http://en.wikipedia.org/wiki/Aluminum#Production_and_refinement
According to Wikipedia, aluminum was once a precious metal more valuable than gold before the discovery of a new refinement process.
What would happen to a free society that used gold as money if a new process was discovered that allowed for gold production at a tiny fraction of its current cost? A new substance would probably be adopted over time, but at a disastrous cost to the economy.
Is this a reasonable argument for fiat money?
Indeed it is. I am personally against tying the money supply to a mineral; no matter how valuable it is. The problem with fiat money is that new denominations of money exists aside the paper notes and there are restrains on its supply. I think this is far easier to control than to mine Gold. A monetary policy should be written in the Constitution to properly finance the Nation's prosperity.
For that reason I was considering in another post to back the money supply not only with gold, but also with oil or with a basket of commodities locally produced by an economy.
My country's currency just got rid of 3 zeros on January 1st, 2008. Another example of a fiat failure.
I am also very wary of changes in constitutions. They are designed, in today's political processes through Constituent Assemblies, to maximize Government power with the excuse on behalf of the people.
Art transcends ideology.
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I agree with you. But my argument is that fiat money problem is its supply. We have this problem due to the way we do banking; fractional lending and fiat=debt. If you remove this you 100% control over your money which can also compete with gold or any bascket of valuable resourses.
I have an idea: how about, you know, we let the market decide? There is absolutely no argument for fiat money though if one construes that as FRB plus central banking, unless impoverization is one's aim.
-Jon
To darkness I condemn you...
Harksaw: According to Wikipedia, aluminum was once a precious metal more valuable than gold before the discovery of a new refinement process.
According to wikipedia, aluminum is also the most abundant metal in the earth's crust. It was just previously hard to get at. No such problem for gold, until the alchemists figure out how to make it from lead.
That's why its better not to dictate what money is, period. No money is ever going to be perfect, so the freedom to use anything is the best defense against the imperfections of any monetary system. Currently gold is about the best we got.
With fiat, you can put all the rules into place that you want, but it is exceedingly difficult to thwart counterfeiters, or the spontaneous decision of government to break their own rules. Or in this day and age, prevent tampering with the electrons that store all our wealth. Gold isn't perfect, but fiat is a disaster.
Perhaps a positive consequence of the current crash is that our proposal for going back to a gold or commodity standard will eventually spread to wider audiences.
For starters, politicians won't consider this "anachronism" because their unlimited spending power would be surrendered. They will make sure to hold even more power during their clique Bretton Woods III to be held soon.
I also believe that fiat is a disaster. Look at Zimbabwe's 100 million dollar bills.
I do think that there's a good deal of risk in having all your money backed by a single commodity. That said, I'd still take that over a fiat system. I think a free market would provide ways to diversify the risk; offering currencies backed by many commodities, instruments to hedge against devaluation, etc.
Has any of the scholars at the Mises organization already come up with a proposal for that "basket of commodities" that could replace the fiat system, so that it can be shared with us?
I also feel there is risk in having all the money backed by either only gold, or only oil, or only fiat or only anything else.
If gold were to experience such a swing, it would likely be abandoned as money by the free choice of individuals. This is not so much an argument for fiat as it is for a different commodity. Another commodity would quickly replace it. Yet, this is doubtful to happen to gold because of its rarity and its inability to be artificailly created in an economical manner...if at all.
If fiat were to experience such a swing, it could not be fully abandoned, being the sole legal tender and means to pay taxes. Thus, you would have greater transactional costs as people attempt to convert between fiat and wealth-preserving alternatives, especially if such alternatives are outright illegal.
Fiat's everyday failure is not its fiat nature, but simply that it is a fool's backstop against the credit contractions that are inherent in fractional reserve or artificial credit systems. Even commodity money like gold cannot work well under such a system, as its market value is altered by its unbacked substitutes. Its extreme failure is hyperinflation, which can occur with or without fractional reserve banking.
The main advantage of gold over fiat is the assurance against counterfeit and reckless debasement by governments. Plus, because fiat is tied to government where free money is tied to individual choice, gold can become a standard global money while fiat requires either high-level government collusion or is not truly global money.
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meambobbo:If gold were to experience such a swing, it would likely be abandoned as money by the free choice of individuals. This is not so much an argument for fiat as it is for a different commodity. Another commodity would quickly replace it. Yet, this is doubtful to happen to gold because of its rarity and its inability to be artificailly created in an economical manner...if at all.
meambobbo: Yet, this is doubtful to happen to gold because of its rarity and its inability to be artificailly created in an economical manner...if at all.
Granted, such a thing might never happen and gold might still take the same amount of effort to obtain 1000 years from now.
Harksaw:A new substance would probably be adopted over time, but at a disastrous cost to the economy.
Disastrous cost? Nonsense. Gold would devalue, life would continue.
There are no guarantees in life. Risk is a feature of every action, even those that we fool ourselves into believing are risk free, like holding money.
Julio:A monetary policy should be written in the Constitution to properly finance the Nation's prosperity.
No, the government should stop forcing people to use the money it wants them to use. No legal tender laws. No Federal Reserve Note. Just freedom of exchange and free market money.
But don't worry, the US Government will have failed and the US Dollar devalued long before Alchemists turn lead into gold.
Harksaw:Wouldn't the sudden reduction in the value of money and switch to another commodity mean that those who held enormous fortunes in gold would become poor overnight? Or are you just saying this is an acceptable alternative to the current situation?
The gold's purchasing power would diminish over the period of inflation, yes.
However, if such a technique more quickly mined ALL the gold from the Earth (or enough to return to a low inflation rate [peak gold?]), then gold would function EVEN MORE RELIABLY as a money at that point.
...until there is an economical means of turning lead into gold or some other alchemy, which could be possible in the future.
But in a free market, there are means of insuring against such things, diversifying holdings and predicting such changes. And without the speculatory manias of cheap credit through central bank artificial credit, stock in productive capital is a more reliable means of preserving wealth.
EXACTLY!
Let the market decide.
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