How would you build a monetary system out of the 5 types of money?

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How would you build a monetary system out of the 5 types of money?

If you were in control of designing a monetary system how would you combine the 5 types of money to ensure a successful monetary system? 

 

Can you identify the types of money we use in our monetary system and how that effects our lives?

 

The five types of money.

1.  Commodity money.  This is a medium of exchange, the units of which are fixed amounts, fexed either by law or custom, of an actual commodity that has value other than as a medium of exchange.  Most people falsely believe commodity money only means gold or silver money.

2. Fiduciary money.  Fiduciary money is a medium of exchange composed of some intrinsically less valuable substance, usually paper or (cotton/linen) which the issuers promise to redeem in commodity money on demand.  The fiduciary money is used for exchanges.  Fiduciary money is based on trust, on the publics confidence that the issuer can be trusted to honor its promise to pay.

3. Fiat money.  Fiat money is anthing that is declared money by law. In the United States all money is fiat money, including all coins and currency issued by the United States Government and including Federal Reserve Notes which are not issued by the government.

4.  Debt money.  Debt money is money that is created as a liability.  A debt based monetary system is an economic system where money is created as a liability to the party issuing the money, or as a debt to the pary receiving the money, or as a debt to both the issuing party and the receiving party.  This form of money is called debt-based or debt money because someone must have a debt for the money to exsist before the money can move into circulation.

5. Wealth money.  Wealth money is money that is created and and spent or exchanged into circulation and is not a debt, liability or an obligation to either the user or the issuer.  The 1792 coinage act is a good example of wealth money and under that law anyone who had some gold or silver, or who dug some gold or silver bullion our of the earth could take it to the United States Mint and have it turned into money free of charge.  The biggest problem with gold and/or silver is that there simpley isn't enough of it on the earth to have it work as a general meduim of exchange.

 

I wrote this posting because I've asked several people how they would design a monetary system everyone said they didn't know enough about money to tackle that question.  If we are going to change our monetary system, just what exactly would we change it to?

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Re: How would you build a monetary system out of the 5 ...

 I think 'wealth money' is the only one that will work in the long run. It is nonsense that there is not enough gold or silver in the world. There is not enough paper in the world to print out all the digital money too. Just go from 1 oz to 1 gram or milligram or nanogram. There will always be enough. If the value goes up, smaller denominations will be available. Follow Hugo Salinas Price system of introducing silver and gold and you will have a change to switch over without disturbing the market place.

 

 

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Re: How would you build a monetary system out of the 5 ...
Thomas Hedin wrote:

If you were in control of designing a monetary system how would you combine the 5 types of money to ensure a successful monetary system? 

The first question to answer in designing a monetary system is, what are the desired properties of money?  The answer is it must peform the following three functions:

1)  Serve as a medium of exchange

2)  Serve as a unit of account

3)  Serve as a store of value

Of the 5 types of money presented above, only the first serves all three of these functions, and the second type is a subset of the first.  Fiat money (#3) does not store value as we all know.  Debt based money (#4) is a subset of fiat money and so it too fails to meet all three functions.  "Wealth" money (#5) can be either fiat or commodity based, so it is a confusing category.  I would say if it is commodity-based, then it passes the three-function test.  If it is debt-based, then it does not.

The idea that "there is not enough gold" (or silver or anything else) to serve as money is wrong.  Any amount of gold is enough - that's what math is for.  As argued by G. Edward Griffin, and I am paraphrasing here, to say there is not enough gold is like saying you cannot measure the length of a football field in miles.  Well yes you can, it's .056818 miles.  It's  just a matter of math and of using small enough quantities.  The beauty about gold is that it is very easy to work with from a measurement/metallurgical standpoint, but even if it weren't, with today's electronically connected world, any amount is possible.

I am not familiar with Hugo Salinas's Price system, but I do believe it would not be very difficult at all to introduce real money (commodity-based) into our system without driving the train off the tracks.  It could be introduced as an alternative currency, while allowing the current sham to continue existing.  Over time, everyone would eventually switch to the commodity based system, exchanging their FRNs for the new money.

