Gyroscopic Investing

Interesting thing about an ancient form of interest free fiat money that was used for centuries without inflation or public debt:-
http://www.freeread.com/archives/3012

Cool, stone... very cool.

I definitely think, and I've said this before, a documentary or book on the history of money and different money systems would be mind-blowingly interesting... of course it would have to be objective in its description of economic history, which is almost impossible to find.

There's so much political bias thrown into most discussions of currency that you can't sift through the bs... not to mention it's kind of a boring subject to most people, so attaching conspiracy theories always brings in more listeners.

In particular, the changing role of a central bank over the 20th century is still something I don't really understand.

moda0306 wrote: Cool, stone... very cool.

I definitely think, and I've said this before, a documentary or book on the history of money and different money systems would be mind-blowingly interesting... of course it would have to be objective in its description of economic history, which is almost impossible to find.

There's so much political bias thrown into most discussions of currency that you can't sift through the bs... not to mention it's kind of a boring subject to most people, so attaching conspiracy theories always brings in more listeners.

In particular, the changing role of a central bank over the 20th century is still something I don't really understand.

There's a pretty good book called "The Origins of Value: The Financial Innovations That Created Modern Capital Markets" by Goetzmann and Rouwenhorst (2005) that covers the invention of interest and the origin of paper money in China all the way up to some of the capital market financial innovations of the late 1990's.  It includes a discussion of tally sticks.  The book was recommended to me a few years ago and I've just started reading it.  It doesn't appear to be too ideologically driven (at least so far).  It doesn't deal very much with modern central banking, however.

The changing role of the central bank was due to the political-economic fads of the times.  The whole point of a central bank is to bail out the insiders [Wall Street] when they screw up, but that is not very good marketing as justification to the common people.  People were way less naive/stupid/ignorant/uneducated in the old days than now.  Ever seen the classic movie, The Wizard of Oz?  The yellow brick road was the gold standard.  Tin man was the unions, etc..

MG

moda0306 wrote: Cool, stone... very cool.

I definitely think, and I've said this before, a documentary or book on the history of money and different money systems would be mind-blowingly interesting... of course it would have to be objective in its description of economic history, which is almost impossible to find.

There's so much political bias thrown into most discussions of currency that you can't sift through the bs... not to mention it's kind of a boring subject to most people, so attaching conspiracy theories always brings in more listeners.

In particular, the changing role of a central bank over the 20th century is still something I don't really understand.

The same happens with the inflation subject as well.  It just goes to show the government should never be in the medium of exchange business (and a lot of other things...)  as it will always act as a magnet for ideaological-political agendas.

MG

moda0306 wrote: There's so much political bias thrown into most discussions of currency that you can't sift through the bs... not to mention it's kind of a boring subject to most people, so attaching conspiracy theories always brings in more listeners.

MG,

Not to be too blunt, but I basically totally disagree with your assertion that gov't has no role in the medium of exchange.. this invention of a "tally stick" system must have involved some sort of central bank, for lack of a better term.  While we can talk about conspiracy theories about the only purpose being bailing out wall street, it would seem that if you WANT to have an expanding money supply so you can have a growing economy without guaranteed deflation (there are reasons to want this), then you need the gov't to step in with an efficient medium of exchange, and any entity that manages this expansion of money supply would likely have to be called some sort of "central bank."

MachineGhost wrote: The same happens with the inflation subject as well.  It just goes to show the government should never be in the medium of exchange business (and a lot of other things...)  as it will always act as a magnet for ideaological-political agendas.

MG

How does a political weight in discussions about inflation and currency "go to show the government should never be in the medium of exchange business?"  

I think that as society runs out of alternatives (gold & maybe silve worked for centuries) that are capable of growing in quantity at the same rate as the rest of the economy, a society has to ask itself whether its better off stifling growth through a scarcity of medium of exchange, or having the government make one up by fiat.  I think the latter is a better choice.  It creates efficiencies that no basket of commodities can muster, and evidenced by recent currency comparisons (Japan & US in the fiat corner vs the Euro in the pegged corner) tends to result in a natural stabilizer when faced with recession.

