When did our march towards fiat currency/coinage start?

[BillJones]

These numbers reported by the fed itself.

 

Citigroup: assets of $902.2 billion

 

Federal Reserve: $905.7 billion dollars in reserve

 

The fed, ain't what it used to be.

 

Those numbers don't mean anything. The Fed has the power to create money. If more is needed, it can create more with the stroke of pen or a computer keyboard. The key question is, will the Fed use that power wisely?

[michael]

 

It seems to me that for our coinage, at least, the government tried to keep pace (with varying success) until the second half of the 1850s -- at which point they gave up and the fiat coinage began...

 

The first step, at least to me, was when the large cents were transitioned into FECs in 1858 -- this set an all all-time low in terms of bullion value. Then the 3CNs and nickels were similarly introduced in 1865 and 66, so this would (to me) be the second and third steps. However, our major coinage (10c and above) remained OK until the clad silver of 1965, so the fourth step in our coinage took a hundred years to take.

 

My perspective is that prior to 1850 that our government tried to keep the value of the coinage relatively close to the bullion value.

 

Comments?

 

(thumbs u (thumbs u

[just-john]

I would much rather have the FEDS $905.7 billion in reserve. Than $902.2 billion in assets.

Bank assets today seem to be getting smaller everyday with all of the loans-credit card-ect that are going unpaid and the property values going down

[MikeInFL]

Precisely! When did it start, and what was the first major step in that direction?

If we restrict it to the current Federal government and not the Continental Congresses or the Articles of Confederation government then the first major step toward a fiat money supply took place in 1792.

 

The original proposals for the mint and coinage required the coins to contain almost their full face value in metal. The problem with this was the copper cent. At full face value the cent would contain 264 grains or 21.18 grams or 3/4 of an oz. It would have been 31.8 mm in diameter. (The half dollar was 32.5mm) This was going to be one heck of a big coin. The silver center cents were an experiment to try and reduce the coin to a reasonable size. They were the size of our current quarter and weighed 4.5 grams (56 grains). But this process was too difficult/time consuming. Finally it was decided to abandon to full intrinsic value concept for the cent. The weight was reduced to 168 grains and the profits gained thereby were to be used to pay the expenses of the mint. In 1795 the weight of the cent was further reduced to 136 grains when the rising price of copper began reducing the amount of the cent seniorage.

 

The next step came in 1851 with the Type I silver trime. This coin was both low in weight and below the standard fineness so as to be a fiduciary coin. (I don't think a lot of people realize that the type I trime was only .750 fine instead of .900 fine.)

 

In 1853 the weights of the half dime through half dollar were all reduced so as to make them fiduciary coins, and their legal tender was for the first time limited to $5.

 

The next BIG step came in 1862 with the introduction of the Union greenbacks. The silver and gold certificates issued for the first time were not really a fiat currency because they could be redeemed for gold and silver at full value upon demand, but the Greenback or Legal Tenders were mere promissory note with NO precious metal backing and the were not redeemable except for other paper currency. These note were COMPLETELY fiat currency and the only basis for their value was the trust and faith in the credit of the US government, just like todays Federal Reserve notes. That was why their value fluctuated so widely during the Civil War. If the Union lost some battles the value fell and if they won the value rose. They didn't finally reach par with the coinage until about 1874.

 

The change from the large cent to the flying eagle cent mentioned earlier in another post was not really a step toward a fiat currency because the metal value in the copper nickel cent was still eight tenths of a cent, higher than the early large cents were. (For the last few years of the large cent the metal value of the cent was actually equal to or higher than the face value of the coin.) The change to the bronze composition in 1864 on the other hand was a further step toward fiat because that reduced the metal value to less than half the face value. A new low for any of the coinage. The copper-nickel three and five cent pieces were also fiat, but not to the extent that the bronze one and two cent pieces were.

 

Thank you, Conder, for your post. This thread was the result of one of your posts on another forum, and I was hoping you would respond to this thread.