The "new money" would consist of Fiduciary money (#2) issued by gold-holding entities, private or public, and insured and audited by private third parties, out of the realm of government.  The only action government needs to take is to lawfully recognize gold and gold-backed fiduciary money (or whatever commodity is chosen - I really can't see anything with better money-qualities than gold however)as lawfully acceptable for receipt of taxes and any other debt, public or private.  The exchange rate between FRNs and the new money would be set by the market.

It really is that simple.

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Re: How would you build a monetary system out of the 5 ...

Hugo Salinas Price's idea is to not 'stamp' any value on coins that contain silver or gold.

When you do this it eventually is worth more as a metal. He had a nice talk about it at the GATA 'Gold rush 21'. If you have bittorent you can download the dvd. It is a really good conference and has a lot of talks about what we are experiencing now. It was held in august 2005, if you see it, you wonder why nothing has been done to prevent the mess we are in because the signs were clear enough.

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Re: How would you build a monetary system out of the 5 ...

Thomas, Brainless and Patrick -

One of the really confusing things about this subject is that there are too many terms and people may not see the same meaning.  The categories are good idea because it does give us some common definitions.

Patrick said:  The first question to answer in designing a monetary system is, what are the desired properties of money?  The answer is it must peform the following three functions: 

1)  Serve as a medium of exchange
2)  Serve as a unit of account
3)  Serve as a store of value 

Good place to start.  Here's my top three functions:

1)  Serve as a medium of exchange
2)  Serve as a unit of account
3) Government should issue and control the money system directly (no treasury borrowing needed) 

The five types of money, I would pick the following:

3. Fiat money.  Fiat money is anything that is declared money by law. In the United States all money is fiat money, including all most coins and currency issued by the United States Government and including Federal Reserve Notes which are not issued by the government.

I think there are some coins in the US that are not fiat coins, and I'd like to keep those.  I'm referring to gold and silver coins (for example, the $50 American Eagle).  You can buy the PM coins through shops and distributors - I do not think they go through the fed.

Fiat money systems get a bad rap in that we almost always think of our current debt money system that goes through private banks.  It is a terrible and exploitive system.  The system I prefer is one whereby the treasury issues all money free and clear from any debt. The private banks could be charged a small amount of interest.  I would also charter state banks to be able to borrow interest free, and sometimes debt free money for building infrastructure.

I am not sure if "fiat" is the best term to use for this system.  I would prefer to call it an "asset backed" currency because "We the People" ultimately back up every penny with our production, assets, and commerce.  This is worth more than gold as it constantly pays dividends.

Larry

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Re: How would you build a monetary system out of the 5 ...
Quote:

3) Government should issue and control the money system directly (no treasury borrowing needed) 

That is not a function of money.  It is merely an origin you wish it to have.

I fail to see how any fiat system can faithfully serve as a store of value.  It does not make any difference if the Fed or the Treasury control the printing presses.  As long as government has printing presses, it will use them at one point or another.

The system you propose puts all the powers of the existing Treasury and the existing Fed into one entity.  That would only serve to further centralize power.  What difference would there be between this and just giving the existing Fed the powers of the Treasury, and scrapping the Treasury? 

The Gold Pays no Interest Myth:

Gold can be lent just like any other asset and interest can be charged so long as there are two willing parties and a free market.

The Fiat Money Asset Backed Myth:

There can be no such thing as fiat money backed by anything.  If it comes off a printing press, it is backed by nothing.  Only money that must itself be produced (labor and capital expended in proportion to the money produced) in order to exist can be said to be backed by anything.  Fiat money does not require labor or capital that is proportional to the money produced.  An extra zero can be added to the printing block to make up for the machine and the guy that runs it.

Store of Wealth

The property of storing wealth faithfully cannot be underestimated.  The failure to provide for this security leads to theft by the government.  It encourages needless speculation.  It devalues the additional effort each person puts forth each day in excess of his daily needs (savings).  It encourages the "bare-minimum" work ethic since savings are pointless.  It encourages spending on pointless things instead of saving for a rainy day or for capital formation. 