We allow our gov't to define, recognize and defend private property and bomb our enemies... they're the only ones allowed to kill people... I think we've already heft upon them great responsibilities.  Given the limits of the private sector to establish a stable, expanding medium of exchange I see no choice bu to hoist upon them another

Well, I view that disagreeing would depend on exactly how you would define the government's role.  If you're on the positive rights side of the issue at it sounds like, you then become guilty of my original claim, because there is simply no free-market justification for a central bank.  Any position that some kind of monopolistic, coercive institution overlayed onto a voluntary exchange marketplace is "necessary" is by default, ideaological-political.  I am not going to argue whether that is "right" or "wrong", merely that such institutions will then act as a conduit for further ideaological-political agendas over time.  History has repeatedly shown this to be true almost without exception.

Now, all that aside, government can certainly could act as a coordinating mechanism for "market failures" by forcing everyone to come to the table and come up with a solution.  But should it?  Every monetary system in the past has failed or was abandoned, including the non-governmental anarchist systems.  A central bank is hardly the ideal mechanism for establishing a medium of exchange (or rather, establishing/emitting bills of credit as that is what we actually have now).  Heck, the U.S. had a medium exchange long before it had a central bank!  The problems with the so-called "gold standard" brought forth don't require a central bank to solve either.

"Political weight" is implicit in statism most especially on the subject of currency and credit as that is most the tenous "power" of a nation-state.  So it will naturally attract all the extremist people with the weakness of wanting to impose their will over other people, just as in any other aspect of politics.  Hence all the political bias on this subject.

In fact, this is all ultimately an argument for either better technological innovation or better government...  either way, we are heading in that direction full steam ahead! 

MG

moda0306 wrote: MG,

Not to be too blunt, but I basically totally disagree with your assertion that gov't has no role in the medium of exchange.. this invention of a "tally stick" system must have involved some sort of central bank, for lack of a better term.  While we can talk about conspiracy theories about the only purpose being bailing out wall street, it would seem that if you WANT to have an expanding money supply so you can have a growing economy without guaranteed deflation (there are reasons to want this), then you need the gov't to step in with an efficient medium of exchange, and any entity that manages this expansion of money supply would likely have to be called some sort of "central bank."

MachineGhost wrote: The same happens with the inflation subject as well.  It just goes to show the government should never be in the medium of exchange business (and a lot of other things...)  as it will always act as a magnet for ideaological-political agendas.

MG

How does a political weight in discussions about inflation and currency "go to show the government should never be in the medium of exchange business?"  

I think that as society runs out of alternatives (gold & maybe silve worked for centuries) that are capable of growing in quantity at the same rate as the rest of the economy, a society has to ask itself whether its better off stifling growth through a scarcity of medium of exchange, or having the government make one up by fiat.  I think the latter is a better choice.  It creates efficiencies that no basket of commodities can muster, and evidenced by recent currency comparisons (Japan & US in the fiat corner vs the Euro in the pegged corner) tends to result in a natural stabilizer when faced with recession.

We allow our gov't to define, recognize and defend private property and bomb our enemies... they're the only ones allowed to kill people... I think we've already heft upon them great responsibilities.  Given the limits of the private sector to establish a stable, expanding medium of exchange I see no choice bu to hoist upon them another

I'm trying to get my head around whether the lack of inflation was BECAUSE the tally sticks paid no interest. Might the interest paid on treasury bonds be what actually creates inflation Japan seems to have low interest rates and low inflation.  I also don't understand what leads to gold being hoarded but the tally sticks staying in circulation. Did every tally stick have to be returned as tax every year? Would it be easy to have an electronic money system that followed the same principles?

stone,

I'm kind of thinking through this here, but if a currency was issued that was incapable or incompatible with expansion of credit, or even if there was a simple law that you couldn't charge interest, wouldn't that make it much harder for inflation to rear its head?

Imagine our system if we DID drop dollars from helecopters, but were all forbidden from engaging in fractional reserve banking.  It wouldn't be all that inflationary unless way too much was printed.

If you remove the interest component from money you remove it's ability to multiply out of control via leverage.

I know some MMT'ers think QE, by lowering rates, actually reduces inflation, as it reduces the amount of additional dollars (that weren't previously short-term bonds... aka, desired savings) from entering the economy.

