fiat sans usury

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johnny Posted: Mon, Jul 16 2012 2:22 PM

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If the United States is sovereign then why doesn't it issue its own currency? I don't understand why we have to borrow money to finance government spending. Why doesnt the US simply print the money that it needs to function at the treasury instead of borrowing it from the fed. Then couldnt the government simply use taxation to reign in on inflation? That seems to make more sense to me. Has an economy that functioned in such a manner ever existed? What are the ramifications? Who are the leading economists that support such an economic policy. Please dont bombard this post with the merits of a gold standard. I think gold is for jewelry. The gold standard creates an unnecessary redundancy.

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Phi est aureum replied on Mon, Jul 16 2012 3:17 PM

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Basically, you want the Treasury to perform the function of the FED. The fact that we wouldn't owe interest to a bank is countered by the fact that taxes will increase to attempt to curtail the rise of prices, which is a symptom of inflation (inflation is an increase in the supply of money). You don't really attack the problem here, assuming you view rising prices as the problem. You attempt to cure the disease caused by one poison (FED) by removing the label on the bottle and naming the poison something new (Treasury). The cause, at least one of the biggest, of rising prices, which are caused by inflation, is government spending. Your "solution" (renamed poison) does nothing to address this. In fact, it may be even worse, if it likely is to make government spending easier in the short run, although when new taxes on top of new taxes must be levied to counter the increased supply of money (inflation), it will become politically difficult again. Not to mention, the reason the FED is a failure is because no man nor group of men can know the proper amount of money to be in supply nor the proper rates of interest. Transferring this power to the Treasury (another group of men) won't change this.

You want the government to steal more money from the People?

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David B replied on Mon, Jul 16 2012 4:19 PM

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Please dont bombard this post with the merits of a gold standard. I think gold is for jewelry. The gold standard creates an unnecessary redundancy.

Why not?  Understanding money as an economic phenomena is an important fundamental step in understanding the state of money in the world today.  

Do you have an understanding of that process?  How money arises out of indirect exchange in a barter economy?  How goods compete to be the medium of indirect exchange, and some goods end up winning in the market through inherent properties that make them preferable to other goods as the medium of indirect exchange?

Do you understand that when a government defines a legal tender they must make it illegal (threat of violence against self or property) in order to enforce the use of such legal tender and thus prevent competitive forces from affecting the legal tender directly?  Do you understand that the Fed is a government chartered "private" entity, which means it's not a private entity, but a governmental institution?  Do you understand then that the government borrows from itself, and has two means for repaying itself?  Print money or Tax the citizenry into oblivion?  Do you realize that in order to defer such taxation or inflation, instead they purchase dollars already in existence and issue IOU's for that money?  This is the debt that is owed.  It doesn't borrow it from the Fed, as I understand it, someone can help me here, if I'm wrong.  So as I understand it, you're talking about a semantic change, NOT in fact a substantive change.  In fact, the thing the Fed accomplishes is hiding from the American public the details of HOW the money supply is being expanded.  The CBO has to publish the details in the budget, and they are alarming.  If they also had to publish the Feds books, we would see directly how the expansion of the money supply is artificially propping up the economy, so that the government can pay the vig, on their debts.  The day the Fed publishes it's books, is going to be an incredibly disruptive day to the world's markets.

So, let's think this through, if you give any economic actor, the right to print money at will, and to define legal tender at the same time, what do you think the side effects are just from basic economic supply and demand?  Well let's see what happens if we change the money supply through any action (mining for gold, or printing for US dollars).  Regardless of which mechanism you use, if I increase the amount of money by 10% overnight,  there is now 10% more money competing for the same quantity of goods in the market place.   Fine, everyone's prices would increase by 10%, overnight.  Except, the money that is printed is issued to someone directly.  This person is able to aquire goods, BEFORE the prices have gone up.  Thus you've actually reduced the value of everyone's goods by 10% in terms of the money supply without them changing their prices.  The actor who gets the new 10% gets to purchase goods and services at a discount, and gradually through his purchasing bids up the prices, everyone else, loses value in 2 ways.  The dollars they are saving lose value.  Second they sell their goods below the expected market cost.  The only good part is that everyone who is buying is getting a good value, because the value of their goods will be worth more tomorrow in terms of money.

So, printing money (inflating the money supply) will reduce the tendency to save (and invest) the money itself, and increase the desire to have real assets.  At the same time it will operate as a wealth transfer to the people who get the new money first.  Thirdly, there is no negative feedback loop.  You've created a positive feedback loop.  Printing money, means prices drop, I purchase goods and services more cheaply, and my debts can be paid off in the future with money that's worth less.  Positive feedback loop, there's nothing to keep the printing function in check.  The printing function will approach infinity relatively rapidly.  

