Questions & Answer Summary About Money, Public Policy and Informational Issues

Lawrence Parks

February 12, 2001

Question: What is the purpose of money?

Critical comments in italics

Nikolaus K.A. Läufer

The purpose of money is to facilitate the transfer of value over space and time. In other words, we use it to exchange wealth geographically, and to provide for future payment. Without money, which is in effect an intermediate good used for trading, it would become very difficult to have a division of labor, i.e., specialization, and everyone’s standard of living would suffer.

Issue	Commodity money such as gold or silver	Fiat, irredeemable paper ticket-token or electronic-checkbook money (U.S. dollars)
Where does money come from; how does it originate?	Commodity money (a medium of exchange) is an invention of the market; it evolves. Market participants want that which is used for money to have the lowest transaction costs when transferring wealth geographically and over time. If you transfer wealth (keep money) over time you don’t transact, there are no transaction costs. This holds for any kind of money. *If you transfer money from one geographical place to the other it is quite costly to transport metal money, and much cheaper to transport paper money.* The market has determined that gold is the most efficient money, then silver. The reason the market chooses gold-as-money is because it is the commodity for which the buy/sell spread increases the least as ever-greater quantities are offered for sale. Because it takes work to create commodity money, it is said to have “intrinsic value.” The value of commodity money does not derive from the labour input but from the value of the commodity. It is the labour input (to produce further money) that depends on the value of money.	An arbitrary (fiat) invention. It is created out of nothing by banks and central banks and made legal (with legal tender, a.k.a. “forced tender,” laws) by politicians with whom they have colluded. Because it takes no work to create fiat money, it is said to have no “intrinsic value.” With fiat money, there is no limit as to how much can be created, and it always eventually becomes worthless. Politicians are elected even if expected to collude, so what? That paper money eventually becomes worthless is not an instrinsic property of paper money.
How is money defined?	With commodity money, money is defined as a quantity of a commodity. For example, in the United States, the dollar was defined by the Coinage Act of 1792 as 325.25 grains of silver.	There is no definition, i.e., there are no units of measure. This lack of a defined unit of measure, as postulated by then Warden of the Mint Sir Isaac Newton, was enough to preclude the use of fiat money in England in the year 1700 and for almost 230 years thereafter. *The unit of fiat money is defined. If it were not it would not exist and it could not perform its function as a unit of account.*
Is there a limit as to how much money exists?	The amount of money is limited by the costs of producing it. In the case of gold-as-money, those costs include prospecting for, mining, and refining gold. *The use of resources in the production of money is a waste.*	Because fiat money is created without work, there is no limit as to how much can be created. *This limit can rationally be set by monetary policy.*
Why do people accept money in exchange for their goods and services?	People recognize commodity money as something that has “intrinsic value.” The concept of money as a medium of exchange is to facilitate trading wealth for wealth; labor for labor; work for work. This has been true all over the world for all recorded time. *People recognize that fiat money has value in exchange. This is sufficient to make it attractive. The additional intrinsic value is wasted.*	Because of material misrepresentation and nondisclosure about fiat money, people are tricked into accepting and saving it. In democratic societies people have elected governments that introduced fiat money and abolished commodity money. Are people therefore stupid and do they trick themselves? In addition, legal tender laws coerce people to accept it when disputes are adjudicated in the courts. It is an advantage that we are allowed to pay taxes using fiat money instead of commodities made from resources which we may use otherwise. For a short while, during the American Revolution, politicians decreed that any who would not accept the fiat currency of the day (called continentals) as payment for goods and services be treated as enemies of the country and precluded from all trade or intercourse. The U.S. Constitution implicitly disallows the notion of fiat currency in Article I Sections 8 and 10. Should we follow a mining/trading lobbyist in interpreting the US constitution?
Is there an historical moral issue with regard to which kind of money we have?	Commodity money is in conformity with the Eighth Commandment: “Thou Shall Not Steal,” and Leviticus 19:35 & 36, which says that one should not falsify weights and measures. Honesty in business dealings is considered consistent with holiness and with moral law. So is fiat money.	Fiat money violates the Eighth Commandment and the admonition that one should not tamper with weights and measures. Because it is used for future payment, money is said to serve as a store of value. The generation of fiat money, which is produced without work—how much more work is involved in producing a $100 bill as opposed to a $1 dollar bill?—dilutes that which has been saved and that which has been promised for future payment. It is the same as stealing. This is a view that maintains that taxing amounts to theft. Given that the bible does not justify the refusal of tax payments it may be said that the bible supports stealing. So there is something wrong with the bible or the author of the claims we critize. The reader may choose.