Moda, I think you are right. It was pure government money printing with no fractional reserve banking allowed ie the tally sticks were a base money only system. M1 and M2 were the same as M0 because there was no banking as such. I'm wondering whether our system is slowly evolving into that as M0 increases by QE and the banks stop making loans.

stone,

It's definitely reverting back to that in a way... I don't think it's in our blood to not have debt be a very major role in our economy.

More interestingly is what it implies about private sector expansion of credit vs gov't fiat BOTH playing a big role in inflation.  If you give young American's credit cards, you've given a lot of whimsicle people the power to "coin money."

Uh oh.

moda, I have queried the MMTers on BillyBlog about why they consider it good to have banks able to make loans from nothing ie why shouldn't we just have M0 as the only medium of exchange. Part of the answer seemed to be that it was impossible to stop it from happening and that interest rates would be very erratic if it didn't. The tally stick system seems to have been interest free with plenty of M0 for liquidity requirement. It seems to me that one crucial thing is that taxes could only be paid in the form of tally sticks that matched the halves kept by the state. We can pay taxes with dollars created as a bank loan. I suppose also they didn't have a sophisticated web of Goldman Sachs types in those days with a huge capacity to convert liquidity into trading parisitism.

stone,

I like a well-regulated banking sector, but disagree with banning fractional reserve lending... I think if you look at person A with a skill and time on their hands, and person B with saved capital seeking interest, it'd be a bit much to think that society can't benefit from a healthy system of serviceable debt.  People wouldn't stand for banks to simply be money storage dealers and to have to pay cash for their home.

Debt is a very natural and (can be) beneficial product of free, private-sector activity... not just some wet-dream of social-engineers and John Keynes.  I think it's unrealistic to think that any system of money be dictated by gov't to involve zero expansion of credit.

That said, if the fed is the fire hydrant, and the banks are the fire hose directing the liquidity to an economy in need of expanding money supply, then there's obviously plenty of room for moral hazards and crony capitalism.  Inflation isn't as much of a crime as 95% of it's "benefit" (assuming there are winners and losers under an inflationary scenario) going to the banksters who are at the front of the line when the fed wants to save the world via liquidity.

moda, wasn't the tally stick system just such a system of cutting out the banks? If, as in your example, "person A has a skill and time on their hands" why involve a bank? The bank making a loan is the bank generating new money from nothing. If person A has something to offer, then the person who wants it could pay for it with money the buyer has. If person B wants to pay for the expenses of person A and then sell the products to person C, then that is not involving bank creation of money or banking as we know it. You might want to have intermediation by loan companies and those could be funded either by issuing shares or bonds but that would be "equity only banking" and so not really banking. The current day equivalent would be venture capital trusts. In effect all intermediation would be done by venture capital trusts and not by banks as we know them.

Doesn't that really give everyone an equity interest though, when the owner of a startup may want to function on debt so as to be able to control the business and not have all sources of funds be equity-based?

I mean do you want to have an equity fund help you buy your home and you pay the shareholders dividends and make only changes to your home that they approve?

Yes, it is probably cutting out the banks, but I think in a normal world banks serve a legitimate purpose.  I think it's quite inefficient to imagine a 100% equity world where all debt (as denominated by the gov't-issued currency) is outlawed.

You'd still essentially have it, as equity owners would pull most of the profit out of the entrepreneurs but would have even more of a say in how the business is run... which would give rise to "passive investors" and "qualified dividends," which is getting so close to credit/debt at that point anyway that we're just talking semantics at this point.

I believe in regulation of how banks manage other people's money, but for the most part I think people should be able to contract in the common currency how and with whom they choose, even if it's a bank.  Outlawing it would be like prohibition, but much worse as it would crush the financial flexibility of businesses and households accross the country.

moda, I think the crucial difference between debt and equity is not voting rights but the fact that equity is a variable return based on what the asset actually earns whilst debt is fixed interest. I'm also not sure that you are giving recognition to the reality that when a bank makes a loan, that is not the bank handling someone else's money, it is the bank creating money and debt from thin air. Banks do also store other people's money but that is not what makes them banks.  Banks infact also do sometimes dictate what companies do.

