How money is created

[Smallc]

Gold is far from useless. It has extensive applications in both jewelery and advanced industrial processes and technologies. Silver, similarly, has many applications.

It's not really any more valuable than anything else. You don't need Gold to live.

[Guest TrueMetis]

Gold is far from useless. It has extensive applications in both jewelery and advanced industrial processes and technologies. Silver, similarly, has many applications.

Jewelery is useless. People like it because it's shiny without that gold would be worth almost nothing. Same for silver.

Edited March 29, 2010 by TrueMetis

[Bonam]

It's not really any more valuable than anything else. You don't need Gold to live.

The majority of the most valuable things are not basic necessities of living. In fact, the things one "needs" to live are generally very cheap. The vast majority of our economy consists of the exchange of goods and services that have nothing to do with the basic needs of living.

Jewelery is useless. People like it because it's shiny without that gold would be worth almost nothing. Same for silver.

Good job ignoring the whole part about industrial applications and technologies. Without jewelery, gold would be worth less but not "almost nothing". There is a wide range of elements that are needed for industrial applications but are relatively rare and thus have value, and gold is far from the most expensive of these.

Edited March 29, 2010 by Bonam

[Guest TrueMetis]

Good job ignoring the whole part about industrial applications and technologies.

Which makes up a fraction of what silver and gold is used for.

Edited March 29, 2010 by TrueMetis

[Bonam]

Which makes up a fraction of what silver and gold is used for.

Yes, a significant fraction, about 11% in the case of gold in the US. Jewelery makes up about 52% of the market, and the rest is related to investment. Remove jewelery, and there would be both less supply and less demand, and gold would retain some of its value, just like I said.

Edited March 29, 2010 by Bonam

[Guest TrueMetis]

Yes, a significant fraction, about 11% in the case of gold in the US. Remove jewelery, and there would be both less supply and less demand, and gold would retain some of its value, just like I said.

Everything has some value but the price would be much less than what it is now.

Edited March 29, 2010 by TrueMetis

[Michael Hardner]

I`m learning from this discussion - thanks.

If it works to have the banks only be able to guarantee some of what they lend out, why force governments to hold their entire currency in gold or precious metals ? It seems archaic, unnecessary and hard to manage.

[Bonam]

Everything has some value but the price would be much less than what it is now.

And your point is?

[Guest TrueMetis]

And your point is?

Something that is valued mostly for it's look shouldn't be used as a standard for money.

[Bonam]

Something that is valued mostly for it's look shouldn't be used as a standard for money.

Why not? What matters is the demand for something and its rarity. Gold has the advantage of being in demand by a great many civilizations throughout history, making it universal, and is relatively rare thus giving small quantities of it value. What it is used for is irrelevant.

[Guest TrueMetis]

Why not? What matters is the demand for something and its rarity. Gold has the advantage of being in demand by a great many civilizations throughout history, making it universal, and is relatively rare thus giving small quantities of it value. What it is used for is irrelevant.

But it is not a constant demand causing the value to rapidly change. Any country that uses gold as its standard has a dollar that's value is reliant upon how much people want a shiny hunk of metal. Can you not see the problem with that?

[August1991]

Why would you want your money to be backed up by the useless metal that is gold?

There is worse. Why would you want the world's money supply determined by such a random variable as the amount of gold people can find and dig up? (What would happen to the world's financial system if someone suddenly found a huge gold deposit beneath the soil in Zaire?)

Come to think of it, what is the sense in having people run around the world, digging in farflung places, looking for a specific rock merely because it's considered money, and in the process making Zairean dictators rich?

Paper money is much, much more civilized than gold.

Edited March 29, 2010 by August1991

[bush_cheney2004]

Paper money is much, much more civilized than gold.

Indeed...it is the embodiment of what a fiat currency should be. There are many things rarer than gold.

[Bonam]

But it is not a constant demand causing the value to rapidly change. Any country that uses gold as its standard has a dollar that's value is reliant upon how much people want a shiny hunk of metal. Can you not see the problem with that?