 

Larry, I'm with you all the way in your stance against the Fed, which makes your interest in maintaing a fiat-money regime all the more confusing to me. 

 

 

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Re: How would you build a monetary system out of the 5 ...

 

Quote:

Bob Prechter: Gold Is Still Money

 

By Robert Prechter, CMT

Have you ever traveled abroad and taken a look at the local currency and wondered how the citizens of that country could take seriously what looks like “Monopoly money?” I’ve got news for you: You’re using the same stuff. Monopoly money is the money over which some government has a monopoly. It is the currency of the realm only because the state makes it illegal to use any other type.

Promissory notes issued by a state and declared the only legal tender are always doomed to depreciate to worthlessness because of the natural incentives and forces associated with governments. A state cannot resist a method of confiscating assets, particularly one that is hidden from the view of most voters and subjects. By extension, it is unreasonable to advocate a standard for such notes, which is simply a state’s promise that its currency will always be redeemable in a specific amount of something valuable, such as gold. A goldstandard of this type is only as good as the political promises behind it, reducing its value to no more than that of paper. It could be argued, in fact, that a state-sponsored gold standard is far more dangerous than none at all, as it imbues citizens with a false sense of security. Their long range plans are thus built upon an unreliable promise that the monetary measuring unit will remain stable. Later, when the government’s “IOU-something specific” becomes, as Colonel E.C. Harwood put it, “IOU nothing in particular,” reliability disappears and the arbitrary reigns. Although the populace tends to retain its confidence in the currency for awhile thereafter, the ultimate result is chaos.

The only sound monetary system is a voluntary one. The free market always chooses the best possible form, or forms, of money. To date, the market’s choice throughout the centuries, wherever a free market for money has existed, has been and remains precious metal and currency redeemable in precious metal. This preference will undoubtedly remain until a better form of money is discovered and chosen. Until then, prices for goods and services should be denominated not in state fictions such as dollars or yen or francs, but in specific weights of today’s preferred monetary metal, i.e., in grams of gold. Anyone might issue promissory notes as currency, but the acceptance of such paper certificates would then be an individual decision, and risks of loss through imprudence or dishonesty would be borne by only a few individuals by their own conscious choice after considering the risks. Critical to the understanding of the wisdom of such a system is the knowledge that private issuers of paper against gold have every long run incentive to provide a sound product, just as do producers of any product. As a result, risks would be minimal, as the market would provide its own policing. Thievery and imprudence will not disappear among men, but at least such tendencies in a free market for money would not have the potential to be institutionalized, as they are when a state controls the currency. From a macroeconomic viewpoint, occasional losses resulting from dishonesty or imprudence would be extremely limited in scope, as opposed to the nationwide disasters that state controlled paper money has facilitated throughout history, which have in turn had global repercussions. As Elliott Wave Principle put it, “That paper is no substitute for gold as a store of value is probably another of nature’s laws.”

That being said, it is also true, and crucial to wise investing, that markets come in both “bull” and “bear” types. Being a “gold bug” at the wrong time can be very costly in currency terms. For nearly three decades, gold and silver’s dollar price trends have confounded the precious metals enthusiasts, who for the entire period have argued that soaring gold and silver prices were “just around the corner” because the Fed’s policies “guarantee runaway inflation.” Yet today, 29 years after the January 1980 peaks in these metals and despite consistent inflation throughout this time, their combined dollar value (weighting each metal equally) is still 40 percent less than it was then.

It is all well and good to despise fiat money, but it is hardly useful to sit in gold and silver as if no other opportunities exist. In contrast to the one-note approach, which has had an immense opportunity cost since 1980, competent market analysis can help you make many timely and profitable financial decisions in all markets, including gold and silver.

For more in-depth, historical analysis and long-term forecasts for precious metals, download Prechter’s FREE 40-page eBook on Gold and Silver.

Copied from:

http://inflationdata.com/Inflation/Gold_Investment_Articles/Gold_is_stil...

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Re: How would you build a monetary system out of the 5 ...

