Reagan Will Disgrace US Currency

[Dardedar]

What is the cost to the US Treasury Dept. of manufacturing seven $100 bills? Probably pennies.

DAR
"Each note costs about four cents to produce, though the cost varies slightly by denomination." --source

What is the cost of a mining company to produce 1 troy ounce of pure gold? About $600.

DAR
Wiki has, with reference:

"The average gold mining and extraction costs are $238 per troy ounce but these can vary widely depending on mining type and ore quality."
link

Note:
"There are about three-quarters of a trillion dollars of U.S. currency in circulation; the majority is held outside the United States." --from first source

There is about 3 trillion worth of gold in existence on the planet. The days of gold backed currency are gone and it matters not. It is conceivable that in my lifetime we may not even have paper backed currency.

[Hogeye]

OK, so what is the advantage to exchanging your money for a commodity?

The advantage is that the ability to exchange tokens for a commodity helps keep the money issuer honest. He is inhibited from arbitrarily inflating the money supply. The point is not that money users find hauling gold around a good thing, on the contrary paper is easier to carry, but that the issuer has a legal obligation to redeem the warehouse receipt, and the user, if he suspects foul-play or unbacked issues or anticipates failure, can get real gold to replace his paper promise.

Doesn't the society have to decree that you can exchange the money for a commodity?

No; the value of a commodity depends on supply and demand. No one makes a decree on the price of eggs, or a box of blueberries at the farmers' market. No one decrees the price of a CD or a car. Some ultra-totalitarian States have attempted such decrees, with terrible results.

Doug, the "secret" of thinking about money is something Barbara mentioned earlier: Money is a commodity. It is simply the most liquid (easily sellable) commodity around. If you keep in mind that money is simply a commodity, the rest follows relatively easily.

It would seem that ALL money is based on decree.

Not specie coins - they are money. Not e-gold digital money - it can be exchanged for gold. Not Liberty Dollars, which are silver coins or paper warehouse receipts for silver coins. Most State-issued money a century ago was hard money. Pounds sterling was a weight of silver, the dollar was at one time a certain weight in gold (but that was over a century ago.) The general population has only become monetarily stupid in the last century or so. Prior to the War of Southern Independence, the US govt didn't issue even warehouse receipts, let alone fiat money, except as an extreme wartime measure. It was generally thought (quite correctly) that the US Con only allowed coining of money, and not the issuing of paper currency. Now most people, having never known anything but fiat money, have trouble grasping even the most rudimentary monetary concepts.

What can you exchange the gold for, if exchanging is supposedly so important?

As explained above, you are missing the point here, which is to keep money issuers honest. Right now, after about 75 years of habituation to fiat money, with the fiat US$ the world monetary standard (the first and only time in history where the world monetary standard is fiat money), there are few who use specie for money anymore. This will continue until the inevitable hyperinflation. Then, when their money is worthless, like the French after the John Law fiasco, like the Germans after their 1920s hyperinflation, like Hungary 1945-46, Brazil 1987-97, and everywhere else fiat money has been tried, people will figure it out. Except they won't have (like Brazil) the WMF to bail them out with US dollars. The US is the WMF, and dollars are the problem.

If you split the money into smaller pieces, isn't the society then arbitrarily saying that the pieces are worth more? How is that not fiat?

"Fiat" means decree. No politician or legislature decrees that beans are X cents a pound. Market prices are determined, not by decree, but as an emergent result of a "spontaneous" process. No one decrees the price of beans; it is determined by the amalgamation of thousands of one-on-one exchanges of money for beans throughout the world.

[Doug]

OK, so what is the advantage to exchanging your money for a commodity?

The advantage is that the ability to exchange tokens for a commodity helps keep the money issuer honest. He is inhibited from arbitrarily inflating the money supply. The point is not that money users find hauling gold around a good thing, on the contrary paper is easier to carry, but that the issuer has a legal obligation to redeem the warehouse receipt, and the user, if he suspects foul-play or unbacked issues or anticipates failure, can get real gold to replace his paper promise.

What I hear you saying is that the advantage of having money you redeem for a commodity is that you can redeem it for a commodity.

It still seems quite obvious that the commodity is superfluous. Imagine if no one redeemed their money for the commodity. The commodity serves no useful function. The system carries on without it. Here in our country we finally wised up and got off the gold standard.

Doesn't the society have to decree that you can exchange the money for a commodity?

No; the value of a commodity depends on supply and demand. No one makes a decree on the price of eggs, or a box of blueberries at the farmers' market. No one decrees the price of a CD or a car. Some ultra-totalitarian States have attempted such decrees, with terrible results.