 

Thanks to you and all those who've posted their thoughts to this thread...Mike

[World Colonial]

If you really want to trace the start of fiat currency in the U.S. after the Revolutionary War, it would be during the Civil War when the Union issued paper money to pay for that conflict. There have been other steps toward it since then, but that was really the start of Federally issued paper money. (And yes, I know about the few notes issued during the War of 1812, but they hardly count for anything.)

 

You guys are getting a bit too hung up with the commodity theory of money. That theory states that money derives its value from its metallic content.

 

Economists have totally rejected the commodity theory of money. Money derives its value from its buying power in the economy. If the value of the metal in a coin exceeds its face value, the people and the government with withdraw those coins from circulation. U.S. 90 and 40 percent silver coinage is a prime example of that. If the prices for copper and nickel and get high enough, all of the nickels will be removed from circulation regardless of what the U.S. Government says about it. Conversely if the metal content of a coin is lower than face value it will remain in circulation.

 

Having gold or silver in a nation’s monetary system is not a magic bullet. All it does is place some limit on the amount of money that can be in circulation. At times the amount money can be too low as it was during the Panic of 1893. At that time the government was not holding enough gold to increase the money supply, which was sorely needed. At other times (late 1870s), when there was glut of silver on the market, allowing that metal to be turned into money with no restrictions would have resulted in massive inflation.

 

Monetary policy is a tricky business, and the current practitioners of it who are now running or have recently run the Federal Reserve Banking System are doing a great job.

 

What you write is the consensus opinion but what exactly is the criteria by which this is measured?

 

From my standpoint the Fed is and has been doing a terrible job. More to the point, at least some of us who do not believe in debasing the currency believe that this "job" should not exist at all.

 

If you are among the many who support what monetary policy really is - legalized theft - then yes, they certainly are doing a great job. But most people do not know that. They know about the declining value of the Dollar but do not usually associate it with the Fed. The US Dollar has lost over 95% of its value since the FRB was created in 1913 and they have suceeded, along with the rest of the world's central banks, in contributing greatly to the greatest credit bubble in history.

 

As for what economists think, since most of them are really apologists for one ideology or the other, most of them should be ignored. What you state is the consensus opinion - that I agree with - but it is only true because there is no competition for money. If competition were allowed as in most other parts of the economy, this consensus opinion would probably not appear so self evident. There certainly would appear to be a "market niche" for those who would like to have the option of using a properly managed currency as a store of value.

 

In any event, nice post.

[jtryka]

If you really want to trace the start of fiat currency in the U.S. after the Revolutionary War, it would be during the Civil War when the Union issued paper money to pay for that conflict. There have been other steps toward it since then, but that was really the start of Federally issued paper money. (And yes, I know about the few notes issued during the War of 1812, but they hardly count for anything.)

 

You guys are getting a bit too hung up with the commodity theory of money. That theory states that money derives its value from its metallic content.

 

Economists have totally rejected the commodity theory of money. Money derives its value from its buying power in the economy. If the value of the metal in a coin exceeds its face value, the people and the government with withdraw those coins from circulation. U.S. 90 and 40 percent silver coinage is a prime example of that. If the prices for copper and nickel and get high enough, all of the nickels will be removed from circulation regardless of what the U.S. Government says about it. Conversely if the metal content of a coin is lower than face value it will remain in circulation.

 

Having gold or silver in a nation’s monetary system is not a magic bullet. All it does is place some limit on the amount of money that can be in circulation. At times the amount money can be too low as it was during the Panic of 1893. At that time the government was not holding enough gold to increase the money supply, which was sorely needed. At other times (late 1870s), when there was glut of silver on the market, allowing that metal to be turned into money with no restrictions would have resulted in massive inflation.

 

Monetary policy is a tricky business, and the current practitioners of it who are now running or have recently run the Federal Reserve Banking System are doing a great job.