Patrick,

For what its worth, I think you have made some cogent and compelling arguments. I'm totally with you on this. I wish I understood all of this better, but what you have written rings true.

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Re: How would you build a monetary system out of the 5 ...

Patrick said:  I fail to see how any fiat system can faithfully serve as a store of value.  It does not make any difference if the Fed or the Treasury control the printing presses.  As long as government has printing presses, it will use them at one point or another.

I don't think money has to serve as a store of value, it is well enough if the money represents value to facilitate commerce.  Let's say we had enough gold to back our money, would you directly use the gold/silver in coins?  If you use paper money as a token representing gold in a stored in a vault, would the money be redeemable in an equal value of gold?  If you can't redeem your money with gold of equal value then what value does it hold - other than representing value? 

I don't think we need gold (PMs) to back our national currency and I don't see how it would be possible - the US may have as much as 5,200 metric tonnes of gold. At $1,000/troy oz, that works out to be around $167 billion.

Is $167 billion enough? Not even close when you consider that our 2005 M1, M2 combined was $9.7 trillion. By these numbers, our $167 billion would back up the money with 0.02% value of gold - each dollar would be backed by less than 2 cents of gold.  How can this low of a percentage be considered a "store of wealth"?

Patrick said:  There can be no such thing as fiat money backed by anything.  If it comes off a printing press, it is backed by nothing. 

I disagree.  "We the People" are backing our currency right now.  If it fails, we will lose wealth and collateral even though the fed and banks create almost all of it for free - for profit, at our expense.  We back up our money with our production, infrastructure and commerce.

I am not suggesting that the Federal government take control of all our monetary policies.  For example, I would still want banks in the business of lending, but instead of going to the non-fed, they would come to the treasury.  Only qualified lenders should be given loans as determined by the banks, and the loans would be backed by collateral of the bank and the lender.

I would not allow the treasury to print when and whatever they want.  Any money they spend, should be appropriated by congress and limited by a balanced budget regimen.  

States should be able to charter banks to lend money without any interest (from the treasury).  This would help de-centralize the system by allowing states to build infrastructure as they deem fit.  For example, a $100 million mass transit system must show a projected cash flow that exceeds the amount of the loan payments.  In this way, the project acts as it's own collateral and establishes value to the currency.

I'm sure some tweaking would be needed, but overall, I think this would work.

Larry

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Re: How would you build a monetary system out of the 5 ...

 

 

Larry wrote:

I don't think money has to serve as a store of value, it is well enough if the money represents value to facilitate commerce.

I would call what you are referring to as paper-money backed by gold.  That is Category #2, Fiduciary money, as defined by Thomas.  These are nothing more than receipts for the actual money - gold (or whatever commodity is used).  As long as there is Rule of Law that enforces contracts (such as between the warehouse - aka the bank - and the depositor), this type of money runs a very good chance of working.  Corruption would be limited in scope to those cases where banks might cheat their depositors.  No system is immune to corruption, but one that is decentralized is able to survive it and minimize its impacts.  Our current centralized system of banking puts all our eggs in the Fed & Treasury baskets.  I assume I do not have to point out the corruption our current system suffers from and how instead of affecting a few unlucky depositors (who would at least have recourse in the law), it affects an entire country which has no recourse whatsoever because the corrupt actions (money-printing) are in fact legal!  The article by Prechter I posted above lays this out as well as I can imagine it could be.

Quote:

Is $167 billion enough? Not even close when you consider that our 2005 M1, M2 combined was $9.7 trillion. By these numbers, our $167 billion would back up the money with 0.02% value of gold - each dollar would be backed by less than 2 cents of gold.  How can this low of a percentage be considered a "store of wealth"?

Why not re-issue a new currency that is 100% backed by something that was actually produced then?  Or, why not make gold worth whatever it has to be to back all our FRNs?  It wouldn't even be necessary to go that far.  The government could make gold lawful tender for payment of taxes and all other debts.  The markets would then decide on what the true value of gold is, and receipts for gold would be issued by any bank with whom one held gold with.  Those receipts could be used as the "real thing" - money -  as long as we maintain a country ruled by law and not one ruled by men.

