) The nominal "price" of such metals would go up
(as it has anyway), or 2) The nominal "price" of everything else would
go down or stay about the same. In other words, there would have been
no inflation. Would this have been bad?

Historically what has happened when silver and gold became scarce is
that the price of the metals did indeed to go up. However, the other
thing that almost always happened was that the local currency was
slowly, and sometimes rapidly, debased. Look at all the silver
denominations and how often the purity suffered as soon as there was an
issue with supply. The debasement then naturaly led to inflation. I
don't think a bullion based curency system has really afforded
protection from inflation.
Another negative thing about bullion is that you can have a crappy
economic system and still get more of it through a variety of usually
destructive ways such as war. Whereas a capital economy cannot be
forced into existence. I suspect the United States leaving the gold
standard greatly increased the speed with which the USSR economy was
left in the dust.

"Jorg Lueke" wrote in message

Another negative thing about bullion is that you can have a crappy
economic system and still get more of it through a variety of usually
destructive ways such as war. Whereas a capital economy cannot be
forced into existence. I suspect the United States leaving the gold
standard greatly increased the speed with which the USSR economy was
left in the dust.


No, WWII effectively ended the Depression in the USA and the post war
economy boomed. It really never left the USSR in the dust, they tried
furtively to catch up, notably in the 1950's and early 1960's under
Krushchev but alasit was later equated to hitching up a dinosaur and yelling
giddy up.

In history as soon as good money left the scene empires fell. Look at Rome,
Athens etc for evidence.

Sibirskmoneta wrote:

In history as soon as good money left the scene empires fell. Look at Rome,
Athens etc for evidence.

I think in those cases the Empire was falling which caused the supply
of good money to dry up. But, look at the HRE, France,Venice and many
other places. They went through periods of very poor money and
continued. The lack of good money made trade more difficult in the
past, and that would often have a negative impact on a government.

Is there a modern innovation that has made it easier to trade without
cash and hence need good money less?

"John Charles Wilson" wrote in message
ups.com...

bri wrote:
"Jorg Lueke" wrote in message
oups.com...
Every so often one hears or reads complaints about how our current
money is not good. That is to say, it's intrinsic value is less, far
less than the official value. This is especially true of modern paper
currency. The linen currency is worth no more than a few cents and
yet
can be redeemed for hundreds of dollars or euros or pretty much any
national currency. Back in the good old days paper money was
generally
backed with bullion. Of course the bullion might be paid out based on
the government's assertion of value rather than at a free market rate
but at least there was some intrinsic value tied to the currency. The
same was true when silver coins were the primary money in day to day
transactions. The government took it's seignorage and deducted the
brassage but the value of the coin had a bottom limit.
However, it has now been over thirty years that the world economy has
functioned on fiat money. This time period has seen enormous growth
and the major currencies have been stable, even if some slowly decline
it is usually a steady decline. Inflation is not a grave danger in
the
industrial nations. Historically, rulers slowly debased coinage used
locally to extract additional profits; this did not work for trade
coinages that needed to be accepted around the globe. These days
governments leverage their current and future GDP and incoming
obligations rather than using bullion. Does it matter?

Sure it matters. If they still backed money with gold or silver you
would
not have seen any world wide growth since 1964. The whole reason for
switching was due to the fact that there just wasn't enough gold or
silver
available to support the size of economies and populations in a growing
world.
It's like being dependant on oil imports--same thing with mining any
kind of
mineral. They have a hard enough time mining silver to meet demand as it
is
today with the fiat money.
It's just like a great many other things--it comes down to having faith
or
not.

I don't see why backing money with gold or silver would prevent
growth. Economic growth stems from human activity. It seems to me that
all that if precious metals were still used for money, one of two
things would happen: 1) The nominal "price" of such metals would go up
(as it has anyway), or 2) The nominal "price" of everything else would
go down or stay about the same. In other words, there would have been
no inflation. Would this have been bad?

Because you just can't have any kind of economic growth when you have a
static supply of silver for which to base all of your money on. That was the
main reason why they stopped using silver. There's only a finite amount of
silver and they also needed to free it up for industrial and military
purposes. Back then they could'nt mine silver fast enough to keep up with
the amounts of cash that was required to grow the engine of commerce. Not
enough silver to match the amount of transactions being made each day. I
think the US economy was about a quarter of the size that it is now back
then so something worked.
It's like--if you only have four peas in a bowl that's all you can afford to
trade with so you seriously need to get out and grow some more peas.

John Charles Wilson wrote:

I don't see why backing money with gold or silver would prevent
growth. Economic growth stems from human activity. It seems to me that
all that if precious metals were still used for money, one of two
things would happen: 1) The nominal "price" of such metals would go up
(as it has anyway), or 2) The nominal "price" of everything else would
go down or stay about the same. In other words, there would have been
no inflation. Would this have been bad?