Of course there are problems with it, but if money is to be backed up by a physical commodity, gold seems as good a commodity as any.

Come to think of it, what is the sense in having people run around the world, digging in farflung places, looking for a specific rock merely because it's considered money, and in the process making Zairean dictators rich?

People look for and dig up gold not because it is considered money (it isn't anymore in many countries) but because it is valuable.

[Pliny]

Lesson on Money.

Group A gave their gold to Guy to store for them.

Guy then gave Group A certificates that they could redeem back to him for their gold.

Guy realized that people would just trade the certificates and not the physical gold.

Guy then had the idea of loaning the gold Group A gave to Guy to other people and charge interest on it.

Guy wouldn't actually have to loan the physical gold, he just gave certificates out.

Group A was concerned that Guy was loaning out their gold, but when they got their all their gold was still their. Instead of withdrawing their gold, they just made Guy pay them a small amount of interest.

Thus the 1st bank was created.

This worked good until their was a panic and everyone wanted their gold from Guy, but he gave out more certificates then he had gold.

Instead of England banning this practice, they legalized it and regulated it.

The system was good for funding and expanding infrastructure.

This money which use to represent a commodity like gold or silver, now represents nothing, the only thing that give currency value now is the residual trust that this paper is valuable. The market didn't decide currency should be backed by nothing, bankers and governments that supported them did.

Now Central banks can determine the purchasing power of our money simply by controlling the supply.

"People would rather have cigarettes then pieces of paper as money" - Ron Paul

Paper can't be money.

Money needs to be backed by something people want.

I think this is the most informed post on the subject of money.

I also disagree a bit with Jerry Fortin in understanding money. We need to understand the fundamentals in order to understand it at all.

In order for something to be called money it needs to fulfill several requirements besides being easily divided and carried around.

The bank used to have on their "paper money" the words redeemable in gold or silver written on them. The money was the gold and silver. The paper was a guarantee redeemable for money. The paper was a money substitute. Instead of trading money for things it became popular to just trade the money substitutes - they became the currency along side of coins made from actual money. Pretty soon the banks stopped putting the words redeemable in gold or silver, they didn't advertise that fact but if it were brought up they said the paper currency was as good as gold. Sure enough people would take it the same as the ones that said they were redeemable in gold. Soon all the paper dollar bills were not redeemable and a decree made them a legal tender. It became a fiat paper currency. A far cry from money. Soon all the coins were void of silver and gold.

Incidentally, they were called dollar "bills" because they were a "bill" submitted to be paid in actual money. Like any bill you get that needs to be paid.

One of the requirements of money is that it be a store of value. So that you can use it in the future and it is still good. A paper currency has a danger of becoming worthless overnight not to mention inflation eats away it's store of value over time.

I am not going to argue that gold can't lose it's value overnight as well because it can, although the likelihood of that is far less than a fiat paper currency losing it's value. Gold coins are still around today and are greatly valued as they have been for several millenia. In that same time, many fiat paper currencies have been decreed the money of the land, eventually becoming valueless and disappearing.

Paper is not money. It is used as a currency but because it lacks several of the requirements that define money, it is more of a "token" than anything else, much like a bus token.

Edited March 29, 2010 by Pliny

[August1991]

I think this is the most informed post on the subject of money.

...

Paper is not money. It is used as a currency but because it lacks several of the requirements that define money, it is more of a "token" than anything else, much like a bus token.

Epiphany!

[Pliny]

I`m learning from this discussion - thanks.

If it works to have the banks only be able to guarantee some of what they lend out, why force governments to hold their entire currency in gold or precious metals ? It seems archaic, unnecessary and hard to manage.

You are arguing for elasticity in the money supply and that is the banks and the governments argument for wishing to divest itself of the gold standard. It certainly unties the hand of government for them to be able to create money or borrow it upon the promise of future tax revenues.

It allows government to start wars when it wants and the ability to promise social benefits to it's citizens all based on future tax revenues. But if the economy crashes they have a problem, their revenues go down and they have to borrow which we will pay back in future tax revenues. Eventually, the currency becomes valueless.