Are different types of money indicative of different societal organization?	Commodity money is generally associated with a freer more democratic society. Government needs money to pay for its programs. Commodity money is impossible to create out of nothing. It must be taxed from citizens. If they have the (theoretical) ability to resist high taxation and withhold their money from government, then politicians cannot act unilaterally. *The claimed link between freedom and democracy does not necessarily exist, as has been correctly emphasized by F.A. Hayek when defending e.g. the Pinochet Regime.* The claimed link between commodity money and freedom and democracy is an ideological statement for the correctness of which no proof exists. Inflation is a form of taxation. It can be resisted as any other type of taxation through control of the government by its citizens.	Fiat money is generally associated with a more statist society. If politicians don’t have to consult citizens or tax them directly to fund government programs, such as wars, then politicians can, and do, implement whatever programs they wish. Thus, fiat money is a necessary ingredient for tyranny. Programs can be funded with money created by the banking system. In effect, politicians and banks embezzle the purchasing power of savings. Commodity money does not prevent tyranny and “statist” societies. Tyranny can do without fiat money.
Is there an implication for property rights?	Commodity money protects property and is protected by the notion of private property. *Commodities are not agents. They cannot protect anything.* *The notion of private property protects nothing. It is the law and its enforcement by the state that protects.*	With fiat money, when money is diluted by the creation of additional money out of nothing, the property rights of savers and those who have been promised future payments, such as pensions, are violated. *By its nature fiat money creation does not lead to inflation. If inflation occurs it is the consequence of an act of taxation.* *Is taxation in a democratic and free society a violation of property rights? Independent of the degree (rate) of taxation?* Again, watch the bible.
Is there a connection between the type of money we have and government deficits?	It is difficult to sustain government deficits with commodity money because they would have to be funded by borrowing. Since a commodity money supply cannot arbitrarily be expanded, interest rates would increase if government increased borrowing. Manufacturers and others would then object to higher interest rates, causing government to reduce spending, and thereby causing deficits to decrease. *Would manufacturers object if the deficit is the result of* *a defence effort following a foreign military attack?*	As long as someone, such as the Bank of Japan, the Federal Reserve, or banks, will purchase government securities by creating money out of nothing (called “monetizing debt”), deficits can be funded without greatly increasing interest rates, and deficits can grow without limit (in theory). Eventually, the debts are defaulted. If interest rates do not rise in the medium or long run this is the consequence of there not being inflation. Without inflation money creation is not a tax. Why should anyone object to zero additional taxation?
Is there a connection between taxation levels and the type of money we have?	Commodity money tends to facilitate lower tax rates and less taxation, since citizens see how much is being extracted from them. The amount of taxation is determined by the amount of public consumption and not by the type of money. There is no evidence that the type of money determines the amount of public consumption.	As fiat money is created out of nothing, there tends to be inflation and ordinary working people are pushed into higher tax brackets. People pay a larger percentage of their income to taxes. *If this were true then inflation would stop. Because the higher taxation would eliminate the need to finance public expenditure by creating money.*
How does the type of money we have affect real wages?	With commodity money, real wages tend to increase, as does the standard of living. This is pure ideology or worse.	With fiat money, real wages tend either to stagnate or decrease, as does the standard of living. *False. See the historical experiences.*
How does the type of money we have affect long-term interest rates?	With commodity money, interest rates have historically been about 3½ percent; just equal to the time-value of money. There is good data from Great Britain going back almost 200 years attesting to this. Whatever the historical rate of interest, in equlibirum it can never deviate from the time value of money.	With fiat money, interest rates include not only the time-value of money but also an additional increment—the so-called “inflation premium”—to compensate for the loss of purchasing power due to the actual and expected creation of additional money. Interest rates are much higher than with commodity money. It is necessary to distinguish between the nominal and the real rate of interest. (See I. Fisher). If the nominal rate rises with the rate of inflation then this implies protection of the property of the lender. (Thus fiat money systems protect property by adjusting the nominal interest rate when inflation occurs.) Damage would result if the nominal interest rate did not rise. *If the nominal rate did not rise then real rates would fall.* *Since it is the real rate that matters for investment, growth, standard of livings etc. a constant or a falling real rate of interest is clearly not doing harm.*
What effect does the type of money have on long-term investments?	Since people have confidence in the stability of the medium of exchange in which they expect to earn a return on investment, there is a much longer investment-time-horizon, and much more long-term investment. *Commodity money does not imply stability as the deflationary period of the 19. century shows.* *The investment horizon is determined by the real rate of interest. There is no proof (historical or otherwise) that a commodity money system reduces the real rate of interest.* *Substitution of ideology for proof is not acceptable.*	With fiat money, there is a much shorter investment-time-horizon (sometimes no long-term investments at all, e.g., as in Mexico, Brazil) because few productive enterprises can earn enough profit to compensate for the loss of purchasing power resulting from money creation. Real investments are known to be the best protection against inflation. Why should then a loss of protection result from inflation and reduce investment? A commodity money does not ensure that “many” enterprises can earn profit from investment.
