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Ziegenbartami View Drop Down
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Posts: 273 		Post Options Post Options   Quote Ziegenbartami Quote  Post ReplyReply Direct Link To This Post Topic: paper money
    Posted: 06 Dec 2009 at 23:06
Originally posted by gcle2003

There are a couple of things about gold: it's pretty well indestructible, and it's èretty, period., qualities it shares with platinum and silver and other 'noble' metals. So if you've got an ounce of gold tucked away now, you can be pretty sure that you'll have an ounce of gold ten years from now, unless someone steals it of course, or you lend it to Bernie Madoff or something. Whereas paper (whatever it's made of) may get burnt or shredded and cowrie shells may break.
 

Not to mention it'll retain its value over the years, unlike paper currency. A unit of gold will buy you a fixed number/amount of goods or services. 50 years later, that same amount of gold will buy you the same number/amount of goods/services, whereas paper currency is easily devalued, and will buy you fewer goods/services after the same period of time.
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Posts: 9301 		Post Options Post Options   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 07 Dec 2009 at 18:07
That's not true. The value of gold, like any other commodity, varies with suppply and demand, including artificial constraints on supply. So it's value in terms of other commodities dropped significantly in 16th century Europe (while going up in 16th century south America: I don't know what was happening in the east), More recently it declined steadily in the firties and sixties, shot up in the seventies, and has wandered up and down ever since. Any time South Africa feels like it, the value of gold could be pushed down by dumping, but of course the regime is unlikely to do that, just as Saudi Arabia is unlikely to start dumping oil.
 
And if Indians stop socking away all they can get hold of, who knows what would follow.
 
Actually diamonds keep their commodity value better than gold does, but that's mostly because supply is artificially and tightly controlled to just that end. And there's a lot of truth in the old saying that land is best, because they aren't making it any more.
 
PS in the early forties an ounce of gold bought you about 700 bottles of Coca Cola (retail): at the end of the 60s it bought about 350. Now it'll buy more like 4,000 but that also reflects the fact that the value of a coke against other things has dropped dramatically.
 
Basically though, nothing's safe.
 
 


Edited by gcle2003 - 07 Dec 2009 at 18:09
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Posts: 273 		Post Options Post Options   Quote Ziegenbartami Quote  Post ReplyReply Direct Link To This Post Posted: 04 Feb 2010 at 01:44
Originally posted by erkut

By the way i also heard that paper money is not actually paper but cotton. Ä°s that true? Ermm

Yes, it's a blend of cotton and linen, which is much more durable than mere paper.
http://shine.yahoo.com/channel/life/15-things-you-never-noticed-on-a-dollar-575113/?pg=1
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Posts: 273 		Post Options Post Options   Quote Ziegenbartami Quote  Post ReplyReply Direct Link To This Post Posted: 04 Feb 2010 at 01:47
For those wondering why gold has long been considered a medium of exchange (ie, money), I'd highly suggest reading the first chapter of The Mystery of Banking by Murray Rothbard.
http://mises.org/Books/mysteryofbanking.pdf
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Posts: 9301 		Post Options Post Options   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 04 Feb 2010 at 11:27
I don't think anyone on earth would deny that gold has not only long been considered a medium of exchange, but has indeed been a medium of exchange for long periods in much of the world.
 
What's wrong is the belief that there is something unique about gold that means it should have specific status. It is no more reliable as a store of value that any other product - as the Coke example I gave indicates.
 
As a collection of fables and fairy tales of the 'lies-to-children'[1] kind, the chapter does indeed marshal all the arguments for the unique desirability of gold, but it fails to consider the counter arguments , and gets away with totally invalid assertions like the reference to von Mises 'money always emerges from free market activity', which has about as much validity as Say's Law.
 
Apart from anything else the passage contains the seeds of its own destruction in its admission that money is created by banks. That's correct. But banks don't create gold. So gold isn't money and money isn't gold.
 