 

I do not think the value of money is wholly derived from it's metal content, however metal content can make a nice floor! When the value of silver in a silver dollar dropped to 30 cents, well at the very least it was 30 cents instead of dropping all the way to 3 cents, which is what the current dollar is worth (and now the floor is ZERO which may be where we are heading). The second point you touch on I think is the most important advantage of a gold standard or bimetallic standard, and that is the abolute limits it places on those in power. You focus on the amount of currency in circulation, yet ignore the velocity of money which would also play a role as money supplies changed. And you ignore the impact on fiscal policy. Whether you're liberal or conservative, do you think the Federal Government would get us into crazy wars, or provide tax cuts for the "rich" or send billions in aid to foreign nations around the globe, or create huge entitlement ponzi schemes that threaten to bankrupt us all if they couldn't simple wish it, if they couldn't simply issue trillions in IOUs to the Fed who then use that to back the "dollars" that magically appear? The fiat system has empowered the political class and taken power from the people, to the point that these people are not ruling based on the consent of the governed but based on contempt for the governed.

 

And let's not even talk about price stability (isn't that one of the Fed's goals?), that's been a miserable failure. Inflation of the currency and resulting rising prices serves to rob the common man of his savings and in the end promotes a perverse system when individuals are rewarded to spending more than they make and going into debt, since the debt will be paid back with dollars worth less than they were when borrowed. We've transformed this nation from producers and savers to deadbeats and debtors, which doesn't seem like a positive no matter how the economists spin it. Oh, and if we kept gold pegged at $20.67 per ounce, guess what? A new house would still cost $5,000 a new car would still cost $695 and a Coke would still cost a nickel. Damn stable prices, that's how they get you!

[Keleum]

How much gold would the US need to use for the currency demands of the federal reserve, as of right now sept, 2007.

 

$750/oz for gold, according to APMEX it's $734.50 so I'm rounding.

 

$1379.3 billion, in currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions as of Sept, 2007. (for those that want to check I'm using M1 from the fed's most recent report.)

 

with

 

$783.5 billion worth of currency in circulation as of dec 31, 2006 (again from the fed).

 

doing the math you would need some where between 1,044,000,000 and 1,838,666,666 ounces of gold, just to cover the needs of the fed and the currency in circulation today.

 

As of 1996, there's somewhere around 1,608,000,000 ounces of gold, (50,000 of the 107,000 tonnes of gold ever mined) in all the government vaults, safes, safety deposit boxes, underground bunkers, that could in theory be used for monetary purposes. World gold supply

 

It would easily take every ounce of gold ever mined in the world, that wasn't around someone's neck, just to meet the demands today (sept, 2007) of the federal reserve. Neglecting the needs of every other country in the world, and anything the gov't might want to keep in reserve.

[DC Dawg]

These numbers reported by the fed itself.

 

Citigroup: assets of $902.2 billion

 

Federal Reserve: $905.7 billion dollars in reserve

 

The fed, ain't what it used to be.

The asset figures are not an indication of worth. The asset total of Citigroup is the value of ALL of their holdings that includes stocks, bonds, various types of loans, cash, etc. Of that $902.2 billion, only 3-percent has to be in cash reserve, as required by law.

 

The $905.7 billion in reserve at the Federal Reserve is liquid assets--cash. These reserves do not count the short-term loans (rate determined by the Fed Funds rate) or Treasury-based obligations.

 

While Citibank manages a large amount of assets which contains risk, the risk in the Federal Reserver are the risks in the currency market--where the US Dollar and the Canadian dollar are on par (for the first time in 31 years), $1.42 buys 1 Euro, and $2.02 for one British Pound!

 

Scott

[jtryka]

I think again you are thinking in static terms and ignoring the velocity of money. Still, this shows that there would be dramatic declines in the money supply and hence dramatic declines in prices, which is exactly what you would expect when trying to undo in on fell swoop the 97% debasement of the dollar which has occurred over the last 94 years. The other thing to consider is that having the physical metal on hand in a vault waiting for someone to redeem a gold certificate is not the most important part of the system, rather the monetary authority's unwavering commitment to maintain the peg, buying gold when the market price fell and selling when the price increased.