Is there a connection between the type of money we have and economic growth?	Commodity money facilitates real growth by investing savings, thereby causing increases in physical and intellectual capital. So does a fiat money. It is the moneyness of money that does it.	Fiat money results in nominal growth and less real growth. Eventually real growth and real earnings decrease. Capital is destroyed and there tends to be less replenishment of physical and intellectual capital. Fiat money does not imply higher inflation. *True, eventually real growth and real earnings decrease (see the Bible about the end of the world) but quite independently of the monetary system.*
How does the type of money affect price levels?	As productivity increases, prices tend to decrease, thereby resulting in more goods for more people at lower prices. This is what an increasing standard of living means. Standards of living increase also under fiat money and not less so than under commodity money.	Prices tend to increase or, at best, remain stable. In all cases, inflation eventually results because the financial sector overreaches and because politicians inevitably become avaricious for additional funds. The financial sector and politicians are not selected by the monetary system but by the consumers and the electorate.
How does the type of money affect the propensity to save?	Commodity money is very savable because it doesn’t obsolesce or deteriorate and is difficult to counterfeit. Purchasing power is not diminished. *Historically false. Commodity money has frequently been* *debased/falsified by lowering the degree of fineness of coins.*	Fiat money is less savable and can discourage long-term savings altogether, since its future value is always in doubt. Why save a depreciating asset? *Inflation is not a necessary outcome of fiat money. In addition,* *the rate of inflation does not affect the rate of savings but the form of savings.*
How is job security affected by the type of money we have?	With commodity money, job security is impacted mostly by increases in productivity, which tends to destroy some jobs and create others. Decreasing prices help offset the negative effects associated with the destruction of jobs resulting from productivity (labor saving) improvements. Relative price movements are not a monopoly of a commodity money system.	With fiat money, job security is impacted by rapidly changing interest and foreign exchange rates, and less of a propensity to save and invest for the long term. Shocks to interest rates and exchange rates also occur under a commodity money system.
Number of manufacturing jobs.	Since there is more investment in productive ventures with commodity money, there are more and higher-paying jobs than otherwise. Because manufacturing is investment intensive, there are also more manufacturing jobs. *Industrialization is not limited to commodity money systems.*	Since there is less investment in long-term productive enterprise, there are fewer and lower-paying jobs in countries with fiat currencies. This is because fiat currencies cause higher interest rates and a shorter investment-time-horizon, causing a decrease in manufacturing activity. Generally, there is an increase in the so-called service sector because it has a much shorter investment-time-horizon. There are no empirical proofs for the stated claims. Since the difference between nominal and real interest rates is again neglected as before, the claims result from confusion.
Research & Development and Science Education.	Because commodity money has a lower interest rate structure and a longer investment-time-horizon, there tends to be more long-term investment. Research and development tend to be a long-term activities. Thus, commodity money results in more scientific activity and the need for more science education. *Since the interest rate premise of this claim is not proven, the claims do not follow.*	Because fiat currency results in a higher interest rate structure and a shorter investment-time-horizon, there tends to be less long-term investment. If interest rates are high enough, as in Mexico or Brazil, there may be no long-term investment at all and little research and development, and less demand for science education. The different economic structures of Mexiko/Brazil and the US cannot be explained by the fiat monetary system which they both have.
Interest rate volatility and foreign exchange volatility.	Virtually none. *Historically false.*	With fiat money, there is inherent high volatility, which tends to be hedged by derivatives, and which adds additional cost to financing. People in the financial sector benefit. Workers, manufacturers, entrepreneurs and consumers pay the cost. *There is nothing” inherent” in fiat money. In addition:* volatility cannot be eliminated by derivatives. It is the distribution of risks over the economic agents that can be affected by derivatives. Derivatives are costly but these costs are overcompensated by an improvement in the efficiency of risk distribution.
Levels of debt.	Because with commodity money prices tend to decrease, it becomes harder to service and pay down debt, and debt is discouraged. *There is no necessity that commodity money is deflationary.* *One should avoid the generalization of particular historical experiences as that of the last third of the 19^th century. The history is full of other experiences.*	Because debt gets serviced and repaid with cheaper money, increases in debt are encouraged. This also works to decrease the purchasing power of savings and future payments, the majority of which constitute pension funds. Today, worldwide government debt is in excess of $13 trillion. Investors are not stupid. They require compensation for inflation if it is to be expected. The size of the government debt indicates nothing except that there is debt of the stated size. (You have to relate this number to other numbers in order to make it meaningful.)
Boom & bust in the economy.	Without fractional reserve lending (leverage), a.k.a. the creation of “bank money” by banks, economic activity expands without busts. With increasing amounts fractional reserve lending, there are periodic booms and busts. A bust results when marginal credit that cannot be serviced is liquidated. The elimination of fractional reserve banking is not restricted to commodity money systems. It is also possible in fiat money systems. In recent times, commodity money systems came along with fractional reserve banking.	Fiat money tends to create huge bubbles, which, when they collapse––and they always collapse––lead to extended depressions and severe hardship, especially for ordinary working people and seniors. *The occurance of bubbles is not a monopoly of the fiat money system.*