An enormous problem with bank credit creation of money is that it tends to be used to bubble up asset inflation. I also don't think consumer credit provides a useful purpose.

Also, if you feel that fixed interest loans are a good thing (I don't really) then such loans could be made by an equity financed loan company rather than a bank. The loan company would raise money just as a venture capital trust does but then lend it as fixed interest loans. That would not be bank credit creation of money. It would be lending on of pre-existing money. Obviously banks prefer to conjure money out of thin air for free. The question is what is the point of giving them that extraordinary priviledge? I suppose the rationale is to not allow too much power to reside with those who hold existing money. To my mind, so long as existing money is distributed evenly amongst everyone, then that is where financial power ought to reside. The issue is to ensure that it is distributed evenly amongst everyone.

I have two books to recommend for those following this interesting topic.  Both are relevant to the concept of central banking, one in general, one in specific.

The first is Peter Schweizer's Throw Them All Out: How our Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison published last month which is an expose of how filty rich those in positions of political power become.  Do not read if you suffer high blood pressure.  http://www.amazon.com/Throw-Them-All-Pe ... 0547573146

The second is Edwin C. Riegel's Private Enterprise Money: A Non-Political Money System from 1944 (!) which provides a realistic alternative to monopolistic central banking (public debt), monopolistic private money creation (commercial banks), without involving government, without causing inflation and without relying on the remnants of supernova explosions.  I believe the only thing preventing its implementation, now that technology makes it feasible, is a simple lack of awareness.  It has long ceased being published and is in the public domain, but there should be copies to read on the Internet.

MG

MachineGhost wrote: Well, I view that disagreeing would depend on exactly how you would define the government's role.  If you're on the positive rights side of the issue at it sounds like, you then become guilty of my original claim, because there is simply no free-market justification for a central bank.  Any position that some kind of monopolistic, coercive institution overlayed onto a voluntary exchange marketplace is "necessary" is by default, ideaological-political.  I am not going to argue whether that is "right" or "wrong", merely that such institutions will then act as a conduit for further ideaological-political agendas over time.  History has repeatedly shown this to be true almost without exception.

Now, all that aside, government can certainly could act as a coordinating mechanism for "market failures" by forcing everyone to come to the table and come up with a solution.  But should it?  Every monetary system in the past has failed or was abandoned, including the non-governmental anarchist systems.  A central bank is hardly the ideal mechanism for establishing a medium of exchange (or rather, establishing/emitting bills of credit as that is what we actually have now).  Heck, the U.S. had a medium exchange long before it had a central bank!  The problems with the so-called "gold standard" brought forth don't require a central bank to solve either.

"Political weight" is implicit in statism most especially on the subject of currency and credit as that is most the tenous "power" of a nation-state.  So it will naturally attract all the extremist people with the weakness of wanting to impose their will over other people, just as in any other aspect of politics.  Hence all the political bias on this subject.

In fact, this is all ultimately an argument for either better technological innovation or better government...  either way, we are heading in that direction full steam ahead! 

MG

moda0306 wrote: MG,

Not to be too blunt, but I basically totally disagree with your assertion that gov't has no role in the medium of exchange.. this invention of a "tally stick" system must have involved some sort of central bank, for lack of a better term.  While we can talk about conspiracy theories about the only purpose being bailing out wall street, it would seem that if you WANT to have an expanding money supply so you can have a growing economy without guaranteed deflation (there are reasons to want this), then you need the gov't to step in with an efficient medium of exchange, and any entity that manages this expansion of money supply would likely have to be called some sort of "central bank."

MachineGhost wrote: The same happens with the inflation subject as well.  It just goes to show the government should never be in the medium of exchange business (and a lot of other things...)  as it will always act as a magnet for ideaological-political agendas.

MG

How does a political weight in discussions about inflation and currency "go to show the government should never be in the medium of exchange business?"  

I think that as society runs out of alternatives (gold & maybe silve worked for centuries) that are capable of growing in quantity at the same rate as the rest of the economy, a society has to ask itself whether its better off stifling growth through a scarcity of medium of exchange, or having the government make one up by fiat.  I think the latter is a better choice.  It creates efficiencies that no basket of commodities can muster, and evidenced by recent currency comparisons (Japan & US in the fiat corner vs the Euro in the pegged corner) tends to result in a natural stabilizer when faced with recession.