However, remember that prices serve to aggregate a vast array of economic information about what goods and services are available in the market, and thus are used for economic calculation both by producers and consumers of goods and services.  When the money supply is expanding so rapidly that it becomes useless at it's only job (aggregating complex supply and demand data) one of two things will happen, economic actors will find an alternative mechanism to establish prices, or if that is prevented they will cease engaging in any economic action that they don't have to.  In other words the economy will screech to a halt, and barter/black markets will try to enable the basic subsistence living necessary just to eat and drink on a daily basis.

Go read about hyper-inflation on wikipedia, you will find a bunch of links to real occurences in the modern day.  The difference with the US is that unlike other localized second and third world occurrences, we have the ability to bring the worlds economy to a screeching halt, not just ours.

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Smiling Dave replied on Mon, Jul 16 2012 6:32 PM

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Phi,

How will higher taxes lower prices, or stop them from rising? The govt will spend the tax money, no?

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Smiling Dave replied on Mon, Jul 16 2012 8:17 PM

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Yes.

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johnny replied on Mon, Jul 16 2012 9:08 PM

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Dave B,

Why not?

Because the supply of gold cannot fluctuate according to its need. So as the population grows- or economic activity increases- we will experience deflation which will destroy people that are required to take loans; because our economy depends on contracts that require fixed payments over time. Also, if the US went on a gold standard right now it would destroy us. We would be bankrupted and our nation's wealth would evaporate, due to capital outflow/imbalances of trade, in less than five years. It would kill us. Additionally, other nations that have learned the 'trick' of inflationary spending, would continue to do so. For instance, China could continue to use inflationary policies to strengthen their military and outspend the US. The potential destructive force that today's militaries  are capable of is astounding- there needs to be a balance of power- people are not nice. You could argue for a free market currency, but I don't believe that all market participants are morally admirable- free market currencies would be hijacked by powerful coalitions of power brokers at the expense of the populous. I wish I lived in Mr. Rogers neighborhood, but I don't. I live in a world that is a balance of evils, and the open, honest, and trustworthy get eaten for breakfast, lunch, and dinner. 

But excellent contribution. Thank you.

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johnny replied on Mon, Jul 16 2012 9:29 PM

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Phi,

Thanks for your contribution. I do happen to believe that there is a role for government; if not, at least to safeguard personal property rights. So as long as government exists there will be government spending and taxation. You seem to suggest that there is very little difference between a government that pays interest on its money and one that doesn't, but it seems to me that if we are paying interest on our money then even more taxpayer wealth is being absconded due to debt servicing; and that, seems to me, is essentially a redistribution of wealth from taxpayers to whomever owns our nation's debt. I don't like that idea.

It seems if we cut out the fed, then our government spending would become much more transparent, and any impropriety would become a central focus for the people to deal with- perhaps leading us to elect politicians that can make a difference. 

But you say that taxes would continue to increase? Why is this so? These are the 'ramifications' that I was referring to, and the reason that I wrote the post.

Thanks!

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Phi est aureum replied on Mon, Jul 16 2012 9:36 PM

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Because the supply of gold cannot fluctuate according to its need. So as the population grows- or economic activity increases- we will experience deflation which will destroy people that are required to take loans

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johnny replied on Mon, Jul 16 2012 9:48 PM

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Phi,

An example of 'increasing' economic activity would be a population increase. There would be more people making economic transactions and therefore greater demand for money. If the money supply were not increased then there would not be enough money to match the increased number of goods and services on the market, which would cause deflation- destroying credit, increasing the burden of debt payments, and running the populous out of their homes.

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z1235 replied on Mon, Jul 16 2012 10:07 PM

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johnny:

If the money supply were not increased then there would not be enough money to match the increased number of goods and services on the market, which would cause deflation- destroying credit, increasing the burden of debt payments, and running the populous out of their homes.

Interesting. So a group of people willing and able to exchange property/capital and labor between each other would all be destroyed and homeless if it weren't for  a sovereign to increase their money supply in order to match the amount of goods produced and services offered by them? 

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johnny replied on Mon, Jul 16 2012 10:13 PM

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z1235,

please explain your comment.

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Phi est aureum replied on Mon, Jul 16 2012 10:17 PM

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@johnny

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David B replied on Tue, Jul 17 2012 8:16 AM

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I think you have to be careful in assuming that because an actor could do something, that he would do it.  How are you going to get a human being in charge of the money supply who would take tax money received and simply destroy it?  Thus decreasing the supply of money?