Effect on the banking system.	The role of bankers is limited to: (1) storing money for safekeeping; (2) acting as intermediaries between savers and credit-worthy borrowers; and (3) facilitating the payments transfer system. Since interest and foreign exchange volatility do not disappear in a commodity money system bankers would do a service to the community if they were allowed to sell hedge instruments and the like.	Bankers have a greatly expanded role: they sell instruments to hedge interest rate and foreign exchange volatility; and they create fiat money (in the form of credit) for which they get the interest and fees. In effect, banks’ traditional role as intermediaries between savers and borrowers decrease, and the banks become the equivalent of hedge funds whose downside is guaranteed and subsidized by ordinary working people. The euphemisms for these guarantees are called the “lender of last resort” bailout facility at the Federal Reserve, and so-called Federal Deposit Insurance, which is not insurance. The lender of the last resort is necessary to prepare for the danger of a run on the banking system. If a commodity money would benefit from the conveniences of using paper instead of heavy metal then there would also exist the danger of runs on banks.
Likelihood, duration, and size of wars.	Wars cost money. Since the only sources of revenues with commodity money are taxes—which people tend to resist—or borrowing—which drives up interest rates—there tend to be fewer and smaller wars. For example, it is less likely that the U.S. would have fought in Vietnam if President Johnson had to finance the war with taxes. Wars have to be paid. Since inflation is also a tax, there is no alternative to taxes. Except if you win the war and make the loosers pay. It is hard to believe that the US would have been less anticommunist if they lived under a commodity money system.	Fiat currency enables politicians to generate revenues with less accountability. They are then able to act without the consent of the citizenry, which, if consulted, would probably allocate their savings differently. Thus, politicians have a freer hand to engage in military adventurism, and they do. Have we had less wars in times of commodity money? Was is not the commodity gold that made Spain and other countries invade America? Who can exclude the following scenario: “We(the US) need your gold for our monetary system while you (the rest of the world) just leave it unused in your “temples”. We shall have to use force if you don’t let us have what we obviously need more urgently than you do.”
Effect on military preparedness and the ability to wage war if need be.	A stronger industrial base makes for a stronger military. Also, lower interest rates, which are a by-product of commodity money, make for a greater capacity to finance a war. This old economy thinking is undervalueing services. *Instead of using axes you might develop software for robot fighters.* *The capacity to finance (savings volume) determines the rate of interest and not the other way around.*	A weaker military due to a weaker industrial base. Since interest rates are higher, there is less of a capacity to finance a war. *Why should the real rate of interest be higher in a fiat money economy?*
Social mobility: the ability to improve one’s lot in society.	High. How do you know except by arbitrary assumption?	Less to none. Because improving one’s lot requires the accumulation of wealth, and because it is not economic to save fiat currency, the poor tend to stay poor. Fiat money is not the only store of value.
Social engineering (the redistribution of wealth).	Hard to do because it must be done with taxation and people tend to oppose higher taxes. They take a greater interest in where money is spent when it is their own. Why should they oppose taxes less in a fiat money system?	Easier to do by creating money out of nothing and “spending” it, lending it, or guaranteeing loans (where it is known in advance that such guarantees can be met by creating additional money). Contrary to popular opinion, most of wealth redistribution is from the poor to the rich. *The fiat money system does not require the hard work of mining men to produce what can be done by easy printing.* *In a fiat money system there is a great saving of resources which can better be used otherwise.*
Who gets the wealth of society?	The people who earn it: workers, entrepreneurs, and the producers of goods and services sold in the market in voluntary transactions. Have you “earned” the mines that were discovered on the earth of your forefathers?	An inordinate amount of wealth is transferred from those who produce it to banks and financial intermediaries. Large credit-worthy borrowers benefit. Also, politicians tend to profit along with people who are direct beneficiaries of government largesse. The size of government is not a consequence of the monetary system but of the choice of the electorate. Or is it paper money that turns people into fools?
Special privileges for banks and other financial players.	None. Sure, the profits of the mining companies are not privileges. They are “earned”, even if “stolen” from the “Indians”.	Because of the instability of fiat-based monetary regimes, to “protect” the efficacy of the payment transfer systems, there is a need for a “safety net” for the financial sector. This “safety net,” as Chairman Greenspan has pointed out, is a subsidy to the financial sector. It constitutes wealth transfer from ordinary taxpayers to the financial sector. While regulators are charged with monitoring the financial sector to reduce or make less likely massive wealth transfer, the financial sector has a history of compromising politicians who are nominally in charge of the regulators. At the end of the day, in all cases, regulation fails and the system collapses. Weeding out corruption by introducing commodity money. My god, how stupid do you think your reader’s are?