It is not conducive to a stable economy.

[Bonam]

It is not conducive to a stable economy.

Then it becomes a value judgment of whether one prefers faster growth or improved stability.

[Jerry J. Fortin]

Then it becomes a value judgment of whether one prefers faster growth or improved stability.

To return to the point, "money is created" as medium of exchange. It matters not if that "dollar" is backed by gold or any other precious metal because money is merely the paper or electronic "real" and tangible footprint used to realize the purchase or sale of a product or service. Money is the fixed term used facilitate a transaction of variably priced objects or ideals to either acquire or divest ourselves of that which we desire.

Consider the reality of all this for a minute, then consider that "dollars" themselves are both valued and sold as if they were in fact a commodity. This is the root of the problem because we are converting a belief into a a reality when something of no particular value is bought and sold. The entire concept of money becomes problematic at this point.

[Pliny]

Then it becomes a value judgment of whether one prefers faster growth or improved stability.

...As Lord Keynes would have us believe.

I doubt that the incentive to improve one's life through the creation of abundance and the advancement of technology would have been stifled had their been no inflationary policy adopted by governments. Historically, it cannot be proven what a deflationary policy would have wrought because we have not adjusted ourselves to a deflationary world. We have adjusted ourselves to an inflationary world.

I believe no policy of inflation or deflation should be followed by government.

From an article by Ludwig von Mises

"An expansion results in misinvestment of capital and overconsumption. It leaves the nation as a whole poorer, not richer and Continued inflation must finally end in the crack-up boom, the complete breakdown of the currency system."

and

"Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."

For anyone interested the whole article appears here: The Inflationist view of history

[Pliny]

To return to the point, "money is created" as medium of exchange. It matters not if that "dollar" is backed by gold or any other precious metal because money is merely the paper or electronic "real" and tangible footprint used to realize the purchase or sale of a product or service. Money is the fixed term used facilitate a transaction of variably priced objects or ideals to either acquire or divest ourselves of that which we desire.

This the modern concept of "money". The old concept that brought us to the use of gold and silver was an evolutionary process generally unregulated except for a guarantee of purity.

Consider the reality of all this for a minute, then consider that "dollars" themselves are both valued and sold as if they were in fact a commodity. This is the root of the problem because we are converting a belief into a a reality when something of no particular value is bought and sold. The entire concept of money becomes problematic at this point.

The concept of a fiat currency substituted and thought of as "money" is what makes it problematic. We believe we are talking about money when we are using it's modern concept. We are however talking about either a fiat currency or an electronic entry on a balance sheet.

You mention that dollars are bought and sold as a commodity. Once again it is our modern concept of dollars. A dollar used to be a specific weight of gold or silver. It was also a measurement of value and it's purchasing power judged by those involved in trade. Today it's only a measurement of value and it's purchasing power is determined by government regulation or at least it's purchasing power is attempted to be regulated. Government's may be able to do so for short periods only, before they eventually destroy the currency they are attempting to regulate.

I make these remarks for other posters mainly as I know from earlier discussions with you Jerry, that you are fairly well informed on the above arguments.

[Jerry J. Fortin]

This the modern concept of "money". The old concept that brought us to the use of gold and silver was an evolutionary process generally unregulated except for a guarantee of purity.

The concept of a fiat currency substituted and thought of as "money" is what makes it problematic. We believe we are talking about money when we are using it's modern concept. We are however talking about either a fiat currency or an electronic entry on a balance sheet.

You mention that dollars are bought and sold as a commodity. Once again it is our modern concept of dollars. A dollar used to be a specific weight of gold or silver. It was also a measurement of value and it's purchasing power judged by those involved in trade. Today it's only a measurement of value and it's purchasing power is determined by government regulation or at least it's purchasing power is attempted to be regulated. Government's may be able to do so for short periods only, before they eventually destroy the currency they are attempting to regulate.

I make these remarks for other posters mainly as I know from earlier discussions with you Jerry, that you are fairly well informed on the above arguments.

