Free Markets, Free People


Money? Or Receipts?

Recently, while listening to the Opie and Anthony show, I heard an interview with Loius CK, the comedian.  And he said something that struck me as quite profound.  And quite true.

Back in olden times–i.e., prior to the 1930s–our paper money wasn’t actually money, as such.  Instead, it was a receipt for the real money–gold, or silver–that we had stored in the bank.  And the amount of gold we had determined how many of those receipts we could get.  The gold or silver we held had an intrinsic value, and the paper currency we carried was simply a representation of that intrinsic value.

Then, in the 1930s, we simply got rid of the metal, and kept the receipts.  Ever since then, the paper money we carry around with us has no intrinsic value.  And the value of that receipt is worth whatever the government says it’s worth.  It is a medium of exchange, and nothing more.

You may have $1,000,000 in the bank.  And if the government says that it’s only worth a cup of coffee in exchange, then that’s exactly what it’s worth.  It doesn’t matter if acquiring that million bucks was the work of a lifetime.  The government can, if it wishes or is unwise, reduce the stored value of your life’s work to a trip to Starbucks.

Just something to think about.

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19 Responses to Money? Or Receipts?

  • “And the value of that receipt is worth whatever the government says it’s worth. … The government can, if it wishes or is unwise, reduce the stored value of your life’s work to a trip to Starbucks.”

    How would a gold standard remedy this, though? If the government fixes the price of gold by fiat, then it can devalue a lifetime’s savings at will just as easily – your money is still worth whatever the government says it’s worth. At least the current system can bring to bear market forces to (try to) reign in foolish governments in the near-term, and that’s more incremental and gradual than the government simply declaring “we will pay out 10% less gold per dollar effective now.”

  • After WWII the Bretton Woods system established a Gold Standard which existed until Nixon took us off it in the early 70s.  By 1958 Yale Economist Triffin noted the dilemma that since the dollar was used as a global currency for trade, the US could not back up the dollars at the $35 an ounce price.  In the 60s De Gaulle started demanding gold for dollars, and it was clear France could within a short period of time get all our gold.  De Gaulle was convinced to cease, and restrictions on gold-dollar exchanges increased.  Most economists hated the Gold Standard — why should currency be backed by a metal that was mostly from the USSR and South Africa?   They thought currencies should be valued according to the trust people had in the currency — a true currency market.   The gold standard simply had become untenable by the 70s without a major revaluing of the dollar (and if you revalued so dramatically, and continually, the standard itself wouldn’t mean much).   So the dollar was officially backed by gold after WWII into the 70s, and in fact the Bretton Woods fixed exchange rate system made other currencies de facto backed by gold (though currency revaluations were possible).

    • Thank you professor for yet another pointless and banal lecture that sounds like you cribbed it from Wikipedia.

      Do you really think the people that hang around here don’t know this stuff? You condescending jacka$$…

      • Scott Erb is absolutely correct in everything he just wrote.  He is occasionally right about something. Nor did he seem condescending.

    • Nobody cares about Bretton Woods anymore. The cat is out of the bag.

      I just want to know when all of those smarmy liberals who told us for eight years that George W. Bush was a spendthrift for having $300 billion deficits will finally admit that The Clown™ is a sick bastard for having $2 trillion deficits. Which means, in simple to understand language, that The Clown™ will have accumulated more debt in one year than Bush did in eight. And The Clown™ will have spent more in just four years (let’s assume, and PRAY, that that’s all he has in office to do his damage) than Bush and Reagan did in sixteen.

      Come on, Erb…you and your fellow liberals have to be choking on your bitter hypocrisy over the deficit. Or, may I assume, that your eight years of outrage against Bush’s deficits was just hatred of Bush and nothing more? Because feigned outrage is worse than no outrage at all.

      • I’ve been on record here and on my blog as being very concerned about the debt and the risk of stagflation.  Many reject the inflation fears because there is no ‘traditional’ inflationary pressure.  However, a rapidly declining dollar value could ignite an inflation alongside continued recession.

  • Technically, we have currency, not money. As a financial professional strongly influenced by Austrian economics, I still believe a gold backing is a terrible idea given its insufficient global supply necessary to represent the current economy. Gold-backed currencies are also invariably manipulated by the nations who reference it for their currency when events lead to draw-downs of their gold supply by other nations.