Quote:

 I disagree.  "We the People" are backing our currency right now.  If it fails, we will lose wealth and collateral even though the fed and banks create almost all of it for free - for profit, at our expense.  We back up our money with our production, infrastructure and commerce.

I couldn't disagree more.  "We the people" have no ability to back up our money.  Whoever controls the printing presses does.  They control our money and our destinies insofar as how far into slavery we will be indebted.  The solution is to make printing presses useless by using a money that is backed by something that cannot be printed or in any other way "willed" into existence.

I don't care what element we use from the periodic table!  I'd be in favor of mercury if it wasn't poisonous and wasn't a liquid at room temperature.  I'd be in favor of lead if is wasn't so soft.  I'd be in favor of copper if it didn't decay (tarnish).  Just pick one!  I happen to think gold has the best qualities for the purposes of being used as money.

 

 

 

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Re: How would you build a monetary system out of the 5 ...
DrKrbyLuv wrote:

  If you use paper money as a token representing gold in a stored in a vault, would the money be redeemable in an equal value of gold?  If you can't redeem your money with gold of equal value then what value does it hold - other than representing value?

 

There are only 3 certainties in life....

Death

Taxes

Governments will debase their own currency.

 

In Roman times the government reduced the thickness of gold coins they minted, then the diameter then the gold percentage...

Paper money backed by gold is not a store of value. Look at the US dollars purchasing power since the fed got involved........

 

The only thing we have Lent from history is that we don't learn from history

 

 

 

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Re: How would you build a monetary system out of the 5 ...

 

gyrogearloose wrote:

There are only 3 certainties in life....

Death

Taxes

Governments will debase their own currency.

 

In Roman times the government reduced the thickness of gold coins they minted, then the diameter then the gold percentage...

Paper money backed by gold is not a store of value. Look at the US dollars purchasing power since the fed got involved........

 

The only thing we have Lent from history is that we don't learn from history 

I couldn't agree more.  That is why government shouldn't issue coins or paper money backing coins.  They should only enforce Standards and Measures which private banks that issue their own receipts for gold, or mint their own coins, must follow.

Decentralize risk and decentralize the power to act corruptly so that when corruption happens, its effects will be minimized, localized, and be prosecutable.

The Founding Fathers wrote a negative document, not granting government powers, but restricting the extent of the powers it could have.  It's time we add money creation, control, and issuance in any form (printed, minted or otherwise) to the list.  They can use their friendly neighborhood bank, just like the rest of us.

 

 

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Re: How would you build a monetary system out of the 5 ...
Thomas Hedin wrote:

If you were in control of designing a monetary system how would you combine the 5 types of money to ensure a successful monetary system? 

 Can you identify the types of money we use in our monetary system and how that effects our lives?

 The five types of money.

1.  Commodity money.  This is a medium of exchange, the units of which are fixed amounts, fexed either by law or custom, of an actual commodity that has value other than as a medium of exchange.  Most people falsely believe commodity money only means gold or silver money.

Thomas, rather shakey here?? Commodity money is not money at all the way I see it. The value of an item traded (especially in barter) is based on how much a certain person desires to possess that item. That is not a definition of money by any stretch, is it?

Money can be defined as the most common medium of exchange or something that functions as legal tender in common exchanges. That nice belt buckle you are wearing might be worth something to one guy but worth absolutely nothing to the next. Commodity money, other than PMs which hold common value, seems rather elusive to me.

Quote:

2. Fiduciary money.  Fiduciary money is a medium of exchange composed of some intrinsically less valuable substance, usually paper or (cotton/linen) which the issuers promise to redeem in commodity money on demand.  The fiduciary money is used for exchanges.  Fiduciary money is based on trust, on the publics confidence that the issuer can be trusted to honor its promise to pay.

Pay what? Are we into gold and silver? Yup, I guess.

"By the late 18th and early 19th centuries paper money and banknotes had spread to other parts of the world. The bulk of the money in use came to consist not of actual gold or silver but of fiduciary money—promises to pay specified amounts of gold and silver. These promises were initially issued by individuals or companies as banknotes or as the transferable book entries that came..."

http://www.britannica.com/EBchecked/topic/206128/fiduciary-money

That is certainly a form of money.

