Redstate

they help the New Zealanders happy with an undervalued currency and cheap
kiwi fruits
this crisis of confidence should cause a run for bargain hunting kiwi importers.

I didn't realize it was Ron Paul Month. And some people worry about hurricane season.

Can Franz bite people via cyberspace? Worth looking into as the cult gathers for this one. :>)

I know exactly where you're going with this. There is a minor subliterature, mostly written during the 1960s, which seeks to interpret The Wizard of Oz (written by L. Frank Baum in 1900) as an allegory about free silver coinage. Naturally, Baum was on the side of the inflationists. In the novel, Dorothy walks on the "yellow brick road" (get it, get it?!) to the mystical land of Wall Street Oz, and she wears... wait for it... SILVER SLIPPERS.

By the time of the 1939 Hollywood movie, we had a fully inflated (albeit still gold-based) dollar and Baum had implicitly been vindicated.

SO THEY CHANGED THE SLIPPERS FROM SILVER TO RUBY!

Redstate is such a valuable source of information I'm just struck speechless. Or typeless. Or something.
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CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

The land of Oz, meaning Wall Street, the land of gold-hoarding wizards that want you to pay no attention to that man behind the curtain.

What is "Oz" an abbreviation for?

add "clueless".
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CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

Baum took it off a filing cabinet.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

and these have been fun to read as well.

Dorothy and her Ruby Slippers.
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CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

So the Fed must be abolished even though it's prevented us from having any panics or depressions since its founding, because it's not 'perfect.'

But we had numerous panics and depressions during our time under the gold standard, yet we should go back toward that ideal?

HTML Help Central for Red Staters

Playing fast and loose with facts here, aren't you? The Fed wasn't running our fiat money system as it stands today until the 1960s, so to blame our money system now for the Depression is silly.

But yes, we had panics and depressions before the 1929 crash and depression. Quoting Wikipedia (I know, I know), we had panics trigger depressions in at least the years 1837 (about 5 years of depression afterward), 1873 (about 6 years of the "Long Depression" following), and 1893 (about 5 years).

If the Great Depression lasted longer it's because the socialists prolonged it, not because it was an anomaly in the system of gold-backed money being run on again, and again, and again, causing widespread ruin when reserves ran short.

HTML Help Central for Red Staters

I'm taking you very much at your word here.

I understand fully that you aren't proposing to abolish the Fed, or even the existing finance-based economy.

You're just trying to establish an alternate currency or currencies that will co-exist alongside the dollar-based system, in order to provide a channel for free markets to discipline the creation of fiat money.

I've completely abandoned all my arguments (which you've brushed aside anyway) that fully adequate free-market mechanisms already exist today to provide such discipline.

I'm on your side now.

I'm just trying to understand exactly how it's all going to work.

The reason I made the point about the Fed being able to keep financial disruptions from feeding through to the real world is precisely because this enables us to reasonably ignore the entire financial world for purposes of this discussion.

We're going to construct an alternative, non-financial currency, you and I. Aren't we? I just want to know how it's going to work.

He will still be trying to figure this out months from now.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Remember, I'm a businessman. I'm deeply attracted to any idea that sounds stupid. That's because every idea that doesn't sound stupid has already been tried. Therefore, the only ideas that have a chance of changing the world are the stupid-sounding ones.

Like Amazon. Computers. Internal combustion. Telephones. Fire.

If Ron Paul really has figured out a way to measurably improve the global financial system, I want to be the first guy to invest in the implementation of it.

But I don't think he's stupid enough.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Already exist, are in widespread use and backed by a variety of asset classes.

Most people who read here probably are taking part and have been for some time.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

...denied that. I'm trying to give them a chance to put up or shut up.

The US had full gold convertibility throughout the 19th century, except for 1862-1879. (And even during the latter period, gold played a crucial role as a proxy for foreign exchange. We didn't have dollar seigneurage in those days, as we do now.)

Commercial banking rose rapidly in the decades after the Civil War, and they employed fractional-reserve banking. Both before and after the resumption of gold payments in 1879, commercial banks were required by law to hold reserves in the form of vault currency, or bonds purchased from the government. That's the shortest reasonably-true answer to your question about how people did financing in the 19th century.

One assumes that Ron Paul has no desire to do away with the modern banking system, but rather to supplement it with non-government money of various kinds. Since fractional-reserve banking expands the money supply, it's contrary to first principles with Paul and his supporters. (I base that on their comments here on RS.) Therefore one assumes that their alternate-money arrangements would not permit fractional-reserve lending. That makes them suitable primarily for the purpose of maintaining the intrinsic value of the monetary commodity, and unusable for the purpose of increasing economic activity.

Do I think there are better ways to bring free-market principles to the American monetary system? This question surprises me every time it comes up. If anyone, Federal Reserve or otherwise, steps up to compromise or debase our money, global investors will dump it overnight. If that's not free-market activity, I don't know what is.

Of course, the fear of that very possibility is precisely what seems to animate the Paulites most. It's really a rather important question. I don't give Ron Paul credit for knowing the answer, and I don't give myself credit for knowing it either. Speaking purely for myself, I'll be happy to get through the current financial crisis without too much more damage. I've lost an ungodly amount of money in the last couple of weeks.

I'm a little bemused that my remark about the Fed's super-powers has stirred people up. I honestly intended it as an intermediate step in the argument I was constructing for non-financial alternative money. A minor, non-controversial point.

What I meant was simply that Wall Street doesn't necessarily impact Main Street to any great extent, so it can be ignored in a discussion of the structure of alternative money.

From scott742's immoderate response to that, it's clear that he wants alternative money precisely to ensure that Wall Street can't mess up Main Street.

It took the Federal Reserve a long time to really perfect the techniques it uses to keep financial disruptions from spilling over into the real world. The Fed really did light the match that set off the Depression, by intentionally taking steps to reduce dollar liquidity in 1928.

But financial disruptions occur because of conditions particular to the structure of free capital markets, and not of actual productive economies. That's why they don't necessarily impact real economies. If you're old enough, do you remember how you reacted to the 1987 stock market crash, the 1997 Asian Flu, or the 1998 Long-Term Crisis? How are you reacting personally to the current Subprime Crisis, which is far from over?

You see my point? The Federal Reserve has played a deft role in keeping all of these financial disruptions confined to Wall Street. And by the way, it's a total misconception that they bail out people who make bad decisions. There are a lot of bankrupt and soon-to-be bankrupt institutions out there right this minute.

Financial problems affect the production of goods and services when they impair the availability of credit. That's an extremely simple yet true statement. And that's why the Fed is so obsessed with "injecting liquidity" into the banking system right now. Because liquidity is what you lose in a financial panic.

Without liquidity, there's no credit. Without credit, there's no business expansion. Do that long enough, and voila', you've turned a problem that only hurts Wall Streeters into a problem that hurts Main Streeters too. And not just in their 401(k) plans, either. They start losing their jobs.

The Fed stepped back from managing the successive crises that erupted in 1929. (As I said, they basically touched them off in the first place.) The problems exploded into ordinary people's lives in horrible ways, through pathways that to this day are not well-understood. (And these have been one of Bernanke's chief research interests.)

Among other things, the US persisted in holding to a gold standard until 1933, when almost every other country dropped off gold in 1930 or 1931. As a result, our recovery from the Depression didn't even start until after most other countries were well on their way back.

As a result, the American people were ready for a complete change in the way the economy is managed. FDR was astute enough to sense this, and capable enough to make it happen. His solution, in short, was to have the Federal government take over the banking system, giving it wide control over the economy. The American people assented, and that's the system we have today.