    The real problem is governments that out-spend their inflows, causing any currency to struggle and eventually crash. Indeed, it’s just a matter of time before the dollar has no worth. Peter Bernstein gives a remarkable history to the use of gold as money in his book The Power of Gold. http://www.amazon.com/s/ref=nb_ss_gw?url=search-alias%3Daps&field-keywords=the+power+of+gold&x=0&y=0

  • If the government fixes the price of gold by fiat, then it can devalue a lifetime’s savings at will just as easily – your money is still worth whatever the government says it’s worth.

    You could sell it in another country. What could be a problem for gold would be if it became possible to create vast quantities of it. That’s not likely though, just because physics say that even an ideal fusion reactor has a hard time making gold. (Stars top out at iron. Heavier elements are probably remnants from supernovas.)

    Hyperinflation, on the other hand, really has happened and there’s really no reason why it couldn’t happen again.

    • Nevertheless there is simply not enough gold in the world to be used that way anymore.  Perhaps if you included all precious and strategic metals at fixed rates and included exchanges of government land upon redemption you might be able to create a completely backed hard currency.

  • Aarrgghh, noooeezzz, fiat moneyyy!!!

    Those were Fonzie’s exact words when he got on the surfboard. 

  • One out of about five TV ads now entice you to buy Gold.
    Good advice, I think.
    Ammo too.

  • A metal-backed currency is not just an issue of economics or monetary policy; it is an issue of MORALITY.  A fiat currency allows the government to steal people’s savings by inflation.  It is theft, pure and simple.  Keynesian and Friedmanite charlatans have convinced everyone that inflation is a good thing, based on the myth that people won’t buy things if there is no inflation or slight deflation.   It’s obvious why every government on earth is anti-sound money: it allows them to spend more, grow bigger, and pay back debts with devalued money.  Before Greenspan became part of the banking elite, he had this to say about the gold standard:

    “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

    Read the whole thing:
    http://www.usagold.com/gildedopinion/greenspan.html

  • I have big news for you folks…

    After The Clown™ gets through with whatever he ends up doing to the American economy, the damage will be so great, and so extensive, that our entire life savings will be worth no more than a cup’s worth of coffee.

    That’s because the dollar will soon be worth less than a turd. Which is how The Clown™ has always wanted it.

  • I don’t understand the argument that there is not enough gold to go around. Prices adjust based on supply. If you double the amount of gold overnight, prices for all goods (in terms of gold) will eventually double. Take away 80% of  the gold, and prices for all goods will tend to drop proportionately. It’s not necessarily that important what is used as the medium of exchange anyway, it’s the practice of creating that medium out of thin air, artificially “stimulating” (read: inflating) the economy. Tying paper currency to specific weights of gold makes it more difficult to perform such fraudulent actions.

    • What the US found after WWII was that there was a real demand for dollars for liquidity in the expanding world economy.   Thus more dollars were printed than the US could back with gold.  If the US had stopped printing dollars at the point they could back them up, the post-war boom probably would have fizzled.   More to the point: why base the value of currency on a metal?   Why is that any better than on the value the market gives to that currency based on the trust people have in that economy?  Of course, in Germany cigarettes were the main currency after WWII  for awhile.   It all depends on what people — the market — believe to have value (will be honored in future transactions).

      And that’s why I check the value of the dollar every day, first thing.  The threat to the US is that current debt and deficits are erroding trust in the dollar.  Obama’s gamble is to try to jump start the economy and somehow find a way to then get fiscal policy back to a sane point before the dollar collapses or we’re hit by painful stagflation.   I don’t know what will happen — it’s a high stakes bet.

  • “What the US found after WWII was that there was a real demand for dollars for liquidity in the expanding world economy.   Thus more dollars were printed than the US could back with gold.  If the US had stopped printing dollars at the point they could back them up, the post-war boom probably would have fizzled.”

    Yes, I will grant you that temporary “stimulus” can occur when you turn on the printing presses and inflate the money supply, but I’m not sure why that’s a good thing, or how anyone could think it is sustainable.

    “More to the point: why base the value of currency on a metal?   Why is that any better than on the value the market gives to that currency based on the trust people have in that economy?”