Funny, you said in another post that people could cut up the gold into pieces. It seems that people would have to decree that the exchange rate would change dramatically to keep the money from being deflated.

If 1000 people have 10,000 gold pieces between them, so each has 10, and the population increases to 2000 people, so each has 5, you suggested that they could cut the money in pieces so they could still have 10 or so. But don't they each have half as much money? If not, if you declare the 1/2 coin to be worth the same as the previous whole coin, isn't that a decree?

[Hogeye]

What I hear you saying is that the advantage of having money you redeem for a commodity is that you can redeem it for a commodity.

No, the advantage is avoiding a situation where the issuer can arbitrarily increase the money supply. If the issuer takes the threat of cashing in seriously, then no one need actually to redeem their paper to keep the system honest (uninflated.) In this sense, the commodity is "superflous" as you put it. There's a saying in chess: The threat is worse than its execution. History shows, and human nature verifies, that anyone who can print up money for free will likely avail himself of the opportunity. With fiat money, under no obligation to redeem notes, governments can and do inflate early and often.

Funny, you said in another post that people could cut up the gold into pieces. It seems that people would have to decree that the exchange rate would change dramatically to keep the money from being deflated.

??? You think it takes a decree for people to exchange 10 tenth oz gold coins for 1 one oz. gold coin?

If 1000 people have 10,000 gold pieces between them, so each has 10, and the population increases to 2000 people, so each has 5, you suggested that they could cut the money in pieces so they could still have 10 or so. But don't they each have half as much money?

Yes! Each has half the weight in gold as before. But they can buy the same amount of goods. Yes, that is called deflation, when prices of goods go down, in this case to half of the price they were before the doubling of goods. (I am assuming a doubling of goods, and not merely of people. It's the goods that matter here, not the number of people.) You have twice as many goods being chased by the same amount (in weight) of money, thus the prices are bid down to roughly half their previous level.

[Doug]

What I hear you saying is that the advantage of having money you redeem for a commodity is that you can redeem it for a commodity.

No, the advantage is avoiding a situation where the issuer can arbitrarily increase the money supply.

You mean like cutting the money into pieces?

If the issuer takes the threat of cashing in seriously, then no one need actually to redeem their paper to keep the system honest (uninflated.) In this sense, the commodity is "superflous" as you put it. There's a saying in chess: The threat is worse than its execution. History shows, and human nature verifies, that anyone who can print up money for free will likely avail himself of the opportunity. With fiat money, under no obligation to redeem notes, governments can and do inflate early and often.

DOUG
And history shows that gold doesn't really "back" any money. It was just a superstition. If everyone accepts the paper money, you don't need the gold to do anything. You could just as well back it up with cartoons.

Funny, you said in another post that people could cut up the gold into pieces. It seems that people would have to decree that the exchange rate would change dramatically to keep the money from being deflated.

??? You think it takes a decree for people to exchange 10 tenth oz gold coins for 1 one oz. gold coin?

No, it takes a decree for people to say that 1/2 a gold coin is now worth as much as 1 gold coin used to be.

If 1000 people have 10,000 gold pieces between them, so each has 10, and the population increases to 2000 people, so each has 5, you suggested that they could cut the money in pieces so they could still have 10 or so. But don't they each have half as much money?

Yes! Each has half the weight in gold as before. But they can buy the same amount of goods.

How can they buy the same amount of goods? A hammer costs one gold piece, say. The next day it costs 1/2 of a gold piece because people cut their money in half? How is this supposed to happen?

Yes, that is called deflation, when prices of goods go down, in this case to half of the price they were before the doubling of goods. (I am assuming a doubling of goods, and not merely of people. It's the goods that matter here, not the number of people.) You have twice as many goods being chased by the same amount (in weight) of money, thus the prices are bid down to roughly half their previous level.

How do you get twice as many goods to bring the price down if there are twice as many people so the demand stays the same?

[Dardedar]

You could just as well back it up with cartoons.

DAR
Good point. I heard the Snoopy franchise (Charles Shulz) is still making about 20 million a year. It made 1.1 billion all together.

Sample:

"For collectors the ultimate is an original strip or drawing, failing that limited edition lithographs and sericels. Original pen and ink strips are valued at anywhere from $2500 (£1500) upwards":



"Pictured [below] is a current limited edition sericel of 500 called Dark and Stormy costing $325. It depicts the scene from "Snoopy, The Musical" when Snoopy, the Literary Ace, is pounding out yet another novel and his editor, Woodstock, listens."



