Re: Amero Hint?


"Harold and Susan Vordos" <vordos@xxxxxxx> wrote in message
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"Ed Huntress" <huntres23@xxxxxxxxxxxxx> wrote in message
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snip--

is a fiat system.


Ed,
As you know, I have almost no knowledge where these things are concerned.
Would you, or could you, explain in a few words exactly what a fiat system
is? All I can think of is the import auto. Leaves a great deal to be
desired.

I'm sincere, Ed. I really don't know.

Harold

Don't feel bad; you aren't alone. And it's not as simple as it sounds. So,
no, I can't do it in a few words. Here's a middling-sized bunch of words.
d8-)

A fiat currency is one that's backed by nothing but faith ("the full faith
and credit of the United States") that the government will take it for tax
payments, that it will be accepted in exchange for goods and services by the
domestic population and by foreigners, and so on. It's what we've had since
1971. The whole world operates now with fiat currencies. They've been in and
out of use for many hundreds of years. To make a fiat based currency work, a
government has to impose its use on its citizens. To make it work
internationally, a government needs to be a fair and honest trader with
other currencies. As for what really "backs" them all, I'll just touch on it
in a minute.

The two major currency systems we've had in history are fiat systems and
commodity-backed systems. The gold standard is a form of a commodity-backed
system. Other commodities have been used, most notably silver, but in
antiquity they used a variety of commodities to back currency.

Beyond that, the subject is one of the most complicated and controversial in
all of economics. Studying it is a career unto itself. The basic argument
has to do with stability of values, and that, itself, is a controversial
subject. I'll just make two small points about them to explain where the
fiat money comes from, and to give one example of why gold is so
controversial.

First, fiat money in a well-run economy (ours, for example, before the last
decade or so) really is "backed," in a sense. The great insight about this
was the key point of Adam Smith's _Wealth of Nations_, published in the
mid-1770s. He said that a country's wealth isn't based on the amount of gold
in its treasury, but rather on the output of goods and services of that
country over a period of time; say, a year.

The amount and value of that country's money should be equal to that amount
of output (we'll skip over velocity multipliers and other distractions). If
there is too little money in an economy, you have deflation. If there's too
much, you have inflation. The amount of money in circulation should reflect
what that country is producing. Without further elaboration, let's just
assume it does, in well-run economies. Ours has been pretty good in that
regard throughout most of our history. That's a key reason that the dollar
has been accepted as a world standard. If a Frenchman gets his hands on $100
and comes here to spend it, he'll get a solid $100 worth of value in goods
or services. Just tell him not to hold it too long before coming over. d8-)
That's the kind of thing that makes fiat currencies tick.

Hoarding gold, or, in Smith's example, cooking pots, just gets you a lot
of...shiny metal. Or a lot of pots. <g> Hoarding a commodity is not good for
stability or growth. The amount of a commodity a country has shouldn't have
anything to do with how much money they have in circulation, because growth
and stable prices, again, are based on how much money you have in
circulation *in relation to how much you're really producing*.

The example of how a gold standard does *not* necessarily lead to stability
is the fact that, during the Great Depression, the countries that had fiat
money were able to dodge the depression's effects better than those, like
the US at the time, that were on a gold standard. That's because the gold
standard tends to be deflationary in bad economic times. It also tends to
get out of whack as the business cycle goes up and down, which it does no
matter what you have backing your currency. It always has, even when our
currency was 100% gold-backed.

There are several types of gold standards and I won't go into them. If
you're interested in getting into the complexities of it, there are books
and Web sites all over the place. Just stay clear of the Austrian School and
the libertarian crackpots until you have a solid, mainstream understanding
of it under your belt, or they'll drive you nuts chasing your tail.

--
Ed Huntress


.

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