    How is that trust to be measured? By the fact that people continue to use the monopoly medium of exchange, that means they trust it? And so inflation of prices is really an indication that people really really trust the economy? Hyperinflation being orgasmic, total, trust? If you had a free market in currency, then I would agree that trust in currency X would tend to equate to increase in demand (purchasing power) for currency X.

    • “I don’t understand the argument that there is not enough gold to go around.”

      My understanding would be that whereas gold is a finite commodity, wealth is not – wealth can be created, but gold cannot. Basing a currency off of a commodity limits the amount of wealth that can exist to the world’s total holdings of that commodity (unless the commodity is devalued by governments, but that would be exactly the same kind of inflation you dislike in fiat money.)

      “How is that trust to be measured?”

      By how much people are willing to pay for that currency on the exchange markets – if people find one currency more trustworthy, they’ll pay more to convert their holdings into that currency. If trust in a currency falls, they’ll transfer their assets to a different currency. Maybe it’s not a perfect free-market system due to the oligarchies on currencies, but a gold standard (effectively government price-fixing) seems far less market-oriented.

      I suppose trust in a currency would be measured by deflation  - the increase in value of the currency. Building on that, a deflationary spiral would imply a lot of trust in the currency; i.e. one is more likely to hide money under the mattress rather than invest it due to the perception that hiding it under the mattress will preserve the value of your holdings better than investment.

    • Hyperinflation is clearly a lack of trust.  Continual use and high value for a currency is increased trust.  Currency markets measure that trust (speculation on future currency values, etc.).   In pure economic terms that makes more sense than relying on a metal, especially in a dynamic expanding economy.    If the US was running a balanced budget before the crisis, a stimulus and short term deficit spending would not be a threat; the way it’s playing out now, there is reason for people to lose trust that the value of the dollar will remain relatively high.

  • “My understanding would be that whereas gold is a finite commodity, wealth is not – wealth can be created, but gold cannot. Basing a currency off of a commodity limits the amount of wealth that can exist to the world’s total holdings of that commodity (unless the commodity is devalued by governments, but that would be exactly the same kind of inflation you dislike in fiat money.)”

    But if there is X amount of “wealth” in the economy (the total value of things on the market, I guess) and Y ounces of gold available, then when gold is used as the medium of exchange each ounce will be worth X/Y. If productivity increases (as it naturally does due to technological improvements and efficiency), so that it’s now X times 2, each ounce will now be worth 2x/y – an increase in value of the currency backed by that gold (deflation in other words).  Each ounce buys you more today than it did 10 years ago – which is really what you would expect, that’s called progress. But it will have been a natural, slow, and expected change in value, and the market would adjust accordingly. If everyone starts to hold on to their money in expectation of more purchasing power in the near future, then there will be less money put to increasing production. This will act as a natural break in the growth, and thus deflation will not be as much, people will start spending, productivity will increase, back and forth, etc. What wouldn’t happen is artificial stimulus/inflation, or unsustainable growth leading to a bust.

    Today the government could print 300 billion dollars and immediately pump it into cancer research. It will take some time for the new money to ripple through the economy, raising prices on everything so the supply/demand curves match again. In the meantime, those doing the research will have benefited from the influx of money, and be able to purchase more equipment/specialists/etc than otherwise. The likely outcome is an advancement in cancer treatment/prevention faster than would otherwise obtain if left to market forces. Some lives would be saved. But what is not seen is the higher cost of living imposed on everyone as a consequence of the new money. People will not be able to purchase as much as they could before, those in fixed incomes would see their value drop, those on the cusp would now face very hard choices. For some that would mean a cut in luxury goods, for others a cut in basic sustenance goods. Some lives would be shortened and some lives would be lost. But I’m sure the news would focus on the wonderful advances in cancer care. Morally, I don’t see how government has a right to play that role. It’s an abuse of trust, to print money out of thin air – people will continue to use it because they have no other choice (the dollar IS legal tender). And it’s an abuse of power to play social engineering games with people’s lives. Tying the currency to a precious metal makes it harder for the government to play those kind of games. Does that mean sometimes the economy will not see the growth it sometimes sees when government ‘stimulates’? Yes. But so what? That growth is artificial, not sustainable, and will need to be paid up in full in the future. That you might be able to pass the cost to the next generation does not absolve you of anything.