 

Oh yeah, one other nice side benefit of this system would be the inability of some deadbeat nations to incur MASSIVE trade deficits eclipsing 6% of GDP without a care in the world. Under such a system, trade imbalances would be temporary, and wealthy Americans could no longer rely on the blood and sweat of workers in developing nations to satisfy our need for cheap at Wal-Mart.

 

Bottom line, both a gold standard and a fiat system are confidence games. It's just that the gold standard is a confidence game with more controls in place to prevent the insanity of 1923 Germany, 1980s Brazil or 21st Century USA.

[World Colonial]

[i do not think the value of money is wholly derived from it's metal content, however metal content can make a nice floor! When the value of silver in a silver dollar dropped to 30 cents, well at the very least it was 30 cents instead of dropping all the way to 3 cents, which is what the current dollar is worth (and now the floor is ZERO which may be where we are heading)]

 

You are correct, there is no reason why money must be made of metal or anything else for that matter. The distiction between money and non-money is artificial though others (primarily economists and the government) may think and say otherwise. If a choice actually existed, we do not know what the market would choose. However, givent that metals have a long history of usage, it is very likely that gold, silver or both would be at least ONE of the options.

 

[The second point you touch on I think is the most important advantage of a gold standard or bimetallic standard, and that is the abolute limits it places on those in power. You focus on the amount of currency in circulation, yet ignore the velocity of money which would also play a role as money supplies changed. And you ignore the impact on fiscal policy. Whether you're liberal or conservative, do you think the Federal Government would get us into crazy wars, or provide tax cuts for the "rich" or send billions in aid to foreign nations around the globe, or create huge entitlement ponzi schemes that threaten to bankrupt us all if they couldn't simple wish it, if they couldn't simply issue trillions in IOUs to the Fed who then use that to back the "dollars" that magically appear? The fiat system has empowered the political class and taken power from the people, to the point that these people are not ruling based on the consent of the governed but based on contempt for the governed.]

 

Abosolutely. Along with the ability to tax, the fiat money monopoly gives the government the power of compulsion over money. The primary purpose of both is to pick winners and losers according to whom those who are able to influence these decisions determine are worthy of it. Much of it is pure populist demagoguery.

 

[And let's not even talk about price stability (isn't that one of the Fed's goals?), that's been a miserable failure. Inflation of the currency and resulting rising prices serves to rob the common man of his savings and in the end promotes a perverse system when individuals are rewarded to spending more than they make and going into debt, since the debt will be paid back with dollars worth less than they were when borrowed. We've transformed this nation from producers and savers to deadbeats and debtors, which doesn't seem like a positive no matter how the economists spin it. Oh, and if we kept gold pegged at $20.67 per ounce, guess what? A new house would still cost $5,000 a new car would still cost $695 and a Coke would still cost a nickel. Damn stable prices, that's how they get you!

 

Once again, correct which was the point I was making in my last post. People talk as if the Fed has done such a great job in managing the currency, at least since the early 1980's. Compared to whom, the central banks of Zimbabwe and Argentina? That is preposterous. How much has the currency lost in purchasing power since then? Well over half its value? That basically leaves you comparing the Fed's performance to that of other central banks which only make the Fed look good by comnparison.

 

And while on the subject of inflation, what is reported in the CPI does not give an accurate picture, not because it is distorted or manipulated but because most of the recent increase in the money supply has not manifested itself in consumer goods but in asset prices through the credit mania. That is why a typical home in California costs a ridiculous $500,000. Also, much of our inflation has simply been postponed by exporting our currency and credit into the foreign currency reserves of the world's central banks. If you want to get an idea on the future inflation potential out there, just pick up a copy of the Economist. China and Japan both have US Dollar reserves that exceed $1 TRILLION and many other countries have hundreds of billions.

[DC Dawg]

You guys are getting a bit too hung up with the commodity theory of money. That theory states that money derives its value from its metallic content.

