However, based on my findings, replacing it wouldn't be as hard as people might think. To understand this, we must first examine what money is, and it's origins.
How did money originate?
Money originated on the market, just like any other good or service.
In the early days, man bartered for what he wanted. Clearly, this had some problems:
1) Barter requires that someone has the good that you want, while you have what they want. You two also both have to have the proper amounts that the other one wants.
2) The "indivisibility problem": It's awkward trading goods that can't be easily broken up, such as a finished house or a car.
3) The "business calculation problem": It's hard to calculate profit. If I trade 5 apples for 1 steak, that may or may not be a fair trade.. it's hard to tell. However, if I spend $1 to produce a bushel of apples and I sell it for $5, I make a $4 profit. Clearly, I have gained from doing this.
So in order to deal with this, man had to come up with a good that could be the medium of exchange. Something that could be traded for goods, and then passed on to be traded for other goods.
What enables something to become money?
Various forms of money originated as commodities that had use to people.
Historically, this was something that had value in its own right: tobacco, nails, copper, seashells, grain, beads, tea, beaver furs, salt, and other things have been used.
Gold and silver eventually rose as the dominant commodities that served as money. This was due to their luster, scarcity, and versatility.
Gold and silver have other uses besides money. They can be made into jewelry, ornaments, used in dental work, and as conductors in circuitry.
Contrast this with our dollar bills, that you can't do anything with except spend. They're not very absorbent, they already have writing on them, and they have no other identifiable functional purpose.
When something becomes generally accepted by society as being valuable (as gold and silver did), it can be used as money. This then has a snowball effect. A few people exchange gold coins for goods, those get exchanged for other goods, and thus more gold coins become more desired.
Stock prices and various currencies can fluctuate, gyrate, and can become worthless.
When was the last time that gold or silver was worthless? Thousands of years ago.
How is money defined as units?
Usually by size or by weight.
Coins with rulers' faces on them were used for centuries.
The British "Pound Sterling" is named as such, because it was based on a pound of sterling silver. A paper note could be taken to a bank, and exchanged for that amount of the metal.
The American dollar used to be defined as $20.67= 1 ounce of gold.
In other words, if you carried this amount of money on you, you could go to a bank and get an ounce of gold for it.
People often "this money is backed by gold and/or silver".
This is actually backwards: The currency is a measurement of the amount of precious metal.
$20.67=1 oz of gold, is like saying 12 inches=1 foot.
Coins were originally exchanged, until it was decided that paper money was more convenient, lighter, and attracted less attention to robbers.
The original purpose of banks
Banks originally served as a warehouse for gold and other precious metals. People could leave their goods under lock and key, knowing that they were protected.
With the advent of paper money, this became where people could exchange their notes for precious metals if they wanted them.
Why did we go off gold and silver?
I talked about this in my blog about the Federal Reserve, but I will restate it here.
As stated above, the dollar was originally demoninated as $20.67 per 1 oz. of gold. This was the case from the 1800's (with a temporary break during the Civil War), till 1934.
During the Great Depression, President Franklin Delano Roosevelt decided that the tie to gold was restraining credit expansion. With less money to loan out, this meant higher interest rates, and not as much lending. It was believe by many, that this was preventing the economy from recovering.
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| President Franklin Delano Roosevelt |
To deal with this, FDR decided to issue an executive order which seized the public's gold and placing it in Fort Knox, making it illegal to hold gold (except in small amounts such as jewelry) until the 1970's.
The parity was now changed to $35 per 1 oz. of gold. Since the public couldn't hold gold in substantial amounts , this gold was only avalable to foreigners redeeming American dollars.
In 1971, Richard Nixon severed the link to gold entirely, allowing the Federal Reserve to print dollars at will. The US now had fiat currency, or that is currency printed out of thin air.
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| President Richard Nixon |
Where this has lead us today.
We have a dollar that lost about 98% of its value, not to mention a widening income gap.
The Federal Reserves balance sheet (the amount it has in reserves) has expanded from over $700 billion to about $4 trillion in this last few decades.
Just ask yourself this for a minute..... Who has the money the Federal Reserve created gone to?
Poor people?
The widening income gap can hardly be blamed on "greed" (I never get why people say this, because greed has existed since the dawn of mankind.), "capitalism" (which has been dead for over a century), or "speculators" (They're always there.)
I heard something recently, which everyone should consider:
"As long as government holds a monopoly over the money creation and supply, a free market can never exist."
What do we do about all of this?
The Federal Reserve and US mint need to be shut down, and the Fed's balance sheet eliminated.
The amount of money in circulation and banks will stop at the amount it's at.
Don't we need the government to print more money to keep the economy going?
No. As David Ricardo argued centuries ago, any amount of money is optimal.
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| Classical economist David Ricardo |
The first law of economics is this:
"Resources are limited, but human desire is infinite."
There is no way around this. Printing pieces of paper and spending them doesn't produce more steel, gold, water, land, etc. It just depletes them faster, hence the rise in prices with more money printing.
If the amount of money stays the same, prices and wages will adjust in accordance with spending, savings, and production. If goods are scare, prices will rise, and then fall as more are produced.
The wealthy citizens will still have a lot of money without the Fed, but they will have to invest what they have to gain more. And without the Fed to loan them more, they will have to invest it in lines of production, rather than the stock market, which is a major bubble waiting to burst at this point.
Regardless of which economic school of thought you subscribe to, (You can refer to my other blog: "What causes economic booms and recessions?" if you want an overview.) this will get the economy going.