We allow our gov't to define, recognize and defend private property and bomb our enemies... they're the only ones allowed to kill people... I think we've already heft upon them great responsibilities.  Given the limits of the private sector to establish a stable, expanding medium of exchange I see no choice bu to hoist upon them another

I pasted a chunk of the wikipedia about what Machine Ghost recommended reading. To me though, the issuance of that money is done by what in effect is a government. It just seems that Riegel has re-invented government and claimed that his new re-invention is not government.  The institution issuing the money under his system would have also had the power to decide who was worthy of what level of fiat money financing. Basically his system seems very much like current action of the Chinese communist party. They make effectively interest free loans (often loss making by design in the Chinese case) to whoever they consider will provide strategic benefit in using that money. In many ways it can be said that the Chinese are getting things done that we fail at but that is hardly Libertarian. It seems amazing to me that Harry Browne was a fan of this. Is the point that all these money issuers can compete with each other and none of them have the power to tax? Is that what makes it Libertarian?  Do they think people will save up "valun" and the issuance will match that "leakage to savings". I suppose Japan shows that such open ended deficit spending can go on but the danger to my mind is that use of those savings as liquidity for speculation can be extremely damaging to the real economy. We are seeing that effect now IMO.

http://en.wikipedia.org/wiki/E.C._Riegel
Riegel's monetary theory differentiated between the "objective view of money" as an "entity having some kind of an independent existence," especially fiat money issued by government. He contrasted this with "the subjective" idea of money, that "money can spring only from trade——that trade creates money, and not vice versa."[11] This is a similar concept to credit money.
Spencer MacCallum writes that E.C. Riegel thought "that a simple and dependable means of exchange would do more to enhance the dignity and well being of the common man than any political reform." He notes that: "Riegel conceived of money as simply number accountancy among private traders. ... Riegel came down on the side of a rigorously free-market fiat system; for a mature exchange system as he conceived it would depend on no intrinsic value at all, nor would it require or tolerate any government participation. In that sense, the fully evolved exchange system would be a natural system operating entirely as a spontaneous, free-market process with no political mandates imposed."[12]
In the "Money Freedom Declaration”? issued by Riegel and supporters of the ideas expressed in Private Enterprise Money,[13] Riegel described the "The Valun Private Enterprise Money System":
By private initiative and without intervention of government or banks, private enterprisers (employers, employees and self-employers) in any state will organize a Valun Exchange to operate a money system of, for and by the people. Such Valun Exchange will unite with every other Valun Exchange in any other state or nation making a universal money system with a single money unit, called the valun (pronounced vallen).

    The money will spring from the mutual credit of all of the members of the Valun Exchanges in this way: It will be agreed that each member will have a credit on the Valun Exchange based upon prospective income, against which he or she can draw checks in payment of purchases from other members - in other words, will have the over-draft privilege.

    When currency bills or coins are desired the members may draw the desired cash. No notes are to be signed and no interest is to be paid. The Valun Exchange will be a nonprofit, non-stock organization. No capital will be invested and the membership fee will be nominal. The Exchange will pay its expenses out of a small charge for each check cleared. All members of Valun Exchanges will use valuns when trading with each other and will continue to use dollars when trading with non-members.

    As the valun system demonstrates its superiority, more persons and corporations will join it and thus more and more trading will be done with valuns and less with dollars, pounds, francs and the scores of other political money units. By this evolutionary process a universal money system will be established under the control of the people. Banks will not participate and governments will be empowered only to receive valuns and pay them out but not to create them.

    The valun private enterprise money system is designed to break the present money control against the people and (a) raise wages and, salaries to the highest possible level, (b) maintain constant employment, (c) maintain a steady price level and prevent inflation and deflation, (d) abolish bureaucracy and centralization of government, (e) defeat fascism and communism, (f) assure real freedom, prosperity and democracy, (g) preserve peace.