Darn... you beat me to this!!

 

Economists have totally rejected the commodity theory of money. Money derives its value from its buying power in the economy. If the value of the metal in a coin exceeds its face value, the people and the government with withdraw those coins from circulation. U.S.

Up until the government stopped trying to regulate and set the cost of metals (1970s), the government would set the price of the metals and would mint coinage and print money in accordance with those values. In fact, up until the (I think) 1860s, the government kept the value of money on par with its intrinsic value. It was only after the release of the Flying Eagle cent in 1857 that the government learned the benefits of seignorage. (thumbs u

 

A number of people explained how this country has produced money at a value to meet their short-term objectives dating back to the continental congress. This type of management of money continues today when, as recently as last month, the Board of Governors of the Federal Reserve authorized the release of billions of dollars into the economy of the US to try to stablize the credit markets. Where did the Fed get this money? It created it by issuing debt bonds to be purchased by investors at the same value issued. In other words, they created the money.

 

Money is an exchange medium that allows for people to trade for goods and services. Rather than pay with money, I can barter services or merchandise for my purchases for any private treaty sale. The value of this barter is worth what the barterer and merchant feels is worth. However, for most trades we use legal tender currency because of its neutral value (e.g., value not tied to a specific item) and it makes trading easier.

 

Monetary policy is a tricky business, and the current practitioners of it who are now running or have recently run the Federal Reserve Banking System are doing a great job.

With the declining value of the dollar, the increased money supply, and the rising debt, the current Fed has not shown it could stand up in a crisis. Rather than working for the public they are supposed to represent and protect, the Fed allowed too many market forces to hurt the citizens of this republic. It has been said that the Fed wants to "teach these people a lesson" but at what expense? Too many civilians are being hurt because the Fed let the financial markets run amok before becomming involved.

 

Remember, every single market failure in this country has been tied to a credit crisis--whether too little (1970s) or too much (1929, 1987)--causing serious liquidity issues (1890s). Failure to learn from these mistakes and allowing them happen over again is far from "doing a great job."

 

Scott

[Keleum]

I'm pointing out, one of the reasons the fed has been less effective is because all but it's most major of actions can be absorbed/diluted by the actions of the top 2 or 3 member banks.

 

Banks that big, with that kind of holdings spread their policies all around the globe, more efficently than the fed can. And to "reign them in" takes more muscle and more cooridination than the fed has ever had to do before.

 

 

 

 

[World Colonial]

[With the declining value of the dollar, the increased money supply, and the rising debt, the current Fed has not shown it could stand up in a crisis. Rather than working for the public they are supposed to represent and protect, the Fed allowed too many market forces to hurt the citizens of this republic. It has been said that the Fed wants to "teach these people a lesson" but at what expense? Too many civilians are being hurt because the Fed let the financial markets run amok before becomming involved.]

 

Remember, every single market failure in this country has been tied to a credit crisis--whether too little (1970s) or too much (1929, 1987)--causing serious liquidity issues (1890s). Failure to learn from these mistakes and allowing them happen over again is far from "doing a great job."]

 

The problem is not that the Fed is not able to stand up to the crisis, but that the Fed and the rest of the US government is the primary reason this current crisis exists.

 

It was the debasement of the US dollar and (not insignificant) contribution the Fed made to the credit mania which has recently shown up in the form of the subprime crisis. Before the Fed and other governemnt created distortions (think today's housing market), you had excessive speculation such as the incidents you mentioned but the market corrected the bad decisions that were made. That is what bankruptcy is and what market panics correct. Most people do not like this resolution but that is not a market failure because bad decisions are supposed to result in bad outcomes. The inevitable fraud that goes hand in hand with a mania can be handled by the legal system as in the past.

 

The primary difference now is that government intervention has allowed the distortions to get larger and larger over time because the offsetting deflationary forces have not been allowed to manisfest as they did before. It is also a complete fallacy to believe that the Fed can prevent the liquidiation of these malinvestments. It can only socialize the losses which is exactly what it does through its credit inflationary policies.