Quote:

3. Fiat money.  Fiat money is anthing that is declared money by law. In the United States all money is fiat money, including all coins and currency issued by the United States Government and including Federal Reserve Notes which are not issued by the government.

Simply not true.....Fiat money:

Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves.

http://www.investopedia.com/terms/f/fiatmoney.asp

Some of the money in the US has intrinsic value. Many gold and silver coins and also collectable bills.

Quote:

4.  Debt money.  Debt money is money that is created as a liability.  A debt based monetary system is an economic system where money is created as a liability to the party issuing the money, or as a debt to the pary receiving the money, or as a debt to both the issuing party and the receiving party.  This form of money is called debt-based or debt money because someone must have a debt for the money to exsist before the money can move into circulation.

Yep, although this is not really a separate type of money from fiat, is it?

Quote:

Wealth money.  Wealth money is money that is created and and spent or exchanged into circulation and is not a debt, liability or an obligation to either the user or the issuer.  The 1792 coinage act is a good example of wealth money and under that law anyone who had some gold or silver, or who dug some gold or silver bullion our of the earth could take it to the United States Mint and have it turned into money free of charge.  The biggest problem with gold and/or silver is that there simpley isn't enough of it on the earth to have it work as a general meduim of exchange.

 Yes there is enough gold and silver around. If it becomes limited, it's value would simply go up regardless of the amount in circulation and coinage would contain less gold/silver but be worth more. Isn't that economics 101?

You obviously are very intelligent and into this subject. So we'll see where this goes with a devil's advocate role. I enjoy your mind games and suspect I will learn from you.

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Re: How would you build a monetary system out of the 5 ...

 

I would take it a step further and NOT have a money system.  This would help end the worry about taxes, interest rates, bonds, stock markets, recessions, depressions, resource wars, housing payments, car payments, tuition, child care, petty crimes, and many more.

 

If we let the real engineers 30-40 yrs ago create the Car that got 100 mpg and lasted 50 yrs we would not be worried about peak oil today, but again the Money system did not want that, funny how it does now.  End money for our survival.  

 

 

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Re: How would you build a monetary system out of the 5 ...

Patrick - Let me start with some agreement.  As I said in post #4, "I think there are some coins in the US that are not fiat coins, and I'd like to keep those.  I'm referring to gold and silver coins (for example, the $50 American Eagle)."  If you want to add coins made of copper or other materials of value, that's fine by me.  These coins should be available by purchase, to anyone who prefers them over paper money.

I'm against having paper tokens represent the value of precious metals or other commodities as this process has been thoroughly scammed through the ages.  Our fractional reserve system evolved from the money lenders who did not keep a full amount of silver and gold on hand.

Patrick said:  I couldn't disagree more.  "We the people" have no ability to back up our money.

"We the People" are backing our money right now and we will have hell to pay when the system collapses.  The bail-out was nothing more than moving liabilities from the private to the public sector.  Our social security, medicare, insurance policies, pension plans, IRAs, 401-ks, etc, will all vanish in a collapse - we are seeing them erode through our current crisis but thats just the tip of the iceberg.  Every dollar that the private banks and non-fed create for profit are ultimately secured by us.

Patrick said:  Whoever controls the printing presses does. They control our money and our destinies insofar as how far into slavery we will be indebted.

I agree and suggest that this is exactly why our constitution states that only congress, through the treasury, has the power to issue and control our currency.  They knew the private central banking fraud had taken root in the UK and elsewhere and that these parasites would connive to get their suckers on us.  

Unfortunately, the government has become as fraudulent and criminal as the central bankers.  How do we tame the beast?

I think that government spending must be put in check via a constitutional amendment that stipulates that the federal government must not spend more than it takes in.  I would also include in that amendment, that the US should move to the accrual basis of accounting so that our current and future liabilities are clearly part of the budget.

