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Tom WoodsOn the January 5, 2014 episode of Exposing Faux Capitalism, I provided a two-hour refutation of Tom Woods’ 2013 presentation paper, “Why the Greenbackers are Wrong.

Here are some highlights:

(2) that fiat money is just fine as long as it is issued by the people’s trusty representatives instead of by the Fed
– It’s not fiat money, since it’s being issued into circulation by the 12 privately-owned Federal Reserve Banks
– Misdirection, since the proposal isn’t to have Representatives and Senators issue money, but to have bankers do it through the U.S. Treasury, under the public trust, akin to the successful Bank of North Dakota.

The Fed pays for this purchase by writing a check on itself, out of thin air, and handing it to the primary dealer.
– Not created out of thin air, but instead, by a bookkeeping entry.

For one thing, pieces of paper with politicians’ faces on them are not saleable goods. They have no use value, and therefore could not have emerged from barter as the most marketable goods in society.
– They do, because of the full faith and credit of the government backing them, which is based ultimately upon the productivity of the people, and the exchange between producers (taxpayers and government).

Second, even if government did try to impose a paper money issued from nothing on the people, it could not be used as a medium of exchange or a tool of economic calculation because no one could know what it was worth. Are three Toms worth one apple or seven fur coats? How could anyone know?
Its value is ultimately determined by the market, and even Lew Rockwell said that not only is the USD a medium of exchange, it’s also money.

This is how unbacked paper money comes into existence. It begins as a convertible substitute for a commodity like gold, and then the government takes the gold away.
– What about the first paper money issued by the Mongols, and what about the United States Notes?

“Free-market money, therefore, is commodity money.”
– Says who? Stephen Zarlenga has documented several other ways that money has arisen, and privately-issued, voluntary, usury-free community currencies have been issued that aren’t commodity-based.

So free-market money does not enter the economy as a loan.
– What about the paper notes issued by banks during the Free Banking Era of the United States? Were they not free-market money, just because they were issued by state-chartered banks?

For consistency’s sake, they should support all forms of debt-free money, including money that takes the form of a good voluntarily produced on the market and without any form of monopoly privilege.
– “They do”, as in me (Jason Erb), Anthony Migchels, George Whitehurst-Berry, Wayne Walton, Tom J. Kennedy and others.

Although the “there isn’t enough money to pay the interest” argument fails, I want to take up a related warning about sound money
– Is gold sound money when it dropped from $1700 to $1200 in 2013?

First of all, no one can expect to print pieces of paper with his face on them and spend them into circulation. Nobody would accept them, needless to say, and as we have seen, it is impossible for money to be introduced ex nihilo in this way. The only kind of money that can emerge on the free market is one that, at least at one time, had been considered a useful commodity. Paper money can come into existence on the free market and without coercion if it serves as a redemption claim for the commodity money, but irredeemable paper money cannot originate without government threats or violence.
– Tom Woods flaunts his ignorance of the success of voluntary, usury-free community currencies, such as Ithaca Hours and mtnHours.

Again, as we saw previously, the pattern is this: a commodity is freely chosen by market participants to serve as money, for convenience paper receipts fully convertible into that money begin to circulate as money substitutes, and finally the government removes the commodity backing from the paper and only the paper circulates.
– In other words, gold doesn’t function directly in a wide-spread way as money.

When Franklin Roosevelt confiscated Americans’ gold in 1933 and gave them paper money in exchange, this money did not enter the system “as debt.” It was a simple act of conversion of specie into paper. (Thanks to J.P. Koning for tracking down that link.)
– If it didn’t enter as debt, why were they still referred to as notes?

the naive confidence in the American political class that the Greenbacker alternative demands is beneath the dignity of a free people.
– By that standard, why trust government with any powers? — In this way, the anarcho-capitalist critics of government-issued money have some credibility on this point, unlike the minarchist critics like Gary North, who still call for government regulation of contracts in his illusory free market gold standard that is just as much a fool’s gold standard as any government-guaranteed gold standard.

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American Gold Eagle

The documentary, Fiat Empire, makes the claim:

When you suggest to people that their money should be gold or silver coin, as it says in the Constitution, they sometimes stare at you with a blank expression, or make the most extraordinary comments.

In some cases, those responses are justified, since the Constitution doesn’t say money should be gold or silver coin.

Article I, Section 8 of the Constitution grants Congress the power “To coin Money,” but nowhere is the word “money” defined in the Constitution.

The Coinage Act of 1792 provided for the coining of copper, in addition to gold and silver, and made those coins lawful tender, showing that something other than gold and silver were coined as money by Congress during the era of the Founding Fathers.

Some cite Article I, Section 10 to claim the Constitution says money should be gold or silver coin.

[No State shall] make any Thing but gold and silver Coin a Tender in Payment of Debts;

But that is a restriction on the individual States of what they can make legal tender, and not a requirement that they make gold and silver coin legal tender. In the same section is the restriction which prohibits the States from coining money, so the only money that can be coined by government is by Congress, and includes more than just gold and silver.

For more misconceptions about gold and silver in the Constitution, please read The Constitution doesn’t insist on a gold or silver-backed currency.

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Bust of Aristotle. Marble, Roman copy after a ...

The following quotation on fiat money is attributed to Aristotle, one of the fathers of Western thought, who lived from 384 to 322 BC.

In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings.

However, when I did a Google search for that quotation, it only produced 56 results, none of which cite the book that he allegedly was reported as saying that.

Searching the MIT Internet Classics Archive for any references to the above quotation, and similar variations thereof, turned up no such reference.

When hearing any quotation, such as the one about private banks that is widely attributed to Thomas Jefferson, you should consider whether it is actually authentic.

There are many quotations widely attributed to prominent historical figures that are used to bolster the credibility of various claims, such as the alleged inferiority of fiat currencies. However, if the quotations are inauthentic, then the credibility of the claims based on them has to rest on other criteria.

See my article on the English tally sticks for an example of a successful fiat currency that lasted hundreds of years.

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