Riegel's “Money Freedom Declaration”? and Private Enterprise Money were endorsed by several progressive thinkers of the time including James Peter Warbasse, an early leader of the cooperative movement in America;[14] libertarian author Charles Sprading; civil liberties attorney Thorwald Siegfried; and Wing Anderson, author of War’s End about the banking system and war.[13]

Endorser Lawrence Labadie wrote that the book "brings out a fact that has not been seen clearly before, namely, that totalitarianism and war would be practically impossible unless the state had control of the money system." Economist John Lossing Buck, husband of Pearl Buck, stated that it explains "the meaning and function of money better than any other treatise on the subject that has come to my attention." Spencer Heath opined that it "is the best expose to date of how a political and coercive money system is bound to destroy free enterprise-to corrupt free citizens into subjects and slaves.

Hmm, you seem to me confused about the delineations between "government", "free market" and "authority".  In my experience, this usually means one is so close to the proverbial trees, they can't see the forest.  The best way to better perceive the forest is to leave it entirely, then look back on the entire forest from the outside.  By "forest", I mean the economic ecosystem that we in the West all currently inhabit, State Capitalism a.k.a. Socialist Corporatism.  Put your thinking cap on, step out of the box and read this: http://econfaculty.gmu.edu/bcaplan/anarfaq.htm

MG

stone wrote: I pasted a chunk of the wikipedia about what Machine Ghost recommended reading. To me though, the issuance of that money is done by what in effect is a government. It just seems that Riegel has re-invented government and claimed that his new re-invention is not government.  The institution issuing the money under his system would have also had the power to decide who was worthy of what level of fiat money financing. Basically his system seems very much like current action of the Chinese communist party. They make effectively interest free loans (often loss making by design in the Chinese case) to whoever they consider will provide strategic benefit in using that money. In many ways it can be said that the Chinese are getting things done that we fail at but that is hardly Libertarian. It seems amazing to me that Harry Browne was a fan of this. Is the point that all these money issuers can compete with each other and none of them have the power to tax? Is that what makes it Libertarian?  Do they think people will save up "valun" and the issuance will match that "leakage to savings". I suppose Japan shows that such open ended deficit spending can go on but the danger to my mind is that use of those savings as liquidity for speculation can be extremely damaging to the real economy. We are seeing that effect now IMO.

Stone,

I'm trying to get my head around whether the lack of inflation was BECAUSE the tally sticks paid no interest. Might the interest paid on treasury bonds be what actually creates inflation  Japan seems to have low interest rates and low inflation.  I also don't understand what leads to gold being hoarded but the tally sticks staying in circulation. Did every tally stick have to be returned as tax every year? Would it be easy to have an electronic money system that followed the same principles?

From my understanding of the modern money system where money is loaned into existence at some interest rate, it is necessary to have a constant growth of the base money supply in order for all of the debtors in the system to repay the principal plus the interest. If loans were made with interest but the base money supply didn't increase, it seems to me that this would necessitate that some percentage of debtors default based on the simple fact that there isn't enough money in the system to pay the principal plus the interest.

Lower interest rates I would think would necessitate a slower growth in base money, and if money supply grew slower than productivity I would think that deflation (a la Japan) would result.

Don't forget that interest rates also attracts capital, which will subsequently produce demand-push inflation.  Capital flows to where it is treated best and the higher the interest rate, the more economic growth there will be due to the pool of capital available to be invested and put to work.  That is why "stimulating demand" by lowering interest rates to nominal levels doesn't work to drive economic growth.  Capital flees.  Capital investing, not "consumer demand" spending is what drives an economy.

Doodle is correct.  The money supply has to be in equilibirum with demand, otherwise there will be unproductive inflation or deflation.  The latter situation is exactly what happened in the double dip recession of 1980-1982.  Volcker killed off the disastrous experiemtn in Friedman's Monetarism to combat the inflation expectations and double digit inflation rates, but went too far and created deflation because demand for money went up after Reagan's election with his "radical" regulatory and income tax reforms (marginal tax rates went from 90% to 35% or so).  Volcker did not let up on the pressure cooker until the Latin American debt crisis in 1982** blew both the lid and regulator off.  He f!@#ed up just as Miller f!@#ed and just as Burns f!@#ed up and so on and so on, all the way back to its inception.