Increasing the supply of money increases prices across the board, in an uneven way.  The prices of goods in the economy tell producers where there is profit to be made because there's unmet demand that could be met at these current prices.  But when those prices increase due to a change in the money supply that's a false signal.

With commodity money, you would expect a slow steady increase in the supply of the commodity(like gold through mining).  The other way in which prices would fluctuate without changes in supply and demand for the specific good would be from saving or spending of commodity money.  The amount of money currently being used to compete for various goods in the market will fluctuate also, as it comes in and out of savings.  Those changes are also good information to the market, because they represent through interest rates and real prices changes in peoples demands for savings, investment, etc.

Printing money is a false signal that looks like other signals, and thus it distorts the distribution of capital for production.  Those distortions are what creates our bubbles.

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johnny replied on Tue, Jul 17 2012 8:48 AM

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thanks phi,

I understand inflation- haha! It is not simply an increase in the supply of money, it is simply an increase in prices. Of course, increasing the money supply can contribute to that effect, but there are other inflationary pressures in the world, too; such as: increasing population- more people means higher demand- competing for scarce resources, etc... I'm sure that you understand this.

Anywho~ if your argument is that taxation would increase at a faster rate than the current system: I suppose that would be a huge problem, initially, because the government would be infusing the system with extra money equal to the size of the defecit (minus) interest payments on newly issued debt; since- as Dave B points out- the government simply issues IOUs to procure dollars that are already in circulation; and without the issuance of new debt- those dollars would remain in circulation- in addition to government spending- requiring a greater need for taxation to reduce (destroy) the monetary base. Just thinking out loud here- feel free to jump in. I'm not arguing for or against the size of government; or for or against inflation; I am simply trying to learn what would happen if we stopped paying interest on our money. Like the supposed quotation by Thomas Edison alludes to:

"If the Nation can issue a dollar bond it can issue a dollar bill.
The element that makes the bond good makes the bill good also. The
difference between the bond and the bill is that the bond lets the
money broker collect twice the amount of the bond and an additional 20%.
Whereas the currency, the honest sort provided by the Constitution pays
nobody but those who contribute in some useful way. It is absurd to say
our Country can issue bonds and cannot issue currency. Both are promises
to pay, but one fattens the usurer and the other helps the People."

It seems to me that taking the usurers out of the picture is a step in the right direction: toward greater transparency in the government, and less redistribution of taxpayer wealth to those who hold treasuries- our mightiful financiers! But it also seems to me that the size of the government is too large to accomplish this feat at present because the true imbalance toward government is so extreme that initial taxation would have to go through the roof in order to reign in the inflation of an extra trillion dollars (budget defecit) to M1 every year. This little thought experiment really helps to reveal what a pickle we are in. 

It seems to me that those in favor of privatizing government need look no further than the current system of the United States because those who own treasuries (private interests) essentially own the government. So the whole 'public sector' is simply a portion of the financial industry's balance sheet. In my estimation, that is the foremost problem with the system. It seems to me that all other issues must take a back seat to the fact that the American Public is being extorted by private financial interests. O blat!

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Phi est aureum replied on Tue, Jul 17 2012 10:37 AM

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@johnny

No, really, inflation is an increase in the money supply. In fact, for years, that was how dictionaries defined it. Check out http://wiki.mises.org/wiki/Inflation. This concept is crucial to understand what you are asking.

Also, I don't understand why you think that an increase in the population automatically means higher prices. Yes, some goods become more scarce, but because labor increases in supply, labor becomes cheaper and thus, so does production. Also, consider with each passing year, so many new, more efficient technologies are implemented to displace old methods of production, resulting in cheaper production/more quantity produced. This bein said, I still see no reason as to why an increase in population requires an increase in the money supply.

Consider a hypothetical situation: on a desert island exists A and B. A gathers vegetables. B hunts meat. A and B have decided to help each other out. They have decided to trade one serving of vegetables for one serving of meat. A can gather two servings of vegetables per day, and B can hunt down two servings of meat per day. Then C appears. C needs to eat as well. It turns out he is an excellent hunter, better even than B. C can get twice the meat that B can in one day. B can continue to hunt, but because the daily supply of meat is 3 times of what it was before C arrived if B hunts as well, the meat B can get in one day will only get him 1/3 of the vegetables it used to. However, vegetables are now more valuable. B learns to gather vegetables and lets C hunt the meat, since C is far superior at it. Let's say B becomes just as good at gathering vegetables as A. Now, because of an increase in the population, the island produces 4 servings of vegetables per day and four servings of meat per day between three people. It used to only produce 2 servings of each between two people. The island is now wealthier; it produces more, thus can consume more. This is because of the division of labor. 

