Why doesn't the world have one currency?

[jay gw]

Other than tradition, is there any reason for the world to have multiple/national currencies?

It seems like it would make more sense to have one global currency, rather than 150 or so, because there wouldn't be any disastrous devaluations, the kind that plague poor countries. About 20 years of growth in Asia was wiped away when they had their currency problems. Same thing with Mexico a couple of decades ago, the middle class was mostly wiped out.

Only the rich survive a serious devaluation of a nation's currency because they hold multiple currencies or just hold US dollars. The poorest don't care because they don't have any currency anyway.

But holding only US dollars/euros means that a poor country's currency will never see a value increase. If everyone just holds euros, why bother increasing the value of the peso?

Does anyone have insights?

[apoger]

Does anyone have insights?


... that you cut many classes in school?

[Luke T.]

I'll give you a hint.

One Euro started out as equal to one American dollar.

[Kerberos]

Having different currencies introduce flexibility. If a country for some reason looses competitiveness then this can be compensated for by lowering the exchange rate. If all countries had the same currency then the compensation would have to take place by fx a pay reduction. This is effectively the same as a devaluation but it generally takes longer time to accomplish leading to a transfer period with higher unemployment.

[jay gw]

One Euro started out as equal to one American dollar.

So what? Every country has regions of properity and poverty. So does the world. What difference does it make that one region of the world would do better economically than another? That's not an argument for one currency.

The reason it's not is because economic progress is measured in many ways, not one single way using currency as a guide. There's productivity, GDP, wages, prices and so on.

Transforming from many to one currency does nothing to change the measure of progress and economic planning. It just means that countries will not lose all progress and impoverish the middle classes because of bad planning. Overnight, the value of your biggest assets become worthless. Happens all the time.

More economic diversity underlying a currency = more stability.

Poorer nations will NEVER have strong currencies. In order to gain a stable currency, it would be necessary for them to completely revolutionize their entire nation into something Western style.

Never happens. Or at least, so few times I can't recall any.

Here's the Western model of economic aid: give the 1 percent elite in the poor country money, telling them "spend it wisely" and then bail them out when it's gone and they're broke. What they SHOULD be doing is preventing shocks to poor economies from turning disastrous in the first place.

Stupid.

[ceo_esq]

The Single Global Currency Association is trying to bring about that very thing by the year 2024.

You can check out their website at www.singleglobalcurrency.org.

[ceo_esq]

Originally posted by Luke T.
I'll give you a hint.

One Euro started out as equal to one American dollar. If I recall correctly, when the actual currency was introduced one euro was worth about $1.18. Prior to the introduction of the coins and banknotes, I think the euro traded on paper at slightly less than that.

[Zep]

http://michelin.web.infoseek.co.jp/cardphoto/sumigin-amex.jpghttp://lichtinsdunkel.orf.at/medias/2/591.jpghttp://www.aeroflotbonus.ru/images/card-mastercard.jpghttp://www.uni.torun.pl/en/alumni/visa/visa.jpg

Etc.

[CapelDodger]

Originally posted by jay gw
So what? Every country has regions of properity and poverty. Quite. The US has always been like that - far more in the past than now - and has always operated on the same currency. It's arguable that the single currency has helped to develop the US, as investment is pulled into low-cost regions. Currency conversion and exchange rate uncertainties are an impediment to trade.

That said, until the 1930's US banknote currency was issued by all sorts of banks, from solid through optimistic to downright fraudulent, and were often subject to discounts (or flat rejection) - exchange rates, in effect. The problem with a world currency is control of the money supply. Where's the Central Bank going to be located (CyberSpace?), and how will it be supervised? Who appoints the Board? Tricky problems just within Europe, let alone worldwide.

The Bretton Woods system of fixed exchange rates between the major trading nations was an attempt at a middle path, and worked pretty well in the 50's and 60's, but it failed in the end.

[CapelDodger]

Originally posted by Kerberos
Having different currencies introduce flexibility. If a country for some reason looses competitiveness then this can be compensated for by lowering the exchange rate.In classical economics, the exchange rate will adjust automatically. If a country's trade is in deficit its currency is flowing out of the country, increasing foreign supply and thus reducing its international value. And vice versa. But this assumes free trade and no governmental interference. It also cannot cope with the speculative flows of today, which can completely swamp normal business trading. If all countries had the same currency then the compensation would have to take place by fx a pay reduction. This is effectively the same as a devaluation but it generally takes longer time to accomplish leading to a transfer period with higher unemployment. The pay-cut only applies to the internationally-traded part of the economy. In effect, it increases the pay of forign workers. This provides an incentive for import-substitution by local producers (job creation), and a change in spending patterns. Classically speaking, that is. In a globalised economy like today's, very little is truly local.

[Art Vandelay]

Having one currency would put all the eggs in one basket: if the worldwide currency is devalued, the entire world has a problem. It also requires massive coordination: how are you going to get inflation and interest to match? And who's going to be in charge of the currency? Would all the other countries be able to trust the country in charge? What happens if two countries with the same currency go to war? How would that work?

[The Don]

One of the pre-requisites for the introduction of the Euro is that the economies of the member countries should be harmonsied in terms of their model, their position in the economic cycle and their debt positions.

This meant that (braodly) the same economic circumstances were in place in the member countries and decisions could be made based on this.

If one part of the Euro zone is racing away and requires relatively high interest rates to control things where another has real problems then a single rate would be injurious to one or both. IIRC having different interest rates within a single currency woudl merely further imbalance the economic situation as capital seeks out the high rate of return (currency movements tend to offset interest rates).

[DaChew]

I think we do have one currency. Gold. I don't think there has been a time in history or a civilization that has not valued gold. Unless you meant: "why doesn't the world have one paper currency?"

[shanek]

It is vital for a country's economy to have its own currency. Without it, you wouldn't have the international currency trade which ensures that every dollar (or whatever) that goes out of the country comes right back in.

I'll give you an example: the economically ignorant make the claim that jobs moving overseas, say, to India, is, well, "Daytukarjawbz!!!!" What they don't realize is that we still pay for the goods in dollars, but the Indian workers need to be paid in rupees. So the company gets dollars from Americans and needs to change them to rupees; it can only do this by finding someone with the appropriate number of rupees to exchange them for dollars. That person wants the dollar for a reason, and that reason is to either purchase American goods or invest in American investments. There's just nothing else that can be done with the money.

(Of course, that relation is indirect; the company could exchange the dollar to yen and the yen to rupees, or the person getting the dollars could be getting them to exchange for some other currency, but ultimately the above is what happens.)

The effect of all this is that any dollar that leaves the economy comes back in three months. And far from moaning about the trade deficit, we should realize that the trade deficit is matched dollar-for-dollar with foreign investment and the capital comes back into the economy to stimulate economic growth.

Here's a thread where this was discussed at length. Notice the blind and willful ignorance of people who just don't want to accept what you'd learn in a beginning macroeconomics class:

http://www.randi.org/vbulletin/showthread.php?s=&threadid=26226

And here's a thread partially transcribing a beginning macroeconomics class, where this exact phenomenon is discussed:

http://www.shanekillian.org/jref/macroeconomics.html

[shanek]

Originally posted by DaChew
I think we do have one currency. Gold. I don't think there has been a time in history or a civilization that has not valued gold. Unless you meant: "why doesn't the world have one paper currency?"

Gold is still the #2 form of money in the world, next to the dollar. I don't know why the economically ignorant still insist there'd be gloom-and-doom if we went back to using gold as money, except, of course, for the fact that they're economically ignorant.

Check out The Case for a Genuine Gold Dollar by Murray Rothbard (http://www.mises.org/rothbard/genuine.asp). It actually covers a lot of things that are relevant to this thread, such as the reason that currencies devaluate.

[The Don]

I'm genuinely ignorant about this (as opposed to pretending to be).

If a currency were to revert to the gold standard, would they be required to hold enough gold bullion to cover all the money in circulation (whatever that means - I think I mean notes and coins - I'm not sure what impact the growth of short term debt has on this, is my credit card viewed as cash in this context?)?
The measure is M2 which includes credit. The answer is "it depends" a 100% standard would require enough is held to cover all - there are less rigourous measures

If they do, is there enough gold to go 'round ?
If not the price of gold will rise until there is enough to go around

If there is, what effect will this have on the gold price as a great proportion of the available gold has to sit in vaults ?
It masy rise, which way have an impact on those that use gold industrially

If two currencies are tied to gold, does this mean they have a fixed exchange rate unless one or other devalues by saying that it is worth less gold ?
Yes, it used to happen regularly but infrequently

Edited to add the answers to my own questions in italics. There appear to be no independent assessments easily available, they all seem to be very pro or very anti

[DaChew]

Originally posted by shanek
Gold is still the #2 form of money in the world, next to the dollar. I don't know why the economically ignorant still insist there'd be gloom-and-doom if we went back to using gold as money, except, of course, for the fact that they're economically ignorant.

Check out The Case for a Genuine Gold Dollar by Murray Rothbard (http://www.mises.org/rothbard/genuine.asp). It actually covers a lot of things that are relevant to this thread, such as the reason that currencies devaluate.

I think the doom-and-gloom comes from the understanding that a gold standard either gold coinage or currency backed by actual gold reserves makes government deficit spending impossible. A government couldn't simply print paper without having the gold to back it up. Government spending becomes very difficult.

[jay gw]

I think it's odd that economists have to argue their ideas again and again.

If your idea is self evident, why does anyone need to argue it?

The posts about macroeconomic theory do not answer why there's a need for multiple currencies.

If people in country X had the same currency as Americans, they wouldn't need to exchange anything. Money wouldn't need to be physically cargoed to other countries. There would be printers in their country printing the money off.

And - the post about one global currency being devalued....how does that happen exactly? Devalued in relation to WHAT?

Valuations of currency are hocus pocus. Money itself isn't worth anything. The fact that people BELIEVE that it's worth something is what makes it worth something.

And - the post about inflation and interest rates. Why would it matter that two countries have different interest rates? Every country has different interest rates internally. Hasn't stopped anything, has it?

[CBL4]

Countries give up economics tools when they give up their own currency. For example, Germany is in a period of low growth and needs a lower interest. Ireland is in a period of high growth and needs a higher interest rate to prevent inflation. But because both are stuck in the Euro zone they have no flexibility.

The EU has relatively similar countries. It would be impossible to create a currency that would match the needs of China, Japan and Zimbabwe at the same time.

Of course, the flexibility can be misused by incompetent governments causing hyperinflation and massive currency devaluations.

CBL

[The idea]

Originally posted by jay gw
If people in country X had the same currency as Americans [...]Money wouldn't need to be physically cargoed to other countries. There would be printers in their country printing the money off.

What would control the amount of money printed and what would prevent money from being physically cargoed back into the US?

One day, the government of Mexico could print a million dollars in US currency and send 100 employees of the Mexican government to the US, with $10,000 each. Each employee would be instructed to buy $10,000 worth of goods and transport the goods back to Mexico. Free goods for the government of Mexico!

[CapelDodger]

Originally posted by jay gw
The posts about macroeconomic theory do not answer why there's a need for multiple currencies. The arguments given for multiple currencies are equally applicable to individual states within the US, or Wales and Scotland within the UK, or cities like New York, Paris, Singapore ... Why should oil-exporting Alaska's currency be dragged down by a poor economic performance in the Rustbelt? Let the Rustbelt devalue it's own currency to compete. If a single currency can work in as diverse a country as the US, why not world-wide? And if it doesn't work, why no secession recently?

[shuize]

Can Alaska print more dollars whenever it likes?

[The idea]

Originally posted by CapelDodger
If a single currency can work in as diverse a country as the US, why not world-wide?
Would you give to the government of North Korea the technology to produce US currency?

[shanek]

Originally posted by The Don
If a currency were to revert to the gold standard, would they be required to hold enough gold bullion to cover all the money in circulation (whatever that means - I think I mean notes and coins - I'm not sure what impact the growth of short term debt has on this, is my credit card viewed as cash in this context?)?

Yes; they would be gold certificates and tokens, or the coins could be made directly with the appropriate amount of gold.

Should you use your credit card, your credit card company would pay the cash to whomever took your card. You would then pay back your credit card company in the future, the cash plus whatever interest etc. has accrued.

If they do, is there enough gold to go 'round?

Of course. There isn't some magic number that says a dollar must be equal to a certain amount of gold. Take how much gold you have, take how much money you want in circulation, divide.

