The American Coinage System

[Doubleshadow]

My apologies to any international members who aren't familiar with the American coinage system, although I would love input from the Canadians and New Zealanders on what the article says about their changes.

It's been quite a while since I first encountered an article about removing pennies from circulation, and I have to say the argument and counter-argument is fascinating due to covering everything from culture and sentimentality to hard-core economics and finance. The articles below have a lot of information, but I wish they had a little more history since it's hard to understand the problem without having an idea of how our current monetary system came to be. I also wish I could find reliable information on the private manufacture of money in the US.

So, I'll save my opinion for later, but what do my fellow Americans (and anybody else) think should be done about the problems with our monetary system?


Link to Articles on Pennies
Brief History of the Fiat System

[ShiroiHikari]

I...don't know. I think the economy itself is of more concern at the moment.

One thing I do know is that my man and I hardly ever use cash anymore anyway. We use a debit card instead, mostly because it gets us rewards with our bank. XD

In the future, I could see us moving away from printed currency and just using cards or something. Is that necessarily a good thing? I don't know. It makes money a lot more abstract.

[LadyRushia]

If they got rid of pennies, they would have to change the prices on everything so that numbers like $5.32 won't show up.

As to whether or not they should get rid of them, I don't know. Pennies are pretty useless; you can't get anything with them these days.

[Shao Feng-Li]

We already have pennies, just keep em :\

[everdred12a]

If they got rid of pennies, they would have to change the prices on everything so that numbers like $5.32 won't show up.

Yeah, and I have a feeling they won't be rounding prices down. Same goes for sales taxes]down[/i]. And especially during this time of recession, getting rid of pennies won't really fix anything.

[EricTheFred]

Our dollar bill is too expensive to produce as well. That's why the treasure dept keeps trying to get dollar coins going.

Americans are a stubborn lot. Japan has not only 100 yen coins (roughly a dollar) but 500 yen coins (5 bucks) as well. Japan no longer prints bills less than 1000 yen.

The Europeans aren't quite as far along, but they have a two Euro coin, which right now is worth around three bucks.

A US penny used to really buy stuff. So much, in fact, that we had a half-penny at one point (and the official smallest currency in the US is the 'mil', one-tenth of a penny.)

Go to the UK, and you will find the word 'farthing'. It's a fourth of a penny. In really old literature you might see a price like 12 3/4 , which reads, '12 pence three farthings'. Just like the 'Ha-penny' (haypenny or 1/2 pence) it's extinct, but the word still exists. Once they'd decreased in value to a point similar to our current penny, the language developed the expression 'not worth a farthing.'

My opinion? Time for 'new dollars'. Other countries have done it. Knock a zero off the 'old dollar' and make becoming a millionaire a significant achievement again (and a billionaire a rarity.) The old nickel becomes the new half-cent, the old dime the new cent, etc. Cars would cost four digits, not five, and a loaf of bread would be twenty cents or less. And people would spend their pennies instead of filling jars with them.

[ich1990]

Gold is the way to go. If each of our monetary units had actual gold in them, we wouldn't have to worry about inflation constantly eroding the value of the dollar. Over the existence of our economy, inflation has averaged 3% per year. In other words, every 23 or so years it takes double the amount of money to buy the same thing. A 1985 dollar was worth two 2008 dollars.

Unfortunately, It would probably be difficult to stop forgery, but I am sure someone could could come up with a way.

Also, while debit cards are convenient, they are too expensive for me. When you pay with plastic, there is not the same "psychological trauma" that occurs when you actually hand over
cash currency.

There are many times when I have considered buying a useless trinket. I have even gone so far as carry it up to the register with me. In the end, however, it is just too painful to give up the money. I ask myself "is it really worth giving up this dollar? This dollar represents a chunk of my life. Do I really want to give up something that took my xx hours to earn? Compare that to swiping a card, it is not the same.

[bakura_fan]

Gold is the way to go. If each of our monetary units had actual gold in them, we wouldn't have to worry about inflation constantly eroding the value of the dollar. Over the existence of our economy, inflation has averaged 3% per year. In other words, every 23 or so years it takes double the amount of money to buy the same thing. A 1985 dollar was worth two 2008 dollars.

Unfortunately, It would probably be difficult to stop forgery, but I am sure someone could could come up with a way.

Also, while debit cards are convenient, they are too expensive for me. When you pay with plastic, there is not the same "psychological trauma" that occurs when you actually hand over
cash currency.

There are many times when I have considered buying a useless trinket. I have even gone so far as carry it up to the register with me. In the end, however, it is just too painful to give up the money. I ask myself "is it really worth giving up this dollar? This dollar represents a chunk of my life. Do I really want to give up something that took my xx hours to earn? Compare that to swiping a card, it is not the same.

To me, I actually prefer a card over cash. I like to have money available, but I don't want to carry around my whole paycheck. I typically split my paycheck in thirds. One third savings, one third checking, one third cash. I keep track of my money in my account all the time, so to me, its the same as giving up my money, because that's what I'm doing. However, if you meant a credit card, not debit...then I whole heartedly agree with ya.

[ClosetOtaku]

Thanks for the article on the fiat system -- Mises has recently become my hero and Prophet for the sad economy we're about to move into.

Well, I'm sure you didn't want this to become a forum on macroeconomics -- and I am thinking about starting a different thread on that issue all together -- but since you asked the question:

The real issue facing, not just coinage, but the dollar itself, is that it is now what is known as a "fiat" currency. Between the early 1930s and the early 1970s the dollar was linked to the gold reserves held by the U.S. When President Nixon removed the U.S. from the gold standard, the dollar became free-floating -- a fiat currency, worth whatever individuals felt it was worth, but not backed by any metal or other medium of exchange. At that time, the dollar was recognized in the Western world as the predominant currency.

Flash forward to the 21st century. Three decades of deficit spending, one huge Savings and Loan crisis, and the recent bailing out of banking institutions that gambled on the mortgage market and lost have caused the Fed to print more money -- "monetize" -- to cover losses and keep the banking system solvent. (By the end of this year, there will be about 14% more dollars in circulation than last year, most of that not in paper bills but on banking ledgers and in electronic systems).

Monetization normally leads to rampant inflation, and indeed the unofficial inflation rate (probably around 10%, you see it in everything from gas prices to food prices) is a reflection of the increased money supply. Really troublesome inflation has been kept in theoretical check by the Fed's constant lowering of the funds rate, but that cannot go on forever.

As Murray Rothbard points out in his excellent book America's Great Depression, a Government has two options to take when the unchecked credit expansion begins to precipitate a crisis: it can (1) move to save the value of the currency at the expense of allowing the banking system to collapse, or (2) it can move to save the banking system while allowing the value of the currency to collapse. During the Great Depression, the Government chose option 1, with the resulting disaster of over 25% unemployment and a severely depressed economy. During the recent Bear-Stearns bailout, the Government indicated it was taking the opposite approach. For all intents and purposes your dollars, almost overnight, have lost a significant portion of their value -- but it will take the overall economy time to catch up to this reality.

During credit crises often the safer bet is to move money out of cash-based instruments (like stocks and bonds) and into commodities and precious metals. There is still plenty of risk involved in these, including the fact that during the Great Depression the Government seized privately-held gold to shore up its own reserves. As one website recently put it, the only safe place for your valuables is somewhere where the Government can't lay claim to it (e.g overseas).

Now obviously there is a lot of generalization and simplification here, but you probably get the picture -- we're in deep trouble economically in the U.S. No one quite knows the outcome, but we may find ourselves once again moving back to a gold standard and a re-issued currency to avoid a deadly bout with hyperinflation. But if we don't, the value of the dollar will plummet dramatically (e.g. we could experience inflation of up to several hundred percentage points, if history is any guide). In that case, all those thousands of pennies you will have been saving out of nostalgia will be worth more melted down and fenced to some scrap-metal collector, and with the proceeds you might even be able to buy a half a loaf of bread.

[ich1990]

You will have to pardon me if I am a little long winded, personal finance and economics are some of my favorite subjects.

To me, I actually prefer a card over cash. I like to have money available, but I don't want to carry around my whole paycheck. I typically split my paycheck in thirds. One third savings, one third checking, one third cash. I keep track of my money in my account all the time, so to me, its the same as giving up my money, because that's what I'm doing. However, if you meant a credit card, not debit...then I whole heartedly agree with ya.

Obviously, it varies from person to person. I think, however, that the chance of impulse buying goes down the more you are forced to think about it. Cash almost always gives me a pause]everything[/I], is pressuring us to buy more. Buy now! Buy if you feel bad! Buy if you feel good! It is sad how many people think that spending money will make them happy or give them meaning in life.

The real issue facing, not just coinage, but the dollar itself, is that it is now what is known as a "fiat" currency. Between the early 1930s and the early 1970s the dollar was linked to the gold reserves held by the U.S. When President Nixon removed the U.S. from the gold standard, the dollar became free-floating -- a fiat currency, worth whatever individuals felt it was worth, but not backed by any metal or other medium of exchange. At that time, the dollar was recognized in the Western world as the predominant currency.

Like I said, we need to get back to the gold standard! Yes, it constantly amazes me that the foundation of the most influential economic system in the world is based on popular opinion. Quite scary actually.

During credit crises often the safer bet is to move money out of cash-based instruments (like stocks and bonds) and into commodities and precious metals. There is still plenty of risk involved in these, including the fact that during the Great Depression the Government seized privately-held gold to shore up its own reserves. As one website recently put it, the only safe place for your valuables is somewhere where the Government can't lay claim to it (e.g overseas).

I imagine that if you bought stocks (or better yet mutual funds) consisting of overseas companies you would do ok as well. Don't get me wrong, if the dollar dies, everything will take a hit, but foreign investments might just survive. As for confiscating gold reserves, that would probably only apply to people who have a very large amount of gold. The everyday person's gold stockpile is not worth the governments time.

As long as we are talking about inflation, the instability of the dollar, and similarly bright topics, allow me to point you to an excellent video that shows, very artistically, how money is made. Most people think that new money is just printed off of a press. Actually printed money makes up a very small amount of all new money. Where does it come from? Watch and see! Really, it is fun. Now I know that most people hate economics and all, but, seriously, watch this video, it is worth it.

http://video.google.com/videoplay?docid=-9050474362583451279&q=money+as+debt&total=4258&start=0&num=10&so=0&type=search&plindex=0

[Dante]

I realized something when I heard of this... if they do it... I'm trading every dollar I own in for pennies and storing them... think I'm crazy... just wait...

In about 5-10 years every one of those pennies will be semi-difficult to come by. So by having them I would have a veritably massive collection for coin collectors... of course, I would be more then happy to sell them, and in fact for the lowest possible price... I'd ask for one nickel for every penny . At 5 cents per penny I'd have a 500% return... Of course maybe I wouldn't try this, because they might only offer me one nickel for every five pennies... but I think I would get some return for all my pennies .

[blkmage]

To me, it seems like the only benefit to having a currency tied to gold is avoiding inflation in the very long run. That inflexibility seems like it would be a very large drawback, especially in the context of a global economy. And honestly, tying the currency to any sort of commodity seems like artificially limiting the value of the currency anyway, with none of the benefits of fiat money. The same question of value that is asked of fiat money can be asked of gold: what gives it value? Because it's shiny? It seems like gold is valuable only because we perceive it to be valuable, which makes it sound exactly like fiat money.

[Warrior4Christ]

In Australia, we have 5c as the lowest denomination coin.

If they got rid of pennies, they would have to change the prices on everything so that numbers like $5.32 won't show up.

Individual items are still commonly not multiples of 5c. They can have odd numbers like that. The final price after all items are checked out is rounded off to 5c.

Yeah, and I have a feeling they won't be rounding prices down. Same goes for sales taxes]down[/i]. And especially during this time of recession, getting rid of pennies won't really fix anything.

It depends who you're dealing with. Some shops do round down or to the nearest 5c. Some may round up. Sometimes the final price is a nice neat figure like $2.50, for example, and the sales tax is a weird value like $0.28. I don't think the sales tax would be rounded separately; only as a whole with the item.

[termyt]

Well, I'm not ready to return to a gold standard. We live in a global economy and Gold is traded much like currency is. What would happen if the US locked it's currency to gold and then Russia decided to mine the huge reserves of gold it has yet to dig out of the ground? An economic crisis in the United States that dwarfs anything we are seeing right now.

The Russian gold reserve is vast and, since it has never been mined, it is not accounted for in the world gold market. Flooding the market with new reserves of gold would crush the economies of any nation depending on it for its currency's strength. Sweet revenge for Russia as they replace us as a super power after losing the Cold War.

At any rate, whether we adopt a gold standard or not is not as important as making sound financial decisions - something every government we've had since at least the turn of the previous century has avoided. Why do we keep the penny? Because people are afraid that $.01 will be rounded up to $.5? That's ridiculous. By the time you saved those additional pennies into something worth having, the US Treasury has waisted billions minting them.

The same can be said for the dollar bill. That people like them better than a coin is irrelevant considering the amount of money lost by printing them.

The simple fact is that we simply aren't willing to even be inconvenienced, let alone actually sacrifice anything, to make our economy stronger. We'd rather blame a politician for our woes than make even a simple nearly painless change that would save or government billions.

[ich1990]

The same question of value that is asked of fiat money can be asked of gold: what gives it value? Because it's shiny? It seems like gold is valuable only because we perceive it to be valuable, which makes it sound exactly like fiat money.

Yes, gold is valuable because it is shiny. Which would you rather have, a piece of green paper, or a lump of shiny gold? You could use commodities, such as oil or steel, but they fluctuate in price dramatically becuase they are constantly being consumed. Alternatively, most gold sticks around through the years, so, over a long period of time, its worth is relatively stable.

Well, I'm not ready to return to a gold standard. We live in a global economy and Gold is traded much like currency is. What would happen if the US locked it's currency to gold and then Russia decided to mine the huge reserves of gold it has yet to dig out of the ground? An economic crisis in the United States that dwarfs anything we are seeing right now.

Prepare yourself for a super long response.

If we got back to the gold standard, then every U.S. dollar would be worth a certain amount of gold. As the gold reserve in one country lowers, the gold in that country becomes more valuable, therefore that monetary unit becomes more valuable. It is the law of supply and demand, the less you have the more it is worth. If Russia mined a lot more gold, the extra gold would cause more Russian rubles to be printed (if it had the gold standard). With so many more rubles floating around, the rubles value would decrease.

However, we have a global market. With the mostly free trade we have now, the more gold Russia mines, the less all gold is worth. Russia would have more rubles, but they would be worth less. The U.S. would have the same amount of dollars, but they would be worth less. As a whole, the monetary strength of a country would shift dependent on how much gold that they have. However......

Here is the tricky part. If Russia mined a lot more gold, the value of the Ruble would drop in that country because there would be a lot more of them. For the purposes of discussion, lets say that a dollar has the same gold value as the ruble. If a loaf of bread had cost 1 ruble, now it costs 1.5. However, the U.S. now has less gold than the Russians. They have less dollars in their country than Russians have rubles, so the dollar has more purchasing power in the U.S. then the Ruble does in Russia. The Russians look over at the United States and see that, because they have fewer comparative dollars, the bread over in the U.S. is cheaper. Now the Russians find that it is cheaper to use their gold to buy dollars to buy American bread. They ship the bread over to Russia, and they get bread for 50% off.

Of course, now America has a huge influx of gold, so there are more dollars, and they become worth less. Now bread costs the same, and both America and Russia have approximately equal economic strength. With all of the gold out of the ground, the only way to become more powerful, is to produce more bread, cheaper. If they did, it would lure more gold to their country.

Therefore, the true power of the country, is not the amount of gold in reserve, but the ability to manufacture quality items cheaply and efficiently. Those who successfully employ capitalism would be the most powerful.

In a way, the fiat currency is the reason why cheap Chinese products have driven out American businesses. The Chinese have artificially pegged their monetary unit so that it is always lower than the dollar. Because they use a fiat system like ours, they can make it worth whatever they want. Because Chinese money is cheaper than American money, we can use the dollar to buy a lot of Chinese stuff. If the Chinese money was allowed to float freely, its worth would go up to a comparative level, and Chinese goods would become more expensive. American businesses could then compete fairly. The Chinese government does not want to do this, however, because, if they unpeg their money, they would end up paying their workers more for their services. This would make their capitalistic-monetary-system-on-steroids less efficient, and allow U.S. companies to compete. The Communist dictators don't want this to happen, because they are getting rich off of U.S. dollars, while sitting on the backs of people who are working for next to nothing.

Capitalism has potential for abuse, but in a free society, Unions provide the appropriate checks and balances.

[EricTheFred]

The problems you are discussing go away the day we refuse to trade with any nation that does not allow their currency to trade properly. The problem isn't 'fiat money'. All money is a surrogate for labor, either present (wages) or past (physical capital and savings bought with prior labor.) The problem is that 'pegging' the money of a particular issuer to another issuer works contrary to this fact, artificially depressing or enhancing the cost of that labor. It's value is now artificially discounted or surcharged (which depends upon if the value is pegged low or high.)

The reason the US and any other country should have the right to automatically close their port to any country which pegs their money is that it isn't just that country cheating their own workers, that country is also taxing the workers of the other countries. If you are in a country like the US or UK, your labor is effectively being taxed by the Chinese government (or any other doing this) on every product sold in their country... and that tax is what is financing the discount on their own products. It is therefore a tariff that is contrary to the principles of GATT and the WTO, and should be judged as illegal.

Gold is fiat money, itself. It has no natural value in that way that real estate, food, etc. do. (Or rather, like diamonds, fancy sports cars and curvaceous movie stars, the natural value it does have is significantly less than the value we pump it up to by our racoon-like fascination with pretty things. There actually are some valid uses for gold... for example, almost every electronic device you own has gold inside the little 'chips' on the circuit boards. The great majority of integrated circuits use it as 'bond wires' to connect from the pins to the silicon.) The problem we are discussing is not solved by Gold unless the foreign government also trades in Gold... and no government responsible for more than 25% of all humans alive today is going to agree to that. So, they will simply peg the Yuan to the value of gold, and the problem continues unabated.

Why can I be sure of this? Because we were still on a gold standard of sorts in the fifties and sixties, when Japan had the Yen pegged to the Dollar. Gold was freely tradeable all over the world except the US, where the Dollar was pegged at 35 dollars per troy ounce (IIRC), and in Japan, the Yen was pegged to the Dollar (I vaguely remember something like 270 yen per dollar)... and all the same trading problems existed with Japan as today with China. We still haven't recovered from that trading imbalance (largely thanks transferring the problem to China, but also thanks to our growing trade imbalance with respect to Oil.)

[Doubleshadow]

I know there is a lot more involved than what I addressed, but I was worried about everything getting into an intellectual tangle; not that I haven't loved reading about international economics. I wish I understood the nuances of it all better.

[ich1990]

I know there is a lot more involved than what I addressed, but I was worried about everything getting into an intellectual tangle]

If you like learning about economics, I highly recommend the video I linked a couple of posts above. I have found this thread to be immensely enjoyable. It has been great hearing so many different views and opinions of our economic system. If you consider this topic thoroughly exhausted, that is fine. For now, however, one more post:

The problems you are discussing go away the day we refuse to trade with any nation that does not allow their currency to trade properly. The problem isn't 'fiat money'. All money is a surrogate for labor, either present (wages) or past (physical capital and savings bought with prior labor.) The problem is that 'pegging' the money of a particular issuer to another issuer works contrary to this fact, artificially depressing or enhancing the cost of that labor. It's value is now artificially discounted or surcharged (which depends upon if the value is pegged low or high.)

Absolutely. It should be illegal for someone to artificially “]Gold is fiat money, itself. It has no natural value in that way that real estate, food, etc. do. (Or rather, like diamonds, fancy sports cars and curvaceous movie stars, the natural value it does have is significantly less than the value we pump it up to by our racoon-like fascination with pretty things.

While it is true that Gold has few actual uses, its value has remained stable for far longer than pretty much anything else in the world. For instance, 2,000+ years ago one of the “wise men” that visited the newly born Jesus brought Gold as a gift. Also, think of Solomon, the son of David. In the bible it records some of the tribute money that Solomon received, much of it was paid in gold. If gold has a track record of being valuable for the past several thousand years, then I would say that it is pretty dependable.

Further, Gold is quite a bit different from real estate, food, or cash. For one thing, it isn't constantly decaying and spoiling. Sure, gold doesn't have as many practical uses as houses or food, but its value doesn't fluctuate as wildly either. In my home state of Michigan, the housing market is severely flooded. Values of houses are dropping so much that, in some areas of Detroit, people are actually giving away their houses so that they don't have to pay property taxes on them. You won't ever find people giving away chunks of gold. Gold is different from paper money, because gold will never become worthless. If faith in the dollar dies, it will become worthless colored paper, not so with gold.

Lastly, if you didn't use gold, what would you use? It just isn't very practical to say “you can go to any bank and redeem this dollar for 1/2 of a can of soup”. Gold is one of the few items that has enough “psychological value” to be valuable, yet is useless enough to avoid being consumed in large quantities (and thus avoid permanent fluctuations in price). Gold also has the advantage of being mildly consumable: its use in computers and the like, nicely offsets the amount of new gold that is being mined.

The problem we are discussing is not solved by Gold unless the foreign government also trades in Gold... and no government responsible for more than 25% of all humans alive today is going to agree to that. So, they will simply peg the Yuan to the value of gold, and the problem continues unabated.

True, gold is not the “cure all”. The only way to stop China from employing their pegging trick, is to either punish them, which is not very likely to happen, or force them to use the gold standard, which is also not very likely to happen. What I was trying to point out, is that their scheme would not be possible if everyone still used gold. If America went to the gold standard, it would probably not do anything to change China. There are several things that gold would do, however.

First, it will save the dollar from a not-so-slow death. I have heard many different estimations of the rate of inflation, from 3-10% per year. Basically, this means that every dollar loses 50% of its purchasing power every 7-23 years. It doesn't take long for that to add up. Recent increases in the Euro's value in comparison to the dollar proves how quickly the dollar is faltering in the real world.

Second, it would encourage government frugality and honesty. Every year, the government prints more new money, this is part of what causes inflation. In effect, by printing more money to pay off its own debts, our government is stealing a few cents from every dollar in the entire country. We are being taxed by the dilution of our money! If each dollar had actual gold behind it, then the government couldn't print more money than it had gold for. In other words, it would be forced to reduce the amount that it spends and borrows to a more reasonable amount.

Third, gold would give the dollar backbone. Right now, the value of our money is determined by the global “popularity contest”. Right now, lots of people believe in the dollar, so it is worth quite a bit. However, in our short two centuries of existence, America hasn't exactly made a lot of friends. Some day, we won't always be the biggest kid on the block. If our nation (and consequently our dollar) falls out of popularity, then our money becomes a worthless slip of green paper. That is not exactly a comforting thought. If, on the other hand, a dollar could be exchanged for actual gold, then, no matter how unpopular America becomes, its currency will still demand some respect (and therefore our country will still demand some respect).

Fourth, it would help get our economic system off of the “debt pyramid scheme”. At this point, we don't have enough money to pay off our national debts. In fact, the only way we can make the minimum payments is to borrow more money. That is a huge problem. The gold backed dollar would ensure that we stop getting so far out of our league (see #2 above). It would also help us cut our debt. Eventually our government won't be able to get enough money to pay for the interest on our debt. At that point, the dollar will become worthless, and many foreign investors will end up losing their entire investment. Sure, they may get their money, back, but it would probably be in worthless pieces of green paper. If we had a gold backed dollar on the other hand, I am reasonably sure that foreign nations would be willing to compromise on how much we pay them back. They would probably decide that a piece of gold in the hand is worth much more than a bunch of pieces of green paper, even if the paper is worth more now.

Once again, I am not saying that gold will fix all of the world's problems; global economics is way to complicated for that. I am, however, saying that gold is one of the best solutions to the myriad of imminent monetary problems in the U.S., at least, out of the many proposed solutions that I have heard about. Still, I don't want this to turn into a personal debate or anything. I love economics, and like hearing other CAA'ers' ideas. Of course, I have also driven this thread way too far off track. So, I am just going to say that I am thankful to you guys and girls for giving me an excuse to put off college homework and go read about economics.

[EricTheFred]

The sad thing about this is, everything you say about it makes it seem logical, and I have seen all these arguments before, but I know from a historical perspective that in practice it doesn't work out. I just am not a sufficiently brilliant economist to put it all together and explain why your 'A' did not lead to history's 'B' in the real world.

What we had instead, until the US government gave up on the pure Gold Standard of the 19th century and allowed itself to print notes it did not literally have the gold to back, (until this event, every twenty dollars of paper currency had a troy ounce of gold in the Treasury, and every twenty dollar gold piece was exactly one troy ounce in weight), was a deflationary economy and one depression following another. Read up on the Free Silver Democrats and other populist groups, and the economic conditions that made them so dedicated to getting more cash into the economy (and so popular they came close to taking the White House a couple times.)

As I said, I'm not good enough to explain this, but I will say this: money is in reality a surrogate for labor, as a means to trade the value of that labor. Economists have understood this for a very long time (I think it was Adam Smith who first made the observation.) The money supply only works efficiently when it can float and adjust itself to the labor supply. When opportunities for growth exist, but the money supply cannot expand to react to them (as with a fixed supply of gold,) credit dries up (no money available to loan, no matter how secure the investment) and businesses fail to meet demands. A deflationary chain of events begins that lead almost inevitably to a depression. This happened repeatedly starting not long after the Civil War, in a chaotic boom/bust cycle that eventually culminated in the big one everyone knows about in the 1930s.

Today's monetary system began during the effort to dig our way out of that depression, and it's significant tht we have not had another true depression since. We did have a 'farm depression' during the Reagan Administration, a sector-specific depression that had to do with the decline of family farming, not with credit and money supply. We have had no economy-wide depression in seven decades.

[Mithrandir]

*blinks*

You've just inspired me to begin reading up on economics. That is very fascinating stuff there!

Capitalism has potential for abuse, but in a free society, Unions provide the appropriate checks and balances.

But the unions are not the end result that should exist. The unions were needed for a specific period of time (think: The Pinkertons), but adequate labor laws have all but removed the need for them. The civil rights movement has done more for the average worker than any union I can think of. The only place unions really make sense any more are places where management is hell-bent on keeping every penny for themselves.

NOTE: This is just my opinion. I happen to belong to a union that I have witnessed throw around it's weight in a very stupid manor. I have seen other unions get broken that had outlived their usefulness, and I think that's the direction the rest of the U.S. unions are heading. If I was not required to be a part of the union I am currently in, I would have received quite a few raises. As it is, I get paid LESS and LESS every year due to inflation. I could go on about worthless coworkers, but I've already said this is an opinion. No need to air all my laundry.

[Mithrandir]

Capitalism has potential for abuse, but in a free society, Unions provide the appropriate checks and balances.

But the unions are not the end result that should exist. The unions were needed for a specific period of time (think: The Pinkertons), but adequate labor laws have all but removed the need for them. The civil rights movement has done more for the average worker than any union I can think of. The only place unions really make sense any more are places where management is hell-bent on keeping every penny for themselves.

NOTE: This is just my opinion. I happen to belong to a union that I have witnessed throw around it's weight in a very stupid manor. I have seen other unions get broken that had outlived their usefulness, and I think that's the direction the rest of the U.S. unions are heading. If I was not required to be a part of the union I am currently in, I would have received quite a few raises. As it is, I get paid LESS and LESS every year due to inflation. I could go on about worthless coworkers, but I've already said this is an opinion. No need to air all my laundry.

[ich1990]

But the unions are not the end result that should exist. The unions were needed for a specific period of time (think: The Pinkertons), but adequate labor laws have all but removed the need for them. The civil rights movement has done more for the average worker than any union I can think of. The only place unions really make sense any more are places where management is hell-bent on keeping every penny for themselves.

I have personally, never been involved in a Union, but from what I have heard, you are spot on in your assessment. I mentioned Unions, becuase they are the figureheads of Capitalism's leash.

The sad thing about this is, everything you say about it makes it seem logical, and I have seen all these arguments before, but I know from a historical perspective that in practice it doesn't work out. I just am not a sufficiently brilliant economist to put it all together and explain why your 'A' did not lead to history's 'B' in the real world.

Thats the hard part about being my age, life is pretty much entirely hypothetical. Unfortunately, the step between theory and real life is a big one.

Read up on the Free Silver Democrats and other populist groups, and the economic conditions that made them so dedicated to getting more cash into the economy (and so popular they came close to taking the White House a couple times.)

Thanks for the suggestion, I will do that.... once I have finished up my homework.

[Mithrandir]

Unfortunately, the step between theory and real life is a big one.

I would expect that could take an entire lifetime. YMMV, though.

[Nate]

Couldn't the government just lie about how much gold we have? I mean it's not like anybody's gonna check right?

[Link Antilles]

Awesome thread. I wish I had the time to write out my thoughts, but that'd go on forever. Maybe we'll talk about it on the next CAA Podcast...

Couldn't the government just lie about how much gold we have? I mean it's not like anybody's gonna check right?

That's why I'm the crazy guy who likes the idea of competing free market currencies. That way the market can decide what fit their needs, as oppose to fitting the needs of the government.

[blkmage]

The Federal Reserve (and the central banks of the primary economies of the industrial world) are separate and autonomous entities from the government. That means that it is not the government that creates or destroys money, but the central banks. The job of the central bank is to manage the economy through adjusting the money supply and interest rates. This distinction is important because the reason why central banks are not controlled by the government is exactly the reason that was mentioned before: the temptation to just create money that will erase the government debt is simply too strong.

Foreign demand for the US dollar has nothing to do with whether the US is well liked or not. Demand for the US dollar has everything to do with demand for US exports. The only way the US dollar's strength can suddenly evaporate because of unpopularity is if the States became so unpopular that no one wanted to buy anything from them. As long as you guys continue to make things that the rest of us wants to buy, you have nothing to worry about. A currency's value is based directly on the exports and imports of that country, not on it's political popularity.

[ClosetOtaku]

News flash: Yesterday, the President proposed reforming the Fed by giving it broad, sweeping powers over economic policy.

For those of you keeping score at home, this is the next step in bringing about an economic downturn that hasn't been seen in the U.S. in almost 80 years.

What you see at work here is a struggle between two powerful monetary philosophies: Keynesian Economics and the Austrian School.

Keynesian economics has believers among many of the political and business elite in the U.S. It adheres to the notion that government must play an active role in manipulating markets and money supply in order to achieve stability.

The Austrian School favors more liberal economic policies, e.g. a "hands off" approach which allows markets to come to equilibrium and recognizes the legitimacy of the "business cycle" of booms and busts as a natural occurence rather than events to be exploited or avoided.

I'm a firm believer that the monetary policies of the last 60 years (and particularly since the start of the Reagan era) that were firmly entrenched in the Keynesian school of thought are about to bear the fruit of hyperinflation, widespread recession and likely depression, and the complete abandonment of the dollar internationally as the currency of choice.

As Murray Rothbard points out in his book America's Great Depression:

"If government wishes to see a depression ended as quickly as possible, and the economy returned to normal propserity, what course should it adopt? The first and clearest injunction is: don't interfere with the market's adjustment process. The more the government interferes to delay the market's adjustment, the longer and more grueling the depression will be, and the more difficult the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure."

This, by the way, was written in 1975.

But we've arrived at what I'll call the Keynesian Paradox: the government has been so complicit in promoting market conditions leading to this disaster that the only sane alternative is more intervention. Almost all economists regardless of philosophy agree that, without the Bear-Stearns bailout, the worldwide economy would have collapsed (and the jury is still out as to whether it will take a nosedive).

This is why we are seeing what is tantamount to a "panic" among the professionals. Fed rates being slashed over the weekend, two days in advance of a scheduled meeting of the governors, is unheard of. Financial maneuverings late at night, press releases at all hours, and now the proposal to eliminate the distinction between thrifts (which have been highly regulated since the S&L crisis) and banks is just one smoking gun that suggests things are spiraling out of control very quickly, albeit behind the curtain.

What can you do? Well, unless you have lots of money in a liquid state and can go about moving it between instruments to take advantage of very high volatility (and get out quickly when your instrument is about to head downard)... the answer is nothing. Like Gandalf at the Bridge of Khazad-dum, "This foe is beyond any of you!" Hang on for the ride, and you might have something to tell your grandchildren about... "Yeah, I was there for the crash of '09"....

[termyt]

I am learning a lot in this thread. Economics is not an area of expertise of mine, so thanks for expaining things so well.

The government does have a role to play, but it should be indirect. As in keeping taxes as low as feasible and spending money appropriately. We do neither very well and we are still among the best in the world at it. The West will likely be doomed by our own inability to use financial resources wisely.

[EricTheFred]

I am learning a lot in this thread. Economics is not an area of expertise of mine, so thanks for expaining things so well.

The government does have a role to play, but it should be indirect. As in keeping taxes as low as feasible and spending money appropriately. We do neither very well and we are still among the best in the world at it. The West will likely be doomed by our own inability to use financial resources wisely.

I know it will be weird after my lecture on floating currency vs. gold standard to hear that I'm a dues-paying Libertarian (this is one of those places where I disagree with most members of my party) but Termyt... you need to check us out. You sound like you would fit right in.

[Technomancer]

Our dollar bill is too expensive to produce as well. That's why the treasure dept keeps trying to get dollar coins going.

Americans are a stubborn lot. Japan has not only 100 yen coins (roughly a dollar) but 500 yen coins (5 bucks) as well. Japan no longer prints bills less than 1000 yen.

The problem is that your government gives people a choice. Instead of simply declaring that the bills will be phased out, they seem to have tried some sort of half and half system that just hasn't worked.

The Europeans aren't quite as far along, but they have a two Euro coin, which right now is worth around three bucks.

As do we (and ours was first!). They nicked our design too.

But we've arrived at what I'll call the Keynesian Paradox: the government has been so complicit in promoting market conditions leading to this disaster that the only sane alternative is more intervention.

The problem is that it wasn't Keynesian policy that created this mess. The US government removed reguations governing the industry and also refused to enforce other laws regarding the same. It wasn't government intervention that brought this mess about]lack[/i].

Second, it would encourage government frugality and honesty. Every year, the government prints more new money, this is part of what causes inflation. In effect, by printing more money to pay off its own debts, our government is stealing a few cents from every dollar in the entire country. We are being taxed by the dilution of our money! If each dollar had actual gold behind it, then the government couldn't print more money than it had gold for. In other words, it would be forced to reduce the amount that it spends and borrows to a more reasonable amount.

This is true, but you've also ignored the flipside, which has a lot to with why the gold standard was abandoned. By not being able to increase the money supply when it is needed, large-scale economic disruptions also occur. Banks can't lend money they don't have, which can reduce economic growth to a snail's pace. Galbraith by the way goes into this matter in his book "A Journey Through Economic Time", and Pierre Berton also discusses the problem of short money supply in his book "The Great Depression". I'd also recommend "The New International Money Game" by Robert Z. Aliber

In that case, all those thousands of pennies you will have been saving out of nostalgia will be worth more melted down and fenced to some scrap-metal collector, and with the proceeds you might even be able to buy a half a loaf of bread.

Reminds me of an anecdote I read about the chaos in Germany. Basically this fellow was paid so many bank notes that he'd had to take home in a wheel barrow. Someone else dumped out his cash and stole the wheel barrow.