Issue

Commodity money such as gold or silver

Fiat, irredeemable paper ticket-token or electronic-checkbook money (U.S. dollars)

Where does money come from; how does it originate?

Commodity money (a medium of exchange) is an invention of the market; it evolves. Market participants want that which is used for money to have the lowest transaction costs when transferring wealth geographically and over time.

If you transfer wealth (keep money) over time you don’t transact, there are no transaction costs. This holds for any kind of money.

If you transfer money from one geographical place to the other it is quite costly to transport metal money, and much cheaper to transport paper money.

The market has determined that gold is the most efficient money, then silver. The reason the market chooses gold-as-money is because it is the commodity for which the buy/sell spread increases the least as ever-greater quantities are offered for sale. Because it takes work to create commodity money, it is said to have “intrinsic value.”

The value of commodity money does not derive from the labour input but from the value of the commodity. It is the labour input (to produce further money) that depends on the value of money.

An arbitrary (fiat) invention. It is created out of nothing by banks and central banks and made legal (with legal tender, a.k.a. “forced tender,” laws) by politicians with whom they have colluded. Because it takes no work to create fiat money, it is said to have no “intrinsic value.” With fiat money, there is no limit as to how much can be created, and it always eventually becomes worthless.

Politicians are elected even if expected to collude, so what?

That paper money eventually becomes worthless is not an instrinsic property of paper money.

How is money defined?

With commodity money, money is defined as a quantity of a commodity. For example, in the United States, the dollar was defined by the Coinage Act of 1792 as 325.25 grains of silver.

There is no definition, i.e., there are no units of measure. This lack of a defined unit of measure, as postulated by then Warden of the Mint Sir Isaac Newton, was enough to preclude the use of fiat money in England in the year 1700 and for almost 230 years thereafter.

The unit of fiat money is defined. If it were not it would not exist and it could not perform its function as a unit of account.

Is there a limit as to how much money exists?

The amount of money is limited by the costs of producing it. In the case of gold-as-money, those costs include prospecting for, mining, and refining gold.

The use of resources in the production of money is a waste.

Because fiat money is created without work, there is no limit as to how much can be created.

This limit can rationally be set by monetary policy.

Why do people accept money in exchange for their goods and services?

People recognize commodity money as something that has “intrinsic value.” The concept of money as a medium of exchange is to facilitate trading wealth for wealth; labor for labor; work for work. This has been true all over the world for all recorded time.

People recognize that fiat money has value in exchange. This is sufficient to make it attractive. The additional intrinsic value is wasted.

Because of material misrepresentation and nondisclosure about fiat money, people are tricked into accepting and saving it.

In democratic societies people have elected governments that introduced fiat money and abolished commodity money. Are people therefore stupid and do they trick themselves?

In addition, legal tender laws coerce people to accept it when disputes are adjudicated in the courts.

It is an advantage that we are allowed to pay taxes using fiat money instead of commodities made from resources which we may use otherwise.

For a short while, during the American Revolution, politicians decreed that any who would not accept the fiat currency of the day (called continentals) as payment for goods and services be treated as enemies of the country and precluded from all trade or intercourse. The U.S. Constitution implicitly disallows the notion of fiat currency in Article I Sections 8 and 10.

Should we follow a mining/trading lobbyist in interpreting the US constitution?

Is there an historical moral issue with regard to which kind of money we have?

Commodity money is in conformity with the Eighth Commandment: “Thou Shall Not Steal,” and Leviticus 19:35 & 36, which says that one should not falsify weights and measures. Honesty in business dealings is considered consistent with holiness and with moral law.

So is fiat money.

Fiat money violates the Eighth Commandment and the admonition that one should not tamper with weights and measures. Because it is used for future payment, money is said to serve as a store of value. The generation of fiat money, which is produced without work—how much more work is involved in producing a $100 bill as opposed to a $1 dollar bill?—dilutes that which has been saved and that which has been promised for future payment. It is the same as stealing.

This is a view that maintains that taxing amounts to theft. Given that the bible does not justify the refusal of tax payments it may be said that the bible supports stealing. So there is something wrong with the bible or the author of the claims we critize. The reader may choose.

Are different types of money indicative of different societal organization?

Commodity money is generally associated with a freer more democratic society. Government needs money to pay for its programs. Commodity money is impossible to create out of nothing. It must be taxed from citizens. If they have the (theoretical) ability to resist high taxation and withhold their money from government, then politicians cannot act unilaterally.

The claimed link between freedom and democracy does not necessarily exist, as has been correctly emphasized by F.A. Hayek when defending e.g. the Pinochet Regime.

The claimed link between commodity money and freedom and democracy is an ideological statement for the correctness of which no proof exists.