Will the Fed avert a recession this time? How I wish I knew. Informed opinion is all over the map. But it's an extremely important question, and the answer will have a big impact on next year's election.

Regarding "If anyone, Federal Reserve or otherwise, steps up to compromise or debase our money, global investors will dump it overnight. If that's not free-market activity, I don't know what is." --> Yes, our dollar is weakening steadily, and has been weakening for a couple of years now. But it's not like the dollar is being dumped for currencies with intrinsic value, it's being dumped for euros, pounds, and loonies. That should *really* make us feel badly.

Regarding "it's a total misconception that they bail out people who make bad decisions. There are a lot of bankrupt and soon-to-be bankrupt institutions out there right this minute." --> Check out this fascinating chronology:

http://www.fdic.gov/bank/historical/s&l/

It's not just "they" who bail out people, it's "we". The system is inherently unstable, but it's too big to fail. So when the system hiccups, or vomits, we throw new cash at it. Some institutions (those who are NOT "too big to fail") may close, and people may be labeled as "criminals" and scapegoated for taking advantage of the system's instabilities, but we always step in through the Fed or Congress and prevent the total loss of assets that would otherwise result.

I'm not saying that's a *bad* thing to prevent Armageddon on a short-term basis, but just that we owe it to ourselves to question a *system* that demonstrates these inherent instabilities.

Which is why I and other RonPaul™ supporters appreciate this thread very much.

Like you said, "Because liquidity is what you lose in a financial panic. Without liquidity, there's no credit. Without credit, there's no business expansion." Amen! Preach it! In an inherently stable free-market system, there would not be panics due to the system itself. You could still have exogenous events like terror or natural disaster. But recovery would be assured, and capital to finance the recovery would be made available, since survival of the financial system itself would never be in question.

Just saw this:

http://www.lewrockwell.com/rothbard/rothbard163.html

It's required reading for this thread. Don't worry, it has nothing to do with RonPaul™

:)

I'm just not willing to give up prosperity to get it.

It's funny, I've been re-reading some classic Friedman lately, and he also questioned the "system" for its inherent instabilities. In his case, he was examining the Fed's role in precipitating and prolonging the Depression. And his feeling is that there is something wrong with anything that depends for its proper functioning on top quality leadership. (The Fed lost its dominant personality, Benjamin Strong, to illness late in 1928.)

So if you have any respect for Friedman (I certainly do), then you're at least asking the right questions.

Now you've also added another interesting dimension when you criticize investors for being willing to hold euros or sterling. Presumably, as fiat currencies, these are also suspect. That tells me all the more that your primary concerns are not so much with making the financial system "work better," but rather to forestall total disaster. Speaking as an investor, I'd say you're not taking enough risk. Which necessarily limits your returns.

There's an obsession with money in all of this that I find very unattractive. At the very least, it's outdated. I'm sure you'll disagree violently with this, but I happen to believe that economic activity is far more important than money. And monetarist regimes have as their goal the fostering of economic activity.

And I'll freely confess the personal bias that informs my view. I love working. I want the personal fulfillment that comes from solving hard problems, being a leader, and helping younger people to understand themselves and their dreams better.

Money is nothing but a means to those ends. In fact, the kind of montarism that the whole world runs, in preference to hard-money standards, is responsible for pulling us out of the past, in which fulfillment was not to be hoped for from work and economic activity. Because everyone had enough trouble just working for food and shelter.

A company can sell a bond, and put the money to work to pay you a rate of return. If you buy the bond with your hard currency, no "new" money has been created. The company has just assumed an obligation to pay you back.

In fact, this mechanism (selling bonds) is used by the People's Bank of China specifically for the purpose of "sterilizing reserves". When new USD come in to pay for exports, the PBC gives the exporter RMB in exchange for their USD. The PBC then sells a bond to Chinese banks and insurance companies to "soak up" an equivalent amount of RMB so no new net RMB are created.

That's just a temporizing measure, though, since those bonds then become reserve assets in China's fractional reserve banking system... and the banks will inflate by loaning against those assets...

Although the PBC regulates reserve ratios etc. to try and minimize inflation, they can't hold it off forever. That's the reason why EVENTUALLY China's currency will float.

Amazing how all this stuff is related...

Say I start up a newspaper, and I get a money from selling a bond. That money buys a printing press and the services of some copywriters. Where's the money going to come from if I get a payment demand? I may not make enough money to pay it back, even if I sell my used printing press.

This is creating money, not in the form of dollars, but in the form of that bond. It may or may not ever be repaid. If that risk gets included in the contract, we're really trading partial ownership in the venture for money.

Our finance law giving sales of debt (bonds) so much privledge over sales of equity is one of the places there's room for improvement, IMO.

Bond == Securitized Loan

If you're starting up a new newspaper, you'd typically get a collateralized loan, or pursue equity investment. If you're an established media company with a good track record looking to expand, you can likely sell a bond which is just a loan that's packaged for purchase by investors.

So you want to start up your newspaper, and blackhedd (with a few of his friends) take a hard look at your business plan. They think you're going to be able to reverse the decline in the print media business with your plan for a new Republican newspaper called the "Daily Red State".

Because they believe in YOU, and the business plan you've proposed for the DRS, they take THEIR EXISTING MONEY and give it to you in exchange for a promise to be repaid over time, with suitable interest to compensate them for the risk. Additionally, because they are debt (instead of equity) investors, they have first claim on the assets of the DRS in the event you can't pay them back as expected (ie, default).

Again, in the context of "This is creating money, not in the form of dollars, but in the form of that bond. It may or may not ever be repaid. If that risk gets included in the contract, we're really trading partial ownership in the venture for money." --> The bond BETTER be repaid, or blackhedd is going to take over your business. The risk of default will ALWAYS be included in the contract. The key difference between debt and equity investors is that debt investors have first claim on the business' assets in default. Equity investors (people who buy stock) are co-owners of the assets with you so you all succeed (or lose) together.

Regardless, NO NEW MONEY HAS BEEN CREATED. The dollars that Blackhedd Syndicate, LLC loan you were earned by them, and not created out of thin air by a fractional reserve banking system.

Regarding, "Where's the money going to come from if I get a payment demand? I may not make enough money to pay it back, even if I sell my used printing press." --> Your creditors expect you to get the money to pay the interest and principal back over time from your customers, and successful execution of your business plan. If they call in the loan and take over your business because you're not successful and default on the loan, then they (and you) are likely to take a loss. But that's the free market at work, and perhaps everyone overestimated the popularity of a daily newspaper comprised of insightful blog postings from redstate.com.

But again, no new money is created when an owner of capital (Blackhedd Syndicate, LLC) lends its existing money to someone else. It's just when banks create new capital out of thin air by lending 10x as much money as they have in the vault that things get, well, inflationary.

Fiat currency + Fractional reserve banking --> Rewards debt and speculation, benefits banks at the expense of the capital owners

Sound currency + "Honest" (not fractional reserve) banking --> Rewards saving and investment, puts banks and their customers (who are the owners of capital) on equal footing

You're pretty astute about how I and my partners would go about evaluating a new media venture, and how we would expect to be rewarded for making the investment. You're even perceptive about what would make me take an interest in the venture in the first place.

But the net result of successful business activity is always the production of goods and services that improve people's lives in ways that are tangible enough to attach a price to.

In a strict sound-money world, as both production levels and productivity levels increase (the latter as a direct cumulative result of the increase in physical capital), the price that ordinary people pay for goods and services must fall.

And so does the price they receive for their labor. Remember, I'm not going to fund the newspaper unless I get my coupon payments every six months, plus return of the principal when the bonds run off. Multiply me by all the other investors, and over time we become a class of fat cats with most of the gold, while no one else has very much to speak of.