The treasury should be responsible to make money available to banks and the government.  If the government needs money, they should get it through congress in accordance with established balanced budget formulas.  

We agree that centralized control should be avoided as much as possible.  States should be allowed to charter banks that have the authority to issue money through the treasury without interest charges, and in some cases, without debt.  States could use this as a way to fund infrastructure and mass transit.

Private banks could borrow money from the treasury with a modest rate of interest (eg 1.5%).  This would be a huge source of revenue that would more than offset the need for federal income tax which should be promptly eliminated.

"The government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity. The financing of all public enterprise, and the conduct of the treasury will become matters of practical administration. Money will cease to be master and will then become servant of humanity." - Abraham Lincoln 

This is probably the most powerful statement about money that has ever been made.  Lincoln realized that creating money was a country's greatest creative opportunity.  The central bankers fear this greatly as it would quickly put them out of business.  After Lincoln issued his "greenbacks" the following article ran in the London Times:

“If that mischievous financial policy, which had its origin in the North American Republic, should become indurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without a debt. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of the civilized governments of the world. The brains and the wealth of all coun­tries will go to North America. That govern­ment must be destroyed, or it will destroy every monarchy on the globe.”

Larry

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tomaquet
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Re: How would you build a monetary system out of the 5 ...

Any monetary system has to match the goods and services in the economy which fluctuate with time. A gold-based (or any relatively-fixed-amount commodity) system is not flexible during economic booms or recessions. In a boom (or any growth period), as more goods and services become available, prices will have to drop but so too will wages. It has been shown repeatedly that workers are incredibly reluctant to accept this, partly because debts become un-repayable. The gold standard also creates difficulties for any government that wants to raise revenue for long term investments.

However the main problem of commodity based systems are still susceptible to manipulation by both private investors and centralised governments (although not as much as the current system). If a large part of the commodity is accumulated (by either private or government) then the public can be held to ransom for the use of their commodity to exchange their goods and services. True democratic liberty will only come when the monetary system is liberalised such that no one (neither private nor government) can manipulate it. Decentralised credit and finance networks have recently become technologically feasible and more commonplace using systems such as LETS, complementary currencies, mutual credit clearing circles, commercial “barter” exchanges – all methods used for reclaiming the “credit commons” (to use a phrase coined by Thomas Greco, whose recent book “The end of money and the future of civilization" I highly recommend by the way).

http://www.amazon.com/End-Money-Future-Civilization/dp/1603580786/ref=sr...

 

 

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jneo
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Re: How would you build a monetary system out of the 5 ...

 

The End of Money, sound like a good read to me.  I'll check it out.  Sounds like a book that describes a Resource Based Economy just by the Title.   I think it will take a complete collapse of our current system to realize that major serious change is needed.  One that has concern for human beings and the carrying capacity of the earth.  A new system with no planned obsolescence, real sustainability, and efficiency and intelligent redundancy built in and stop paralyzing helpful technology.  Our current profit structure prevents all those things that HELP humanity.  Time to update our system.

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Farmer Brown
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Re: How would you build a monetary system out of the 5 ...

 

tomaquet wrote:

Any monetary system has to match the goods and services in the economy which fluctuate with time. A gold-based (or any relatively-fixed-amount commodity) system is not flexible during economic booms or recessions. In a boom (or any growth period), as more goods and services become available, prices will have to drop but so too will wages. It has been shown repeatedly that workers are incredibly reluctant to accept this, partly because debts become un-repayable. The gold standard also creates difficulties for any government that wants to raise revenue for long term investments.

Flexibility

The argument behind the flexibility of any commodity based money is that its production will naturally go up when the costs of production drop below the proceeds of production.  Put another way, if it costs an ounce of gold to extract an ounce of gold, there would be no point in mining gold.  In a static economy, there would be no gold production, and it wouldn't be needed since there is no increase in goods and services.  If goods and services increase and prices for labor and everything else go down, then it would cost less than an ounce of gold to produce an ounce of gold.  Before or very close to that even happening, gold miners would realize it and mine more gold, as it is there business to keep a very close eye on this, and make a nice profit doing so.  That is the fundamental argument for any commodity-based money system and so far, none of the fiat-money-sters have been able to defeat it as far as I know.