[1] 'Lies-to-children' - phrase invented by Ian Stewart and Jack Cohen for the answers you give to children when the real answers are too difficult for them at that stage.
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Posts: 273 		Post Options Post Options   Quote Ziegenbartami Quote  Post ReplyReply Direct Link To This Post Posted: 05 Feb 2010 at 03:44
Originally posted by gcle2003

I don't think anyone on earth would deny that gold has not only long been considered a medium of exchange, but has indeed been a medium of exchange for long periods in much of the world.
 
It is no more reliable as a store of value that any other product - as the Coke example I gave indicates.

If it's so unreliable, then name another product that is more stable in price. Your Coke example alone indicates hardly anything, other than the value of Coke--it could just as easily reflect changes in the price due to different methods of production or shipping, or the overall decline in the value of the dollar as it was devalued by the US government to pay for the Vietnam War, ending in the complete abandonment of the gold standard in 1971.
 
Originally posted by gcle2003

As a collection of fables and fairy tales of the 'lies-to-children'[1] kind, the chapter does indeed marshal all the arguments for the unique desirability of gold, but it fails to consider the counter arguments, and gets away with totally invalid assertions like the reference to von Mises 'money always emerges from free market activity', which has about as much validity as Say's Law.

What counter-arguments? And how is Say's Law or von Mises' claim that money emerges from free market activity invalid?

Originally posted by gcle2003

Apart from anything else the passage contains the seeds of its own destruction in its admission that money is created by banks. That's correct. But banks don't create gold. So gold isn't money and money isn't gold.

You've missed the point of Rothbard's argument. He "admits" that money is created by banks only insofar as he acknowledges the current practice of fractional reserve banking, which he opposes. No, banks do not create gold, but for paper money to have any intrinsic value, it has to be backed by a substance with intrinsic value of its own, such as gold. Money is nothing other than a medium of exchange, and for centuries gold and silver were such mediums for their high value-to-mass ratio. All the banks did was to issue a lighter, more easily transportable form of money in the form of paper, which is nothing more than receipts entitling the bearer to the amount of gold or silver specified on the receipt upon demand. In other words, paper money is nothing more than a gold substitute, and the money supply can only be expanded by expanding the reserves of bullion or devaluing the currency (the latter of which being the case for many decades and likely to continue in the foreseeable future).
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Posts: 9301 		Post Options Post Options   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 05 Feb 2010 at 12:02
Originally posted by Ziegenbartami

Originally posted by gcle2003

I don't think anyone on earth would deny that gold has not only long been considered a medium of exchange, but has indeed been a medium of exchange for long periods in much of the world.
 
It is no more reliable as a store of value that any other product - as the Coke example I gave indicates.

If it's so unreliable, then name another product that is more stable in price.
There isn't one. That's rather my point. However, I already suggested diamonds. Or platinum. Whenever one product varies in value compared to another, it's totally arbitrary which is seen as the yardstick and which as the variable. In fact both are variables.
Your Coke example alone indicates hardly anything, other than the value of Coke--it could just as easily reflect changes in the price due to different methods of production or shipping, or the overall decline in the value of the dollar as it was devalued by the US government to pay for the Vietnam War, ending in the complete abandonment of the gold standard in 1971.
Prices shift for one reason or another, usually because their relative scarcity changes. The point of the Coke example is that it exemplifies how Coke can be priced in gold, or gold priced in Coke. What remains constant is that an ounce of gold is always an ounce of gold, and a bottle of Coke is always a bottle of Coke.
 
Originally posted by gcle2003

As a collection of fables and fairy tales of the 'lies-to-children'[1] kind, the chapter does indeed marshal all the arguments for the unique desirability of gold, but it fails to consider the counter arguments, and gets away with totally invalid assertions like the reference to von Mises 'money always emerges from free market activity', which has about as much validity as Say's Law.

What counter-arguments? And how is Say's Law or von Mises' claim that money emerges from free market activity invalid?
As for von Mises, his claim is that money always emerges from free market activity. It's the 'always' that is wrong.
Money is created by banks, including the central bank if there is one officially, or by some other government branch, notably any branch responsible for minting coins or issuing treasury notes. Coins and notes are given value by edict of the government, which decrees them to be legal tender. (This is just as true in the US as anywhere else - cf Section 8 Article 1 of the Constitution.)
 