Over a hundred years ago in Chicago, a Presidential candidate with a huge voice said what I just said, but in a much more concise and compelling way:

"You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold!"

inflation as a means of removing capitalistic gains? It seems a rather poor system that affects a $1000 savings account and these "fat cats" the same way.

I agree there is a balance in risk and reward. But the risks need to go to those getting the rewards. Bond investors are largely shielded from risk, because of the legal status we give those bonds. I agree this can all too easily spill over into ursury.

Suppose there were no bonds, and that equity was the only way to go. Then the rich would have only a few choices:

1) Invest the capital in a equity-venture. They may get richer off it, but only for creating something good. They may lose off it; the money then goes elsewhere.

2) Spend the money. Any mutually agreeable trade is an economic gain for both parties.

3) Watch the money sit in a pile, and pay depository or security fees. Eventually, it goes to a heir, who hopefully can find a better use for it.

The cross of gold illustration was a good one, but it was showing the problem of people making monthly payments with deflated funds. This isn't as much a problem when the economy isn't centered around bond payments.

This is not to deny that deflation can be a real problem. If the deflation rate is high enough, letting your money sit in a pile starts becoming attractive. Sound money implies constant value. How you get that is a good question.

With the greatest of respect, I don't think your understanding of modern financial markets (the kind that Ron Paul supporters have a problem with) is very complete.

I thought about explaining all sorts of arcane things by way of showing how modern portfolio theory requires the presence of a large number of bonds, and several other things.

But it's all just gobbledygook for finance types anyway. And the Paulites aren't even willing to acknowledge that there is such a thing as modern portfolio theory in the first place, so it's a waste of breath. ("If you think things are different now, you have your head in the sand!")

But then you said "Sound money implies constant value." That's actually close to true, but it cuts both ways. An economy without an expanding supply of money will have a very hard time generating economic growth, because increases in production will necessarily result in deflation.

In all likelihood, such an economy will find its own natural level of economic activity, related to the amount of existing physical capital and the amount of sweat equity that workers put in, and ultimately constrained by the size of the money supply. And it will probably be concentrated on agriculture and food production.

Not quite what I want to see.

Now in regard to the inflation that we have today: it's entirely true that the money supply expands on a daily basis. It's also true that the Federal Reserve does this with a diligent eye toward keeping the total supply in a healthy relationship with the amount of growth that the economy is generating.

I happen to think they do a halfway-decent job at this. I see no evidence that they're making too much money. Of course, the Paulites disagree vehemently, pointing to the low foreign-exchange value of the dollar. But that's completely reasonable given that the US is now a low-growth economy, and there are opportunities to invest in high-growth economies in other countries.

As far as the fear of the Fed generating a hyperinflation: they could totally screw up and misread the global economy and do that. I admit it. Does that mean we should get rid of them? Who do you replace them with? If your answer is "the free market," that's a pretty good answer, but you're relying on the continuous presence of strong-willed individuals who have the knowledge and the leadership to pull the economy out of panics. If these individuals materialize when you need them (1907 is a great example), you're ok. If they don't (1929 is a great example), you're royally screwed. And that's true whether or not we have a Federal Reserve.

Would the Fed intentionally hyperinflate the dollar and ruin the whole country? Anyone who thinks that needs to get his tinfoil hat adjusted.

blackhedd, this is great. We're getting there.

Regarding "But the net result of successful business activity is always the production of goods and services that improve people's lives in ways that are tangible enough to attach a price to.... In a strict sound-money world, as both production levels and productivity levels increase (the latter as a direct cumulative result of the increase in physical capital), the price that ordinary people pay for goods and services must fall... And so does the price they receive for their labor."

You've illustrated a potential cause of price deflation for whatever goods/services are subject to increased production and increased productivity levels. But the subsequent argument about wage deflation does not follow from that. Just because a particular item is cheaper now due to greater production or productivity does NOT imply that anyone's time or labor is less valuable.

The bottom line is that in a free monetary system, where gold or silver or platinum (or whatever) is transferred among buyers and sellers as a medium of exchange, the purchasing power of any individual unit of money WILL NOT REMAIN CONSTANT over time. It will fluctuate, appropriately, based upon the supply and demand for money itself.

I repeat, we "sound money" folks are not against inflation or deflation per se. Inflation is a loss of purchasing power of an individual monetary unit -- and in an "honest" system, that simply reflects a decreased demand for money. Deflation is a gain of purchasing power of an individual monetary unit, and simply reflects an increased demand for money.

Perhaps this example will help. Most people get stuck on sound money because they are obsessed with the "quantity" of money. Will we have enough money to create growth? What if there isn't enough "circulating" because people are hoarding it? (You said earlier that you're real concern is ECONOMIC ACTIVITY, not MONEY... and I agree 100%. Let's just see how this plays out.)

Let's take the case of folks irrationally hoarding gold coins, taking them out of circulation. What happens? The purchasing power of the remaining gold coins go up, and prices go down. Voila, deflation. The money you have now buys more stuff. How is that a problem? Does that hurt economic activity? If you were saving to make an investment, or start a new business, your now-increased purchasing power might be the impetus for pulling the trigger on your latest entrepreneurial venture. Your investors likewise feel that their dollars will now provide enough working capital to fund the business plan, and you start creating value and true wealth in the market. All because prices of goods had fallen (or the purchasing power of your money had increased).

Now let's look at the flip side. All of sudden these irrational hoarders start dying off, and their relatives find these massive supplies of coins in walls, mattresses, and closets. Assuming the relatives choose to spend or invest the coins, they will then re-enter the economy. Just as the hoarding drove demand for money up (and price levels down), this "dishoarding" drives demand for money down (and price levels up). So more money available means higher prices, or inflation. Is that a bad thing? No... as I'm sure you'd agree, this money is now available for spending or investing... it may be spent on goods and services, or invested still your NEXT entrepreneurial venture. So while low prices may have been the impetus for investment in the deflationary environment, access to this newly-freed capital will be the impetus for investment (and subsequent growth) in the inflationary environment.

Get it? The quantity of money ultimately DOESN'T matter. Prices will adjust to their appropriate monetary ratio based upon the availability of the "moneystuff", whatever it is.

So we sound-money types don't fear inflation or deflation *in a free market*. But we should ALL fear inflation AND deflation in a "managed" system with a fiat currency and fractional reserve banking... because the boom/bust cycles that result disrupt what we all want, which is real economic growth.

***

Regarding " Remember, I'm not going to fund the newspaper unless I get my coupon payments every six months, plus return of the principal when the bonds run off. Multiply me by all the other investors, and over time we become a class of fat cats with most of the gold, while no one else has very much to speak of."

Huh? That doesn't make any sense to me at all. First of all, you're a CREDITOR, not an investor. You loaned me the money to start a paper. I pay you back out of my earnings as expected and you receive your desired rate of return. No more, no less. But I participate in the upside of my equity position, and when Rupert Murdoch decides he wants to buy the DRS, I (and my equity partners) have a huge payday. But on the balance, we all do well -- we should, we created real value in the market.

***

Regarding " Over a hundred years ago in Chicago, a Presidential candidate with a huge voice said what I just said, but in a much more concise and compelling way:
"You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold!" --> Ironically, we're kind of on the same page here. There's no reason that ONLY gold should be coined into money. Silver will also work fine, as well. There's no need to fix a ratio between the two, however, as that will also take care of itself.