 

Today, the private sector distortions are also greater than ever to which I attribute at least two causes. One is financial intermediation in which the managers of these assets recklessly speculate with other people's money. (That is why the subprime mortgage got as large as it did.) Second, perverse government incentives which encourage both institutions and individuals to also recklessly speculate.

 

On top of this, there are also distortions created by foreign central banks. One such example is the Yen (and other smaller) carry trade(s). If the BOJ did not artificially hold down rates, this would not be possible.

 

You would think from listening to conventional economic apologists that the Fed has some magical power or "tools" to prevent economic contractions and falling living standards. It does not just as the central banks of Zimbabwe, Argentina and every other central bank that has been overwhelmed by forces outside of their control did not. The only difference between the Fed and every other central bank is the level of prosperity of the economy it "manages" and the foreign holders of its currency it can plunder.

 

 

 

[BillJones]

You can go on and on about how the Federal Reserve is responsible for the current situation in the housing and mortgage markets, but the bottom line is we operate under capitalism, not socialism. Capitalism allows speculators to make fools of themselves and lose all their money. It allows people to borrow money when they have overextended themselves if there are lenders who are foolish enough to loan money to them. Under capitalism people make choices. Under socialism the government makes choices for you and depending on the amount of paternalism you advocate, gets to control large aspects of your life.

 

The Federal Reserve is responsible for providing a monetary climate that is conducive to providing opportunities for a healthy economy. It was never set up to micro manage the financial system. If it tried to do that Congress would howl and the agency would have overstepped its charter. The Fed can control the reserve requirements for banks and manage the money supply through open market operations. It can also send signals by the discount rates it charges member banks for loans. It can’t tell individual borrowers if they can have a loan. That’s the lenders’ job.

 

Government influences economic activity through monetary and taxation policies as well as the level of government spending and regulation. Taxation policies are tied up with politics, which makes adjustments via that route difficult and tedious. The same can be said for government spending and regulation. Within recent memory both political parties have shown themselves to fiscally irresponsible in that regard. The leaves the Federal Reserve as the only agency that has the authority to influence the economy in a rational manner.

 

To those of you who like to do away with the Federal Reserve and go back to the gold standard and 19th century monetary policy, my response is study some history before you proceed. If you do that, you find that “the good days were not good. They were terrible,” to steal a title from a book that I read many years ago.

 

[World Colonial]

You can go on and on about how the Federal Reserve is responsible for the current situation in the housing and mortgage markets, but the bottom line is we operate under capitalism, not socialism. Capitalism allows speculators to make fools of themselves and lose all their money. It allows people to borrow money when they have overextended themselves if there are lenders who are foolish enough to loan money to them. Under capitalism people make choices. Under socialism the government makes choices for you and depending on the amount of paternalism you advocate, gets to control large aspects of your life.]

 

You completely misunderstand the point of my posts and you and I probably just have a disagreement of what the Federal Reserve is. The Fed is not part of a capitalist system. It is associated with socialism regardless of whether it is included in a private market economy or not. If you do not believe this, just take a look at a list of Karl Marx's "Ten Planks" in the Communist Manifesto.

 

Also, I have no problem when people make bad choices and fail. That is exactly what I think SHOULD happen. In the current situation, I think everyone who voluntarily made a bad choice to buy a house they cannot pay for should lose it, but politicians, including those at the Fed, do not agree.

 

[The Federal Reserve is responsible for providing a monetary climate that is conducive to providing opportunities for a healthy economy. It was never set up to micro manage the financial system. If it tried to do that Congress would howl and the agency would have overstepped its charter. The Fed can control the reserve requirements for banks and manage the money supply through open market operations. It can also send signals by the discount rates it charges member banks for loans. It can’t tell individual borrowers if they can have a loan. That’s the lenders’ job. ]

 

The primary outcome of the Fed's policies, regardless of the political nonsense to the contrary, is to redistribute wealth and income. And no, I do not believe the Fed or the government for that matter, should "manage" the economy at all. Both the government and the Fed distort the economy.