Again, as I've said many times, central banking -- the single most important plank of Communism -- should never be centralized and politicalized.  The free market, i.e. free individuals making voluntary win-win transactions, should decide what credit it needs (borrow) and does not need (pay back), so there is equilibrium and no inflation or deflation of the money supply.  Obviously, we can't go back to the volatile situation we had pre-1933 with fixed exchange rates to gold, rolling banking failures and runs and no check on speculative excess, but that is not the automatic corollary for the future.

Do note that the current monetary base (the "money supply" the Fed does Open Market Operations for by buying and selling Treasuries) is no longer controlled by the Fed as it was in the past.  Reserve requirements are only required for on-demand checking accounts nowadays, having been abolished for everything else.  Which is a very minuscule slice of the total money supply, so in a sense we already have a gigantic "free market" in private money.

In many ways the Fed is an anarchronism and redundant as it has very little power to effect the economy and people adjust their behavior to null its decisions.  Yet, it is a Wizard of Oz that everyone seems to fear and respect as they just hate the idea of a power vacuum.

MG

doodle wrote: Stone,

I'm trying to get my head around whether the lack of inflation was BECAUSE the tally sticks paid no interest. Might the interest paid on treasury bonds be what actually creates inflation  Japan seems to have low interest rates and low inflation.  I also don't understand what leads to gold being hoarded but the tally sticks staying in circulation. Did every tally stick have to be returned as tax every year? Would it be easy to have an electronic money system that followed the same principles?

From my understanding of the modern money system where money is loaned into existence at some interest rate, it is necessary to have a constant growth of the base money supply in order for all of the debtors in the system to repay the principal plus the interest. If loans were made with interest but the base money supply didn't increase, it seems to me that this would necessitate that some percentage of debtors default based on the simple fact that there isn't enough money in the system to pay the principal plus the interest.

Lower interest rates I would think would necessitate a slower growth in base money, and if money supply grew slower than productivity I would think that deflation (a la Japan) would result.

MG,

First, the idea that interest rates attract capital are correct, but keep in mind, the fed only can affect interest rates of treasury bonds by adjusting supply of those instruments.  They don't force other parties to contract with each other in low vs high interest rates.  That's completely up to them.  Interest rates are an effect, not cause, of proper investment in productive activity.  I think it helps if we concentrate first on real productivity and value in the economy that makes a real difference in peoples' lives, and then look at the financial framework that allows that process to happen more efficiently.

Secondly, I like how you try to get to the very core of what these arguments are getting at (though I completely disagree with your conclusion).  I think the real question we first have to answer is whether we want the government to be an issuer of currency (fiat implied) or simply a user of currencies that already exist (any peg is essentially like this, with gold being the most basic).

I think the very nature of money is that of something that exists as a result of a market failure to allow buyers of REAL (not financial assets/liabs) value to efficiently meet providers of that value, and supply them something of equal REAL value.  AKA, if you're a plumber, and you want to buy a car, even with craigslist you'd have problems trying to efficiently engage that transaction, nevermind all the other transactions of daily life.

Luckily, for centuries we had a metal that fit all the basic needs that we have decided money must have, and that metal (gold) acted as a wonderful medium of exchange.

That said, implied by us having a growing economy is a need for more and more medium of exchange... nevermind the systemic issues around default risk.  If we have only a fixed amount of currency, then we will either have deflation or zero growth until the end of time.  Do we really want our economic activity (prosperity and all) to be limited to the amount of naturally-occurring monetary-metal we can find?

If not, a government issued fiat currency is our next best choice.  Yes, it can be politicized, but so can our military... that entity with enough nuclear weapons to destroy the world more than once.  This entity is also the one we entrust to recognize and enforce private property and contracts.  We entrust the public sector to do very important things, that can often times be very complicated.

The thing that truly debases our currency is issuing more of it than our productive capacity can keep up with.

So while I like how you dig deep, I think you come to a very wrong conclusion.  Your conclusion basically implies a gold standard.  A gold standard means the government is simply a user of a currency (in effect) and not an issuer of it (though the paper notes would to the average consumer appear otherwise).  In fact, simply by picking gold as the metal the gov't will accept in payment of tax liabilities is politicizing things, as other things of value (silver, other metals, pelts, salt, and platinum don't qualify for extinguishment of the liability).  Should our gov't be in charge of deciding what item of value be used to pay taxes?  That's huge manipulation of the market, and puts an amazing amount of value in the hands of those with the metal that is decided.