***

By the way, I love to work, too. You might enjoy these:
http://bhday.wordpress.com/2007/08/17/uhhhh-you-cant-say-that/
http://bhday.wordpress.com/2007/08/16/preventing-economic-growth-101-sec...

check out "What Has the Government Done to Our Money" by Murray N. Rothbard.

purchase private deposit insurance. The insurer would be incented to watch the bank closely, and it would be cheapest to buy insurance for deposits in the best banks.

The free market would be an amazing thing...

In what follows, I'm assuming that your new commodity-money system operates alongside of the existing financial-money system, and only supplants it to the degree that free markets determine.

If I may assume that (and nothing any of the Paulites have said contradicts it), that simplifies the analysis because I don't have to throw away the whole existing infrastructure that is based on capital-asset pricing models.

That allows us to concentrate strictly on personal business that would now be transacted in commodity money.

You disposed of the problem of bank runs as I expected you would: by strictly ruling out fractional reserves. Strictly speaking, this rules out commercial banking as well.

Insofar as demand deposits are concerned, we're in agreement. The reason to continue having them is that gold is cumbersome and inconvenient to hold compared to paper or electronic gold-certificates, so someone has to be the custodian of the physical metal. And since that someone (I call it a depositary, you call it a bank) needs to be paid to provide the service, you and I agree that they should take a small fee either for every transaction or a yearly fee for deposits.

As you say, the services provided to demand-depositors are something they have to pay for. We're agreed on this point. Now my point about this that you brushed past is that since the total amount of gold is fixed, if the depositary/bank takes, let's say, 50 basis points per year from your deposits (about the load of the most efficient mutual funds), then after a couple hundred years, the bank owns everything and the depositors own nothing. Of course, the "natural" inflation of the gold supply through mining takes care of this little problem.

On to time deposits. What you're proposing amounts to this: I give my money to a bank, which gives me in return a piece of paper that is no different from a traditional coupon-bearing fixed-income security.

The bank, in turn, uses its resources (of wisdom, judgment of character, personal contacts, and knowledge of current business conditions) to invest my money in ways that will bring them a high enough return to make coupon payments to me, and still have a profit for themselves.

Now in a low or no-inflation world, interest rates are generally very low, because (obviously) investors don't need to be compensated for the (nonexistent) risk of inflation.

But investors still need to be compensated for taking credit risk and market risk. What if the bank invests the money from my CD in a business that fails?

So the rate of interest can never be zero. But in a strictly non-inflationary world, a non-zero interest rate is socially unsustainable because, given enough time, the investors own everything and the people own nothing.

So what rate of interest is low enough to forestall this outcome, yet high enough to make investments worth making? That's why I said that there is no risk capital in your world, and we still need my world of finance and capital assets backed by (somewhat) inflationary money.

My conclusion at the end of the day is that your system is useful primarily as a hedge against total catastrophe, which can result from market failures, government malfeasance, incompetence, or all three.

Since Paulites consider total catastrophe to be a foregone conclusion with only the timing in doubt, this is a very reasonable hedge for them to buy.

Since I'm a financially-oriented guy, I take a risk-adjusted view of everything. Since you're willing to buy a hedge against total catastrophe, I'm willing to sell it to you. Let's meet in New York next chance you get and discuss deal terms.

...unless, of course, we get our cut.

Moe

PS: Joke. Joke twice, in fact. ;)

The Fuzzy Puppy of the VRWC. I've been usurped!

Ok, deep breath... Here we go:

Regarding "That allows us to concentrate strictly on personal business that would now be transacted in commodity money." -->

What? I'm starting a business here, a real entrepreneurial venture called the Daily Red State, with your commodity money that you earned through great effort. There's no distinction between "personal" and "commercial".

***

Regarding "You disposed of the problem of bank runs as I expected you would: by strictly ruling out fractional reserves. Strictly speaking, this rules out commercial banking as well." -->

Hmmm... Why does this rule out commercial banking? A bank simply holds deposits (demand deposits for a fee, and time deposits that earn interest). An HONEST bank just doesn't confuse the two, and never lends out more than its depositors have allowed it to. Commercial or retail, there's no difference. This free market system would encourage and reward honest banks.

***

Regarding "As you say, the services provided to demand-depositors are something they have to pay for. We're agreed on this point. Now my point about this that you brushed past is that since the total amount of gold is fixed, if the depositary/bank takes, let's say, 50 basis points per year from your deposits (about the load of the most efficient mutual funds), then after a couple hundred years, the bank owns everything and the depositors own nothing. Of course, the "natural" inflation of the gold supply through mining takes care of this little problem." -->

What? All we're talking about is a network of warehouses that store physical assets. Those warehouses will compete in a free market for their services, which are not highly technical. That competition will make the storage service available as cheaply as possible -- because if anyone starts earning "abnormal" profits, you are free to open a competing warehouse next door. In the absurd case you postulate, if a bank could truly own EVERYTHING just by guarding the gold at 50bp per year, then EVERYONE (myself included) would open a bank to do just that. That

Economically, here's what happens: The person paying the storage fee is the person holding the "demand" on the gold. After you loan me your sound money at 8% to start the DRS, I have claim on that gold. My carrying cost for this capital is 8.5% (8% interest, plus 0.5% storage fee). But I am going to deploy this capital into printing presses and other investments that I expect to grow at 20%. (You believe it too, which is why you gave me the loan.) So not only am I going to earn a better rate of return than the interest plus the storage fee, that storage fee will go down as I start spending the money.

The point you make is actually a strong argument for the *pro-growth* nature of free-market money in an honest (non-fractional-reserve) banking system. There IS a cost to just leaving gold idle in the vault. You could take it out of the vault and hide it in your mattress, but that doesn't scale too well. What you've illustrated is that in this environment capital does NOT benefit from being lazy -- it will always seek to be invested in a way that maximizes its return, and certainly will cover the (very small) storage fee.

***

Regarding "On to time deposits. What you're proposing amounts to this: I give my money to a bank, which gives me in return a piece of paper that is no different from a traditional coupon-bearing fixed-income security... The bank, in turn, uses its resources (of wisdom, judgment of character, personal contacts, and knowledge of current business conditions) to invest my money in ways that will bring them a high enough return to make coupon payments to me, and still have a profit for themselves... Now in a low or no-inflation world, interest rates are generally very low, because (obviously) investors don't need to be compensated for the (nonexistent) risk of inflation... But investors still need to be compensated for taking credit risk and market risk. What if the bank invests the money from my CD in a business that fails?" -->

Well, the bank better not make too many bad investments, or else they will lose their depositors' money. But they will ONLY lose the money that was put at risk. And that risk could be minimized by (again) private insurance. So let's say that the bank (or ANY institution -- doesn't need to be a "bank") offered an interest-bearing deposit that gave you 5% interest over 6 months. The prospectus said that the deposit funded short-term working capital needs for your local gas and electric utility company. Would you invest in that? Sounds pretty safe to me. But it's your choice. Say you could also buy principal protection insurance for another 50bp. Thus, your RISK-FREE return was 4.5%. Does that sound better to you? You're still covering the storage cost, and you've preserved your buying power over time since interest rates reflect the supply and demand for money discussed in my prior post.

The free market can provide all that, and more. It slices, it dices... it's the invisible hand! (Meanwhile, the bank has been forced through competition to get quite lean, and charges the utility 6% to borrow the funds. It can be profitable on a spread of 1% due to the lack of government regulations and compliance requirements. It just needs to satisfy its private insurers demands for transparency and internal controls).