The other side of the inflation coin (no pun intended) is deflation,
and it has its own problems. Prices going down sounds great when
you're a consumer, but if you're a producer, it's really bad news.

1. You sell widgets for a living at $100.00 a pop. You have $50.00 per
widget expenses for materials, labor and other expenses. Your $50 per
widget profit is partially invested to develop the next generation
"super widget" to keep your business going.

2. Deflation hits because the economy grows faster than commodity that
backs the money (for example, they can't mine the gold fast enough).
Money becomes scarcer than it was before.

3. Because money is scarcer, no one will buy widgets at $100.00 a pop.
But they will buy them at $50.00 a pop.

4. Your profits are now gone. To get back on track you'll have to cut
wages or force your suppliers to cut prices. Either way, the deflation
that hit you now hits other people.

5. The loss of profits stalls the company's investment in future
development. Before long the economy stalls as well.

A final thought: when the money supply is backed by some physical
substance such as silver or gold, protecting the integrity of the money
requires protecting the substance that backs it. I wouldn't enjoy the
laws that governments would enact to "protect gold from terrorists" -
current laws regarding gold sales may have already gone to far.

---
Fjord

In article .com,
Fjord wrote:

John Charles Wilson wrote:

I don't see why backing money with gold or silver would prevent
growth. Economic growth stems from human activity. It seems to me that
all that if precious metals were still used for money, one of two
things would happen: 1) The nominal "price" of such metals would go up
(as it has anyway), or 2) The nominal "price" of everything else would
go down or stay about the same. In other words, there would have been
no inflation. Would this have been bad?

The other side of the inflation coin (no pun intended) is deflation,
and it has its own problems. Prices going down sounds great when
you're a consumer, but if you're a producer, it's really bad news.

1. You sell widgets for a living at $100.00 a pop. You have $50.00 per
widget expenses for materials, labor and other expenses. Your $50 per
widget profit is partially invested to develop the next generation
"super widget" to keep your business going.

2. Deflation hits because the economy grows faster than commodity that
backs the money (for example, they can't mine the gold fast enough).
Money becomes scarcer than it was before.

3. Because money is scarcer, no one will buy widgets at $100.00 a pop.
But they will buy them at $50.00 a pop.

4. Your profits are now gone. To get back on track you'll have to cut
wages or force your suppliers to cut prices. Either way, the deflation
that hit you now hits other people.

5. The loss of profits stalls the company's investment in future
development. Before long the economy stalls as well.

A final thought: when the money supply is backed by some physical
substance such as silver or gold, protecting the integrity of the money
requires protecting the substance that backs it. I wouldn't enjoy the
laws that governments would enact to "protect gold from terrorists" -
current laws regarding gold sales may have already gone to far.

Another twist in deflation is that as cash becomes scarce, credit
becomes very expensive--think very high interest rates. This simply
kills debtors, since a larger amount of cash is needed to service debts
at the same moment that incoming cash flows decline.

On 28 Dec 2006 18:55:50 -0800, "Fjord" wrote:


John Charles Wilson wrote:

I don't see why backing money with gold or silver would prevent
growth. Economic growth stems from human activity. It seems to me that
all that if precious metals were still used for money, one of two
things would happen: 1) The nominal "price" of such metals would go up
(as it has anyway), or 2) The nominal "price" of everything else would
go down or stay about the same. In other words, there would have been
no inflation. Would this have been bad?

The other side of the inflation coin (no pun intended) is deflation,
and it has its own problems. Prices going down sounds great when
you're a consumer, but if you're a producer, it's really bad news.

1. You sell widgets for a living at $100.00 a pop. You have $50.00 per
widget expenses for materials, labor and other expenses. Your $50 per
widget profit is partially invested to develop the next generation
"super widget" to keep your business going.

2. Deflation hits because the economy grows faster than commodity that
backs the money (for example, they can't mine the gold fast enough).
Money becomes scarcer than it was before.

3. Because money is scarcer, no one will buy widgets at $100.00 a pop.
But they will buy them at $50.00 a pop.

Sure, but you're not going to pay $50 for expences and materials
either. In stead of a $50 profit over a $50 widget, you're now going
to have a $25 profit over a $25 widget. Since everyone else is in the
same boat -- less money, lower pay and lower costs overall -- wouldn't
it all even out?

Padraic

4. Your profits are now gone. To get back on track you'll have to cut
wages or force your suppliers to cut prices. Either way, the deflation
that hit you now hits other people.

5. The loss of profits stalls the company's investment in future
development. Before long the economy stalls as well.

A final thought: when the money supply is backed by some physical
substance such as silver or gold, protecting the integrity of the money
requires protecting the substance that backs it. I wouldn't enjoy the
laws that governments would enact to "protect gold from terrorists" -
current laws regarding gold sales may have already gone to far.

---
Fjord

--
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