Actually, I don't believe in the so-called "gold standard".  Even though we never really had a so-called "gold standard" post-Civil War -- merely fixed exchange rates -- it is enough that the Roman experience was instructive in how government will incestously engage in gold debasement right into its own demise.  I would abhor returning to a "gold standard" where such malarky could once against be done.  Gold needs to remain a free market so it can serve its best function as insurance protection against government corruption.  Heck, the PP relies on it!  Tricky Dick Nixon did the world a huge favor!

Communism was concerned with monopoly control over credit as that is the fundamental basis for modern government's continual illegitimate existence, i.e. to borrow on fraudulent pretenses and to use the barrel of the gun to collect taxes via conscripted human labor to pay off the borrowed principal/interest and keep all its idol worshippers loyal and faithful.  It is an oxymoron to expect that this "crony capital" based on fraud and coercion will result in the efficient allocation of scarce resources.  Indeed, it does not, or we would not ever have any unproductive inflation.  I just laugh at the thought how the former Sovet Union with its multitude of Politiburos could not set optimal prices for goods/services and direct the economy's resources efficiently, why then a swarm of elected, economically-illiterate attorneys and a hoard of unelected bureaucrats in DC can be expected to do the same!

Anyway, I think its critical to recognize "medium of exchange", "store of value", "equilibrium", "credit", "legal tender" and "lender of last resort" are all distinct monetary phenomenom.  Not all need be monopolized by a central bank as is currently the case.  I could temporarily accept the argument for logistical reasons that until we are ready to be responsible and self-governing with our innate individualistic power to emit credit, that a central bank is currently "necessary" to monopolize credit creation to prevent excess speculation and act as lender of last resort.  But look at the price we are paying: endless wars, corruption, political ruling class, perpetuating poverty, etc..

The free market can certainly (and is in some cases) provide those functions also.  Without remarking on the Fed's poor track record, cartelization and centralization is an anarchronism from another era in an age of decentralizing "Power to the People" technology.  For example, BitCoins is an interesting experiment of a free market "store of value".  E-gold was another interesting experiment of a free market "medium of exchange".  We are still taking baby steps.  But some day, the political money system will be circumvented and rendered irrelevant.

MG

moda0306 wrote: So while I like how you dig deep, I think you come to a very wrong conclusion.  Your conclusion basically implies a gold standard.  A gold standard means the government is simply a user of a currency (in effect) and not an issuer of it (though the paper notes would to the average consumer appear otherwise).  In fact, simply by picking gold as the metal the gov't will accept in payment of tax liabilities is politicizing things, as other things of value (silver, other metals, pelts, salt, and platinum don't qualify for extinguishment of the liability).  Should our gov't be in charge of deciding what item of value be used to pay taxes?  That's huge manipulation of the market, and puts an amazing amount of value in the hands of those with the metal that is decided.

MG,

We could have fiat money AND efficient allocation of resources at the same time... this isn't some communist quest.  As MMT senate candidate Warren Mosler perscribed, we should spend based on public need (not worrying about fiscal "limitations," nor spending on Alien invasion defense), and taxing simply to make sure there's not too much or too little money in the economy for it to efficiently function.

The problem with private credit is that it involves a liability to every asset.  These forms of money are also very inefficient.  We want our medium of exchange to be simple and uniform IMO... I'm not going to accept bitcoins for the sale of my car, I want dollars.... if I choose to buy gold with that, or some other form of currency for savings, I can immediately do that.

I totally agree with you on the gold standard though... I think our gold standard ought to exist in our safe deposit boxes and safes... not via a government promise.

Further, as long as the government has the ability to tax, borrow and spend, it very definitely has the power to control the economy.  I see fiat currency issuance as a something we should embrace, and then use our mental energy to focus on public purpose and economic capacity usage when deciding how to spend & tax, respectively.

Maybe it's in there somewhere, but what exactly do you suggest the government use as a system of money?

MG,

Also, referring to endless wars, poverty and corruption?  Do you realy think the monetary policy, or the lack thereof, prevents those in any way, shape or form?