***

Regarding "So the rate of interest can never be zero. But in a strictly non-inflationary world, a non-zero interest rate is socially unsustainable because, given enough time, the investors own everything and the people own nothing... So what rate of interest is low enough to forestall this outcome, yet high enough to make investments worth making? That's why I said that there is no risk capital in your world, and we still need my world of finance and capital assets backed by (somewhat) inflationary money." -->

I'm not following the assertion that nonzero interest rates imply all wealth flows to investors over time, and "people own nothing". The reality is that in a free-market monetary system, ALL the people (and institutions) are investors. There is no difference between saving and investing. Say you (as a corporation or individual) keep two months' worth of money in a demand deposit account. You pay your bills out of that account, live within your means, and structure the rest of your assets in equity investments, real estate, fixed income, and short-term certificates of deposit for ready access to emergency capital. YOU are the investor. I am the investor. We all are investors. As we invest, we are by definition taking risk. All our investments are risk capital in different types of assets. We DO NOT want all our assets just sitting in a demand account, withering away. That would be irrational. So we manage our demand deposit balance accordingly.

Now granted, this system is NOT for everyone at first. The only people who will participate are those who understand that true wealth comes from creation of value in the marketplace (like you said earlier), and not from some misguided effort to finance conspicuous consumption. Folks with credit card debt, subprime mortgages, car loans, and so forth will probably feel more comfortable in the inflationary world, where they can try to get ahead on the hamster wheel of paying down their debt with a depreciating paper currency. While prior discussions have characterized that behavior as "rational" and "smart", in the long run it's a form of slavery to the banking industry. But the banking industry isn't complaining.

But that's at the micro level. At the macro level, the real problem comes when a nation of debtors with a national debt can no longer sell bonds to China because they no longer need, or want, to support their fixed RMB exchange rate. Then we'll all be competing with a billion Chinese to buy food and energy in the global market with an even weaker paper currency:
http://www.redstate.com/stories/economy/sino_american_economic_relations...
http://bhday.wordpress.com/2007/08/12/the-china-conundrum/

***

Regarding "My conclusion at the end of the day is that your system is useful primarily as a hedge against total catastrophe, which can result from market failures, government malfeasance, incompetence, or all three. Since Paulites consider total catastrophe to be a foregone conclusion with only the timing in doubt, this is a very reasonable hedge for them to buy. Since I'm a financially-oriented guy, I take a risk-adjusted view of everything. Since you're willing to buy a hedge against total catastrophe, I'm willing to sell it to you. Let's meet in New York next chance you get and discuss deal terms." -->

The problem is that when that hedge pays off, your paper money, contracts, and promises will be worthless. Seriously, all we RonPaul™ supporters are asking for here is free choice. The dynamics have changed -- this time, the cross is not of gold, it's of paper. WJB did not want to be limited to gold, we don't want to be limited to paper.

I would caution you not to be too comfortable with our current position, and more importantly our trajectory, as a nation and an economy. We have a number of challenges facing us, and the stability of our currency within the international monetary system is a significant one. The governmental assault on domestic job creation and the entrepreneurial environment is also critical. It's not too late to make a difference, but folks need to get educated on these topics, and quickly.

First, I hope these posts have illustrated how a free-market commodity currency in a non-fractional-reserve banking system is the *most* pro-growth monetary system imaginable. Since there is a small but real cost for holding commodity money in a demand deposit account, all monetary assets will immediately, and efficiently, be assigned through investment to their highest-yielding (and thus most valuable) use. That's the key to responsible growth. It doesn't require subsidies, "adding liquidity", or social engineering. Just let the market do its job separating the good ideas from the bad.

Second, while I welcome the discussion, at some point I need to suggest that you read the following books:
What Has the Government Done to Our Money? (Murray Rothbard, available from www.mises.org)
Economics in One Lesson (Henry Hazlitt)
Economics for Real People (Gene Callahan)

They're straightforward easy reads and debunk a lot of myths and misunderstandings that permeate our current dialog.

...banks will create investment options for you to put your money into. Those investment options will NOT be 100% backed and that's fine because you choose to take that risk.

Ok, so you believe in fractional-reserve lending. Good for you, and welcome to the late 19th century.

I won't lend you my gold necklace, but I'd sure like to borrow yours. I'm happy to buy you lunch. I'm going to sell the necklace to buy cotton and a three-mast sailing ship. I'll send the ship to the Far East. If When it comes back in two years loaded with gold, I'll buy you a new necklace just like the one you lent me.

Deal?

(If you said no, then you see exactly what's wrong with your theory about risk.)

Okay so the idea here is to have currency that is worth what it says it is, and not allow the banks to lend the gold that is backing your cash. So your cash is 100% backed by gold, other investments do not have to be.

So fractional-reserve lending is alive and well it's just being killed off in only a very narrow circumstance. That being the financial institution which is backing up the currency cannot lend it's reserve out. Everyone else can work out whatever plans they want, including banks, lending institutions, loan sharks, pawn shops etc.

I would be extremely surprised if Ron Paul was in favor of putting massive restrictions on the terms of private contracts between citizens. I could be wrong though maybe you can point me to where someone is saying this.

As for your belittling final comment; in risk analysis there is a little concept called underwriting that comes into play here, and you sir would be a poor risk indeed.

Let's say I'm using Bank of Bob Notes in my town.

According to your plan, Bank of Bob is not allowed to lend out the gold it uses to back its Bank of Bob Dollars.

However if I deposit 100 Bank of Bob Dollars in to the Bank of Fred, then the Bank of Fred can go lend out 90 bucks of that to someone else?

Doesn't that still inflate BoB dollars, because there are now 190 BoB dollars in the system where there is only backing for 100?

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Okay so Bank of Bob is issuing 'Bob money (tm)' which is actually backed by 100% gold.

This brand of money is the safest out there since it has 100% backing.

Neil deposits his BoB dollars in bank of Fred. You get a certificate back saying

"This certificate is worth $100 BoB dollars guaranteed by the Bank of Fred"

This certificate is basically Bank of Fred money.

You essentially gave Bank of Fred a loan (except that instead of a payment schedule you can redeem the full amount at any time).

Bank of Fred can now loan your $100 Bob dollars to someone else. If Bank of Fred happens to go bankrupt whoever is in possession of the actual currency is fine. Whoever is in possession of the Bank of Fred certificates is rather upset.

So there is not more Bob dollars out there it's just being used as the unit of account on the Bank of Fred certificate.

Right now all banks are Banks of Freds and I think the idea is to also have a Bank of Bob option in case the markets melt down.

It sounds to me like you want to return us to physical shuffling of paper currency for all transactions. No checks, no wire transfers, no sending money over the Internet?

Am I wrong there?

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I think you guys may be talking past each other.

The form of the "money" (i.e., bills, notes, certificates, bookkeeping entry in a computer) is not critical.

What is critical is that the commodity behind the money (i.e., gold, silver, platinum, or whatever) cannot be created out of thin air either by fiat or by fractional reserve lending.

Sound free-market money and sound (non-fractional-reserve) banking are linked if you truly want a stable system that respects the owner of capital.

The bank can only create a "bill" (i.e., Bob's Bank Certificate for 100g of gold) IF the bank literally OWNS the gold, or has been authorized to lend it for a period of time and is giving it to someone else with an expectation of receiving it back (with interest).

But in terms of implementation, when you get a loan from a "sound" bank, you could get a "Bill", a "Cashier's Check", a "Gold Receipt", a "Note", or just an electronic bookkeeping entry in your demand deposit account for the amount of "moneystuff" that you now control. Ultimately, the name or form is not important.

Then, when you use that "moneystuff" that you borrowed to buy stuff, the transaction between you and the seller is just changing the controlling owner of a quantity of the commodity from one account to another.

A free-market monetary system can use, if market forces desire, all the tools of technology. As long as all transactions are backed by a commodity, and the banks respect the difference between time deposits and demand deposits, you will have stability.