Inflation is a form of taxation. It can be resisted as any other type of taxation through control of the government by its citizens.

Fiat money is generally associated with a more statist society. If politicians don’t have to consult citizens or tax them directly to fund government programs, such as wars, then politicians can, and do, implement whatever programs they wish. Thus, fiat money is a necessary ingredient for tyranny. Programs can be funded with money created by the banking system. In effect, politicians and banks embezzle the purchasing power of savings.

Commodity money does not prevent tyranny and “statist” societies. Tyranny can do without fiat money.

Is there an implication for property rights?

Commodity money protects property and is protected by the notion of private property.

Commodities are not agents. They cannot protect anything.

The notion of private property protects nothing. It is the law and its enforcement by the state that protects.

With fiat money, when money is diluted by the creation of additional money out of nothing, the property rights of savers and those who have been promised future payments, such as pensions, are violated.

By its nature fiat money creation does not lead to inflation. If inflation occurs it is the consequence of an act of taxation.

Is taxation in a democratic and free society a violation of property rights? Independent of the degree (rate) of taxation?

Again, watch the bible.

Is there a connection between the type of money we have and government deficits?

It is difficult to sustain government deficits with commodity money because they would have to be funded by borrowing. Since a commodity money supply cannot arbitrarily be expanded, interest rates would increase if government increased borrowing. Manufacturers and others would then object to higher interest rates, causing government to reduce spending, and thereby causing deficits to decrease.

Would manufacturers object if the deficit is the result of

a defence effort following a foreign military attack?

As long as someone, such as the Bank of Japan, the Federal Reserve, or banks, will purchase government securities by creating money out of nothing (called “monetizing debt”), deficits can be funded without greatly increasing interest rates, and deficits can grow without limit (in theory). Eventually, the debts are defaulted.

If interest rates do not rise in the medium or long run this is the consequence of there not being inflation. Without inflation money creation is not a tax. Why should anyone object to zero additional taxation?

Is there a connection between taxation levels and the type of money we have?

Commodity money tends to facilitate lower tax rates and less taxation, since citizens see how much is being extracted from them.

The amount of taxation is determined by the amount of public consumption and not by the type of money. There is no evidence that the type of money determines the amount of public consumption.

As fiat money is created out of nothing, there tends to be inflation and ordinary working people are pushed into higher tax brackets. People pay a larger percentage of their income to taxes.

If this were true then inflation would stop. Because the higher taxation would eliminate the need to finance public expenditure by creating money.

How does the type of money we have affect real wages?

With commodity money, real wages tend to increase, as does the standard of living.

This is pure ideology or worse.

With fiat money, real wages tend either to stagnate or decrease, as does the standard of living.

False. See the historical experiences.

How does the type of money we have affect long-term interest rates?

With commodity money, interest rates have historically been about 3½ percent; just equal to the time-value of money. There is good data from Great Britain going back almost 200 years attesting to this.

Whatever the historical rate of interest, in equlibirum it can never deviate from the time value of money.

With fiat money, interest rates include not only the time-value of money but also an additional increment—the so-called “inflation premium”—to compensate for the loss of purchasing power due to the actual and expected creation of additional money. Interest rates are much higher than with commodity money.

It is necessary to distinguish between the nominal and the real rate of interest. (See I. Fisher). If the nominal rate rises with the rate of inflation then this implies protection of the property of the lender. (Thus fiat money systems protect property by adjusting the nominal interest rate when inflation occurs.) Damage would result if the nominal interest rate did not rise.

If the nominal rate did not rise then real rates would fall.

Since it is the real rate that matters for investment, growth, standard of livings etc. a constant or a falling real rate of interest is clearly not doing harm.

What effect does the type of money have on long-term investments?

Since people have confidence in the stability of the medium of exchange in which they expect to earn a return on investment, there is a much longer investment-time-horizon, and much more long-term investment.

Commodity money does not imply stability as the deflationary period of the 19. century shows.

The investment horizon is determined by the real rate of interest. There is no proof (historical or otherwise) that a commodity money system reduces the real rate of interest.

Substitution of ideology for proof is not acceptable.

With fiat money, there is a much shorter investment-time-horizon (sometimes no long-term investments at all, e.g., as in Mexico, Brazil) because few productive enterprises can earn enough profit to compensate for the loss of purchasing power resulting from money creation.

Real investments are known to be the best protection against inflation. Why should then a loss of protection result from inflation and reduce investment? A commodity money does not ensure that “many” enterprises can earn profit from investment.

Is there a connection between the type of money we have and economic growth?

Commodity money facilitates real growth by investing savings, thereby causing increases in physical and intellectual capital.

So does a fiat money. It is the moneyness of money that does it.

Fiat money results in nominal growth and less real growth. Eventually real growth and real earnings decrease. Capital is destroyed and there tends to be less replenishment of physical and intellectual capital.

Fiat money does not imply higher inflation.