If there is, what effect will this have on the gold price as a great proportion of the available gold has to sit in vaults?

It already is sitting in vaults.

If two currencies are tied to gold, does this mean they have a fixed exchange rate unless one or other devalues by saying that it is worth less gold ?

In the long run, yes, they end up being pretty much fixed. A government could devalue its own currency, but it would be a very, very bad idea. They'd be better off purchasing gold from the market and issuing new certificates, or taking certificates out of circulation and selling the gold, depending on which way they'd want the overall currency to go.

[shanek]

Originally posted by DaChew
I think the doom-and-gloom comes from the understanding that a gold standard either gold coinage or currency backed by actual gold reserves makes government deficit spending impossible.

Not impossible; just extremely difficult. There certainly wouldn't be the unlimited debt/inflation capacity that exists today.

[shanek]

Originally posted by jay gw
I think it's odd that economists have to argue their ideas again and again.

If your idea is self evident, why does anyone need to argue it?

Because, as Nixon pointed out in his memoirs, "The politics of economics outweighs the economics of economics." Politicians don't like being told that their gravy train is economically spurious.

And - the post about one global currency being devalued....how does that happen exactly? Devalued in relation to WHAT?

The real value of the currency. Inflation, or devaluation, is the value of the worth of the currency itself decreasing.

Think of all the money that is just sitting around doing nothing. In pockets, in purses, in safes, stuffed in mattresses, etc. That money isn't being spent, but it isn't being saved in a bank where it can be invested. When the value of money is high, people want to hold on to it. But when the value of money drops, people want to get rid of it faster. This is most noticeable in periods of hyperinflation where people spend their money almost immediately upon getting it.

If you have $20 in your pocket, you have many alternatives for what you could do with it right now; but if you aren't doing any of those things, it means you value the $20 more than any of the things you could be using it for. You're wanting to keep it, for whatever reason. That makes it more valuable. To rush out and spend it immediately means you value it less; if everyone does that, this is inflation.

[shanek]

Originally posted by The idea
One day, the government of Mexico could print a million dollars in US currency and send 100 employees of the Mexican government to the US, with $10,000 each. Each employee would be instructed to buy $10,000 worth of goods and transport the goods back to Mexico. Free goods for the government of Mexico!

And inflation for everybody. The Nazis did exactly this with British currency in World War II, and it almost completely wrecked the British economy.

[shanek]

Originally posted by shuize
Can Alaska print more dollars whenever it likes?

No. That would be a violation of Article I Section 10 of the Constitution. Under the Articles of Confederation they could, and the currency, called the Continental, very quickly ended up being worthless, giving us the phrase, "Not worth a Continental." So our framers were determined not to let that happen again.

[Bjorn]

Originally posted by jay gw
And - the post about inflation and interest rates. Why would it matter that two countries have different interest rates?(Let's imagine) I have a hundred thousand dollars in the bank here in the US. I get 1,5% a year. I could get 8% in Brazil.

I would make $6,500 more a year by moving my money to Brazil - that is, unless their currency is devaluated. :(

The difference in interest rates pretty much reflects the strenght, or perceived strenght, of the currencies.

[shanek]

Here's the explanation from the Macroeconomics thread (http://www.shanekillian.org/jref/macroeconomics.html):

Supply and demand in the loanable funds market determines the real interest rate; the real interest rate determines the amount of NFI; NFI determines the supply of dollars available in the currency exchange market; and that supply of dollars combined with the demand for dollars gives us the real exchange rate...We have a demand and supply of loanable funds. This market determines an equilibrium real interest rate. That, in turn, will determine the level of NFI.

Remember, NFI is downward-sloping with respect to real interest rates. So when US interest rates are very high, the demand for foreign assets by US citizens is very low. At the same time, the demand for US assets by foreign investors is very high. Why? If US financial assets, like bonds, offer a high interest rate, then people from all over the world, including the US, will want to buy them. People go where they can get the highest interest rate. A high US interest rate means that we would import a lot of capital and export very little capital. As the domestic interest rate declines, then US bonds don't pay as much. So demand for US assets by foreign investors also falls, and the demand for foreign assets by US investors will increase. In that case, we're actually exporting a lot of capital. So the NFI is downward-sloping. So we've got this downward-sloping NFI curve and we've got a real interest rate determined by the loanable funds market. These two things together give us the equilibrium level of NFI—exactly the amount of NFI that takes place.

Now that we know NFI, we can pull in our last step. We know that the supply of dollars into the foreign currency exchange market is given by the equilibrium level of NFI. Earlier, in our first look at this market, we pulled this supply curve out of nowhere. Now we can see exactly where it comes from. The real interest rate combined with the NFI schedule gives us the supply of dollars in the foreign currency market. And this supply curve, when combined with the demand curve, gives us an equilibrium real exchange rate.

So, here's how we tie the markets together: the demand and suppy of loanable funds gives us an equilibrium real interest rate, which in turn determines a level of NFI, and that in turn gives us an equilibrium real exchange rate.

If people begin to save more (remember, savings is the source of loanable funds), we'd shift the supply of loanable funds schedule out. And, of course, the first thing that happens as a result of that increased supply of savings is that the equilibirum interest rate declines. We find that NFI will be larger than before. Why? If the US interest rate declines, American savers will want to buy foreign bonds more than they did before, because American bonds don't offer as high an interest rate as before. At the same time, there is a reduced incentive for foreign savers to buy US dollar assets because the rate of interest on those assets is now relatively lower than before. So on both counts. we find NFI increasing. Now, this increase in NFI means that there's a larger supply of dolalrs being pushed into the foreign exchange market. The supply of dollars increases in the foreign exchange market, and in order for the market to get back to equilibrium, we have to have a decline in the real exchange rate. So if US consumers choose to save more, that leads to a lower interest rate in the US, an increase in NFI, and a decrease in the real echange rate.

[Drooper]

Originally posted by jay gw
I think it's odd that economists have to argue their ideas again and again.

If your idea is self evident, why does anyone need to argue it?

You're right. Just like that silly theory of evolution.

Aa one extreme, a single global currency would be as silly as a separate currency for every household at the other.

The reasons have been stated above by others. In short they allow exchange rates, wich are just relative prices. As an (limited) analogy, try to imagine what would happen if you permanently fixed all relative prices within your country. As in: the price of a PC would forever be fixed.

[Art Vandelay]

Originally posted by DaChew
I think we do have one currency. Gold. I don't think there has been a time in history or a civilization that has not valued gold.
But can you walk into most stores and buy something with gold? Diamonds are valued, too. That doesn't make them currency.

shanekWithout it, you wouldn't have the international currency trade which ensures that every dollar (or whatever) that goes out of the country comes right back in.I don't see how separate currencies are need for that. If a California firm outsources labor to Arkansas, they will have to pay the workers dollars. The firm will have to get those dollars somehow. Eventually, the chain has to lead back to Arkansas.

Of course. There isn't some magic number that says a dollar must be equal to a certain amount of gold. Take how much gold you have, take how much money you want in circulation, divide.The problem with that is that there is a certain amount of real money that needs to be in circulation. Changing the gold:dollar ratio creates more nominal money, but it doesn't create any more real money. If we need X dollars, what that means is that we need X today dollars. Decreasing the gold:dollar would make more dollars, but only by devaluing the dollar, which would in turn increase the number of dollars needed. The dollars created wouldn't be today dollars, they would be devalued dollars.

Originally posted by jay gw
If your idea is self evident, why does anyone need to argue it?What makes you think the ideas are self-evident?

And - the post about one global currency being devalued....how does that happen exactly? Devalued in relation to WHAT?To its current value, of course.

And - the post about inflation and interest rates. Why would it matter that two countries have different interest rates? Every country has different interest rates internally. Hasn't stopped anything, has it? Are there countries with the same currencies but widely disparate interest rates?

[UserGoogol]

A somewhat tangential question I don't think deserves its own thread:

When the government prints money, where do they put it?

[The Don]

Originally posted by shanek
And inflation for everybody. The Nazis did exactly this with British currency in World War II, and it almost completely wrecked the British economy.
This is factually untrue. The Nazis attempted to do this but were in fact unsuccessful. Thia was due in the main to the very poor quality of the notes produced.

[Drooper]

Originally posted by UserGoogol
A somewhat tangential question I don't think deserves its own thread:

When the government prints money, where do they put it?

Usually it is a Central Bank that has responsibility for printing notes (although IIRC it is the responsibility of the Treasury in the US), which is usually contracted out to a security printer.

Then the notes are just shipped out to banks in armoured cars.

[The Don]

The UK Royal Mint produces currency for a number of foreign countries and managed to lose money doing so:

http://news.bbc.co.uk/1/hi/business/2335347.stm

[Drooper]

Originally posted by shanek
Gold is still the #2 form of money in the world, next to the dollar. I don't know why the economically ignorant still insist there'd be gloom-and-doom if we went back to using gold as money, except, of course, for the fact that they're economically ignorant.

And the econ 101 assignment I am setting you this week is to name the three functions of money and explain how gold fulfils any more than one of them.

When you do that you can start calling other people ignorant about economics.

I think I have said this to you before. If you are so interested in economics, which you appear to be, why not enrol in a reputable course?

[DaChew]

Originally posted by Art Vandelay
But can you walk into most stores and buy something with gold?

Yes, you can. Gold and silver coins dating back to the early 20th century in the U.S. are still legal tender regardless of age. You would be foolish to use them this way unless you enjoy throwing money away but they will work. Also, there isn't a bank in the world that would not exchange local currency for gold. You will lose a percentage in the exchange for the bank's service just as you would exchanging money.

[Drooper]

Originally posted by DaChew
Yes, you can. Gold and silver coins dating back to the early 20th century in the U.S. are still legal tender regardless of age. You would be foolish to use them this way unless you enjoy throwing money away but they will work. Also, there isn't a bank in the world that would not exchange local currency for gold. You will lose a percentage in the exchange for the bank's service just as you would exchanging money.

But as you yourself point out in your example you are not paying with gold, but currency.

Gold does not fulfil the function of a means of exchange.

Damn!!! I just gave Shanek a clue for his big assignment.

[DaChew]

Originally posted by Drooper
Gold does not fulfil the function of a means of exchange.


Define "means of exchange" please.

[Skeptic]

[QUOTE]Originally posted by The Don
The UK Royal Mint produces currency for a number of foreign countries and managed to lose money doing so:

It must take some sort of special talent, managing to lose money while running a mint. One wouldn't think that is even logically possible.

I think it's odd that economists have to argue their ideas again and again.

If your idea is self evident, why does anyone need to argue it?

I think it is odd that physics textbooks still publish that same old Newtonian mechanics stuff. If it's so true, why bother to keep arguing it?

I think it is odd that mathematicians still claim that 2+2=4. If it's that obviously true, why keep arguing it?

I think it is odd that politicians claim that they want democracy and peace all the time. If democracy and peace are so wonderful, why keep making speeches in their favor?

[shanek]

Originally posted by Art Vandelay
I don't see how separate currencies are need for that. If a California firm outsources labor to Arkansas, they will have to pay the workers dollars. The firm will have to get those dollars somehow. Eventually, the chain has to lead back to Arkansas.

Because they would be paying the workers the dollars directly, and those dollars would very likely not be spent or invested in the American economy. But if you have to exchange them for rupees, then you ensure those dollars would have to come back in. It isn't about how the firm gets the dollars; it's about what happens to the dollars when they pay their workers, what happens when the dollars go outside the country.

The problem with that is that there is a certain amount of real money that needs to be in circulation.

Not a problem. As I said, take that amount, take how much gold you have, divide.

If we need X dollars, what that means is that we need X today dollars. Decreasing the gold:dollar would make more dollars, but only by devaluing the dollar,

No, it wouldn't! The dollar would still have the same market value; the only difference is it would also have tangible value in that it would be redeemable for gold, which would increase its real value, not devalue it!

[shanek]

Originally posted by UserGoogol
When the government prints money, where do they put it?

That is hardly a straightforward question. Money in the US is printed by the Bureau of Engraving and Printing for the Federal Reserve. The Fed buys the money at about 3½¢ per bill.

The Fed orders new money when it needs to increase the number of reserves. After it prints it, the money gets loaned out; they either purchase bonds from the Treasury whenever the government runs a deficit, or they loan it out to banks at the discount rate.