The question then becomes how do we proceed from here? An international currency that is devoid of speculation? The elimination of fiat currencies altogether? Yet perhaps the problem has other depths than merely the creation of money itself or if you prefer the creation of wealth which is at least more accurate.

In my view, as long as there are competing systems in play there will always be disparity. Systems are tools of citizens to be utilized to their advantage. These things have been well used to the advantage of some, but definitely not for all. In my view no amount of regulation is capable of eliminating the problems of inflation or deflation until some form of global standard is agreed upon. It is not the financial industry at fault, nor is it the evolution of systems in use that are at fault. There is no blame to be assessed, nor single finger that may be pointed to define the specific issue in contention. I think that perhaps these things are a result of a society coupled with technological advancement that is winding its way through a developmental process that does in fact correct its own mistakes through advancement. That advancement is based upon the successful resolution of the problems encountered. This is simple logic.

Is not the real problem we have the dissociation of the fruits of labour and the value of currency? Is there not a very real and problematic difference between the modern ideas of production and wealth? Is not the human removed from the equation to a very true extent? Does not the modern perception of value have more relevance than the effort of production? Is not leverage the true measure of capitalization? The entire concept is devoid of the realization of the human interface within the productive process and the value of human effort. I will suggest that we have developed beyond the concept of "money" altogether, yet out of greed and avarice we retain the use of money as a "fair" means of exchange. If anything at all, money is far from such a concept when we consider the variance amongst the fiat currencies of the world.

Perhaps the Japanese had it right at the height of their feudal system. Money was a reference to an amount of rice sufficient to sustain life. There were indeed variances such as taxes and the like to contend with, yet it was a true measure of defined value. Money = Life. No money equates to no food and hence no life.

[Pliny]

The question then becomes how do we proceed from here? An international currency that is devoid of speculation? The elimination of fiat currencies altogether? Yet perhaps the problem has other depths than merely the creation of money itself or if you prefer the creation of wealth which is at least more accurate.

In my view, as long as there are competing systems in play there will always be disparity. Systems are tools of citizens to be utilized to their advantage. These things have been well used to the advantage of some, but definitely not for all. In my view no amount of regulation is capable of eliminating the problems of inflation or deflation until some form of global standard is agreed upon. It is not the financial industry at fault, nor is it the evolution of systems in use that are at fault. There is no blame to be assessed, nor single finger that may be pointed to define the specific issue in contention. I think that perhaps these things are a result of a society coupled with technological advancement that is winding its way through a developmental process that does in fact correct its own mistakes through advancement. That advancement is based upon the successful resolution of the problems encountered. This is simple logic.

Is not the real problem we have the dissociation of the fruits of labour and the value of currency? Is there not a very real and problematic difference between the modern ideas of production and wealth? Is not the human removed from the equation to a very true extent? Does not the modern perception of value have more relevance than the effort of production? Is not leverage the true measure of capitalization? The entire concept is devoid of the realization of the human interface within the productive process and the value of human effort. I will suggest that we have developed beyond the concept of "money" altogether, yet out of greed and avarice we retain the use of money as a "fair" means of exchange. If anything at all, money is far from such a concept when we consider the variance amongst the fiat currencies of the world.

Perhaps the Japanese had it right at the height of their feudal system. Money was a reference to an amount of rice sufficient to sustain life. There were indeed variances such as taxes and the like to contend with, yet it was a true measure of defined value. Money = Life. No money equates to no food and hence no life.

You don't disappoint. Just a comment below on one of your statements.

I will suggest that we have developed beyond the concept of "money" altogether, yet out of greed and avarice we retain the use of money as a "fair" means of exchange.

We indeed are trying to eliminate money. I think it is a mistake to believe that we have retained the use of "money" in the pre-Keynesian sense of the word. The post-Keynesian sense of the word, that money substitutes or mere accounting entries are money, is, I think, the concept you employ.

[Bonam]

The question then becomes how do we proceed from here? An international currency that is devoid of speculation? The elimination of fiat currencies altogether? Yet perhaps the problem has other depths than merely the creation of money itself or if you prefer the creation of wealth which is at least more accurate.