Understand that wealth is not denoted by money. Far from it. If it were, we could just print money to give to everything and we would all be very well off, able to afford anything. This is not the case, though. Wealth comes from production. In the hypothetical situation I provided (sorry it if wasn't helpful), lets say the islanders made some paper note that represented the power to purchase one serving of vegetables or meat. It would not be necessary or even helpful to create extra notes upon the arrival of C, because, as you put it, increasing population drives up the demand for money. C needed to produce, and B needed to move his efforts to a different area, to make the best allocation of resources possible, and the "market" (supply and demand essentially) told him where that was. Printing money would have allowed somebody to attempt to work less while eating the same, which would result in less production of food, and thus, rising "prices." The reduced production would also clearly make the island's inhabitants poorer on the whole because there was now less food per person. 

The keys here are: understanding inflation is just an increase in the money supply; understanding why inflation tends to cause a general rise in prices; understanding why the division of labor allows for increased production, and thus increased consumption; understanding that wealth is based on production; understanding that money IS NOT wealth.

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David B replied on Tue, Jul 17 2012 11:39 AM

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I understand inflation- haha! It is not simply an increase in the supply of money, it is simply an increase in prices. Of course, increasing the money supply can contribute to that effect, but there are other inflationary pressures in the world, too; such as: increasing population- more people means higher demand- competing for scarce resources, etc... I'm sure that you understand this.

Johnny,

Prices and interest rates act as pressures on commodity money.  When prices are high, people save more, reducing demand.  When interest rates are high, people invest more, to get more dollars later.  Both of these have an effect on how much of the money is competing for goods.  The implication is that a certain quantity of money (and a growing or flexible quantity of money) is a necessity in order for an economy to do X.  I'm not sure what X is in this example. 

The reason I state this is that all of the things I can think of that I'd like the economy to do (increase standard of living and my subjective quality of life) can be done (historically demonstrated) on a commodity money standard.  Look at the increase in standard of living and in technology through the 1800s in the US. 

There are 8.67x10²² atoms of gold in an ounce of gold.  It seems to me that given the technology to measure and organize gold at the atomic level, a few ounces of gold would probably be sufficient to handle all of the exchange needs for the global economy.  By comparison there have been approximately 5.3x10⁹ ounces of gold mined in the history of the world.  Do you see where I'm going?  In order to understand why an artificially manipulated money supply is unhealthy to the economy one has to understand the role of savings in providing the capital for investment in production.  But if there are no savings it's a ponzi scheme.  

We don't know which capital investments are productive and which ones aren't before hand, we only know that from the results.  Under commodity money, savings invested in unproductive capital will result in losses for the investor.  It will fall directly on the speculator, that's a powerful incentive to be prudent.  Risk small amounts in high risk high reward ventures, and risk larger amounts only in low-return highly stable ventures.  But the savings have to exist, someone has to amass the capital to put into the productive endeavor BEFORE it produces.

Under fiat money, where the government drives money supply through debt, money printing, and interest rate manipulation, investment is driven by credit not by savings.  The money is created out of thin air and promises, promises which can only be kept by new debt or printing money.  Also, because there is no real savings to drive the interest rates to their market rate, the production that is financed is necessarily production which was MORE risky at couldn't compete for investment funds at the market interest rates.  They are (in general) viewed as higher risk investments, that are only enabled because of the artificially low interest rates (a signal that should mean there is excess savings competing to be invested in production).

Under a commodity money system there is a constant steady real inflation of the money supply in that gold, silver, etc. are being mined out of the earth on a daily basis.  The only data I was able to find quickly for inflation is like this.  In 2009 it's estimated that the total mined gold in the world was 165,000 tonnes.  In 2008 2260 tonnes were mined from the earth.  This is an inflation rate of 1.3%.  Bear in mind that at the same time the total quantity of goods being produced and exchanged either as consumer goods or as factors of production is constantly (to date) increasing.  One would expect a slow and steady deflation.  But it's a failure of imagination to think that the supply of gold can't continue to be used to quantify prices of goods in terms of a necessary quantity of gold to purchase that good in the market.

Gold is a good, Silver is a good.  Part of it's value is drawn from direct use.  Part of it's value is as a pricing mechanism.  Part of it's value is in it's used for indirect exchange and thus it's reliability as a store of value.  But the role as a savings/store of value mechanism only functions if it's considered to be stable.  That people can't create them out of thin air is important.  In fact, as a measure of energy in the universe, Gold (atomic weight 79) requires an extreme amount of energy to create.  

So, my point is that there are good reasons to use gold as a store of value, a medium of exchange, and as one column in a price table.  