Forget gold, hoard cartoons.

HOG
No one makes a decree on the price of eggs, or a box of blueberries at the farmers' market. No one decrees the price of a CD or a car. Some ultra-totalitarian States have attempted such decrees, with terrible results.

DAR
The US, nationally, has a policy of low prices for such food staples. They are routinely subsidized. I grew up on a dairy farm. The most valuable part of the farm was the "quota", that is the amount of milk you were allowed to produce per month. You had to buy your quota and I think they were tens of thousands of dollars if not over one hundred thousand for a large one. If you produced an amount of milk over your quota your were penalized. Music companies recently talked about deciding to lower the price of music CD's across the board.

D.

[Barbara Fitzpatrick]

Whe the price of specie was controlled, coins were made with slightly less specie metal than the coin was worth. Otherwise people would melt down the coins and sell them on the market. Making it illegal was a waste of time (too bad the government hasn't figured that out about making MJ and other "recreational" drugs illegal). That's why they had to move to paper money before letting gold (and silver) go to market values. Market fluctuation of the metal makes specie-backed paper very unstable.

[Hogeye]

Hogeye> The advantage [of commodity money] is avoiding a situation where the issuer can arbitrarily increase the money supply.

Doug> You mean like cutting the money into pieces?

Cutting an oz of gold into 10 parts does not increase the total weight in gold. Obviously. It does not increase the money supply. Similarly, printing 10 warehouse receipts for .1 oz gold to replace 1 warehouse receipt for 1 oz gold does not increase the money supply. Again, please don't equivocate total weight of a commodity with the number and size of containers its stored in.

And history shows that gold doesn't really "back" any money. It was just a superstition.

On the contrary, gold (or some other commodity) has backed money for most of human history. In 19th century US, the money was generally warehouse receipts printed by private banks, redeemable in gold (gold or silver in the bi-metal days). This is a matter of record and a matter of fact. It wasn't until 1933 that the US stopped cashing in its notes for gold for its own citizens. It wasn't until 1972 that the US stopped redeeming its note for foreign central banks.

It takes a decree for people to say that 1/2 a gold coin is now worth as much as 1 gold coin used to be.

No, the prices of bread, butter, chickens, etc. were bid up in varied and diverse individual one-on-one transactions, the sum total of which we call a "market." You seem to think all prices are fixed by decree, like the old Soviet system attempted. Why can't you tell a market result from a decree?

Hogeye> Each has half the weight in gold as before. But they can buy the same amount of goods.

Doug> How can they buy the same amount of goods? A hammer costs one gold piece, say. The next day it costs 1/2 of a gold piece because people cut their money in half? How is this supposed to happen?

David Hume explained this long ago. Suppose half the money people use in a society magically disappeared? What would be the effect on prices? They would be bid down. Similarly, if the money supply magically doubled, prices would be bid up. Neither would happen instantaneously; it would happen as buyers and sellers discovered shortages and surpluses. In our scenerio, where the amount of goods doubles, shopkeepers would notice that most of their hammers are not selling. People simply could not afford to buy all the hammers on sale at the current price. Shopkeepers (and hammer manufacturers, and iron and wood suppliers, all down the line) would notice that their replacement costs have diminished. To clear the market (shopkeepers not liking hammers for aethetic value, but as an income-generating trade item, and not wanting an unsalable item lingering on their shelves) cut their prices until supply equals demand. Eventually an equilibrium price is reached, roughly half the old pre-doubling of goods price. In short, prices are bid down since you have the same amount of money (in weight!!!) chasing double the amount of goods. You say, "there are twice as many people so the demand stays the same." For goods, yes, but the demand for money (per oz!!!) has doubled. This is where one must keep in mind that money is just another commodity, with the same considerations applying.

That's the process - not a decree from on high, but an emergent process driven by many individual interactions on the basis of local conditions. An analogy: The water level in my teapot is the same in the main pot part and the spout. Is there a god decreeing, "Level thou water molecules," with the H2O obeying? No, on the contrary, the water molecules are acting according to their local conditions of other water molecules and air pressure. The water seeks its level phenomena is the result of emergent order, not planned order.

When the price of specie was controlled, coins were made with slightly less specie metal than the coin was worth. Otherwise people would melt down the coins and sell them on the market.