Booms and Busts

I think the hallmark of a great monetary system would be one that avoids booms and busts.  Slow but steady would be my preference over the roller coaster ride that's been our reality for the past 100 years or so.  Each and every one of these roller coaster rides has been caused by a misreading of the monetary fig leaves by our grand wizards at the central bank.  The reason I like commodity-based money is that it takes the fig-leaf reading out of the equation.  Gold miners may make a mistake on reading deflation now and then, but if they do, then they won't sell until the price grants them a profit, hence the money does not enter the system until the market, by deflating enough, tells it to.

Wages

Workers wouldn't have to accept lower wages, but their pay would definitely not increase the way it does under fiat money regimes.   The reason wages would not decrease due to deflation is because commodity production would kick in the moment deflation kicked in, or possibly before, as explained above.

One Flaw

There is one flaw in all this, and that is, what happens when we've mined all the gold, or when gold has become so hard to find that it really does require deflation to take hold in order for the production of gold to be worthwhile.  I don't know what the official gold-argument answer to that is, but in my view, another commodity, such as silver could start being used as money, concurrently with gold.  The exchange rate would always favor gold as there would never be anymore of it produced, and it would be unfavorable to silver, as there would be more of it with each passing day, but as long as one is fixed in supply, that shouldn't matter.

Decentralization

With regards to your second paragraph, and you admitted this yourself, I can hardly see how the current system is any better.  I think there are ways to decentralize gold, and gold is very amenable to decentralization, because nobody "makes" it, and it's all the same.  Private gold accounts could be held anywhere in the world, and debited electronically through a plastic card without regard to country of use, or coin minting.  That is, I think it would be better if gold (or pick your commodity) was acceptable everywhere in its raw form.  In any case,  I totally agree we need to move to a decentralized monetary system.

 

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tomaquet
Status: Martenson Brigade Member (Offline)
Joined: Oct 7 2008
Posts: 16
Re: How would you build a monetary system out of the 5 ...

I think it is a stretch of the imagination that discoveries in gold would always match the increase in goods and services. What would happen when the economy shrinks? A certain amount of gold would be set aside and excluded from being used as money? I don’t follow the argument about miners not selling gold in deflationary times if the gold has already been sold.

Granted in a steady state economy this would not be a problem but I am not convinced that such an economy can exist. Not all bubbles and busts (or growth and decrease) in the economy are caused by the monetary system. There are plenty of economic theories which suggest that growth and decline are inherent and unavoidable (e.g. business cycle, financial instability hypothesis and irrational exuberance). Obviously our current monetary system greatly increases the bubble and bust affect. It is likely that all complex adaptive systems have this fluctuation as part of their natural dynamics. Neo-classical economics is greatly flawed in supposing equilibrium theory is valid. Heterodox branches of economics acknowledge this weakness (such as evolutionary economics or ecological economics). As a practical example, George Soros made a career (and a stack load of cash) by refuting equilibrium theory.

My argument about workers accepting lower wages was obviously contingent on the assumption of a fixed amount of commodity. Again, I’m not sure how you can add additional commodities to the “money supply”. Your argument supposes that as goods and services increase, at some point there is no more gold left and so suddenly you include another commodity (like silver) in the money supply. So now all gold and silver is accepted as currency. This seems like an extreme shock to the system with such a huge influx of a given commodity.

However, my main problem with using commodity based money is the fact that the system of interchange of goods and services is centralised to those that have the gold. Given a group of traders that only want to trade among themselves in a closed circle, why do they have to pay (with some of their goods and services) those that currently have the gold to exchange their products? True liberalisation can only come from allowing everyone access to exchange their goods and services without the need of a third party.

Karl Polanyi (in “The Great Transformation”) says that capitalism’s greatest failure is to treat money (and land) as a commodity when in fact it is information. I believe a hierarchical system of complimentary money systems is the best way of creating resilience in the economic system such that if one system receives a shock, other monetary systems can continue without greatly affecting the economy.

 

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