If other banks are allowed to do fractional reserve lending with money from other banks, then they are creating money in other banks' currencies. So it's not sufficient just to prohibit the lending of gold used to back a currency, to prevent the same inflation we get now, as far as I can tell.

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It doesn't matter if it's paper or not. It was just easier to illustrate the concept using a paper certificate.

Banks have different levels of safety and this would be part of a bank's brand. Would you rather deposit your money in Washington Mutual or some sketchy overseas bank you've never heard of?

In the US we take bank safety for granted because the Fed insures all deposits up to 100k so we just use whichever gives us free checking, or the highest interest or most convenient.

When you deposit your money in a bank it is an expression of faith in that financial institution. It is not longer your currency, it's a short term loan to the bank.

You might feel like it is still Bob cash but it isn't. Just like you feel like you own $10,000 when you are holding 100 shares of a company stock that is worth $100 each.

The exception is the Bank of Bob, deposites would not be a loan it would just be a convenient place to store your gold.

The bank of Bob would probably charge you to use their services. It's more like a security vault, you don't expect the vault to loan out your mother's diamond necklace to other people and you don't expect to get interest from them either.

If you deposit your money/gold in any other kind of bank then it's not cash it's an investment.

This thread has scrolled off so no one will probably read this, but.....

Bank of Bob is basically a depository, not a commercial bank.

Bank of Bob isn't going to pay you interest on your gold deposits, obviously. They'll do the opposite, in fact. They'll charge you a small amount of gold every year.

What Bank of Bob will never do is lend your gold out at interest, because part of its charter is not to engage in fractional-reserve lending.

This is totally different from commercial banking, which can and does work under either a gold-standard or a fiduciary-standard (in fact, commercial banking in America first got big during the resumption era after the Civil War).

Yes, you're taking a risk that the bank will fail when you accept a rate of interest on deposits. The bank can then lend some fraction of your money out at interest consistent with its reserve requirements. This multiplies the amount of economic activity, assuming the bank makes good decisions about who it lends to.

If you disallow this, then you still get normal lending on a non-fractional basis, and you also reduce the size of the mess that a bank makes when it fails. But you also forgo a huge amount of incremental economic activity (another word for which is prosperity).

Are you sure you want to make that trade?

If Bank of Bob is a "sound" (i.e., non-fractional-reserve) bank, it can (and should) offer both demand deposit accounts and time deposit accounts. So when I put my sound currency in Bank of Bob, and put 20% into a demand deposit account, and 80% into a 3 month CD, I would expect Bank of Bob to lend 80% of my gold. 20% would sit there, unloaned and unloanable, for my use at any moment.

Regarding "The bank can then lend some fraction of your money out at interest consistent with its reserve requirements." --> No, the bank lends a MULTIPLE of your money out to earn interest. With a 10% reserve ratio, $1 of deposits is "magically" transformed into $10 of loans. An extra $9 are created out of thin air. That expands the money supply and reduces the purchasing power of your (and everyone else's) money.

Regarding "This multiplies the amount of economic activity, assuming the bank makes good decisions about who it lends to." --> Inflation and increasing the money supply does NOT increase economic activity. Remember stagflation in the 70s? There is a behavioral aspect to economic activity. If people are confident and willing to take risks in business, you will get economic activity. You can throw all the "liquidity" in the system you want, and expand the money supply through lending indefinitely, and all you will get is hyperinflation and economic stagnation. Look at Zimbabwe! (http://www.iht.com/articles/ap/2007/08/20/africa/AF-GEN-Zimbabwe-Shortag...)
Granted, that's an extreme case, but the MORE MONEY THERE IS IN CIRCULATION, THE LESS REAL "STUFF" EACH INCREMENT OF MONEY WILL BUY.

The critical point is that fractional reserve banking has been practiced for so long NOT because it's a good idea, but because it has ALWAYS been so easy for banks to "cheat" by lending in excess of their reserves. The current system simply "legitimizes" the cheating. But we've never been in a better position technologically to embrace the stable, pro-growth alternative of sound money.

Remember, it's YOUR money that you've deposited in the bank. Why should the bank be allowed to steal your purchasing power and make your dollars buy less stuff through credit expansion?

Does this make sense?

The fallacy in your argument about the preservation of purchasing power through 100% commodity backing is this: you won't have anything to purchase.

Let's assume a strict non-fractional banking system. Every transaction that involves money (ie, is not a barter) must be conducted using a 100% backed currency.

To simplify the analysis, let's assume that there is no natural inflation of the gold supply due to mining.

Now, the total amount of money is strictly constant. In this world, if economic activity grows, (meaning that more goods and services are produced), then the price of each will necessarily fall. And there will be no incentive for producers to keep producing good and services.

Are we on the same page so far?

Now if I were to lend my gold-backed money out at interest, I might stimulate some economic activity, but I won't lend the gold unless I get a rate of return. And since the supply of money is fixed, that means that risk-taking is a strict zero-sum game. Do this for enough years, and the investor class owns nearly everything, and everyone else owns nearly nothing.

Something approaching this actually happened in the 1880s and early 1890s. We had a gold-standard and fractional-reserve banking. (At that time, reserve ratios weren't set by the Federal Reserve, but fluctuated according to the market.) But prices fell continuously throughout this period because the money supply didn't expand fast enough.

And the country was nearly torn apart.

Believe me, you don't know what you're talking about with this.

I'll post more later but briefly:
I think we're mixing different issues here. Mainly banking and currency are separate issues.
If the bank isn't deciding how much money to print then the Bank can't create or cause inflation.

I disagree with the 'multiplies money' argument (that's Keynesian economics btw which I disagree with). It seems like the money is multiplying but that's because we are improperly categorizing a checking account as 'money' when in reality it is a low risk loan.

I also disagree with this: "And there will be no incentive for producers to keep producing good and services". Just because gold is deflationary doesn't mean there are no incentives it just means as technology progresses gold is worth more and more.

bhday seems to disagree with the concept of a loan that is due upon the whim of the lender (this is what a checking account is now), that's fine you should have both options available to you.

This is my illustration of why I disagree with the 'multiplies money' thing

Simple scenario:

Neil has they only gold in this system

He has a block of gold worth $1 (whatever that means)

He deposits it in Bank of Bob (BoB)

Bank of Bob lends it to a construction worker named blackhedd

he buys some material to build a house

the store owner (Jim) now owns the block of gold

and he puts it into Bank of Bob.

Here is a summary of the Bank of Bob account values:

Lou +1
blackhedd -1
Jim +1
-------------------
net total = 1

Total assets:
1 block of gold
1 lean on house material

If blackhedd defaults and we were to liquidate Bob right now then we'd have the following assets to disperse

1 block of gold
house material

to give to Lou and Jim.

Banks are a way of layering loans and insulating retail consumers from the volatility of individual loan defaults. In case Lou ACTUALLY loaned money to blackhedd. So you forfeit a higher interest rate to pay the bank for its services which are analysis of the risk using the law of large numbers to reduce volitility of your account.

Have you read any of the above discussion?

Please, read some books on the subject. I'd suggest:

Economics in One Lesson, by Henry Hazlitt. Great book that illustrates the fallacies of economic interventionism and the “law of unintended consequences”.

Money, by Lawrence Ritter and William Silber. Classic and entertaining book on the nature of money and its role in economic growth. Does a good job contrasting different economic schools of thought, and asks prescient questions about the future.

What has Government Done to our Money?, by Murray N. Rothbard. Available at www.mises.org, the classic text on free-market monetary systems.

Peace, out :)

from your momma. You will lose this argument.

Envisioning when all that is Left is the Right.