If you really want to know how all this works, an excellent book (which is also a good and surprisingly quick read) is The Case Against the Fed by Murray Rothbard.

[The Don]

Originally posted by Skeptic
[QUOTE]Originally posted by The Don
The UK Royal Mint produces currency for a number of foreign countries and managed to lose money doing so:

It must take some sort of special talent, managing to lose money while running a mint. One wouldn't think that is even logically possible.

'Fraid so. Apparently their volumes (and hence income) fell but their fixed costs remained, well, fixed.

[shanek]

Originally posted by The Don
This is factually untrue. The Nazis attempted to do this but were in fact unsuccessful. Thia was due in the main to the very poor quality of the notes produced.

The historical record disagrees with you. They did such a good job that they could even deposit their notes at the Bank of England without question. The forgeries were called "almost perfect." It forced the Bank of England to recall all their notes higher than £5 and reissue them with new designs.

[shanek]

Originally posted by Drooper
Usually it is a Central Bank that has responsibility for printing notes (although IIRC it is the responsibility of the Treasury in the US),

Nope...it was until 1913, but now it's the responsibility of our (unconstitutional) central bank, the Federal Reserve.

[shanek]

Originally posted by Drooper
And the econ 101 assignment I am setting you this week is to name the three functions of money and explain how gold fulfils any more than one of them.

1) Medium of exchange; gold has been used for this throughout history.
2) Store of value; I don't think anyone is going to doubt gold's use here.
3) Unit of account; you can argue that gold possibly doesn't meet this one, but the reality is that throughout history units of accounts have often been measured on weights of gold.

Gold is still the #2 form of money behind the dollar because when the dollar starts to inflate, people start buying more gold, and vice-versa. Talk to pretty much any investor and they'll confirm this.

I think I have said this to you before. If you are so interested in economics, which you appear to be, why not enrol in a reputable course?

I have taken reputable courses, thank you very much.

[The Don]

Originally posted by shanek
The historical record disagrees with you. They did such a good job that they could even deposit their notes at the Bank of England without question. The forgeries were called "almost perfect." It forced the Bank of England to recall all their notes higher than £5 and reissue them with new designs.
You are quite wrong when you intially said thatThe Nazis did exactly this with British currency in World War II, and it almost completely wrecked the British economy
It did not almost completely wreck the economy.

Notes higher than £5 were comparatively rare at the time (the equivalent of notes hogher than $100 in value in use in the U.S.)

The war DID have massive economic repercussions but I cannot find any source which ascribes these to the volume of forged bank notes in circulation.

[shanek]

Originally posted by Skeptic
It must take some sort of special talent, managing to lose money while running a mint. One wouldn't think that is even logically possible.

Not really; the US Mint stopped making pennies out of copper when it started costing 2½¢ to make a penny.

[jay gw]

The real value of the currency. Inflation, or devaluation, is the value of the worth of the currency itself decreasing.

The value of the global currency could be set by something other than the value in relation to other currencies.

If the government decides to print less or charge more to banks for the money, making the costs higher, then that would control the circulation. That's what they do internally with the Federal Reserve. That doesn't change, it just means instead of one country's banks, it included many countries.

I still don't see a very good reason why there shouldn't be one global currency, or maybe 4 or 5 regional currencies. For example, the US/Mexico/Canada and the Carribbean could have one currency.

The economies of neighboring countries are ALREADY interlocked. When one rises, they all tend to rise. When one falls, they all start falling.

About 10 years ago or so, the Asian countries started having serious problems with their currencies. It all started in one country, I think Japan and then everyone fell into the sewer. Countries that border each other are already economically linked. Why have multiple currencies?

[Drooper]

Originally posted by shanek
1) Medium of exchange; gold has been used for this throughout history.
2) Store of value; I don't think anyone is going to doubt gold's use here.
3) Unit of account; you can argue that gold possibly doesn't meet this one, but the reality is that throughout history units of accounts have often been measured on weights of gold.

Gold is still the #2 form of money behind the dollar because when the dollar starts to inflate, people start buying more gold, and vice-versa. Talk to pretty much any investor and they'll confirm this.



I have taken reputable courses, thank you very much.

For 1 correct out of three you get an F.

Gold is NOT a medium of exchange. (historically, we used to use all sorts of things for exchange)
Gold is NOT a unit of account.
Gold IS a store of value.

Ergo it is not money.

And there some who buy gold as an inflation hedge. But simply as an asset with (relatively) fixed supply. Ther eis also flight to other assets, commodities as well.

Repeat after me. Gold is not money.

[CapelDodger]

Originally posted by The idea
Would you give to the government of North Korea the technology to produce US currency? A single world currency is desirable in principle, but there would have to be a lot of changes in the world before it became workable. Currency conversion costs and uncertainties are an impediment to trade, and therefore, in my opinion, undesirable. But there are other impediments, and other undesirables. Different standards on workers' health and safety, child labour, forced labour, environmental standards, tariffs and so on are also impediments. Member countries would have to provide certain basic standards, and free trade.

The process could begin with the developed nations that engage in most of international trade, and other countries could join as and when they fulfilled the necessary conditions. A Central Bank of some sort would have to exist to manage the money-supply. As the (evolving) European Central Bank does for the Euro.

All of this is blue skies thinking. I doubt that any of us will live to see it.

[Drooper]

Originally posted by CapelDodger
A single world currency is desirable in principle....

I would have to disagree with this entirely.

It is not a question of whether it would be desirable or not, but whether it would be optimal.

I can not imagine the circumstances EVER arising when it would be optimal.

[CapelDodger]

Originally posted by Drooper
I would have to disagree with this entirely.

It is not a question of whether it would be desirable or not, but whether it would be optimal.

I can not imagine the circumstances EVER arising when it would be optimal. If it's never optimal for the world, it's never optimal for the US. Currency conversion and uncertainties impose a cost on trade which has nothing to do with the traded goods (or services). Currency speculation also distorts trade, and currency manipulation is a constant temptation to governments (see China currently). On an otherwise level playing-field, a single currency would eliminate conversion and hedging costs without otherwise affecting trade and thus would be a good thing.

[Drooper]

Originally posted by CapelDodger
If it's never optimal for the world, it's never optimal for the US. Currency conversion and uncertainties impose a cost on trade which has nothing to do with the traded goods (or services). Currency speculation also distorts trade, and currency manipulation is a constant temptation to governments (see China currently). On an otherwise level playing-field, a single currency would eliminate conversion and hedging costs without otherwise affecting trade and thus would be a good thing.

FX costs are the tiniest proportion of trade costs.
Compared with tarriff, regulatory, customs, insurance costs etc. that are associated with international trade, and could be far more easily reduced, they aren't even worth measuring.

By comparison, the cost imposed by a single currency are of a significant magnitude - even in a country like the US.

For example the Euro area is bearing a massive cost for their single currency, just as the Eastern Lander in Germany did before that. Other countries that are at the limit of their optimal currency area include Italy, the UK, and France - all of which would probably be better off if the split into separate monetary areas.

But if you want a good example of the absurdity of stretching monetary areas too widely, just go to Argentina, which Dollarised. Once an assymmetric shock hits such disparate regions within a common currency area the shock to the real economy (output, employment) can be shocking.


A single global currency will always be a ridiculous idea from this perspecitve alone.

[Art Vandelay]

Originally posted by shanek
Because they would be paying the workers the dollars directly, and those dollars would very likely not be spent or invested in the American economy. What are the workers going to do with them, then? Make paper hats?

It isn't about how the firm gets the dollars; it's about what happens to the dollars when they pay their workers, what happens when the dollars go outside the country.The two come down to the same thing. A situation in which dollars flow into India, but not out of, is simply not sustainable.

Not a problem. As I said, take that amount, take how much gold you have, divide.Okay, say we need one trillion dollars in circulation. And say gold is selling at $10/gram (IOW, one dollar is worth 100 milligrams). Logic says that to be fully backed by gold, the dollars require 100 billion grams (or 100 kilotons). But say we only have 1 billion grams. Then that would mean that each dollar would be backed by 1 milligram. So in a world in which one dollar is worth 100 milligrams, we are going to guarantee that each dollar can, at any time, be turned in for 1 milligram? I guess one could call that being "backed" by gold, but only in a rather trivial sense. If we rely on the gold backing to support the value of money, the dollar will experience a 99% devaluation.

No, it wouldn't! The dollar would still have the same market value; the only difference is it would also have tangible value in that it would be redeemable for gold, which would increase its real value, not devalue it! Except that under your scheme, there is simply no way to BOTH keep the market value, AND keep it redeemable for its full market value. Offering holders of dollars a deal they would be a fool to accept would not increase its value.

[shanek]

Originally posted by Drooper
For 1 correct out of three you get an F.

Gold is NOT a medium of exchange. (historically, we used to use all sorts of things for exchange)

And still do. Ever heard of e-Gold?

Gold is NOT a unit of account.

Again, e-Gold?

[shanek]

Originally posted by Art Vandelay
What are the workers going to do with them, then? Make paper hats?

No, they would be spending them in the Indian economy, duh!

Are you aware that there are localities that are using their own money, only useful in that area? For example, the Ithica Hour? It's there for precisely that reason: to avoid capital flight.

Okay, say we need one trillion dollars in circulation. And say gold is selling at $10/gram

It's irrelevant what gold is trading at on the commodities market.

Except that under your scheme, there is simply no way to BOTH keep the market value, AND keep it redeemable for its full market value.

Again, this has nothing to do with the market value. You can redeem the gold not at the market value, but at whatever the gold standard is set to. Or, you can use the dollar to purchase gold in the commodities market; but that just moves the dollar to where it can be spent by someone else. Redeeming the dollar takes it out of circulation.

[Art Vandelay]

Originally posted by shanek
No, they would be spending them in the Indian economy, duh!
So they give the dollars to other Indians. That doesn't answer my question. What do these Indians do with the dollars?

Are you aware that there are localities that are using their own money, only useful in that area? For example, the Ithica Hour? It's there for precisely that reason: to avoid capital flight.
That's simply an argumentum ad populum: "people in Ithaca think that separate currencies stop capital flight, therefore it does". Sorry, not much of an argument.

It's irrelevant what gold is trading at on the commodities market.
Then I'd like for you to explain what it means for the value of a dollar to be backed by gold, if a dollar can be redeemed for only a small portion of that value. According to that logic, dollars are already backed by gold. Go to any bank in the nation and ask whether you can turn in a thousand dollars in exchange for a gram of gold. I'm sure they'll agree.

What you are proposing is a completely vapid meaning of "backed" by gold. Only part of the value would be backed by gold, and on top of that, that portion wouldn't even be guaranteed. The whole point of being backed by gold is that one can turn in money at any time for gold. If the formula is total gold/money needed, then any inflation would cause the "money needed" portion of the equation to go up, reducing the redemption value of a dollar. So how is that any different from the current situation?

Again, this has nothing to do with the market value. You can redeem the gold not at the market value, but at whatever the gold standard is set to.
If the redemption value is less than the market value, then it is not backed by gold. The only possible way that the market value could be greater is if people attach value to it beyond its redemption value.

[UserGoogol]

Originally posted by shanek
And still do. Ever heard of e-Gold?



Again, e-Gold?

I think e-Gold is more of a Gold-backed-currency than Gold itself. I'm not sure what difference this makes, but I'm sure the difference could be viewed as meaningful by someone, if not you.

[shanek]

Originally posted by Art Vandelay
So they give the dollars to other Indians. That doesn't answer my question. What do these Indians do with the dollars?

Mostly give them to other Indians. They don't have to return to the American economy like they do now.

That's simply an argumentum ad populum: "people in Ithaca think that separate currencies stop capital flight, therefore it does". Sorry, not much of an argument.

:rolleyes:

Then I'd like for you to explain what it means for the value of a dollar to be backed by gold, if a dollar can be redeemed for only a small portion of that value. According to that logic, dollars are already backed by gold. Go to any bank in the nation and ask whether you can turn in a thousand dollars in exchange for a gram of gold. I'm sure they'll agree.

Try it and see. The only way you can get gold for your dollars now is in the commodities market, where the price of gold fluctuates. FDR actually made what you're saying illegal in 1933.

What you are proposing is a completely vapid meaning of "backed" by gold. Only part of the value would be backed by gold, and on top of that, that portion wouldn't even be guaranteed.

