Re: The Economy Of Plenty

Keith Elis (
Fri, 19 Sep 1997 04:34:47 -0400

Hal wrote:

> Secondly, there are contracts which explicitly state a value in dollars.
> One example is mortgages. With a mortgage, the lender retains title to
> the property. The mortgage contract states that upon presentation of
> a certain number of dollars, title is transferred. The total value of
> mortgages is approximately equal to the total money supply (unsurprisingly,
> if you understand where money comes from). This then gives backing in
> terms of real property.

You sound so sure of that.

Yes, some fiat tender is backed by real property. But loans in general
need not be granted based upon bank assets. This is why you can
*negotiate* with a bank for a mortgage and recieve a credit card.

Some background:

The whole point of the Federal Reserve's interest rate is to assign a
price to the creation of a dollar. For example, let's say the Fed's
interest rate is 7.0%. You go to the bank for a loan of $10,000. You are
essentially asking that bank, "How much does $10,000 cost? The bank
says, "Okay, $10,000 costs us (multiply by 7.0% and add the product),
$10,700. So for you (given that we must profit from this) we will give
you $10,000 for the low, low price of $10,800 (or at 8% interest -- I

Lower the interest rate and what happens? The price of money is
decreased and more people (given a relatively constant dollar value)
seek loans. This is why I consolidated what little debt I had a few
years ago. To take advantage of the low price of money (much less than
my credit cards).

By lowering the interest rate, the Fed lowers the price of a dollar
which correspondingly increases the demand for a dollar.

But, as banks loan more and more money (to buyers, investors,
entrepreneurs, etc.) the supply of disposable dollars increases. What
does this do? It lowers the value of a dollar -- or more simply, it
causes inflation of prices. Where at one point 1 dollar could buy 1
widget, inflation makes 1 widget cost $1.05 (or whatever).

This is the business cycle. Recession, plateau, expansion, plateau,
recession . . .

It's all controlled by the Fed.

So, my point is, after that annoying review of U.S. econ (which was more
for my own amusement than anyone else's), money is created by way of
bank loans. The process of "creating" money is in no way dependent on a
"standard." Given real property, gold, or comic books, a bank needs
nothing to create money out of thin air (except a charter from the Fed,
or something like that). Interestingly, this is why a bank can offer you
a credit card. True, this is type II money, but it is still money. A
credit card offers people dollars at a very high price, and may have
been a partial cause of inflation within the past two decades.

The short of it is, I'm missing your point about the sum of mortgages
being approximately equal to the money supply.

> > } You need backing with a useful, valuable commodity (or service) in order
> > } for something to be accepted as money (or else the money itself needs to
> > } be useful and valuable, like gold has been historically).
> >
> > Gold was hardly useful or practically valuable itself. Jewelry only
> > goes so far, and chip wires are new and also probably don't go that
> > far. (You can't eat gold.) But everyone believed that everyone else
> > would sell food or iron or blacksmithing for gold, so everyone sold
> > things for gold. Again, the real backing is mutual agreement, or rather
> > faith and habit which may get rationalized as mutual agreement. (Or
> > they may not.)
> The big problem with getting something new accepted as money is
> bootstrapping it. It has to be valuable enough that people will accept
> it even before everyone else will. Gold and other early forms of money
> (beads, etc.) had that property. Fiat notes issued by me, scrawled on
> a scrap of paper, do not.

I disagree. The most important thing to a currency is how easily it can
be counterfeited. Wood chips carved with a big "C" for currency will
never be money. Wood is too common, and a currency based upon it is
prone to easy counterfeit. This is why transmutation was such an
intriguing thing. Wouldn't it be nice to be able to take a lump of lead
and turn it into gold? Not because I like gold at all, but because it
cannot be counterfeited -- gold is gold is gold. When Archimedes figured
out how to determine how much gold composes a certain alloy ("Eureka!")
he changed the world forever. (Okay, for a good long time at least.)
Gold has a specific mass per volume. Mix in other metals and this mass
per volume changes. The short of it is that gold turned out to be
difficult to counterfeit. Even with nanotech one cannot counterfeit gold

My point is that no item will become currency unless it is difficult to
replicate. Who cares if it has value or not? As long as it can represent
value, that's all that matters. I don't see what the hubbub is over
> > I can't see that there's any serious problem with fiat currency except
> > the ability to "print" a lot of it, which seems to be generally accepted
> > as a bad idea these days.
> Yes, historically the number of examples of fiat currency inflation has
> almost been too many to count.
> The bigger problem IMO is that usually any form of competition is
> disallowed. If the fiat currency had to compete with privately issued
> banknotes that would provide needed discipline.
> At one time, casino chips began to be accepted in a small form in Las
> Vegas for purchases. (I think this was largely a promotional effort by
> the casinos, something to be fun for the customers.) This was stopped
> because it violated the currency laws. Similar attempts to set up local
> scrips have also had problems. They may be tolerated on a small scale,
> but if they show signs of spreading they will be halted.

Yes, the power to print currency is reserved to the Fed in the
Constitution. But one must ask, "Why?"

The Fed is inherently conservative in its fiscal policies. What I mean
is that it will try to stay true to historical methods of dealing with
economic woe rather than opt for an untried solution.

Clearly, allowing local scrips is inflationary. Or, at the very least,
creates money where money would not have been. This is of course very,
very bad for central fiscal policy. No matter what the Fed does to
reduce inflation, anyone with poker chips (or the capacity to make poker
chips) may add to the money supply at will.
In short, I'm not surprised they hate new currencies.