Wealthier people will have to spend and invest, rather than just gamble on the stock market with money from the Fed. I often hear about "greedy people hoarding their money", but that makes little sense. If people aren't consuming their fortunes, they are investing them to see a return.
Competition in money
Money should once again return to its proper role as a commodity emerging on the free market.
The Legal Tender laws should be repealed. The US dollar could stay the de facto currency for now, but there should be nothing stopping from new currencies emerging. If those currencies become popular enough, the dollar could even be scrapped entirely.
Various precious metal companies could start minting their own coins. If celebrities wanted to purchase metals and produce coins with their own image, they could do that too. The value of those coins would be determined by the price of the metals that they're made of, denominated in US dollars. If the new money starts to be used commonly in circulation, vendors can just convert their prices in dollars to the amount of the new currency.
How will the government pay it's bills?
Government taxes, borrowing, and spending need to be cut dramatically. (This is a whole other discussion in of itself.)
The government can still be paid its dollars through taxation. If a certain commodity based currency becomes commonplace, it can use that instead. Gold and silver is valuable throughout the international community.
The US Dollar was originally made the World's Reserve Currency because the most gold was held here.
Won't counterfeiting be a problem?
The risk is there, but it's less of a problem in a freer market. Here's why:
Monarchs have debased their currencies for centuries. It was in fact, common for a monarch to melt down the coins in the royal treasury upon coming to power, because then junk metals could be mixed in. The coins would then be reissued with new ruler's image. This would create more money for the sovereign, which he could spend accordingly. This subsequently drove up prices, which could promptly be blamed on the usual scapegoats. Nobody was the wiser, except those near the top of the power structure.
The reason that this would be less of a problem in a freer market, is that there would be competing currencies, and everyone would want to have the most valuable currency.
Intelligent producers would clearly label the weight of the metal on the coin. Standards mean something. Just as how paper comes at a certain size for printers, screws are made to a standard size, meat is sold in certain quantities, etc. The same is true of precious metals made into money.
Damaged coins or random pieces of the metal wouldn't be accepted by most people.
Another guard against debasement is "milling", which is inserting ridges into the edges of coins. (Take a look at a quarter that you have.) This was because people used to grind down the edges of the coins, save the clippings, melt them down, and reuse the metal. The ridges are to prove that this hasn't been done.
It would be in the interest of the producer to put out a legitimate product, lest something else takes its place. Just as lousy food producers are put out of business because people say no, and flock to another one.
There could also emerge evaluation agencies similar to credit rating agencies (like Moody's, or Standard and Poor's) which could evaluate different currencies, and advise people on which currencies are the best to hold. Like investment advisers, they would have an economic incentive to steer people in the right direction.
The agencies could employ experts, who could identify if the money has been tampered with. And since there would most likely be more than one agency doing this, fraud would be easier to find out.
Could the ratings agencies be fraudulent themselves?
It would be very hard to expensive to buy off a multitude of rating agencies, and each one could make their findings readily available.
Similar to how you can view different ratings on a product online, on a website such as Amazon or "Rate your doctor".
The competition amongst the agencies would keep each other honest too, since people could just patronize other agencies if some seemed dishonest. Again, there's a financial incentive to please the customers.
What would determine the exchange rates of currencies versus goods and each other?
The rates would reflect the various supply and demand factors in the market.
There could be an application available on a phone, which would show the exchange rates of the private currencies. That already exists for the prices of stocks, gold, oil, etc. This data is easily accessible via computer too.
Let's say that I want to produce coins, based on the current precious metal prices. For example, if I want to produce "Gold Kirschners" which would weigh 1/16 oz. of gold each, they would each be worth about $75. I could produce "Silver Kirschners" which would weigh 1 oz, and be worth about $17 each. I could produce "Copper Kirschners" which could weight 1 oz, and be worth $0.18 each. People could come to me, and buy them the desired amount.
I would have an incentive to produce enough to earn a profit, but if the price of metals falls, I stop. I only produce them if I can make a profit.
When precious metals are mined, the metals are not all shipped out immediately. The mine owners have an incentive to get the best price they can, based on supply and demand at present. If the price of gold starts sky rocketing, more metal is produced in order to cash in on the opportunity. The increased supply puts a downward pressure on the price. When the price falls lower and lower, less is produced. As more and more people buy the metal, the price starts to go up again. Production then resumes.
This is the beauty of precious metal based currencies: They retain or even increase in value over time. If people want more of them, more has to be produced, but not so many produced that they become worthless. This then also compels people to produce more goods in order to get the more valuable money.
The Gold Standard of the late 19th century was responsible for an era of prices falling dramatically, relative to wages. This improved the standard of living for the ordinary person, dramatically.
Could other paper currencies be issued?
They could be, but what incentive would there be to use them?
If I print a series of "Paper Kirschners", and denominate each one as being $1, what can I do with them?
If I walk into a store, and offer it as money, people will think that I'm crazy. People will have no idea who I am, and the currency won't have value elsewhere unless enough people want them. And why would people want them? The only value they have is in my head.
The only other way I would see pieces of paper being valuable, would be if they could be redeemed for precious metals or another commodity. This has been done historically, i.e. tobacco receipts, hemp receipts, or grain receipts. Issuers of the receipts would be required by law to redeem the receipts on demand, or else be arrested for fraud.
I suppose that this type of system is a possibility, but I'm not sure. It would depend of what the people wanted.
Conclusion
Restoring sound money that has real value is one of the keys to getting our economy back on track, and restoring freedom in this country.
Thank you all for reading! Hope that you enjoyed it!
- STK