The value of the dollar would be defined as a certain weight of gold, and that would be guaranteed. You're not reading.

The whole point of being backed by gold is that one can turn in money at any time for gold. If the formula is total gold/money needed, then any inflation would cause the "money needed" portion of the equation to go up,

There wouldn't be inflation! We didn't have inflation in this country as long as the dollar was tied to a specific weight of gold. Abraham Lincoln used a dollar that had the same value as the one George Washington used.

Please learn what you're talking about.

[shanek]

Originally posted by UserGoogol
I think e-Gold is more of a Gold-backed-currency than Gold itself.

Nope. E-Gold is traded by weight.

[bjornart]

Originally posted by UserGoogol
I think e-Gold is more of a Gold-backed-currency than Gold itself.

Originally posted by shanek
Nope. E-Gold is traded by weight.
The e-gold people themselves seem to disagree with you:

http://www.e-gold.com/unsecure/qanda.html

e-gold is an electronic currency
AUG is an abbreviation for the currency unit "grams of gold"

[Leif Roar]

Originally posted by shanek
Of course. There isn't some magic number that says a dollar must be equal to a certain amount of gold. Take how much gold you have, take how much money you want in circulation, divide.

Then deal with the problems that arise because a) gold becomes far too expensive to use for anything other than currency (Gold is actually used for stuff besides jewelry, after all,) b) people who have a few gold rings lying around are suddenly made much richer than before (with the reciprocal effect that people who do not own any gold becomes much poorer,) c) the higher value of gold and future technologies makes it profitable to extract gold from seawater, and the currency is devalued by a massive influx of new gold (re the collapse of the Spanish economy because of the imported gold from South America.)

[shanek]

Originally posted by bjornart
The e-gold people themselves seem to disagree with you:

http://www.e-gold.com/unsecure/qanda.html

Ahem...

e-gold is integrated into an account based payment system that empowers people to use gold as money. Specifically, the e-gold payment system enables people to Spend specified weights of gold to other e-gold accounts. Only the ownership changes - the gold in the treasury grade vault stays put.

e-gold is accounted by weight of metal, not US$ or any other national currency unit.

What about this do you think contradicts what I said?

[shanek]

Originally posted by Leif Roar
Then deal with the problems that arise because

of all of your misconceptions that aren't really problems:

a) gold becomes far too expensive to use for anything other than currency (Gold is actually used for stuff besides jewelry, after all,)

Nothing whatsoever to do with it. You can still purchase gold by weight at the market value; it's a completely different thing entirely.

b) people who have a few gold rings lying around are suddenly made much richer than before

No, they aren't. They still have the value of that gold at whatever price it's currently demanding. The gold in their rings is not used to back up the currency. Only gold owned and stored by the Treasury.

(with the reciprocal effect that people who do not own any gold becomes much poorer,)

Not only false but ridiculous. They have the same amount of money as they did before.

c) the higher value of gold

still doesn't have anything whatsoever to do with what gold is being used to back up the currency.

and future technologies makes it profitable to extract gold from seawater, and the currency is devalued by a massive influx of new gold (re the collapse of the Spanish economy because of the imported gold from South America.)

Geez, how many times to I have to debunk this crap? This problem was due to them fixing the exchange rate of their currency, not of finding the new gold.

[Leif Roar]

Originally posted by shanek
There wouldn't be inflation! We didn't have inflation in this country as long as the dollar was tied to a specific weight of gold. Abraham Lincoln used a dollar that had the same value as the one George Washington used.

But did it have the same worth? Could Lincoln purchase just as much for his one dollar as George Washington was able to? The price of bread didn't change at all? Neither the price of land, milk, butter or beer?

[Leif Roar]

Originally posted by shanek
Geez, how many times to I have to debunk this crap? This problem was due to them fixing the exchange rate of their currency, not of finding the new gold.

Shanek, a gold standard is by definition a system where the currency is completely convertible to gold. The point of the gold standard is that people trust the value of their coins and bank-notes because they can at any time go to a bank and convert their money to the same amount of gold (and, of course, they have to be able to convert this gold back into money as well - otherwise they can't actually convert their money to gold.) Anything else is not a gold standard.

[shanek]

Originally posted by Leif Roar
But did it have the same worth? Could Lincoln purchase just as much for his one dollar as George Washington was able to? The price of bread didn't change at all? Neither the price of land, milk, butter or beer?

That's absolutely correct! The price of some goods fluctuated, and many actually got cheaper because of technological innovations (don't confuse that with deflation), but the value of his dollar, the worth it had, in real terms, was the same.

Shanek, a gold standard is by definition a system where the currency is completely convertible to gold.

It's one where each unit of currency is tied to a specific weight of gold. When the currency is redeemed for the gold, it is taken out of circulation. That's not the same as purchasing gold on the commodities market, as I keep pointing out.

[Leif Roar]

Originally posted by shanek
It's one where each unit of currency is tied to a specific weight of gold. When the currency is redeemed for the gold, it is taken out of circulation. That's not the same as purchasing gold on the commodities market, as I keep pointing out.

Unless the amount of gold you get from exchanging your currency to gold is roughly equal to the amount of gold you get from using the same amount of currency to buy gold on the commodities market, there is no reason to trust the currency. The point of a gold standard currency is that people can trust it because it is interchangeable with gold - you can get the same amount of goods for 10 Gold Ounces bills as you can get for ten ounces of real gold; and you know you can always get that amount of goods because you can go to the bank and convert your bills into the ten ounces of gold.

You can not operate with one "currency value" for gold and one "commodities market" value, because then there is no reason to trust the currency. You can not set aside one million tons of gold to back up your currency, and then treat it as different from other gold - then you're not having a gold standard; you're just got one million tons of gold in a vault somewhere, that can not be used for anything else but paying for goods (as its "currency value" will necessarily be greater than it's "commodites market" value.) You will then have acomplished the feat of having a currency with gold used as money (with a further level of money that is used to represent the gold you use to represent value) that is not itself backed by gold.

[shanek]

Originally posted by Leif Roar
Unless the amount of gold you get from exchanging your currency to gold is roughly equal to the amount of gold you get from using the same amount of currency to buy gold on the commodities market, there is no reason to trust the currency. The point of a gold standard currency is that people can trust it because it is interchangeable with gold - you can get the same amount of goods for 10 Gold Ounces bills as you can get for ten ounces of real gold; and you know you can always get that amount of goods because you can go to the bank and convert your bills into the ten ounces of gold.

You can not operate with one "currency value" for gold and one "commodities market" value, because then there is no reason to trust the currency. You can not set aside one million tons of gold to back up your currency, and then treat it as different from other gold - then you're not having a gold standard; you're just got one million tons of gold in a vault somewhere, that can not be used for anything else but paying for goods (as its "currency value" will necessarily be greater than it's "commodites market" value.) You will then have acomplished the feat of having a currency with gold used as money (with a further level of money that is used to represent the gold you use to represent value) that is not itself backed by gold.

You just show your ignorance more and more with every post. You just don't see how redeeming the certificate takes it out of circulation. You just don't see how many people doing that would both increase the value of the currency (since there is now a lower supply of the currency) and decrease the value of the gold in the commodities market (since there is now a larger supply). You just don't see how the gold backing the currency being less than the price of gold on the commodities market would be an incentive for people to use the gold to trade for new currency.

Think about it for more than a second and see the balancing effect that the gold standard has on the currency, and how it keeps the currency at the real value of gold.

[Leif Roar]

Originally posted by shanek
You just show your ignorance more and more with every post. You just don't see how redeeming the certificate takes it out of circulation. You just don't see how many people doing that would both increase the value of the currency (since there is now a lower supply of the currency) and decrease the value of the gold in the commodities market (since there is now a larger supply).

What makes you say that I don't see that? How does what I've said conflict with this?

You just don't see how the gold backing the currency being less than the price of gold on the commodities market would be an incentive for people to use the gold to trade for new currency.

Of course I see that; that's why I'm saying that the currency value of the gold will have to be roughly the same as the commodities market value of gold or else the currency will collapse. That, in turn, means that you can not treat the value of gold in rings and jewelry, that used for engineering purposes or that mined or produced from sea-water different from the value of the gold used to back the currency.

Think about it for more than a second and see the balancing effect that the gold standard has on the currency, and how it keeps the currency at the real value of gold.

Except that the value of gold is not indepentend of its use as backing of the currency. If you want to make a world-wide currency backed in gold, you have to value the gold by the total amount of capital in the world, divided by the amount of available gold in the world. I can not see how this will not increase the value of gold dramatically; which will cause problems with the cost of gold as an engineering material, the redistribution of wealth to people who happen to own gold prior to the introduction of the standard (necessarily from the people who does not own gold) and the potential problem of devaluation if it ever becomes profitable to mine gold from sea-water, and inflation whenever the influx of new gold from mining fails to keep up with the growth of the world's economy.

[bjornart]

Originally posted by shanek
Ahem...

What about this do you think contradicts what I said?

Okay, let me quote the whole paragraph then:

e-gold is an electronic currency, issued by e-gold Ltd., a Nevis corporation, 100% backed at all times by gold bullion in allocated storage.

How is this different from a gold backed currency, which you've said it isn't?

Calling the currency 'grams of gold' and having a one to one relation between 'grams of gold' in circulation and grams of gold in storage doesn't make it less of a gold backed currency.

[shanek]

Originally posted by Leif Roar
What makes you say that I don't see that? How does what I've said conflict with this?

You said there would be no reason to trust the currency if this happens, did you not?

Of course I see that; that's why I'm saying that the currency value of the gold will have to be roughly the same as the commodities market value of gold or else the currency will collapse.

They'll be kept in balance by market forces; that's not the sam ething.

That, in turn, means that you can not treat the value of gold in rings and jewelry, that used for engineering purposes or that mined or produced from sea-water different from the value of the gold used to back the currency.

No, not at all, because they're not added into the gold that's being used to back up the currency.

Except that the value of gold is not indepentend of its use as backing of the currency.

The value of the gold is what gives the currency its value.

If you want to make a world-wide currency backed in gold,

Woah, wait just a minute—I never said anything about world-wide. If you recall, I've been arguing against a world-wide currency in this thread. A world-wide currency based on gold probably would have some of the problems you're mentioning.

[shanek]

Originally posted by bjornart
How is this different from a gold backed currency, which you've said it isn't?

The gold itself is the currency. You're directly trading weights of gold. The post of mine you responded to was my claim that e-Gold is traded by a certain weight of gold.

[Leif Roar]

Originally posted by shanek
You said there would be no reason to trust the currency if this happens, did you not?

No, I said that there would be no reason to trust the currency if the "currency gold" was valued differently from the "non-currency gold."

They'll be kept in balance by market forces; that's not the sam ething.

Not the same thing as what? Are you disagreeing with my statement that "he currency value of the gold will have to be roughly the same as the commodities market value of gold or else the currency will collapse."?

No, not at all, because they're not added into the gold that's being used to back up the currency.

No, but the value of this gold, as all other gold, will be affected by the use of gold as currency back-up. In other words, if all currencies were to be backed by gold, this gold would increase dramatically in value.

The value of the gold is what gives the currency its value.

Woah, wait just a minute—I never said anything about world-wide.[/B]

Well, considering how you said "Gold is still the #2 form of money in the world, next to the dollar. I don't know why the economically ignorant still insist there'd be gloom-and-doom if we went back to using gold as money," in a thread called Why doesn't the world have one currency, I think it's reasonable to assume that you meant that all currencies should be on a gold standard - which for the problems of a gold-standard would be the same as a single, world-wide currency backed on gold.

If you recall, I've been arguing against a world-wide currency in this thread. A world-wide currency based on gold probably would have some of the problems you're mentioning.

I would believe these problems would come into play in any case where gold-standard currencies covered a large enough economic region.

[bjornart]

Originally posted by shanek
The gold itself is the currency. You're directly trading weights of gold. The post of mine you responded to was my claim that e-Gold is traded by a certain weight of gold.

Actually I responded to the post where you said that it wasn't a gold backed currency, and (unless you just threw that in for kicks) that this was because it uses grams of gold as the unit of exchange.

This doesn't change the fact that e-gold calls it a gold backed currency, and that one is just moving numbers from one account to another, numbers that e-gold promise are backed by gold in storage with various firms. But never mind that, it's merely a question of definition. If you want to draw a distinction between this and banknotes saying "redeemable for such and such value in gold" (or electronic representations of such) very well. I'm more curious about how much money you plan to have in circulation in USDs, and how you plan to aquire the gold necessary to back it.