This doesn't make sense. OTBE an ounce of gold in coin form is more valuable than an ounce chunk of gold, since you'd have to assay the chunck to determine its purity whereas a known coin is "certified" by the mint. I strongly suspect, Barbara, that you are referring to the fixed price bimetal period. "When the price of specie was controlled," is a dead giveaway. Coins of the overvalued metal would disappear by Gresham's Law (In a "legal tender" regime, bad money drives out good.)

Market fluctuation of the metal makes specie-backed paper very unstable.

We've been over this fallacy already - saying "gold is unstable as measured by the dollar" is saying exactly the same thing as "the dollar is unstable as measured by gold." It's symmetrical - they are equally unstable using the other as a measure. Obviously, you have to use something else, a third commodity or the general price level as a measure. Using these measures, specie is much more stable than fiat money. Do I need to trot out my comparisons over time with chicken, beef, and shovels again?

[Betsy]

I'm not reading all of these posts, because they bore me, but I looked at the pictures so here's my thought on that.

Cartoons and other collector's items have increased in value, but the difference is that gold is the basis of our economy, the thing upon which our money is (supposed to) represent. It's the bottom line. So, doesn't that mean that if you're going to hoard something, that would be the wisest thing to hoard?

If you invest money in an investment fund, and the economy suddenly went belly up, you'd have nothing. If you have a bunch of gold in a vault in your basement and the economny suddenly went belly up, your gold wouldn't be worth as much as it was, but it would still be there and be valuable.

During the Depression, I don't think it mattered if you had a collector's item cartoon if no one cared about it or could buy it any more. But if you could take a handful of gold to the store, you could still get a bottle of tequila. (which is, of course, what you would want to be buying if the economny went belly up)

[Betsy]

and by the way, I think Reagan will be a disgrace to our currency, but not nearly as much as YOU KNOW WHO.

[Dardedar]

DAR
Well at least it is just a small time temporary thing. It's not like he is getting on the $1 and we will have to look at it all the time. As Doug's article noted:

"a different president appearing every three months.

The series will honor four different presidents per year, in the order they served in office. Each president will appear on only one coin..."

With Bush in, Reagan isn't looking so bad.

[Doug]

Cartoons and other collector's items have increased in value, but the difference is that gold is the basis of our economy, the thing upon which our money is (supposed to) represent. It's the bottom line. So, doesn't that mean that if you're going to hoard something, that would be the wisest thing to hoard?

DOUG
Gold is no longer the basis of our economy. Our money is no longer intended to represent gold, or silver. The U.S. is no longer on the gold standard as of August 15, 1971, when Nixon decreed that the United States would no longer redeem currency for gold.

The phrase "gold standard" means different things, but in general it is no longer viable in an international market.

This article on the advantages and disadvantages of the gold standard seems fair and balaced.

[Barbara Fitzpatrick]

Betsy - You Know Who will have to be dead 2 years before they will mint a coin with his face on it. By then we'll either have become a fascist state and nobody will dare say anything about it, or we will have lived through this dark period and his face will be a reminder that IT CAN HAPPEN HERE.

Hogeye forgets to note that the market balancing forces he's talking about (that would reduce the price of hammers to one half) not only take a long time, but will also put the shopkeeper out of business. (Shopkeeper can't move his goods for what he paid for them, so he goes under.) It's true that somebody will pick up the slack and hammers will be available, but the scenario Hogeye relates is called depression and it is accompanied by massive bankruptcy, farm and small business forclosure, and unemployment.

[Doug]

Hogeye forgets to note that the market balancing forces he's talking about (that would reduce the price of hammers to one half) not only take a long time, but will also put the shopkeeper out of business. (Shopkeeper can't move his goods for what he paid for them, so he goes under.) It's true that somebody will pick up the slack and hammers will be available, but the scenario Hogeye relates is called depression and it is accompanied by massive bankruptcy, farm and small business forclosure, and unemployment.

DOUG
Many economists blame the gold standard for the Great Depression.

[Betsy]

DOUG: Gold is no longer the basis of our economy. Our money is no longer intended to represent gold, or silver. The U.S. is no longer on the gold standard as of August 15, 1971, when Nixon decreed that the United States would no longer redeem currency for gold.


ME:

oh. my bad.

i'll just go back to reading the political cartoons

[Hogeye]

That's a pretty good article on the gold standard, Doug. The first half is excellent, with its explanation of the gold standard and the price-specie-flow mechanism. It supports what I've been saying about hard money's resistance to inflation and its long-term price stability. IOW The gold standard did not allow governments to arbitrarily inflate the money supply, as they can with fiat money.