Adjusted for inflation, average incomes fell from 2000-2005. Class warfare is intensifying, fingers are being pointed EVERYWHERE except the real cause, and the Democrats are poised to clean house in 2008.

Is it still 2005? Pretty handy you can pull your propaganda from DNC talking points instead of having to invent it yourself. Must be a real time saver.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

You folks should read more than you write.

(Moe, was that out of line?)

:)

Since apparently you didn't read my comment (all 3 sentences of it) and are now just randomly pasting URLs from your list of bookmarks into new comments.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

and merely suggested a more recent reference that you might find more stimulating. Your point about the NYT is well-taken... it's the last place to look for economic insight. But the issue they raise is real, and if you'd read a bit on the history of our Consumer Price Index and its (re)calculation over the years, you'd understand how understated the erosion of our purchasing power really is.

Ultimately, it's an issue of social stability as well as economic survival. The challenges for the Republicans in 2008 include more than just Iraq -- it's also the persistence of underemployed people working multiple jobs and still being squeezed through food, energy, and healthcare.

These are issues that go to the heart of our economic system, and any candidate that doesn't understand and articulate them will have a tough time. Unfortunately, now we're looking at Big Government Statists on the Democratic side, and a bunch of economic lightweights on the Republican side (with one notable exception).

I can just see Rudy in the Iowa debate saying he's just not sure "how the fair tax could work...". But that's not the first book he's failed to read, either.

---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

If you want COMPETITION then you have to let gold AND Fed notes BOTH be legal tender, or have NEITHER get that status.

Right?

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Introduction of the Honest Money Act
SPEECH OF
HON. RON PAUL OF TEXAS
IN THE HOUSE OF REPRESENTATIVES
FRIDAY, JUNE 15, 2007

Mr. PAUL. Madam Speaker, I rise to introduce the Honest Money Act. The Honest Money Act repeals legal tender laws that force American citizens to accept fiat money in their economic transactions.

Absent legal tender laws, individuals acting through the market will determine what is money. Historically, when individuals have been free to choose their money they have selected items that are portable, widely accepted, and have a stable value. Having the market, rather than the government, define money is integral to the functioning of a free economy. As Edwin Vieira, perhaps the Nation's top expert on constitutional monetary policy says, ``..... a free market functions most efficiently and most fairly when the market determines the quality and the quantity of money that's being used.''

While fiat money produced by the State is portable and, thanks to legal tender laws, widely accepted, it is certainly not of stable value. In fact, our entire monetary policy is predicated on the government's ability to manipulate the value of the currency. Thus, absent legal tender laws, many citizens would refuse to accept government money for their transactions.

Legal tender laws disadvantage ordinary citizens by forcing them to use inferior money, which they would otherwise refuse. As Stephen T. Byington put in the September 1895 issue of the American Federationist: ``No legal tender law is ever needed to make men take good money; its only use is to make them take bad money. Kick it out!''

It may seem surprising that the Mr. Byington's well-phrased attack on legal tender laws appeared in the publication of the American Federation of Labor. However, enlightened union leaders of that time recognized that ways in which workers where harmed by the erosion of the value of money which inevitably follows when governments pass legal tender laws.

Legal tender laws may disadvantage average citizens but they do help power-hungry politicians use inflationary monetary policy to expand the government beyond its proper limits. However, the primary beneficiaries of legal tender laws are the special interests who are granted the privilege of producing and controlling the paper money forced on the public via legal tender laws. Legal tender laws thus represent the primary means of reverse redistribution where the wealth of the working class is given, via laws forcing people to use debased money, to well-heeled, politically powerful bankers.

The drafters of the Constitution were well aware of how a government armed with legal tender powers could ravage the people's liberty and prosperity. This is why the Constitution does not grant legal tender powers to the federal government. Instead, Congress was given powers to establish standards regarding the value of money. In other words, in monetary matters the Congress was to follow the lead of the market. When Alexander Hamilton wrote the coinage act of 1792, he simply adopted the market-definition of a dollar as equaling the value of the Spanish milled silver coin.

Legal tender laws have reversed that order to where the market follows the lead of Congress. Beginning in the 19th century, Federal politicians sought to enhance their power and enrich their cronies, by using legal tender powers to change the definition of a dollar from a silver-or-gold-backed unit whose value is determined by the market, to a piece of paper produced by the State. The ``value'' of this paper may be normally backed in part by gold or silver, but its ultimate backing is the power of the State, and its value is determined by the political needs of the State and the powerful special interests who influence monetary policy.

Unfortunately, the Supreme Court failed to protect the American people from Congress' unconstitutional legal tender laws. Supreme Court Justice, and Lincoln Treasury Secretary, Salmon Chase, writing in dissent in the legal tender cases, summed up the main reason why the Founders did not grant Congress the authority to pass legal tender laws: ``The legal tender quality [of money] is only valuable for the purposes of dishonesty.'' Justice Chase might have added dishonesty is perpetrated by State-favored interests on the average American.

Another prescient Justice was Stephen Field, the only justice to dissent in every one of the legal tender cases to come before the Court. Justice Field accurately described the dangers to the constitutional republic posed by legal tender laws: ``The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress. Those limitations must be preserved, or our government will inevitably drift from the system established by our Fathers into a vast, centralized and consolidated government.''

Considering the growth of government since the Supreme Court joined Congress in disregarding the constitutional barriers to legal tender laws, can anyone doubt the accuracy of Justice Field's words? Repeal of legal tender laws would restore constitutional government and protect the people's right to use a currency chosen by the market because it serves the needs of the people, instead of having to use a currency chosen by the State because it serves the needs of power hungry politicians and special interests. Therefore, I urge my colleges to cosponsor the Honest Money Act.

Wild Shrimp, anyone?

Funny how Chief Justice Chase, as Treasury Secretary, authored the Legal Tender laws that he later struck down!

And Justice Field .... he analogized polygamy to human sacrifice so who knows about his logical abilities.

Anyway, just some fun history. I actually agree with their monetary reasoning. But why are the Justices deciding what is and is not Constitutional? That is a whole other can of worms ... and I have not really heard Ron Paul's stance.

For Freedom and protection of Life, Liberty and Private Property: RonPaul2008.com

"If you want COMPETITION then you have to let gold AND Fed notes BOTH be legal tender, or have NEITHER get that status.

Right?"

We also ought to follow the Rule of Law under the U.S. Constitution.

Art. 1 Section 10 Clause 1 "No state shall ... emit Bills of Credit; make anything but Gold or Silver Coin a Payment in Tender of Debts"

There is no express grant of authority to the Federal Government to pass Legal Tender laws. Therefore, these are retained to the States or The People themselves (10th Amendment).

Sorry I was not clear in my original post; each State, not the Federal Government, should enact Legal Tender laws for gold or silver. Property rights issues are handled under State law.

So, for your argument to make Federal Reserve Notes, or Toilet Paper or Cucumbers for that matter, Legal Tender we would need to (1) Amend the Constitution following the proscribed process and (2) have Congress enact a law making Toilet Paper Legal Tender.

The US Constitution does not provide that gold or silver SHALL be Legal Tender only that if a STATE makes ANYTHING Legal Tender it must be either gold or silver.

Just because the USSC had a Constitutional Convention Pow Wow after FDR threatened to 'pack the Court' if they did not rule the way he wanted them to does not mean our current monetary system or application of the Commerce Clause is either legal or Constitutional.

For Freedom and protection of Life, Liberty and Private Property: RonPaul2008.com

Read the whole thing instead of the little snippets passed along by Gold bugs.