Here are some numbers for starters:

Total world gold stocks private and government in metric tons (according to usgs 2004)
123,000

Current US reserves in metric tons (according to usgs 2004)
8,140

Current commodities gold price in USD/g (according to www.e-gold.com)
13.46

Current volume of dollars in circulation (according to http://www.federalreserve.gov/boarddocs/speeches/2004/20040426/default.htm)
700,000,000,000

Tons of gold needed to back current volume of dollars at current commodity price
51,994

So anyone wanting to replace the dollar has to buy up 42% of the entire worlds stock of gold (or just 35% if its the US government).

How is this to be accomplished?

[shanek]

No, no, no, wrong, wrong, wrong. You people just don't read.

So the government has 8,140 metric tonnes of gold. It's actually more than that because if memory serves that doesn't include the amount held by the Federal Reserve, but anyway, let's go with 8,140 metric tonnes.

$700 billion in circulation. The current commodity price has nothing to do with this.

So, we dissolve the Fed (and in the process gain its gold reserves, but again, we're not going to count that here) and start, through attrition, replacing the Federal Reserve dollars with gold certificates issued by the Treasury. If we want there to be $700 billion floating around the economy, and if we don't want to purchase any more gold to make that happen, then you do simple division to find your base.

Murray Rothbard detailed a plan to do exactly this in his book The Case Against the Fed. It's a good and surprisingly quick read. At the time he wrote the book, this would have meant each dollar would have been redeemable for .02 grams of gold.

[Leif Roar]

Originally posted by shanek
No, no, no, wrong, wrong, wrong. You people just don't read.

So the government has 8,140 metric tonnes of gold. It's actually more than that because if memory serves that doesn't include the amount held by the Federal Reserve, but anyway, let's go with 8,140 metric tonnes.

$700 billion in circulation. The current commodity price has nothing to do with this.

Ahem. Remember this line? "The value of the gold is what gives the currency its value." Are you saying that the commodite price of gold has no connection to the value of gold?

[shanek]

Originally posted by Leif Roar
Ahem. Remember this line? "The value of the gold is what gives the currency its value." Are you saying that the commodite price of gold has no connection to the value of gold?

Right. The commodity price is arbitrary. The real value of the gold is pretty much constant. The commodity price is a nominal, not real, value.

[The Central Scrutinizer]

Originally posted by shanek
No, no, no, wrong, wrong, wrong. You people just don't read.

So the government has 8,140 metric tonnes of gold. It's actually more than that because if memory serves that doesn't include the amount held by the Federal Reserve, but anyway, let's go with 8,140 metric tonnes.

$700 billion in circulation. The current commodity price has nothing to do with this.

So, we dissolve the Fed (and in the process gain its gold reserves, but again, we're not going to count that here) and start, through attrition, replacing the Federal Reserve dollars with gold certificates issued by the Treasury. If we want there to be $700 billion floating around the economy, and if we don't want to purchase any more gold to make that happen, then you do simple division to find your base.

Murray Rothbard detailed a plan to do exactly this in his book The Case Against the Fed. It's a good and surprisingly quick read. At the time he wrote the book, this would have meant each dollar would have been redeemable for .02 grams of gold.

Now that we're talking about the Fed, can you tell us - Are all banks required to be members of the Federal Reserve? Maybe your buddy Murray could answer for you?

[Drooper]

For pete's sake. e-gold? That is a transferable voucher, not money. It is neither a means of exchange, nor a unit of account

Do you know what happens when you try and make an FX transaction with e-gold?

Well, they take the price of the good in, say, Australian dollars. Then they work out what the current price of gold is in Australian Dollars using a spot gold price and a spot USD/AUD exchange rate. Then they calculate how much gold represents that value at the time of the transaction and that is how much e-gold you pay.

Even if you make a domestic purchase you still need to calculate the required e-gold payment by referring to the price of gold (that is the unit of account bit) which is expressed in Dollars.

e-gold could not be used as a medium for exchange without the existence of real money - Aussie and US Dollars in this case.

For the same reason it is not a unit of account.

Repeat after me Shanek. Gold is not money, e-gold is not money, super secret planet X e-gold is not money. You can argue until you are blue in the face, but you would still get an F for claiming so in any first year undergraduate economics course because it shows that you don't understand the definition of money.

[The Central Scrutinizer]

Originally posted by Drooper
Repeat after me Shanek. Gold is not money, e-gold is not money, super secret planet X e-gold is not money.

You mean all that super secret planet X e-gold I have in the bank is worthless? :(

[Drooper]

Originally posted by The Central Scrutinizer
You mean all that super secret planet X e-gold I have in the bank is worthless? :(

Not on planet X.

I have been reliably informed that you can buy a brand new frubrulating comboxidodler for less than fifty schumen.

[Bjorn]

Originally posted by shanek
Right. The commodity price is arbitrary. The real value of the gold is pretty much constant.Would you mind telling us how much it is, say in dollars per gram? (I wonder if I should sell or buy.)

The commodity price is a nominal, not real, value.I thought the price the market is willing to pay is the real value (I mean, it's a free market and all that). Was I wrong?

[Art Vandelay]

Originally posted by shanek
Mostly give them to other Indians. They don't have to return to the American economy like they do now.[/quote[They don't have to, but dollars would have no value to them if they didn't. The US would be importing goods and services without having to give anything back.

[quote]Try it and see. The only way you can get gold for your dollars now is in the commodities market, where the price of gold fluctuates.
If by "commodities market" you mean "a place where you can exchance dollars for gold", that's a tautology. And the ability to exchange one thousand dollars for a gram of gold is not something that fluctuates.

FDR actually made what you're saying illegal in 1933.Cite?

The value of the dollar would be defined as a certain weight of gold, and that would be guaranteed. You're not reading.Rude little bastard, aren't you? Next time you start getting arrogant, you might try not having a completely idiotic position. Simply offering a certain amount of gold does not constitute "defining" the value of the dollar, and the exchange rate would not be guaranteed, as I have already explained. You have not countered my reasoning, simply reiterated your claim that it would be "guaranteed".

There wouldn't be inflation! We didn't have inflation in this country as long as the dollar was tied to a specific weight of gold.
But the dollar wouldn't be tied to gold. If it were, IT WOULD COST THE SAME! Just how difficult is it to comprehend the concept of "tied"?

learn what you're talking about. Not only have I learned what I'm talking about, I don't even need to. Your statements are so obviously false that merely understanding basic logic shows them to be false, without even having to resort to economic arguments. All you have to defend yourself is an oblique argument to authority ("if you'd learn about his, you'd realize I'm right").

That's absolutely correct! The price of some goods fluctuated, and many actually got cheaper because of technological innovations (don't confuse that with deflation), but the value of his dollar, the worth it had, in real terms, was the same.Are you seriously claiming that the real value of gold never changed?!? Why is it that every other good changed value, but gold didn't?

The value of the gold is what gives the currency its value.
If the value of the dollar is greater than its redemption value, then it MUST have a source of value other than the redemption value. That's just a basic, obvious, only-a-person-like-you-could-deny-it fact.

You just don't see how redeeming the certificate takes it out of circulation. You just don't see how many people doing that would both increase the value of the currency (since there is now a lower supply of the currency) and decrease the value of the gold in the commodities market (since there is now a larger supply). You just don't see how the gold backing the currency being less than the price of gold on the commodities market would be an incentive for people to use the gold to trade for new currency.If the redemption value is less than the commodity value, then the effects of redemption are COMPLETELY IRRELEVANT because no one in their right mind is going to ever redeem a dollar. And while people will certainly have an incentive to trade gold for dollars at the redemption rate, they will have no opportunity to do so because NO ONE IN THEIR RIGHT MIND WILL REDEEM A DOLLAR. What is so hard to grasp about this?

Shane, your insistence that anyone who disagrees with you (note that that is EVERYONE who has responded to you: tell you anything?) is simply "not reading" is so monumentally conceited that I can't see how you could possibly expect to be taken seriously.

[Leif Roar]

Originally posted by shanek
Right. The commodity price is arbitrary. The real value of the gold is pretty much constant. The commodity price is a nominal, not real, value.

This doesn't make any sense, Shanek.

How is the commodity price not a real value? If gold is selling for X dollars an ounce on the commodity market, then I can purchase - directly or by way of a currency - X dollars worth of goods for an ounce of gold. That certainly is a real value.

Secondly, I've explained earlier how the currency value for gold has to be roughly equal to the market or commodity value of gold. If the currency value is less than this, then the reason to trust the currency is gone; and if the currency value is greater than this, the currency will cease to exist as people will convert all the available currency into actual gold (which, for a currency the size of US dollars, would affect the market price of gold quite a bit.) That means you can not consider the currency value of gold as different from the market value.

[shanek]

Originally posted by Bjorn
Would you mind telling us how much it is, say in dollars per gram?

That's nominal value, not real value! Sheesh...

[shanek]

Originally posted by Art Vandelay
If by "commodities market" you mean "a place where you can exchance dollars for gold", that's a tautology.

:rolleyes:

There is a difference between buying and selling gold and redeeming a certificate for an amount of gold. I would have hoped that was obvious...

Cite?

You can't be this ignorant of history, can you? Look up Executive Order 6260.

Rude little bastard, aren't you?

Pointing out that someone clearly hasn't read my posts is rude?

Next time you start getting arrogant, you might try not having a completely idiotic position. Simply offering a certain amount of gold does not constitute "defining" the value of the dollar, and the exchange rate would not be guaranteed, as I have already explained. You have not countered my reasoning, simply reiterated your claim that it would be "guaranteed".

Next time you tell someone not to have a completely idiotic position, try not having one yourself. We aren't talking about the exchange rate!!! We are talking about the amount of gold you can redeem the currency for!!! They're two completely different things!!! Why don't you get that???

It IS guaranteed because THAT'S what the dollar would be set at!!! Read the Coinage Act of 1792. That set up all of the specific weights of gold and silver that the dollar was redeemable for...and that never changed.

Furthermore, I can cite books backing me up on this...the Rothbard book I mentioned earlier...The Economics of a Pure Gold Standard by Mark Skousen...Should There Be an Independent Monetary Authority? by Milton Friedman...source after source after source.

So don't go blathering on about how you've learned such-and-such when pretty much every book written on the subject backs up me and not you.

Are you seriously claiming that the real value of gold never changed?!? Why is it that every other good changed value, but gold didn't?

The real values of goods never change, unless a new use is found for the good. You're talking about nominal value again. Please learn the difference!

If the value of the dollar is greater than its redemption value, then it MUST have a source of value other than the redemption value.

No; if the dollar is greater than its redemption value then people will simply hold on to the dollar rather than redeeming it. If the dollar drops below its redemption value then more people will redeem their dollars, taking them out of circulation, and revaluing the remaining dollars.

You, despite your claims to the contrary, are showing yourself to be completely ignorant and uneducated on this issue. I beg you to read the books I've cited!

[shanek]

Originally posted by Leif Roar
How is the commodity price not a real value?

All prices are nominal. Learn some economics, people! This is getting frustrating!

The Macroeconomics thread, again: http://www.shanekillian.org/jref/macroeconomics.html

If gold is selling for X dollars an ounce on the commodity market, then I can purchase - directly or by way of a currency - X dollars worth of goods for an ounce of gold. That certainly is a real value.

No; if something sells for X dollars that is its nominal value!

That means you can not consider the currency value of gold as different from the market value.

I have explained this at length, and nothing in your paragraph suggests that you considered or even read my explanation.

[shanek]

Here we go, people, nominal value:

http://www.economist.com/research/Economics/alphabetic.cfm?TERM=NATION%20BUILDING#NOMINAL%20VA LUE

NOMINAL VALUE

The value of anything expressed simply in the MONEY of the day. Since INFLATION means that money can lose its value over time, nominal figures can be misleading when used to compare values in different periods. It is better to compare their real value, by adjusting the nominal figures to remove the inflationary distortions.

So the nominal value is the value expressed in the money of the day, i.e., its price.

