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Re: Our financial solutions are right in front of us if we …

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  • Fri, Jul 24, 2009 - 08:01pm

    Peak Prosperity Admin

    Peak Prosperity Admin

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    Re: Our financial solutions are right in front of us if we …

It is a very good sign that after 60 years of silence, every day people like us, are beginning to challenge conventional monetary theory and practices. 

propamanda said: wrote, Financial Dictionary, Fiat Money – "Money that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves."

Patrick said: Fiat money has no value without the government decrees that enforce its acceptance. Real money holds value regardless of whatever laws call it money or not.

Hamish said: Because how can US dollars be considered money when part of wiki’s definition of money is " is a store of value" as it lost 96% of its value in a single lifetime.

I offer another definition of money that I think is equally accurate: money is an incremental token of value for the exchange of goods and services.

All of these definitions can be supported, so instead of discussing the "correct" meaning we should probably specify what exactly it is that money should do – the definition is really a specification.  For clarity, I am talking about a national currency – there could be alternative currencies used in parallel to the national currency. 

I think we are diverging into two groups that seem to prefer one of the following types of money:

  • Commodity Money should hold intrinsic value, backed by one or more commodities, typically gold and sometimes silver
  • Greenback Money is a medium for exchange, backed by the productivity and assets of the people

I’ve already rambled on enough to bore everyone in this thread supporting the "greenback" system.  So, I’ll shift gears in explaining why I think a commodity backed dollar is the wrong way to go in designing a monetary system.

What’s wrong with a commodity backed dollar?

We have very little gold and silver  – 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 – each dollar would be backed by less than 2 cents of gold. And we have considerably less silver.

It would be very difficult to launch such a system as you would de-value all of our money that is out there already unless you were willing to swap.

We don’t own enough commodities to back up a currency –  First, what other commodities would you suggest to back up the currency?  You would have to buy the commodities by borrowing which makes the system debt based exactly as we have now.

Don’t forget, after we use all of our gold and silver; we would still need to back up the other 98 cents of every dollar?  We would still need over $9.5 trillion more commodities.

How would you assure that the banks are maintaining an adequate amount of commodities? – we’ve been down this road before, it doesn’t work.

Lending money would virtually stop as banks could not leverage with fractional reserves – banks would have to have 100% backing for every dollar they lend, this would stop virtually all lending in crushing the economy.

How would you trade with the rest of the world? – if we, or one country alone, went to a commodity based currency; trading partners would have the benefit of trading a "debt-based fiat" currency against our commodity currency that holds some intrinsic value.  And a commodity based currency would be susceptible to speculative manipulations.

The value of the money would fluctuate with the value of the commodity – if you’re looking for stability, you won’t find it with a commodity system.  Here is an extreme, but real example:  A 1 oz. US Golden Eagle has a legal tender value of $50 but by commodity value, it is worth close to $1,000.

You already free to store your wealth in the commodities of your choice – we may buy gold, silver, uranium, oil, etc., anytime we want if we prefer storing our wealth in that manner.  We don’t need, or want, banks or government deciding how to invest our money.