The Monetary System

[OneShotKi11]

I have been trying my best to research the Monetary system and fiat Money as of late. I am doing so because i see alot of discussion around the political scene about how much better a Monetary system is, and how a Gold standard is terrible and could never work.

I was wondering if anyone here would be able to link me to some really informative articles or videos that could clearly explain the benefits of this system and its advantages over a gold standared, or any other standard for that.

From what i have been able to read the system really isnt sound and the money holds value based on faith alone. I know this cannot be the case and wish to learn more on how this system works.

 

[Tsukasa Buddha]

From what I understand, the gold standard is really irratic when it comes to inflation/deflation rates.

The talk about money having no "real" value is rather silly, as nothing has intrinsic value. Value is always something we humans add to something.

Sorry I didn't save my sources , this is just my two cents.

 

[OneShotKi11]

You have already in those two short sentences made a valid point that i will take note of! Thank you!!!

"value is rather silly, as nothing has intrinsic value"

 

[Francesca R]

From what i have been able to read the system really isnt sound and the money holds value based on faith alone. I know this cannot be the case and wish to learn more on how this system works.

I think what you've said is broadly correct. Witness bank runs, speculative attacks and devaluations as illustrations of what happens when there is a temporary (or not temporary) vacuum of that "faith"

However I would describe it as "confidence in future reciprocity" rather than faith, which might make it sound woo-like. It is logical to trust present and future promises made by fiat money in the expectation that you will be trusted when bearing the same money. Evidence shows that exceptions and beeakdowns to this model are rare.

ETA: I would expect this thread to be in "business skepticism". P'raps it will be shifted.

 

[CaptainManacles]

well, we just had a thread on this like a week ago, but something that kills the idea dead before it gets out of the starting gate, there isn't enough gold in the entire world to back our currency. That's why every country has now dropped the gold standard. There isn't enough gold to handle a modern economy, even a small one.

Further arguements against it. When you back a currency with gold it makes gold even more valuable then it would be otherwise, it makes your whole economy reliant on your ability to mine gold. Also, people hoard gold. Hoarding money is bad. When people hoard money then no one is using it and you basically have to go back to bardering. Bardering sucks. That's possibly an unrealistic extreme, but that's a simplified explination of the problem. No one will use it. They just sit on it and watch the economy tank and the gold prices go up.

I still don't know if I disagree with the sentiment that our money is worthless though. It's based off of percieved value, not any real value.

 

[OneShotKi11]

Thank you guys sooo much for the info thus far, but you must realize i dont know much on this and stupid questions i have might need to be answered by those more well rounded on the subject.

So theoretically we could just continuously print money as we see fit.

That just doesnt seem right so i have to ask this "what is to stop us from printing infinites amounts of money"?
If we have nothing to back our currency then why wouldnt we just continuously print Cash that is believed by everyone to be worth so much?

Also, what actually can devalue the buying power of our currency if it is a currency based on faith? If no matter what people believe $5 dollars is $5 dollars then what makes it worth less?

Thanking those who are willing to give me answers ahead of time, for i know that your help is not required!!!

 

[Francesca R]

Thank you guys sooo much for the info thus far

You're welcome.

So theoretically we could just continuously print money as we see fit.

That just doesnt seem right so i have to ask this "what is to stop us from printing infinites amounts of money"?

Like anything else, the more of it there is, the less it is worth in comparison to other things.

If we have nothing to back our currency then why wouldnt we just continuously print Cash that is believed by everyone to be worth so much?

It is the expectation that £5 will be backed up by £5 worth of goods or services, and that £5 will retain the ability to purchase roughly the same amount of them, which "backs" the money. Debase those expectations and you are in (serious) trouble with currency as a medium of exchange.

Also, what actually can devalue the buying power of our currency if it is a currency based on faith? If no matter what people believe $5 dollars is $5 dollars then what makes it worth less?

Changes in those expectations, however wrought.

 

[geni]

Thank you guys sooo much for the info thus far, but you must realize i dont know much on this and stupid questions i have might need to be answered by those more well rounded on the subject.

So theoretically we could just continuously print money as we see fit.

It's been tried doesn't work too well.

That just doesnt seem right so i have to ask this "what is to stop us from printing infinites amounts of money"?

Because goverments know what will happen when they do. As a result most goverments are not going to print significantly more money unless they activly want to increase inflation.

If we have nothing to back our currency then why wouldnt we just continuously print Cash that is believed by everyone to be worth so much?

Because they would rapaidly belive it would be worth rather less.

Also, what actually can devalue the buying power of our currency if it is a currency based on faith? If no matter what people believe $5 dollars is $5 dollars then what makes it worth less?

Because they amount of faith would have been reduced. One way to get the value of $5 (it doesn't actualy work for various reasons) is to consider the total value goods that can be purchased in $ devide by the number of $ in circulation and you have a value for the $.

 

[Puppycow]

The central bank usually tries to keep inflation low but positive. Someting like 2 to 3% is considered ideal.

If you print too much cash, you will eventually have high inflation, even "hyperinflation." Obviously this would be a problem because you can't save money if it loses too much value in a short period of time.

Inflation 1923-24: A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.

That's why you can't just print "infinite amounts of money."

 

[Ryokan]

.....money holds value based on faith alone.