[Art Vandelay]

Originally posted by Leif Roar
How is the commodity price not a real value? If gold is selling for X dollars an ounce on the commodity market, then I can purchase - directly or by way of a currency - X dollars worth of goods for an ounce of gold. That certainly is a real value.Actually this is wrong. While it is "real" in the normal use of the term- it certainly isn't fake- it's not "real" in the economic sense of the word. The distinction between "real" and "nominal" is a bit abstract, but basically, "nominal" refers to the price in terms of some currency. "Real" value refers to a more permanent type of value, that does not depend on arbitrary measures such as price.

[Art Vandelay]

Originally posted by shanek
You can't be this ignorant of history, can you? Look up Executive Order 6260.Not only did I not see anything in that order that proves what you said, I'm pretty sure it's been repealed.

Pointing out that someone clearly hasn't read my posts is rude?No, ascribing dissent to "clearly" not reading your posts is rude. The implication is that no one could POSSIBLY read your posts without being convinced of your point of view.

Next time you tell someone not to have a completely idiotic position, try not having one yourself. We aren't talking about the exchange rate!!! We are talking about the amount of gold you can redeem the currency for!!! They're two completely different things!!! Why don't you get that???
A poor choice of words is hardly the same thing as having an idiotic position. I used "exchange rate" because it is the rate at which the exchange is made; I failed to consider the fact that the term is usually considered to refer specifically to inter-currency exchange rates. I stand by my term being technically correct, but I agree that different choice would have been clearer. It's a tribute to my argument is that the worst that you can do is quibble over word choice.

It IS guaranteed because THAT'S what the dollar would be set at!!!
You are still simply asserting your position rather than actually presenting a counterargument. My argument stands unrefuted.

Read the Coinage Act of 1792. That set up all of the specific weights of gold and silver that the dollar was redeemable for...and that never changed.My position is that one cannot simply use whatever level of gold reserve that one wants. You respond that a specific level of reserves did work. What kind of argument is that? Of course, given enough of a reserve, one can guarantee a constant redemption rate. That hardly means one can use any level one wants. To take your position to an extreme, do you seriously think that a gold standard can be maintained through one gram of gold? If the entire national gold reserve were one gram, could we use that to back the dollar?

Furthermore, I can cite books backing me up on this...the Rothbard book I mentioned earlier...The Economics of a Pure Gold Standard by Mark Skousen...Should There Be an Independent Monetary Authority? by Milton Friedman...source after source after source.Clearly, you are completely ignorant of the difference between “cite� and “namedrop�. A citation would be an actual quote, with an explanation for how it supports your position and disproves mine. Simply naming a book and claiming it supports you isn’t going to convince anyone of anything other than that you’re a wanker.

The real values of goods never change, unless a new use is found for the good. You're talking about nominal value again. Please learn the difference!
That’s ridiculous. The real value of every good changes. Buggy whips are an extreme example of this, but every good, to some extent or another, fluctuates. If real values were constant, there would be no need to decide on a CPI; one could use any good at all as a base good. Don’t presume to tell me what I’m talking about; it would be an act of arrogance even from someone who knows what HE is talking about, which you clearly don’t.

No; if the dollar is greater than its redemption value then people will simply hold on to the dollar rather than redeeming it.
Hmm. You post an obviously true statement, and pretend that it contradicts mine. What an odd debating tactic.

"Triangles have more than two sides."
"No, SQUARES have more than two sides."

[shanek]

Originally posted by Art Vandelay
Not only did I not see anything in that order that proves what you said, I'm pretty sure it's been repealed.

It was only repealed in 1971 when Nixon made it irrelevant by getting us completely off the gold standard. FDR's executive order made it impossible for people to redeem their dollars for gold.

No, ascribing dissent to "clearly" not reading your posts is rude. The implication is that no one could POSSIBLY read your posts without being convinced of your point of view.

This is just bogus. I'm saying that no one could possibly read my posts and make the comments about them that they're doing. Being convinced has nothing to do with it, although I'm sure you'd love for that to be the case.

You are still simply asserting your position rather than actually presenting a counterargument. My argument stands unrefuted.

Your argument is completely bogus pretty muc by definition! Check any of the sources I cited. It doesn't really matter so much how much gold you have backing up the currency, as long as you set it at one amount and leave it there.

Did you read the Coinage Act?

[The Don]

I'm clearly not understanding the argument. Please can someone set me straight ?

I understand that if the value of the dollar is defined to be a set fraction of an ounce of gold then the value of gold is set in those terms. Does this mean that the commodity value of gold will always be a fixed value (barring devaluation) or can the commodity value diverge from the fixed value for periods of time ?

I understand how fixing to a gold standard aims to reduce inflation by restricting the supply of money on the grounds that unless there is a significant increase in the size of the gold reserve then there cannot be an oversupply of money chasing the same value of goods. What I fail to understand is how a (relatively) fixed money supply fails to prevent inflation in a shortage situation.

How does the central bank regulate the value of bullion held ? How does it make a decision to incdease or decrease its holdings and how does this differ from a decsion to print money without increasing the gold reserves.

Shanek claimed that :

There wouldn't be inflation! We didn't have inflation in this country as long as the dollar was tied to a specific weight of gold.

This isn't borne out in fact. If you look here http://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx?rsCPI_currentPage=6 you find periods of (damaging) inflation followed by periods of (potentially even more damaging) deflation, it's not a stable system.

[WildCat]

Originally posted by shanek
That's nominal value, not real value! Sheesh...
So what is the real value?

[Bjorn]

I'm trying to imagine a scenario where the dollar is backed by gold and the price of gold in the commodity market is different from the amount of gold I would get per dollar from the Federal Reserve:

If dollars are backed by gold at ten dollars a gram .....

and the commodity gold is more expensive, say 15 dollars a gram:

I would demand 100 grams of gold for my 1,000 dollars and sell it in the commodity market immediately. Repeat. :)

If the commodity gold is cheaper, say 5 dollars a gram:

I would see no point in having gold backing up the dollar since the gold could be sold in the market at only half the dollar amount I 'paid' for it when I did the 'exchange' with the Federal Reserve. :(

There's something I don't get here. :confused:

[shanek]

Originally posted by The Don
I understand that if the value of the dollar is defined to be a set fraction of an ounce of gold then the value of gold is set in those terms.

Note: it's the nominal value, not the real value, that's being set. There's been plenty of confusion about that in this thread, so I just want to make sure it's straight.

Does this mean that the commodity value of gold will always be a fixed value (barring devaluation) or can the commodity value diverge from the fixed value for periods of time ?

Oh, it can certainly diverge. If, for example, there's suddenly more demand for gold jewelry then we can expect the commodity price to rise. But long run it should stay in balance.

I understand how fixing to a gold standard aims to reduce inflation by restricting the supply of money on the grounds that unless there is a significant increase in the size of the gold reserve then there cannot be an oversupply of money chasing the same value of goods. What I fail to understand is how a (relatively) fixed money supply fails to prevent inflation in a shortage situation.

A shortage of what?

It prevents inflation because it prevents the government from printing money with impunity.

How does the central bank regulate the value of bullion held ?

It doesn't. There is no need for a central bank in this system.

How does it make a decision to incdease or decrease its holdings and how does this differ from a decsion to print money without increasing the gold reserves.

They just aren't able to do that. To do so would be outright fraud.

This isn't borne out in fact. If you look here http://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx?rsCPI_currentPage=6 you find periods of (damaging) inflation followed by periods of (potentially even more damaging) deflation, it's not a stable system.

Um, that table is from 1913 to the present. 1913 is when the Federal Reserve and its fiat money was introduced to America.

[shanek]

Originally posted by WildCat
So what is the real value?

The real value of gold is the actual value of the gold based on how much it's desired and what you can do with it.

[shanek]

Originally posted by Bjorn
If dollars are backed by gold at ten dollars a gram .....

and the commodity gold is more expensive, say 15 dollars a gram:

I would demand 100 grams of gold for my 1,000 dollars and sell it in the commodity market immediately. Repeat. :)

Remember: when you redeem the gold, your $1000 is taken out of circulation. Whereas 100 grams of gold is now in the commodity market where it wasn't before. So you have fewer dollars chasing after more gold, and the commodity price of gold drops.

If the commodity gold is cheaper, say 5 dollars a gram:

I would see no point in having gold backing up the dollar since the gold could be sold in the market at only half the dollar amount I 'paid' for it when I did the 'exchange' with the Federal Reserve.

If the commodity gold is cheaper, then the dollars are worth more than the gold. So you're going to keep your dollars and spend them in the economy. And BTW, the Federal Reserve wouldn't exist anymore.

[Elind]

Originally posted by jay gw
Other than tradition, is there any reason for the world to have multiple/national currencies?

It seems like it would make more sense to have one global currency, rather than 150 or so, because there wouldn't be any disastrous devaluations, the kind that plague poor countries. About 20 years of growth in Asia was wiped away when they had their currency problems. Same thing with Mexico a couple of decades ago, the middle class was mostly wiped out.

Only the rich survive a serious devaluation of a nation's currency because they hold multiple currencies or just hold US dollars. The poorest don't care because they don't have any currency anyway.

But holding only US dollars/euros means that a poor country's currency will never see a value increase. If everyone just holds euros, why bother increasing the value of the peso?

Does anyone have insights?

You've probably had an earful on this already, but I don't want to read the obvious, just type it.

So who do you want to have decide who prints what may become your toilet paper? The UN?

[The Central Scrutinizer]

Originally posted by shanek
That's nominal value, not real value! Sheesh...

What color is the sky in your world?

[bjornart]

I'm not an economist and I'm not planning to become one, so ignore anything I may have posted earlier and answer these questions for my edumacation.

Originally posted by shanek
Remember: when you redeem the gold, your $1000 is taken out of circulation. Whereas 100 grams of gold is now in the commodity market where it wasn't before. So you have fewer dollars chasing after more gold, and the commodity price of gold drops.

So the nominal (did I get that right?) value of gold is influenced by its use as a backing for the dollar, right?

Now how are you going to determine the real (and unchangeable if I understand you correctly) value of gold for the initial print run of gold backed dollars?

If the commodity gold is cheaper, then the dollars are worth more than the gold. So you're going to keep your dollars and spend them in the economy. And BTW, the Federal Reserve wouldn't exist anymore.

Okay, so redeeming and not redeeming dollars should keep the nominal price of gold somewhat close to what the dollar bills says the real value is. And the FR is out of business. Now who's going to issue the bills, and what will be their incentive to do so?

[dann]

"Why doesn't the world have one currency?"

Well, one very important reason is that it's not one world. When issuing dollar bills the US state has access to all the goods sold by people who accept this currency, in principle everybody, because they have faith in the dollar as a currency, as money, because they have faith in the power of the USA to back up its currency, which is still a kind of IOUs even though it is no longer tied to gold the way it used to be.
Thus the USA would not be opposed to the dollar being used immediately to buy goods everywhere, since this would mean immediate access to these goods. However, it would be opposed to any other national state issuing dollar bills!
US-$$ circulating in a neighbouring country were recently replaced by pesos convertibles, establishing a functioning national currency (and at the same time getting access to a whole lot of 'free money' to be used in the world market - a brillant move, in my opinion), though not a very popular move in Washington, I think.

Currency and its value is explained here: http://www.gegenstandpunkt.com/english/currency.html
Not easily read, but also not impossible to get through for people like Bjornart who are not economists and don't plan to become economists.

[shanek]

Originally posted by bjornart
So the nominal (did I get that right?) value of gold is influenced by its use as a backing for the dollar, right?

Yes.

Now how are you going to determine the real (and unchangeable if I understand you correctly) value of gold for the initial print run of gold backed dollars?

As I said, take the number of dollars you want circulating in the economy, take the amount of gold you have, divide.

Okay, so redeeming and not redeeming dollars should keep the nominal price of gold somewhat close to what the dollar bills says the real value is. And the FR is out of business. Now who's going to issue the bills, and what will be their incentive to do so?

The Treasury would issue them, just as they did before the Fed (and continued to somewhat do later until the gold standard was decimated). Check these out:

http://www.usarare.com/a76.jpg

http://aes.iupui.edu/rwise/banknotes/glen_johnson/0625b.jpg

http://aes.iupui.edu/rwise/banknotes/glen_johnson/0808g.jpg

http://aes.iupui.edu/rwise/banknotes/glen_johnson/0822f.jpg

[shanek]

Originally posted by Drooper
Do you know what happens when you try and make an FX transaction with e-gold?