Article 1, Section 8: "The Congress shall have the Power...To coin Money, regulate the Value thereof, and of foreign Coin,..."

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not print it. The difference was quite well understood at the time, considering the disaster of state currencies while we were under the Articles of Confederation.

So why is it that the Constitution specified for the States, but not the National government, that money not based on gold or silver was prohibited?

Seems to me they felt the need to draw a distinction there.

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A bar on state governments repeating Rhode Island's stupidity has nothing to do with the Congress.

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Lead however, would be of great value.

Envisioning when all that is Left is the Right.

why you're even contemplating a big crash.

Are you envisioning an inherent systemic instability, perchance?

In any case, I'll be happy to take your "worthless" gold in the event of a big crash. Because eventually the crash will be over, and gold will retain its intrinsic commodity value.

with my lead.

Envisioning when all that is Left is the Right.

And when the situation you're predicting occurs, in the unlikely event that *you* have any assets worth seizing, there will be even more desperate folks who will do the same to you.

It worked then, it works now, make it work for you."

As for assets, I also have enough to buy you from your momma.

Envisioning when all that is Left is the Right.

compared to blackhedd or Tbone (loosely referred to as "the rich guys"), and I could never buy you from your momma, I'm reasonably sure that I could convince her that your arguments are so stupid that she should just give you to me. The thing that would likely mess up the deal though, is that I wouldn't take you without a significant cash infusion from momma.
____
CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

Under Economic Law there will be a 'Crack-Up Boom' as a result of our insane monetary policy. It is as if previous societies were only able to build Monetary Towers of 10-20 stories and our Monetary Tower of Babel is 1,000 stories. Our system is inherently flawed.

I am not sure what floor we are currently at but we are falling fast. Of course, everything is alright, and from stories 900 to 5, the 'same ole, same ole.'

Who has all their 'capital' tied up in FDIC insured accounts? You know there are only $50B in assets to 'insure' $4.2T in deposits?

Bank runs are chaos and the lines starting forming around Countrywide last week.

Good article here: http://goldmoney.com/en/commentary.php

For Freedom and protection of Life, Liberty and Private Property: RonPaul2008.com

You know there are only $50B in assets to 'insure' $4.2T in deposits?

The federal government has a lot more than $50bln in assets.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

but $10.4 trillion in liabilities as of 2006
(http://fms.treas.gov/fr/index.html)

If that makes you feel any better, I don't think I can help you.

Mike Gamecock DeVine @ The Charlotte Observer
www.race42008.com
www.hinzsightreport.com
www.theminorityreportblog.com
"One man with courage makes a majority" - Andrew Jackson

n/t

the debt.

Mike Gamecock DeVine @ The Charlotte Observer
www.race42008.com
www.hinzsightreport.com
www.theminorityreportblog.com
"One man with courage makes a majority" - Andrew Jackson

...that is held by Americans.

Remember, debt is an asset.

;-)

Did you read the notes that go along with the balance sheet? Look at Note 6. They aren't including the current value of government land on the balance sheet. How much do you think all the land owned by the Federal government is worth? I can't even begin to get. You can start with most of the state of Alaska and go from there.

That balance sheet has less to do with reality than Enron's did.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

the balance sheet *is* unrealistic.

It also does not account for the massive unfunded (and unfundable) long-term net liabilities of Social Security and Medicare. I wasn't going to bring this up, as I didn't want to depress you, but even the optimistic official estimates are sobering. Look at pages 46-47:

Social Security: ($6.4 trillion)
Medicare Part A: ($11.3 trillion)
Medicare Part B: ($13.1 trillion)
Medicare Part D: ($7.9 trillion)
Railroad Retirement: ($101 billion) <-- what a bargain!

Add those up... over $38 trillion in long-term liabilities that are not on the balance sheet.

But maybe if we sell all the Federal government's land, and liquidate the wealth of the American people, we'll be ok :)

Again, I refer you to David Walker (our Comptroller General) and his cry for help:

http://www.ft.com/cms/s/0/80fa0a2c-49ef-11dc-9ffe-0000779fd2ac.html

We don't owe anybody that money. We can change the benefits at any time (as we've done in the past) and make it go away. This will certainly happen down the road. It just needs to become a full blown crisis before there will be the political will to mess with the AARP. You haven't been promised a dime in SS or Medicare benefits. When you retire, you'll get what we say you get and that's it. That's the way those programs have always worked.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

They just won't be very happy about it :)

We just might, and they'll be left asking "What, we can't go to war with you AND collect?"

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I think that we're in violent agreement that we're in a non-sustainable, undesirable situation.

I think you don't understand how great this situation is. China sells us goods, then sends us a rebate in exchange for bonds, then holds those bonds as assets. Oh, plus they peg their currency to ours.

Don't you see how great a spot that is for us to be in? If they look at us funny, they tank their currency right along with ours, plus jeopardize turning their holdings into worthless paper. But we get to keep the assets they sold us, plus the money they lent back to us.

We have nothing to lose. They have everything to lose.

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system under which we're living seems fine for the short term, but the inevitable adjustment based upon China's economic growth, growing middle class, and eventual need to let their currency appreciate will be very painful unless we take appropriate action now.

I don't think we can compare this Chinese forex asset bubble with previous surpluses accumulated by other trading partners, such as Japan. The demographics, and rationale behind China's actions, are quite different.

I'll say it again: when China transitions from a supplier of cheap goods to a voracious consumer, and when we're competing in the global market for goods and services with a currency that's 10-20% (at least) weaker than it is today, economically we'll be the "developing nation".

Not to say that there won't be opportunities to be the supplier instead of the consumer in that scenario, but the standard of living we take for granted will be seriously threatened.

Since China will remain a capable commoditizer based upon their massive pool of labor, we'll have an interesting time competing with them on a production basis.

I'm not predicting Armageddon with respect to China. These imbalances, by and large, resolve gradually. However, the resolution will leave us in a very different spot economically than we are today.

All I (and Ron Paul) are suggesting is that we reign in our federal government to its Constitutionally-appropriate scope, make our nation an international "tax haven" by elimination of a punitive and ridiculous tax code, and unleash the creativity and entrepreneurial spirit that (still) makes our country unique. That's our ultimate competitive advantage. If we take those steps, we'll have a strong enough economy to get over the protectionist fear of legal immigration, and we can deal with the demographic imbalances by again being a land of opportunity for qualified and hardworking immigrants.

Would sound money also help? I believe it would. Regardless, now we're being asked to compete with one (if not two) hands tied behind our back thanks to the relentlessly expanding scope of our government and its assault on entrepreneurship and domestic job creation. Governments are good at redistributing wealth, but not so good at creating it.

If that were the case it would be nice. As Buffet says we are selling off pieces of our huge farm and increasing the mortgage. We are starting to pay the piper as standards of living are decreasing.

The bottom line is that America no longer loves and treats capital, both human and economic, as well as it used to. Consequently, capital, both human and economic, is fleeing America. Of course, this is a good thing as it raises the standard of living for people in other countries. The worse America treats capital the faster capital will flee.

The Chinese now have the option of taking possession of gold at their local banks. I would not be surprised if the average standard of living of an American is equal to the average standard of living of a Chinese in 20 years. Of course, the Chinese will continue to increase while the American decreases.

For Freedom and protection of Life, Liberty and Private Property: RonPaul2008.com

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Envisioning when all that is Left is the Right.

And we're going to do the same thing to the Chinese.

They just won't be too happy about it.

And we aren't going to default on it. That doesn't mean we ever have to pay it off, either. There's a big difference between a 30 year bond and a wealth redistribution program that makes no promises about the money and benefits you'll actually receive when you qualify, if you ever qualify.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman