Re: Long article on the dollar -- but worth reading

Rumpelstiltskin wrote:

On Tue, 21 Feb 2006 12:06:25 -0600, Harlow Wilcox wrote:

Rumpelstiltskin wrote:
It didn't make a difference while governments were at least making a good try at balancing the money it spent with the money it brought in through taxation and other means, but the
temptation to run up excessive debt because there's nothing like "gold" to force governments to keep accounts in line with the real state of national wealth has now poisoned the well of
trust in viability.

I certainly agree that the fiscal irresponsibility of government is reprehensible, but what does that have to do with the concept of 'money'? Many commentators rail incessantly about 'fiat money', but how would backing a currency with commodity X improve the deficit/debt situation?

Because the paper can be exchanged for the commodity, and
the commodity does have real value. That's assuming, of course,
that the paper isn't false, and that the commodity (or commodities)
actually could be exchanged when the time came. When we run up national debt, that means the paper is false to the extent
of the debt.

The practical difficulty, as you point out, is whether or not the commodity can be exchanged for food, or clothing, or shelter, or anything else needed or wanted, rather than just another medium of exchange. Short of a total collapse of the world's governments and the world's societies, no one is normally going to agree to such a commodity exchange.

Whether I obtain a good or service with government notes or bits and bytes seems immaterial to the willing exchange I make with the vendor. Whether or not the government takes in enough in taxes to support its spending habits is a totally different animal.
If there were sufficient a supply available of a commodity such as gold to represent the 'national wealth', there would have been no valid reason to discontinue commodity backed currency. There is no way that the world's total economic worth can be expressed in such a manner. That is a big reason why the reputation of country 'X' is so important in world markets. For instance, the wild speculation that the U.S. government will repudiate the debt represented by the bonds it issues is totally laughable.

They're trying to do it right now, with Social Security.

And returning U.S. currency to a gold standard will thwart that evil scheme? And, oh by the way, do you have any evidence that "they're trying to do it right now"?

If the bonds and notes issued by the government represent 'fiat money', so be it. They are backed by the full faith and credit of the taxpayers.

"Faith" is necessary, but not what the money is supposed
to represent. The money is supposed to represent goods.
"Fiat money" is money that has no such backing, as I understand the term.

Finally, the nubs of the discussion. 'Money' represents purchasing power, nothing else. Not wealth, no goods, not rhubarb pie. In centuries and eons past, users of 'money' lost purchasing power when counterfeit 'money' eroded the confidence of buyers and sellers of goods in the value of the 'money'. Governments thus 'backed' the money they issued with valuable commodities, which they promised to exchange for the 'money' they issued.

'Money' has always had the characteristic of faith; faith of the users of it that their purchasing power was safe if they used the 'money' printed by a government. Fiat money is money issued by a government which the world accords a bad "credit rating", or which a government cannot support. The actual form that the 'money' takes or the supposed worth of a commodity upon which the money may be based does not alter that characteristic.


--
Harlow
.

Relevant Pages

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