Well, they take the price of the good in, say, Australian dollars. Then they work out what the current price of gold is in Australian Dollars using a spot gold price and a spot USD/AUD exchange rate. Then they calculate how much gold represents that value at the time of the transaction and that is how much e-gold you pay.

Uh, no, they don't. They transfer direct weights of gold from one account to another. You can do the above calculations to find out how much gold you want to transfer if you want the equivalent of USD or whatever, but the actual exchange is done in weight units of gold.

e-gold could not be used as a medium for exchange without the existence of real money - Aussie and US Dollars in this case.

Yes, it could. You could easily go and pay for something in grams of gold. You are just plain wrong here.

[WildCat]

Originally posted by shanek
The real value of gold is the actual value of the gold based on how much it's desired and what you can do with it.
No, that is the nominal rate, as you've said so yourself. The real rate is something else, and it never changes according to you. So, what is the real rate? Preferably in dollars.

I won't hold my breath waiting for a clear answer.

[The Central Scrutinizer]

Originally posted by shanek
The Treasury would issue them, just as they did before the Fed (and continued to somewhat do later until the gold standard was decimated).

Speaking of the Fed, you have repeatedly stated that ALL banks are forced (at gun point) to belong to the Fed. Several skeptics have shown that you are wrong. Now you are making a claim regarding gold and money. Should skeptics just assume you are wrong again?

[bjornart]

Originally posted by shanek
Yes.

As I said, take the number of dollars you want circulating in the economy, take the amount of gold you have, divide.

The Treasury would issue them, just as they did before the Fed (and continued to somewhat do later until the gold standard was decimated).

And the US economy would function fine for forever with this limit (the number of dollars in circulation)?

[WildCat]

Originally posted by WildCat
No, that is the nominal rate, as you've said so yourself. The real rate is something else, and it never changes according to you. So, what is the real rate? Preferably in dollars.

I won't hold my breath waiting for a clear answer.
I at least expected a convoluted answer by now. :p

[epepke]

I think that the OP and most of the responses here are back-assward.

Currency doesn't exist because some sort of Medieval United Nations decided that there should be currency.

Currency exists because goldsmiths invented it. They later became banks. Even later, some of the functions of banks got taken over by government. (But not entirely; when I first went to Britain, there were three Scottish banks printing bank notes.) To this day, British bank notes say "I promise to pay the bearer on demand." Up until 1952, a similar slogan appeared on American bills.

People have found uses for different currency rates, but that isn't the reason. The reason is that there isn't some big World-wide Socialist Daddy who makes everything make sense. Everything in your life that you take for granted was thought up by some individual nutcase who had an idea. Everything, without exception. Some of them have percolated upward through governments, corporations, or sheer popularity. But this is how things work.

[Earthborn]

Originally posted by WildCat
No, that is the nominal rate, as you've said so yourself.Actually he didn't say that. He said that the nominal rate is the amount of money people are willing to spend on it, not the value they attribute to it.The real rate is something else, and it never changes according to you. So, what is the real rate? Preferably in dollars.A bit of Google searching told me what economists mean with 'real' value: inflation adjusted value. So you can't say what real value is in dollars, you'll have to do it in the dollars of a specified period of time.

Of course that does not mean the 'real' value is fixed: people can value something more or less in different times and that will be reflected in the 'real' value. People who promote a gold standard are probably hoping gold won't fluctuate in 'real value' too much, but if there is a gold standard and a solid gold asteroid drops on the earth I think people will still experience a drop in the value of their money.

Well, that's how I understand it. The economists on this board can correct me where I went wrong.

Also check Wikipedia on the Gold Standard (http://en.wikipedia.org/wiki/Gold_standard)

[shanek]

Originally posted by WildCat
No, that is the nominal rate, as you've said so yourself.

No, the nominal rate is the rate expressed in dollars or some other form of currency.

So, what is the real rate? Preferably in dollars.

:rolleyes:

It's just like trying to deal with my autistic son some days...

[shanek]

Originally posted by bjornart
And the US economy would function fine for forever with this limit (the number of dollars in circulation)?

Sure. What causes the problem is the ability of the government to print dollars at will. There must be a limiting factor. The fact that they would have to get a certain amount of gold to print more money is such a limiting factor.

[shanek]

Originally posted by Earthborn
Of course that does not mean the 'real' value is fixed: people can value something more or less in different times and that will be reflected in the 'real' value.

True. And I've already mentioned two things that can affect the real value of gold: if new gold is put into the market, and if someone finds a new use for gold.

People who promote a gold standard are probably hoping gold won't fluctuate in 'real value' too much,

History has shown that it won't. In fact, most people who invest in gold do so because it holds its own very well against inflation.

[dann]

Originally posted by epepke
Currency doesn't exist because some sort of Medieval United Nations decided that there should be currency.

Currency exists because goldsmiths invented it.

No, goldsmiths make jewelry, not currency:

"But also in those former times, when gold coins were being circulated and paper money was actually just an order for quantities of specie; in those times too this madness was not a property or emanation of the metallic material of money. Instead, just as it is now in our modern paper-money economy, this lunacy was the deed of the supreme power." http://www.gegenstandpunkt.com/english/currency.html

Which is the reason why old coins have the portraits of emperors printed on them, not of goldsmiths!

[dann]

Originally posted by shanek
History has shown that it (gold) won't (fluctuate in value too much). In fact, most people who invest in gold do so because it holds its own very well against inflation.
No, history has only shown that so far it hasn't, not that it won't!

What would "affect the real value of gold", however, would be if a new and much cheaper way of producing gold were introduced, be it due to the discovery of vast quantities of gold much easier accessible than in the mines already in existence, Earthborn's "solid gold asteroid", for instance, or jmproved methods of mining the existing gold resources.
A "new use for gold" probably wouldn't influence the price of gold much, it being the only substance whose main 'use' lets most of it lie around in safes doing nothing most of the time. The value of gold has very little to do with is use-value. Similarly the exchange rate of the dollar doesn't increase when you're in Mexico and discover that you can actually use 1-$ bills to wipe your ass if you've run out of toilet paper!

[senor boogie woogie]

Hola!

The US Dollar is more or less a world currency, to the point that some nations like Equador has made the dollar the "official" currency. The dollar is known worldwide, everywhere.]

Senor

[bjornart]

Originally posted by shanek
Sure. What causes the problem is the ability of the government to print dollars at will. There must be a limiting factor. The fact that they would have to get a certain amount of gold to print more money is such a limiting factor.

Won't this lead to deflation as the economy grows?

[shanek]

Originally posted by bjornart
Won't this lead to deflation as the economy grows?

No; economic growth does not lead to deflation. The economy grows as production becomes more efficient; this effect tends to lower prices over time. A lot of people think that means deflation, but it doesn't. Allow me to illustrate.

Let's consider an economy where the only thing produced is widgets. We can get everything we need to live and be happy as long as we have enough widgets. Everyone works at the widget factory, and the only stores are widget stores (okay, people would work there, too...but you get the idea).

Widgets take a certain amount of materials and labor to put into existance. They need to be loaded onto the widget-mobiles and shipped to the widget stores. Let's say that the entire cost of widget production is $5 per unit and they sell for $6 apiece, making a $1 profit. Let's also say there are 100,000 widgets and $600,000 floating around the economy.

Now, WidgeCo finds a way of making widgets with fewer materials, and also installs some new technology that allow the workers to make widgets more efficiently. WidgEx designs some more efficient routes to get the widgets to the store more quickly, and Widgets-R-Us streamlines the shopping process. As a result of all of this, widgets now cost $4 to make and have a shelf price of $5. This is not deflation. What has actually happened is that $100,000 of capital has been freed up in the economy, which can now be used for other things: to produce even more widgets, investment in new widget-making technology, etc.

But let's reset and go a different route...Instead of the new efficiencies put into the system, let's say a bunch of people get together and burn $100,000. Now we have less money chasing after the widgets. But all other things are equal, so the drop of the price of widgets to $5 reflects a change in the value of the dollar, not a change in the cost of producing widgets. The difference is that there's not that extra $100,000 in extra capital. We've essentially just redefined what the dollar means. That's deflation.

Get the difference?

[bjornart]

Okay, I get that I didn't know that deflation means a decrease in prices due to a decrease in the volume of money.

But the value of this money will apparently increase in relation to widgets as production is done more efficiently and as the population increases.

If the population doubles without other factors changing the $600,000 will have to roughly equal 200,000 widgets.

So anyone who manages to save some money will hang on to it, since it'll buy more widgets later, which temporarily removes money from circulation and drives a further apparent increase in the ratio between money value and widget value.

It might not be deflation but it looks a lot like it. Unless there is something I've ignored?

[shanek]

Originally posted by bjornart
Okay, I get that I didn't know that deflation means a decrease in prices due to a decrease in the volume of money.

But the value of this money will apparently increase in relation to widgets as production is done more efficiently and as the population increases.

Yes, but that isn't deflation. That's freeing up capital for other purposes.

If the population doubles without other factors changing the $600,000 will have to roughly equal 200,000 widgets.

So anyone who manages to save some money will hang on to it, since it'll buy more widgets later, which temporarily removes money from circulation and drives a further apparent increase in the ratio between money value and widget value.

It might not be deflation but it looks a lot like it. Unless there is something I've ignored?

Yes: that people are most likely going to hold on to their money by putting it in a bank, which invests the money in the economy.

[bjornart]

Originally posted by shanek
Yes, but that isn't deflation. That's freeing up capital for other purposes.

No, only in the case of increased efficiency. In the case of population increase there is no freeing up of capital.

In your widget example, if the population doubles without any increase in production efficiency, the desire for widgets also doubles, and people all keep working producing widgets, they will have 200,000 widgets, $600,000, an _no_ _additional_ _free_ _capital_. Please pay attention to what I'm asking about.

It may not be deflation, but neither is it freeing up capital.

Yes: that people are most likely going to hold on to their money by putting it in a bank, which invests the money in the economy.

Only if people are willing to take up loans, and when the money is decreasing in value, due to deflation or some other process with the same effect, they'll be hesitant to do so since they'll be forced to pay back what amounts to a larger and larger value.

[shanek]

Originally posted by bjornart
No, only in the case of increased efficiency. In the case of population increase there is no freeing up of capital.

There is an increase in labor resources. Same effect.

It may not be deflation, but neither is it freeing up capital.

You're correct; increases in labor resources is different. And the third function, natural resources, can also play a role if, for example, new, easy-to-get-to sources of widget-making material is found. But it's all the same effect.

Only if people are willing to take up loans, and when the money is decreasing in value, due to deflation or some other process with the same effect, they'll be hesitant to do so since they'll be forced to pay back what amounts to a larger and larger value.

That just means that interest rates will decrease to compensate. If anything, the lower interest rates attract more investors.

[CapelDodger]

Originally posted by Drooper
FX costs are the tiniest proportion of trade costs.
Compared with tarriff, regulatory, customs, insurance costs etc. that are associated with international trade, and could be far more easily reduced, they aren't even worth measuring.

By comparison, the cost imposed by a single currency are of a significant magnitude - even in a country like the US.
A chunk of that cost has been income for me, and I lived pretty high on the hog from it. Not as much as some, but pretty well. It isn't just conversion costs that matter, it's currency uncertainty, which leads to hedging - also a cost.

As I said, in principle a single currency is desirable since these costs are artificial. Ditto tariffs. Regulatory costs - health and safety, consumer protection, environmental standards etc. - are there for good reasons. So is insurance.

For example the Euro area is bearing a massive cost for their single currency, just as the Eastern Lander in Germany did before that. What cost? East Germany took a nose-dive because it was dominated by inefficient, state-supported industries. It was one of those failed socialist states we've all heard of. The one-to-one Ostmark exchange-rate was a mistake because it damaged West Germany, not the East. In the East it meant that there was more capital available to modernise industry. In the West it meant monetary restriction to prevent inflation. The effects are still being felt, not because of the single currency but the politically-motivated, economically disastrous echange-rate. Other countries that are at the limit of their optimal currency area include Italy, the UK, and France - all of which would probably be better off if the split into separate monetary areas.The UK isn't in the Euro, of course. Within the UK the exchange-rate is determined by the performance of the financial sector, concentrated in London. The industrial regions (they still exist, just about) such as South Wales and Scotland have to put up with it. These regions would be better off with their own currencies - or the Euro, which is not so dominated by one economic sector.