 

[Government influences economic activity through monetary and taxation policies as well as the level of government spending and regulation. Taxation policies are tied up with politics, which makes adjustments via that route difficult and tedious. The same can be said for government spending and regulation. Within recent memory both political parties have shown themselves to fiscally irresponsible in that regard. The leaves the Federal Reserve as the only agency that has the authority to influence the economy in a rational manner.]

 

I am familiar with all of this and agree with most of what you say, except that the Fed has not acted "rationally" or responsibly. The idea that the Fed knows or can possibly know what it supposedly does know is false. They have no more idea what interest rate levels should be any more than the Soviet Union did to establish an "optimal" five year economic plan.

 

[To those of you who like to do away with the Federal Reserve and go back to the gold standard and 19th century monetary policy, my response is study some history before you proceed. If you do that, you find that “the good days were not good. They were terrible,” to steal a title from a book that I read many years ago.

quote]

 

This is a false arguement and certainly not what I said. I do not believe that it is necessary to go back to the gold standard. I am not a "gold" bug and do not have a problem with fractional reserve banking like many "gold" bugs do. I am in favor of monetary competition just as in every other economic area. It would be voluntary and people could make choices on what form of money to use instead of the fiat money disaster we have now where our savings our expropriated. If someone wanted to use a private money alternative, they could so. If they wanted to use the existing fiat money system, they could do that also.

 

This concept is not perfect, but at least when the inevitable disaster did happen, it would be limited in scope and could be handled through the legal system

 

I wrote a paper of this topic. It is not "scholarly" in an academic sense but I believe it is written in a logical fashion, though there is obviously room for disagreement. I can send it to you if you wish and you could point out my errors if you are interested.

[BillJones]

This is a false arguement and certainly not what I said. I do not believe that it is necessary to go back to the gold standard. I am not a "gold" bug and do not have a problem with fractional reserve banking like many "gold" bugs do. I am in favor of monetary competition just as in every other economic area. It would be voluntary and people could make choices on what form of money to use instead of the fiat money disaster we have now where our savings our expropriated. If someone wanted to use a private money alternative, they could so. If they wanted to use the existing fiat money system, they could do that also.

 

We had this system in the United States before the Civil War. It was in the form of an almost totally unregulated state banking system. Each bank could issue its own currency, and the people were allowed to accept or reject it at whatever rate seemed to be appropriate. For example a $10 bill issued by a local bank that appeared to be on a firm financial footing might be accepted in trade at $9.50. A similar bill issued by a bank that was shaky might have been worth two or three dollars. Bills from banks that had gone belly up or banks that had never opened at all, and there were some of those, were worth nothing. It was impossible to tell what a note was worth by looking at it unless you knew the banking lay of the land.

 

There were many problems with this monetary system. First, it took a score card to keep up with the discount rates for the various banks. Second, the many designs for notes made it difficult to tell if a bank note was genuine or not. Totally counterfeit notes were not uncommon, and genuine notes that had had their face value raised to a higher amount (e.g. a $1 note raised to $10 or $100 or some other higher value) were also encountered.

 

If this is what you mean by, “private money alternatives,” all I can say to you that it has been tried, and it failed miserably. The Federal Government put that system out of its misery by placing high taxes on privately issued bank notes. It’s been said that taxation can kill, and this instance killing privately issued bank notes was a public service.

 

At any rate for those who are truly tied to the commodity theory of money here’s a chilling thought. Well over 80% of our nation’s money supply does not exist in paper or coin form. It is an accounting record on a computer and has no physical form at all. Now I know that all of you are convinced that the economy and the world are going to hell in a hand basket.

 

For those others have some sense reason, perhaps you need to expand your holdings from these computer entries to gold. That works well at times, but be advised that there have been long periods during which investments in gold yielded poor returns and not as much security as the gold bugs tell us it does.