True, eventually real growth and real earnings decrease (see the Bible about the end of the world) but quite independently of the monetary system.

How does the type of money affect price levels?

As productivity increases, prices tend to decrease, thereby resulting in more goods for more people at lower prices. This is what an increasing standard of living means.

Standards of living increase also under fiat money and not less so than under commodity money.

Prices tend to increase or, at best, remain stable. In all cases, inflation eventually results because the financial sector overreaches and because politicians inevitably become avaricious for additional funds.

The financial sector and politicians are not selected by the monetary system but by the consumers and the electorate.

How does the type of money affect the propensity to save?

Commodity money is very savable because it doesn’t obsolesce or deteriorate and is difficult to counterfeit. Purchasing power is not diminished.

Historically false. Commodity money has frequently been

debased/falsified by lowering the degree of fineness of coins.

Fiat money is less savable and can discourage long-term savings altogether, since its future value is always in doubt. Why save a depreciating asset?

Inflation is not a necessary outcome of fiat money. In addition,

the rate of inflation does not affect the rate of savings but the form of savings.

How is job security affected by the type of money we have?

With commodity money, job security is impacted mostly by increases in productivity, which tends to destroy some jobs and create others. Decreasing prices help offset the negative effects associated with the destruction of jobs resulting from productivity (labor saving) improvements.

Relative price movements are not a monopoly of a commodity money system.

With fiat money, job security is impacted by rapidly changing interest and foreign exchange rates, and less of a propensity to save and invest for the long term.

Shocks to interest rates and exchange rates also occur under a commodity money system.

Number of manufacturing jobs.

Since there is more investment in productive ventures with commodity money, there are more and higher-paying jobs than otherwise. Because manufacturing is investment intensive, there are also more manufacturing jobs.

Industrialization is not limited to commodity money systems.

Since there is less investment in long-term productive enterprise, there are fewer and lower-paying jobs in countries with fiat currencies. This is because fiat currencies cause higher interest rates and a shorter investment-time-horizon, causing a decrease in manufacturing activity. Generally, there is an increase in the so-called service sector because it has a much shorter investment-time-horizon.

There are no empirical proofs for the stated claims. Since the difference between nominal and real interest rates is again neglected as before, the claims result from confusion.

Research & Development and Science Education.

Because commodity money has a lower interest rate structure and a longer investment-time-horizon, there tends to be more long-term investment. Research and development tend to be a long-term activities. Thus, commodity money results in more scientific activity and the need for more science education.

Since the interest rate premise of this claim is not proven, the claims do not follow.

Because fiat currency results in a higher interest rate structure and a shorter investment-time-horizon, there tends to be less long-term investment. If interest rates are high enough, as in Mexico or Brazil, there may be no long-term investment at all and little research and development, and less demand for science education.

The different economic structures of Mexiko/Brazil and the US cannot be explained by the fiat monetary system which they both have.

Interest rate volatility and foreign exchange volatility.

Virtually none.

Historically false.

With fiat money, there is inherent high volatility, which tends to be hedged by derivatives, and which adds additional cost to financing. People in the financial sector benefit. Workers, manufacturers, entrepreneurs and consumers pay the cost.

There is nothing” inherent” in fiat money. In addition:

volatility cannot be eliminated by derivatives. It is the distribution of risks over the economic agents that can be affected by derivatives. Derivatives are costly but these costs are overcompensated by an improvement in the efficiency of risk distribution.

Levels of debt.

Because with commodity money prices tend to decrease, it becomes harder to service and pay down debt, and debt is discouraged.

There is no necessity that commodity money is deflationary.

One should avoid the generalization of particular historical experiences as that of the last third of the 19^th century. The history is full of other experiences.

Because debt gets serviced and repaid with cheaper money, increases in debt are encouraged. This also works to decrease the purchasing power of savings and future payments, the majority of which constitute pension funds. Today, worldwide government debt is in excess of $13 trillion.

Investors are not stupid. They require compensation for inflation if it is to be expected. The size of the government debt indicates nothing except that there is debt of the stated size. (You have to relate this number to other numbers in order to make it meaningful.)

Boom & bust in the economy.

Without fractional reserve lending (leverage), a.k.a. the creation of “bank money” by banks, economic activity expands without busts. With increasing amounts fractional reserve lending, there are periodic booms and busts. A bust results when marginal credit that cannot be serviced is liquidated.

The elimination of fractional reserve banking is not restricted to commodity money systems. It is also possible in fiat money systems. In recent times, commodity money systems came along with fractional reserve banking.

Fiat money tends to create huge bubbles, which, when they collapse––and they always collapse––lead to extended depressions and severe hardship, especially for ordinary working people and seniors.

The occurance of bubbles is not a monopoly of the fiat money system.

Effect on the banking system.