But if you want a good example of the absurdity of stretching monetary areas too widely, just go to Argentina, which Dollarised. An example of a government manipulating the exchange rate so as to produce a short-term, unsustainable boom. Had Argentina been a US state, using the US dollar as they do, it could never have gone up that cliff it fell off.
A single global currency will always be a ridiculous idea from this perspecitve alone. In principle, a single global currency is a benefit to trade. Because of that, it might someday come about. But in the long term we're all dead, of course.

[bjornart]

Originally posted by shanek
There is an increase in labor resources. Same effect.

Not really. The freeing up of capital allows investment in something new. An increase in labor resources proportionally increases demand, and if it's utilised increases production. The economy grows in the number of people and number of widgets only, since the supply of a medium of exchange is limited.

You're correct; increases in labor resources is different. And the third function, natural resources, can also play a role if, for example, new, easy-to-get-to sources of widget-making material is found. But it's all the same effect.

And it's not an effect you consider disadvantageous?

That just means that interest rates will decrease to compensate. If anything, the lower interest rates attract more investors.

But interest rates can only sink so low. Money is getting more and more valuable, no investment objects seem likely to give higher returns than just holding on to the cash, holding on to the cash causes increased "pseduo-deflation", increasing the insentive to hold on to the cash...

[shanek]

Originally posted by bjornart
Not really. The freeing up of capital allows investment in something new. An increase in labor resources proportionally increases demand, and if it's utilised increases production. The economy grows in the number of people and number of widgets only, since the supply of a medium of exchange is limited.

True, but it's still the case that the widgets drop in price without deflation. The productivity of the economy has increased.

And it's not an effect you consider disadvantageous?

It might be disadvantageous to certain investments, but then, it would be advantageous to others.

But interest rates can only sink so low.

Not really true. Treasury bonds during the Great Depression actually gave a negative interest return. And if you think about it, that actually makes sense.

Let's say, for example, that there's deflation at 3%. With deflation, you want to hold on to all the cash that you can. You have some options. You can just stack it all in your house; but if you do this, you're going to want to put it in a safe and maybe even hire some private security to guard it. That costs money. Or you can put it in a bank's safety deposit box (as opposed to an account), and that'll also cost money.

Or you can buy Treasury bonds at, say, -1%. This is as secure as anything, and you're essentially paying 1% of the value of your money per year for someone to securely hold on to it. Logically it's the same thing.

[Drooper]

Originally posted by CapelDodger
A chunk of that cost has been income for me, and I lived pretty high on the hog from it. Not as much as some, but pretty well. It isn't just conversion costs that matter, it's currency uncertainty, which leads to hedging - also a cost.

As I said hedging costs are tiny in relative terms.

Originally posted by CapelDodger
As I said, in principle a single currency is desirable since these costs are artificial. Ditto tariffs. Regulatory costs - health and safety, consumer protection, environmental standards etc. - are there for good reasons. So is insurance.

A single currency is not desirable, as I stated earlier. It may or may not be suitable for a particular arbitrary area.

Originally posted by CapelDodger
What cost? East Germany took a nose-dive because it was dominated by inefficient, state-supported industries. It was one of those failed socialist states we've all heard of. The one-to-one Ostmark exchange-rate was a mistake because it damaged West Germany, not the East. In the East it meant that there was more capital available to modernise industry. In the West it meant monetary restriction to prevent inflation. The effects are still being felt, not because of the single currency but the politically-motivated, economically disastrous echange-rate.The UK isn't in the Euro, of course. Within the UK the exchange-rate is determined by the performance of the financial sector, concentrated in London. The industrial regions (they still exist, just about) such as South Wales and Scotland have to put up with it. These regions would be better off with their own currencies - or the Euro, which is not so dominated by one economic sector.[/B]

The effects of German monetary union are still being felt partly because of:

1. lack of nominal currency adjustment between Eastern and Western and Lander, and
2. lack of nominal currency adjustment between Germany and the rest of the Eurozone.

On the second points you raise, I think you misunderstood my post. I stated that the UK itself, Italy itself, Germany itself are at the limits of an optimal currency area and could possibly benefit from regional currencies.. This you acknowledge youself.

In fact you seem to get a bit muddled here. You state that a single currnce imposes no costs and then you claim that regions within Europe would benefit from seperate currencies.


Originally posted by CapelDodger
An example of a government manipulating the exchange rate so as to produce a short-term, unsustainable boom. Had Argentina been a US state, using the US dollar as they do, it could never have gone up that cliff it fell off.
In principle, a single global currency is a benefit to trade. Because of that, it might someday come about. But in the long term we're all dead, of course.

Argentina was not a case of a government maniipulating an exchange rate.

They dollarised the economy. The dolar was the official currency of Argentina. It was effecitvely in a unilateral monetary union with the US. But it was not an optimal currency area and a large economic shock, which effected Argentina more than the US led to MASSIVE costs for the Argentinian people.


The fact is the thought of widespread common currencies appeal to laymen. But the literature and stylised facts suggest that the imposition of monetary unions accross heterogeneoous economies, with limited labour mobility tend to impose very large cost due to the way the prevent nominal relative price adjustment. This is something the Euro area is proving now.

I suggest you go read the literature on optimal currency areas, it is quite interesting. An interesting statistic to note is that labour mobility in the US is about 20 times that of Europe

[bjornart]

Originally posted by shanek
True, but it's still the case that the widgets drop in price without deflation. The productivity of the economy has increased.

It might be disadvantageous to certain investments, but then, it would be advantageous to others.

Not really true. Treasury bonds during the Great Depression actually gave a negative interest return. And if you think about it, that actually makes sense.

Let's say, for example, that there's deflation at 3%. With deflation, you want to hold on to all the cash that you can. You have some options. You can just stack it all in your house; but if you do this, you're going to want to put it in a safe and maybe even hire some private security to guard it. That costs money. Or you can put it in a bank's safety deposit box (as opposed to an account), and that'll also cost money.

Or you can buy Treasury bonds at, say, -1%. This is as secure as anything, and you're essentially paying 1% of the value of your money per year for someone to securely hold on to it. Logically it's the same thing.

I'm disinclined to believe it will always magically even out though. So unless you've got something short enough to post here that isn't "but you'll want to buy a safe, or give your money to the bank", I guess I'll remain unconvinced on the hole gold standard thing. Less skeptical than before, yes, but in the end it seems inflexible (which is of course also an upside, especially if you're terrified of governments) and impractical.

[CapelDodger]

Originally posted by Drooper
As I said hedging costs are tiny in relative terms.They are still artificial costs with no benefits for efficiency of production or transport, so they impede trade for no good reason. In principle, therefore, doing without them is desirable (unless you live amongst the money-changers). The absolute amounts are irrelevant to the argument.
The effects of German monetary union are still being felt partly because of:

1. lack of nominal currency adjustment between Eastern and Western and Lander, and
2. lack of nominal currency adjustment between Germany and the rest of the Eurozone.Are you saying that monetary union has led to a fall in East German living standards or productivity since the fall of the Wall? Not the failed socialist economy? How exactly do you distinguish between the effects of the bankruptcy of that economy and those of monetary union with West Germany? East German industry wouldn't have suddenly become competitive by converting to a fully-traded currrency. And with Russian oil supplies also becoming fully-traded, rather than subsidised within Comecon, the results would have been disastrous. A flood of refugees would have headed westward.

On the second points you raise, I think you misunderstood my post. I stated that the UK itself, Italy itself, Germany itself are at the limits of an optimal currency area and could possibly benefit from regional currencies.. This you acknowledge youself.

In fact you seem to get a bit muddled here. You state that a single currnce imposes no costs and then you claim that regions within Europe would benefit from seperate currencies.
Given that trade currently takes place in a multi-currency environment, regions such as Wales would indeed benefit from being part of the Euro, or at least out from under the dead weight of the City. A single world currency would be even better.

Argentina was not a case of a government maniipulating an exchange rate.

They dollarised the economy. The dolar was the official currency of Argentina. It was effecitvely in a unilateral monetary union with the US. But it was not an optimal currency area and a large economic shock, which effected Argentina more than the US led to MASSIVE costs for the Argentinian people.The official currency of Argentina is the Argentinian peso, and has been for a long time. Dollarisation involved the government backing the currency with dollars at a fixed rate. If that's not manipulation, I'm at a loss. It had no control over the US money supply, and the US did not take Argentina into account when making monetary decisions. The peso being over-valued, there was a distinct sucking sound and Argentina's dollar reserves disappeared. When the government could no longer redeem pesos with dollars, splat.

The fact is the thought of widespread common currencies appeal to laymen. As more an unfrocked priest, I also find them appealing. But the literature and stylised facts suggest that the imposition of monetary unions accross heterogeneoous economies, with limited labour mobility tend to impose very large cost due to the way the prevent nominal relative price adjustment. This is something the Euro area is proving now.(Stylised facts? Que?) What the Euro is proving is that inefficiencies previously covered-up by inflation and devaluation need to be addressed. If you can't do something competitively, don't do it. Do something you can be competitive at. Division of labour - regarded by most as a something desirable.
I suggest you go read the literature on optimal currency areas, it is quite interesting. An interesting statistic to note is that labour mobility in the US is about 20 times that of Europe It's hardly surprising that labour mobility is higher in a society descended from people who crossed an ocean - voluntarily or not - just to start the thing, and has subsequently spread across a large part of a continent in a couple of centuries. (And has had a single currency, which would tend to increase labour mobility, since a new currency is one thing you don't have to get used to). Europe filled up a long time ago, but there was significant mobility beforehand. Late Roman times, for instance; there was a lot of to-ing and fro-ing around then. (Damned Saxons.) Scandinavians, Magyars, Slavs, it was all go for a good while.

I've read a lot of argument against globalisation, and I'm not convinced. As long as there's a level playing-field, so to speak, and externalities are properly taken account of, I see no problems with it. In fact, I see it as inexorable and inevitable absent a major economic breakdown.

[shanek]

Originally posted by bjornart
I'm disinclined to believe it will always magically even out though. So unless you've got something short enough to post here that isn't "but you'll want to buy a safe, or give your money to the bank", I guess I'll remain unconvinced on the hole gold standard thing. Less skeptical than before, yes, but in the end it seems inflexible (which is of course also an upside, especially if you're terrified of governments) and impractical.

Fine. I really can't explain it any better without going really at length, in which case you're better off reading the Rothbard book I linked to.

[CapelDodger]

A single currency is not desirable, as I stated earlier. It may or may not be suitable for a particular arbitrary area.Stated, but failed signally to demonstrate. What do you see as the benefits of multiple currencies?

[Shane Costello]

Originally posted by Capel Dodger:
Stated, but failed signally to demonstrate. What do you see as the benefits of multiple currencies?

The ability to set interest rates. At the moment Ireland has to deal with interest rates set by the ECB that aren't suitable to the countries needs.

The official currency of Argentina is the Argentinian peso, and has been for a long time. Dollarisation involved the government backing the currency with dollars at a fixed rate. If that's not manipulation, I'm at a loss. It had no control over the US money supply, and the US did not take Argentina into account when making monetary decisions. The peso being over-valued, there was a distinct sucking sound and Argentina's dollar reserves disappeared. When the government could no longer redeem pesos with dollars, splat.

Something similar existed in Ireland from 1929 until the late 70's. We may have had a currency called the punt, but in effect it's value was tied to sterling and there was a currency union between Britain and Ireland.

[CapelDodger]

Originally posted by Shane Costello
The ability to set interest rates. At the moment Ireland has to deal with interest rates set by the ECB that aren't suitable to the countries needs. Ireland has to deal with the interest rates that lenders will lend at, which depends on the lendee and the purpose for the loan. I don't personally favour governments determining interest rates, and in practice they have little real control in today's global market system. Apart from attracting the attention of hot-money merchants and speculators. If the Irish economy is overheated - and I'm quite preapred to accept that - the market should recognise the shortage of real investment opportunities and demand a risk premium.
Something similar existed in Ireland from 1929 until the late 70's. We may have had a currency called the punt, but in effect it's value was tied to sterling and there was a currency union between Britain and Ireland. The UK economy suffered from an over-valued currency from the 50's to the 80's. Not that it hasn't been very successful, but it could have been more so had sterling not been a reserve currency. Post-imperial policy was to require the use of sterling as a reserve, in order to maintain the over-valuation. Go figure. The US is going through an identical experience, and doesn't seem to realise it. That's a lot easier to figure, given the crew in charge.