Other forms of money can generally be represented as promises to pay notes and coin, though the promises are formal and cannot all be met.
 
As for Say, the law doesn't work because it overlooks that some members of society may be cut completely out of the economic process through unemployment (for whatever reason). It is therefore not true that there is always enough monetary supply to balance the supply of goods. Soif there isn't enough monetary demand, supply of goods goes down, increasing unemployment and driving monetary demand down even more. Optimum employment is therefore not guarateed, contrary to Say.
 
The economic record demolishes Say anyway. Persisting sub-optimum employment at equilibrium is a relatively common phenomenon.
 
As for the counter argumnts, the inelasticity of gold supply is one, guaranteeing that money supply cannot increase to keep pace with, and fund, economic growth. No country has been able successfully to stay on the gold standard for long, at least without frequent intermittent depressions. Attempts to do so for too long have been ruinous, as with Britain's return to the gold standard in the 'twenties.

Originally posted by gcle2003

Apart from anything else the passage contains the seeds of its own destruction in its admission that money is created by banks. That's correct. But banks don't create gold. So gold isn't money and money isn't gold.

You've missed the point of Rothbard's argument. He "admits" that money is created by banks only insofar as he acknowledges the current practice of fractional reserve banking, which he opposes. No, banks do not create gold, but for paper money to have any intrinsic value, it has to be backed by a substance with intrinsic value of its own, such as gold.
No it doesn't, and for that matter gold has no intrinsic value of its own, or at least not much. In fact one of the things about gold is that it has much less intrinsic value than stuff like oil, housing, land, cattle, transistors ... or anything else that actually contributes something to the quality or length of life.
 
I don't know what you mean by the 'current practice' of fractional reserve banking. It's as old as banks. Moreover abolishing fractional reserve banking wouldn't get rid of the problem anyway. Say customer X deposits $1000 with the bank (in gold or whatever). The bank then lends $50 to customer Y. That's not 'fractional' reserve banking, but it remains true that if customer X should want his money he can't have it: or the bank has to claw it back from Y, which won't be possible if the term of the loan isn't up.
 
 Money is nothing other than a medium of exchange, and for centuries gold and silver were such mediums for their high value-to-mass ratio. All the banks did was to issue a lighter, more easily transportable form of money in the form of paper, which is nothing more than receipts entitling the bearer to the amount of gold or silver specified on the receipt upon demand. In other words, paper money is nothing more than a gold substitute, and the money supply can only be expanded by expanding the reserves of bullion or devaluing the currency (the latter of which being the case for many decades and likely to continue in the foreseeable future).
A fundamental problem there, as I already pointed out, is that you cannot just expand the reserves of bullion. Not even if you are South Africa or Russia. All you can do with gold is increase its price in dollars or what you will - which is what you of course refer to as devaluing the currency, but is actually revaluing gold, and which happened under FDR and Nixon before it was finally freed.
 
Not only can you not expand gold reserves, you also cannot prevent gold reserves leaking away, so you're left with a dilemma if you insist that money must be gold backed and you don't have any gold to back it with.
 
Paper money has value because the holder of it believes he will be able to spend it usefully. Credit cards - another manifestation of money - similarly have value because the person accepting them expects to be paid in turn with paper money. Except of course that nowadays he doesn't even expect that: he expects a few integrated circuits around the world to click and switch and end up in his bank's computer indicating that he is worth more 'money' now than the was before.
 
It is of of course a big bubble dependent omn faith in the system to keep it going, but then it ever was, even when kings borrowed gold coins from Lombard bankers.
 
Have you ever stopped to think why every country came off the gold standard?


Edited by gcle2003 - 05 Feb 2010 at 12:10
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Posts: 3467 		Post Options Post Options   Quote drgonzaga Quote  Post ReplyReply Direct Link To This Post Posted: 05 Feb 2010 at 17:04
Paper money, just as with religion, is a function of strength in faith! Hedging with gold as an insulator against inflation is totally illusory.
 
And gcle is right! Having even paper money in one's pocket is a sign of the untrustworthy.
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