In my view, as long as there are competing systems in play there will always be disparity. Systems are tools of citizens to be utilized to their advantage. These things have been well used to the advantage of some, but definitely not for all. In my view no amount of regulation is capable of eliminating the problems of inflation or deflation until some form of global standard is agreed upon.

I would not be so quick to assume that simply introducing a global standard would address inflation or deflation. Any global standard currency would undergo the same types of changes in value as other currencies, the only difference being that one could not simply exchange their money to a different currency (but they could still purchase a commodity with their currency just as one can now).

It is not the financial industry at fault, nor is it the evolution of systems in use that are at fault. There is no blame to be assessed, nor single finger that may be pointed to define the specific issue in contention. I think that perhaps these things are a result of a society coupled with technological advancement that is winding its way through a developmental process that does in fact correct its own mistakes through advancement. That advancement is based upon the successful resolution of the problems encountered. This is simple logic.

I agree on this point. In my view, technological progress trumps all, simply because of the seemingly unstoppable trend of exponentially accelerating growth associated with technological progress.

Is not the real problem we have the dissociation of the fruits of labour and the value of currency?

How have these been dissociated? More precisely, how should they have been associated to begin with? Currency is a means of exchange, and in the simplest sense its value is related to the total value of goods and services in circulation divided by the total amount of currency in circulation.

Is there not a very real and problematic difference between the modern ideas of production and wealth?

I don't see that there is. Production is still very much related to wealth. One who owns the means of producing something of value has the capability to generate wealth.

Is not the human removed from the equation to a very true extent?

How is the human removed from the equation? It is still ultimately individuals that make all the decisions that affect economies, production, wealth, value, etc.

Does not the modern perception of value have more relevance than the effort of production?

Indeed. Value is how much something is worth to someone. How much effort it took you to make it is irrelevant, what matters for determining its worth is how much someone values it. If you can reduce the effort (cost) it takes you to produce something while keeping its value (in the eyes of your customers) constant, you will accumulate more wealth. I don't see anything wrong here.

Is not leverage the true measure of capitalization?

Leverage is a term relating to using borrowed money to invest. Capitalization is the worth of an enterprise. Using leverage (borrowing money) actually reduces an enterprise's worth. So I don't see why you would consider leverage to be a measure of capitalization.

The entire concept is devoid of the realization of the human interface within the productive process and the value of human effort. I will suggest that we have developed beyond the concept of "money" altogether, yet out of greed and avarice we retain the use of money as a "fair" means of exchange. If anything at all, money is far from such a concept when we consider the variance amongst the fiat currencies of the world.

Money may be an imperfect means of exchange in some sense but I have yet to hear a proposal for a better means of exchange. What would you suggest? I think that some form of money (medium of exchange) will continue to exist until our civilization completely eliminates any scarcity of any sort for any product or service, and I don't think that will happen any time soon.

Perhaps the Japanese had it right at the height of their feudal system. Money was a reference to an amount of rice sufficient to sustain life. There were indeed variances such as taxes and the like to contend with, yet it was a true measure of defined value. Money = Life. No money equates to no food and hence no life.

Rice (or food of any sort) is simply another commodity to tie money to, not inherently superior as a means of exchange to any other such commodity (for example gold). In fact, I would argue that rice would be quite a poor means of exchange as you would need truly vast quantities of rice to exchange for things that are of much higher value. This is generally true of any modern commodity necessary for basic living - the basic needs of survival are incredibly cheap and plentiful, and enormous quantities of them would be needed to trade in fair exchange for certain things that are not basic needs of survival (luxuries, large industrial goods & machinery, real estate, advanced technological devices, etc).

I do not think tying money to the basic needs of survival, which are constantly decreasing in value compared to other types of goods and services, makes sense.

Edited March 30, 2010 by Bonam

[bjre]

the basic needs of survival are incredibly cheap and plentiful

How many Canadian completely own their house?

How many years will they need to work for their house?