The role of bankers is limited to: (1) storing money for safekeeping; (2) acting as intermediaries between savers and credit-worthy borrowers; and (3) facilitating the payments transfer system.

Since interest and foreign exchange volatility do not disappear in a commodity money system bankers would do a service to the community if they were allowed to sell hedge instruments and the like.

Bankers have a greatly expanded role: they sell instruments to hedge interest rate and foreign exchange volatility; and they create fiat money (in the form of credit) for which they get the interest and fees. In effect, banks’ traditional role as intermediaries between savers and borrowers decrease, and the banks become the equivalent of hedge funds whose downside is guaranteed and subsidized by ordinary working people. The euphemisms for these guarantees are called the “lender of last resort” bailout facility at the Federal Reserve, and so-called Federal Deposit Insurance, which is not insurance.

The lender of the last resort is necessary to prepare for the danger of a run on the banking system. If a commodity money would benefit from the conveniences of using paper instead of heavy metal then there would also exist the danger of runs on banks.

Likelihood, duration, and size of wars.

Wars cost money. Since the only sources of revenues with commodity money are taxes—which people tend to resist—or borrowing—which drives up interest rates—there tend to be fewer and smaller wars. For example, it is less likely that the U.S. would have fought in Vietnam if President Johnson had to finance the war with taxes.

Wars have to be paid. Since inflation is also a tax, there is no alternative to taxes. Except if you win the war and make the loosers pay. It is hard to believe that the US would have been less anticommunist if they lived under a commodity money system.

Fiat currency enables politicians to generate revenues with less accountability. They are then able to act without the consent of the citizenry, which, if consulted, would probably allocate their savings differently. Thus, politicians have a freer hand to engage in military adventurism, and they do.

Have we had less wars in times of commodity money? Was is not the commodity gold that made Spain and other countries invade America? Who can exclude the following scenario: “We(the US) need your gold for our monetary system while you (the rest of the world) just leave it unused in your “temples”. We shall have to use force if you don’t let us have what we obviously need more urgently than you do.”

Effect on military preparedness and the ability to wage war if need be.

A stronger industrial base makes for a stronger military. Also, lower interest rates, which are a by-product of commodity money, make for a greater capacity to finance a war.

This old economy thinking is undervalueing services.

Instead of using axes you might develop software for robot fighters.

The capacity to finance (savings volume) determines the rate of interest and not the other way around.

A weaker military due to a weaker industrial base. Since interest rates are higher, there is less of a capacity to finance a war.

Why should the real rate of interest be higher in a fiat money economy?

Social mobility: the ability to improve one’s lot in society.

High.

How do you know except by arbitrary assumption?

Less to none. Because improving one’s lot requires the accumulation of wealth, and because it is not economic to save fiat currency, the poor tend to stay poor.

Fiat money is not the only store of value.

Social engineering (the redistribution of wealth).

Hard to do because it must be done with taxation and people tend to oppose higher taxes. They take a greater interest in where money is spent when it is their own.

Why should they oppose taxes less in a fiat money system?

Easier to do by creating money out of nothing and “spending” it, lending it, or guaranteeing loans (where it is known in advance that such guarantees can be met by creating additional money). Contrary to popular opinion, most of wealth redistribution is from the poor to the rich.

The fiat money system does not require the hard work of mining men to produce what can be done by easy printing.

In a fiat money system there is a great saving of resources which can better be used otherwise.

Who gets the wealth of society?

The people who earn it: workers, entrepreneurs, and the producers of goods and services sold in the market in voluntary transactions.

Have you “earned” the mines that were discovered on the earth of your forefathers?

An inordinate amount of wealth is transferred from those who produce it to banks and financial intermediaries. Large credit-worthy borrowers benefit. Also, politicians tend to profit along with people who are direct beneficiaries of government largesse.

The size of government is not a consequence of the monetary system but of the choice of the electorate. Or is it paper money that turns people into fools?

Special privileges for banks and other financial players.

None.

Sure, the profits of the mining companies are not privileges. They are “earned”, even if “stolen” from the “Indians”.

Because of the instability of fiat-based monetary regimes, to “protect” the efficacy of the payment transfer systems, there is a need for a “safety net” for the financial sector. This “safety net,” as Chairman Greenspan has pointed out, is a subsidy to the financial sector. It constitutes wealth transfer from ordinary taxpayers to the financial sector. While regulators are charged with monitoring the financial sector to reduce or make less likely massive wealth transfer, the financial sector has a history of compromising politicians who are nominally in charge of the regulators. At the end of the day, in all cases, regulation fails and the system collapses.

Weeding out corruption by introducing commodity money.

My god, how stupid do you think your reader’s are?

CONTACT INFORMATION

Larry Parks, Executive Director

FAME,501(c)(3)

Box 625, FDR Station,

New York, NY 10150-0625

Phone:212-818-1206

Fax: 212-754-6543

Lparks@FAME.ORG