I would quibble with some things in the second half of the article - it seems entirely too optimistic/naive about the ability of govt central banks to control the economy. It takes the Keynesian view that governments can effectively manipulate unemployment levels, and the monetarist view that government can/should manipulate price levels via the central bank. So the writer is more of a statist than I - no big surprise.

The only downright dubious claim I detected was regarding the alleged short-term price instability. Besides wondering what measure he used (what market-basket of goods), I have to say that his choice of time-periods is clearly biased. His gold-standard period (1879-1913) includes the Alaska gold rush, an influx of gold. Fine. But he excludes the roaring 20s, the crash of '29, and the great depression from the non-gold standard period! (He only looks at 1946-1990.) This is, of course, a sleazy, underhanded, and rigged comparison.

For a veritable "short course" in monetary theory, I recommend (again):

What Has Government Done to Our Money?

It's available online at the link above, and in a real meatspace book in the Fayetteville Public Library.

Hogeye forgets to note that the market balancing forces he's talking about (that would reduce the price of hammers to one half) not only take a long time, but will also put the shopkeeper out of business.

Doubling the amount of goods (and population) takes a long time, too - so it is not a shock. Prices are changed and adjusted all the time without shopkeepers going out of business. So while you are correct in the case of our hypothetical example, where goods/people magically double instantaneously, many shopkeepers would no doubt go out of business, in real life such changes are slower and quite routine. (Computer prices are half of what they were two decades ago. Some PC sellers did go out of business, e.g. garage clone-makers. Others thrived. SOP for the overall economy.)

Many economists blame the gold standard for the Great Depression.

But most blame the Federal Reserve Bank (founded 1913 to reduce!! monetary instability) for "putting a penny in the [monetary] fuse box." The was something the late great Milton Friedman wrote about.

"Allowing the state to create paper money is like putting a penny in the fuse box. The resource costs of the penny may be less than the resource costs of the fuse, but the total costs, which take into account the likelihood of a destructive fire, are undoubtedly higher." - Alan Greenspan (who later became a traitor to this sentiment, as we know)

[Doug]

ME:

oh. my bad.

i'll just go back to reading the political cartoons

DOUG
Hey, don't feel like you've been smacked down. I didn't know much about the gold standard until recently either.

[Barbara Fitzpatrick]

Hogeye - while nobody can really control unemployment (except with hiring programs like the WPA and CCC of the 1930s), since Reagan our government has been doing a stellar job of HIDING unemployment. That's when the calculation for what is considered "unemployment" changed to not count in the labor pool anyone in school, mothers of children 5 and under, people who've used up their unemployment benefits, people who are not registered with the state employment division - and to count as employed unpaid volunteers of 10 hours a month and anyone who gets paid for an hour or more work a month. By reducing the labor pool and counting people who aren't actually employed, you can get lovely "under 5%" unemployment rates when reality is more like 20%. I don't know what Keynes was thinking of (unless it was the WPA & CCC of the 1930s).

The government can and has manipulated price levels via the central bank so that is a possibility - should is another issue altogether. I'd say depends on the circumstances - but I've yet to see an American long-range solution to anything and most of the short-range ones are in your "penny in the fusebox" category. But then, I consider 2 generations to be short term. (Like the deliberate use of advertising to turn America from a producer to a consumer society post WWII to prevent the traditional post-war depression. It worked, but it caused, and is still causing, more trouble than it prevented.)

[Hogeye]

Right, Barbara. Other quick fixes (but longer term disasters) for unemployment, in addition to WPA & CCC, are milfare employment in imperial wars and monetary inflation.

How USAmerica went from a producer to a consumer society is a tough question. We can certainly find correlations (e.g. majoritarian democracy with greater time preferrence/low savings rate, more advertising with more consumerism), but its harder to discern the process that causes it. E.g. It's not clear whether advertising causes more consumerism, consumerism causes more advertising, or both are the result of some third factor.

[Barbara Fitzpatrick]

Advertizing, especially TV advertizing, causes consumerism. (Not to be confused with normal purchasing of items necessary for living like basic food, adequate clothing, basic cleaning products - bacon that has to be cooked v precooked, non-refrigerated bacon or water from the tap v flavored, bottled water (or soda for that matter) or jeans v $80+ beatup jeans with the holes already in them.) However, the push was started in that direction as a deliberate post-WWII policy (the Fed determined mass consumerism would prevent the historic depression-following-war syndrome). Somewhere in the early 1960s it passed the point of fiscal responsibility, or even sanity. We've been not just spending but burning capital ever since.