From: Mike Lorrey (mlorrey@yahoo.com)
Date: Mon Jul 07 2003 - 18:21:43 MDT
--- Lee Corbin <lcorbin@tsoft.com> wrote:
> Dossy writes
>
> > > 1. when should government print money
> >
> > When it needs more new money, of course.
>
> How perfectly awful of you to say that!
>
> > I don't know much about this printing of money business. I hear it
> > devalues the currency ... which might be good if your currency is
> strong
> > and obviously bad if your currency is weak.
>
> Printing more money definitely devalues the currency,
> and, by itself, is quite destructive. It's an implicit
> cheat against anyone holding the money, and punishes
> especially the prudent.
>
> But when an economy really is expanding---due to the
> very miracle I like to discuss---then the printers
> whip up some more money and lend it to the banks, who
> lend it to their customers. (And in times of contraction,
> this same money vanishes in the exact reverse process.)
Most money today is not printed. Most money is in electronic form,
numbers on a balance sheet in the fractional reserve system. Only a
small fraction of the money supply is actually printed Federal Reserve
Notes. The Fed decides, via instruments like the reserve ratio and
short term interest rates, how to regulate the money supply. The money
supply is supposed to reflect the value of the economy as a whole, a
large part of which relies on what is called the velocity of money,
i.e. how quickly money changes hands. An economy where a dollar changes
hands three times a day is three times bigger than one where the same
dollar only changes hands once a day.
When consumer sentiment (since most of the economy is based on
consumption) gets insecure and fearful, the velocity of money decreases
and the money supply therefore contracts. The fed can try to compensate
for this by making the cost of money less (reducing interest rates) and
reducing the reserve rate, i.e. the fraction of money that banks must
keep in reserve. If they have to keep a smaller fraction in reserve,
they can lend a proportionately larger multiple out in loans. When
consumer sentiment surges upward, the fed can do the reverse to
constrain any 'irrational exhuberance'.
I've recently run into an organization called NORFED that issues money
based on a silver standard and which is pretty widely accepted in some
parts of the US (Mostly agricultural areas, which will be understood
later). These people want to do away with the federal reserve system
and restore the use of a metal based currency. It is essentially a
populist agricultural movement, as indicated by its favor of a silver
standard, because back when we used gold and silver money, the farmers
got wealthier when silver was favored by exchange rates, and got poorer
when gold was favored (good gold rates made the bankers wealthier). You
might recall William Jennings Bryan's presidential election speech
where he famously said,"You shall not crucify man on a cross of gold."
Metal based currencies are fine for nations which are predominantly
agriculturally based. When your wealth is tied up in crops and herds
that can be wiped out by weather and disease, in land whose topsoil can
be blown away by wind and flood, it is of paramount importance to keep
your savings in assets that are tangible and not easily destroyed, and
don't have much consumptive value beyond this. Gold and silver have no
technological use in an agricultural economy. Their value is only in
their scarcity and permanance.
However, when you have a broad, technologically based economy, metals
become consumed commodities, while the value of the economy is invested
in the means of production which are not so easily destroyed:
factories, tools, machines, roads, bridges, rail lines, communications
networks, computers, software, and knowledge. In such an economy,
basing your money supply entirely on one or two very narrow commodities
is the height of folly. Better to base your money on the value of the
entirety of that economy. This is what the fractional reserve system
does, because most assets are mortgaged in some way, in either public
or private debt, to a banking institution somewhere in the country.
The mortgaged assets are the real 'reserve'. The economic activity they
produce is the real money supply. The Federal reserve is all of the
assets of the federal government: its buildings, bases, and lands. The
gold in Fort Knox is a very minor asset in the whole panoply of federal
assets. Most of the federal governments assets are the land it owns 'in
trust': national parks and forests, BLM and Interior controlled lands.
When the federal reserve issues loans of 'money' to banks, or when it
prints money up, it is using these federal assets as collateral.
=====
Mike Lorrey
"Live Free or Die, Death is not the Worst of Evils."
- Gen. John Stark
Blog: Sado-Mikeyism: http://mikeysoft.zblogger.com
Flight sims: http://www.x-plane.org/users/greendragon/
Pro-tech freedom discussion:
http://groups.yahoo.com/group/exi-freedom
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