How is that different from gold?

Is there any country left on the globe that still backs its money with gold? Is there any country other than the US that even has this fiat money/gold standard debate?

 

[CaptainManacles]

How is that different from gold?

Is there any country left on the globe that still backs its money with gold? Is there any country other than the US that even has this fiat money/gold standard debate?

gold has subjective value to certain people. Non-backed currency has no basis for it's value besides error.

 

[Puppycow]

Non-backed currency has no basis for it's value besides error.

Wrong.

 

[Ryokan]

gold has subjective value to certain people.

How is that different from money?

 

[CaptainManacles]

How is that different from money?

besides coin collectors or people who want to burn it in their furnace, nobody subjectively values money. People want it because other people want it, nobody in the chain actually values it.

 

[Kerberos]

Because goverments know what will happen when they do. As a result most goverments are not going to print significantly more money unless they activly want to increase inflation.

A government might actually want to do that, because politicians can manipulate the monetary policy for short term gains in order to secure re-election. That’s why monetary policy is handled by an independent central bank in most advanced countries.

 

[UserGoogol]

I really wanna learn more about monetary systems besides the gold standard and central-bank-controlled-fiat-currency-with-fractional-reserve-banking. There are others (at least in theory) and I wish people could talk about them more. Social Credit sounds vaguely interesting, for instance, not that I'm saying it's a good idea.

besides coin collectors or people who want to burn it in their furnace, nobody subjectively values money. People want it because other people want it, nobody in the chain actually values it.

I strongly suspect that paper money and gold are closer in intrinsic value than one might immediately think. I doubt that a person on a desert island, even a fairly prosperous person on a desert island, would care that much about a bit of shiny metal. Except for the industrial applications of gold, gold is largely valued for social reasons, and "I like gold because other people like gold and therefore I will seem like a cool guy" isn't much more intrinsic than "I like gold because other people like gold and therefore I can trade it with them for stuff I want."

Ultimately, gold is valuable because of supply-side factors: it's relatively difficult to mine up new gold. The problem is that the economy grows too fast for gold mining to keep up with it. Austrian economists, of course, will argue that you can have whatever money supply you want and everything will magically be able to manage as long as the value of money remains steady but I think (as do mainstream economists for the most part) that they are wrong.

 

[geni]

A government might actually want to do that, because politicians can manipulate the monetary policy for short term gains in order to secure re-election. That’s why monetary policy is handled by an independent central bank in most advanced countries.

Generaly hyperinflation is not considered a short term plus. The central back thing looks fine until you realise that goverments still control taxes and goverment spending which means they can atchive much the same results as when they dirrectly controled the centeral bank.

 

[Francesca R]

Generaly hyperinflation is not considered a short term plus.

I doubt Kerberos meant hyperinflation. That's almost always a policy accident. However, a politically inspired monetary policy may be far more likely to compromise inflation stability at the margin--such as avoid a rate rise in the 6 months before an election is due.

The central back thing looks fine until you realise that goverments still control taxes and goverment spending which means they can atchive much the same results as when they dirrectly controled the centeral bank.

Yes--governments can "print money" without a central bank being involved. Though an independent central bank, if it feels that fiscal spending is inflationary, can counter the effect by hiking interest rates. The ECB (and particularly before that the Deutsche Bundesbank) have apparently done this. So the government does genuinely cede control of monetary policy.

 

[Kerberos]

Generaly hyperinflation is not considered a short term plus. The central back thing looks fine until you realise that goverments still control taxes and goverment spending which means they can atchive much the same results as when they dirrectly controled the centeral bank.

Not hyperinflation, but higher inflation than the 2-3% we get today. Yes politicians have other economic tools they can abuse, but monetary policy, unlike taxes and spending, can largely be reduced to technocratic considerations, so removing it from politicians control is a good thing. It's been proven that countries with an independent central bank have lower inflation and comparable unemployment to countries with less independent centrla banks.

 

[Ziggurat]

The debate between gold (or silver, or any commodity-backed currency) standard and fiat currency seems to revolve largely around how much you trust government.

If you turst government absolutely, then fiat currency is the clear winner, because a commodity-based currency distorts the economy by providing artificial incentives to produce that commodity (for example, with a gold-based currency, you'd have a lot more gold mining even though there's no increase in actual use of gold). Commodity-based currencies are also subject to deflation, which is very damaging to economies.

If you distrust government completely, then a commodity currency is the clear winner because government cannot arbitrarily decrease its value (ie, inflation or, if it's really bad, hyperinflation). And that happens sometimes (Germany in the 1920's, Zimbabwe right now), and it can be quite a bit worse than the negative effects of a commodity-backed currency (at least, if you didn't pick something really stupid for that commodity, like tulips or something).

So the real question isn't so much which is better, but which is better for a given country. If I was in Zimbabwe, I'd love to have a commodity-backed currency. But I live in the US. And while I don't trust my government absolutely, I don't distrust them too deeply either. The track record of fiat currency in the US is pretty good, and direct manipulation of that currency by elected officials is quite difficult. Except for the crackpots, it's pretty clear to most people that fiat currency works here, and works better than the gold standard did.

Historical note: the Wizard of Oz was originally an allegorical tale about the problems caused by the gold standard, and an appeal to adopt a silver standard for backing the dollar instead.