And there are good reasons for economic actors to want the type of stability that a medium of exchange like gold produces.  There are very real reasons, which we are observing now, also for an economic actor to want to control money supply himself, and to not want someone else to control money supply.  So who do we trust with that power?  It's too much.  

The positive feedback loop from printing your own way into hyperinflation is too great, and history demonstrates that only commidity money can create (over long periods of time) the type of stability that enables healthy economic growth.

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johnny replied on Tue, Jul 17 2012 12:36 PM

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Thanks all,

Great posts~

Though it is headed in a different direction than I had intended (see my previous post), so I am going to depart the pattern. Best of luck- trudging the road to happy destiny!

Johnny

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David B replied on Tue, Jul 17 2012 1:52 PM

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Johnny,

I apologize if I pushed this in a different direction.  You're wondering what the way out is.  I'm guessing that history holds the secrets.  Looking at historical bank failures or currency devaluation scenarios which collapsed and trying to understand what grew out of the ashes, how long it took and what the pain points were. 

We can create thought experiments, and they are important to understand the dynamics of such complex scenarios.  One point I'd make is that until 1971 (and 2000 evidently in Switzerland) the world was on a commodity money standard to at least some degree, in that the US dollar was tied to a specific quantity of gold.  41 years off the Gold standard isn't an argument that it's succeeded.  Looking back through history one can find (I've read books and articles that fill in detailed dates, times, and places) a slew of examples where fractional reserve banking, fiat currency, currency debasement (coin clipping) have been engaged in either by private institutions or by monopoly state governments (or their "private" proxies).  The current global economic ecosystem is about to become another such example.  We will find out how it plays out.  

A thought experiment in which a government taxes it's inflated currency and then destroys those tax dollars sounds good in theory, but I don't see how you create feedback pressures that would make this happen in reality.  Policy makers and policy implementors have no real localized pressure to do so.  

In addition, not paying the interest on debt, amounts to defaulting on the loan, declaring bankruptcy.  Governments, will no longer loan us money without us reducing our spending levels and increasing our taxes.  Look at Spain and Greece.  At this point, there will be only three options, 1)reduce spending to levels that can be supported by tax revenues, 2)increase taxation to levels that will support the current spending levels, or 3) print money to payoff debts, creating the hyperinflation scenario.  The US polity will kick out "the bastards" who do 1 or 2, and the economy will be destroyed by 2 or 3.  Scenario 1 would not directly destroy the economy, but would result in a temporary massive unemployment in as public programs shutdown and government workers enter the market seeking a means to make an income to support a lifestyle they've grown accustomed to.

Option 1, combined with market money is the only option I see in which some semblance of the US Federal Government survives.  I believe it's more likely for a decentralized break up of both the European Union and the United States, in which the state entities which engage in sound market (by Austrian Standards) will thrive and recover rapidly by comparison those who follow interventionist economic policies.  

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David B replied on Tue, Jul 17 2012 2:48 PM

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One last point, stable prices are not the goal.  Stable prices don't mean anything, because prices are information signals about supply and demand.  Stable commodity money supply means that the majority of the information in the price is being generated by changes in the supply and demand for the good being priced.  When the majority of the information contained in price fluctuations is information about inflation of the money supply, it obscures the information about the good being priced, and that's the information that is most important to producers and consumers.

Keeping gas prices low by flooding the market with oil that was set aside as a policy mechanism, just delays the signal to producers that more gas is needed in the market place.  The higher price will make it profitable to engage in new gas production ventures, new and more efficient refineries, new oil finding mechanisms, etc.  Delaying that signal, just delays the amount of time till the entrepreneurs realize there's a profit to be made and begin saving to generate capital to generate additional gas production (or production of the factors that are consumed to produce the gas, like oil)

The actors in the economy are best served by prices which accurately reflect all of the minute details that make up the supply and demand for the various goods in the market.

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johnny replied on Wed, Jul 18 2012 8:12 AM

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Thanks Dav3b,

Great content on pricing. As for default, the government can pay off its current debt with newly minted money. That seems governmental.

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Phi est aureum replied on Wed, Jul 18 2012 1:54 PM

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@johnny

if the government tries to pay its debt with newly printed money, this will result in the devaluation of the currency. This is inflation, since the newly created money increases the supply of money, and as the supply goes up, demand goes down. This is why increasing the supply of money tends to cause a rise in prices; as the demand for dollars decreases, you'll need more dollars to buy things. That is, when the currency is inflated, it's like the receivers of the new money are getting it right out of your pocket. This is why the best money is 100% commodity money, as it cannot just be created out of thin air, thus stealing from everyone. Do you feel like the government's debt is your responsibility to pay off?