Full Money Market

Archive for the ‘fiat currencies’ Category

It leads to hyperinflation every time. How fast just depends on how fast they run the printing press. In order to keep a fiat monetary system running, the money supply has to be continually expanded to cover payed back loans, in addition to the interest.

What are some examples of fiat currencies that have lasted longer than a human life span?

Go back to past and print money in gold coins demonetizing all currencies then the legal tender would be gold; we can justify slavery too subjugating Africa.

(yes I know how to spell atheist, but yahoo likes to delete any question with atheist in the title.)

Fiat means "faith based" so how do you feel about your money being backed by nothing but faith, not even gold!

Crazy huh?

which countries today have fiat currencies? is the sterling (uk currency) a fiat currency or is it based on gold or something?

In economics, fiat currency or fiat money is money backed by government demand for it as legal tender in payment of legal liabilities, such as taxes. It is often associated with paper money because legal liabilities are created and settled by documents which are usually paper. Without government demand for certain kinds of paper as legal tender, such as bank notes, only specie is unlimited legal tender. However this is not universally true, as some currencies, (notably sterling issued by Scottish banks), are not legal tender but are accepted by longstanding confidence.

A bank of issue whose notes enjoy legal tender status by government fiat can use its own notes, making their redemption in specie optional — a matter of the ‘monetary policy’ of the bank in question. Historically, the institution of fiat currency has preceded and enabled the demonetisation of specie, via a monetary policy decision not to offer payment in specie at par, e.g. by suspension, devaluation or redemption in bullion or foreign currency instead. Eventually this leads to no form of payment, redemption or exchange whatsoever being offered by the issuer and a system of irredeemable freely floating national currencies.

The term “fiat” currency is also used specifically to refer to a currency that is not pegged or fixed to a mass of precious metal, and similarly the term “gold standard” is used to refer to fiat currency with a gold bullion exchange system, or to a parallel gold coin/fiat currency with a law that requires the fiat currency bank of issue to pay in gold coin.

[edit] Value of paper money
Paper money has almost no value of use, but has a very high value of exchange. The inherent value of use of paper money is almost zero, but when it is measured in value of exchange, it becomes the manifestation of labor, which can be traded for services or goods based on the exchange rate of currency in their (the owner) to the seller. Additionally, paper money has an intangible value that is directly related to the condition of need of its bearer. While a one hundred dollar currency may be inconsequential to a person with little material need, the same may be the governing factor with regard to homelessness, health, and even life for another with lesser means, hence, priceless. Simply put, paper money is valued at the maximum amount of consumable goods for which it can be traded, either directly or indirectly.

[edit] Historical summary
Historically, the names of the individual coins and the names of the unit of account were identical, e.g. a shilling was both a type of coin and a unit of account. The law would therefore recognise tender of those coins as legal satisfaction for debts denominated in that unit of account. Different-mass coins of the same metal could explicitly be recognised as being legally valued at fixed multiples of each other in their names (e.g. in the case of the crown and half-crown) or simply by reference to their legal masses (e.g. the legal mass of a florin is twice that of a shilling). A government could legislate for the minting of a system of metallic currency, including the fineness of the metal and the legal and original masses of the coins, without legislating for legal tender or legal values of the coins themselves — they can be discovered or implied by the ratios of legal masses of fine metal in each species of coin.

Coins of different metals naturally resist incorporation into a common unit of account, and therefore of a common legal tender value system. Governments have historically attempted to fix the legal values of different metallic coins to create a unified unit of account and standard of legal tender for payments large and small. Two mechanisms have been used in this connection: multi-metalism and token coinage. The former took the form of bimetallism, where both gold and silver coins were given legal values in terms of each other. e.g. gold coin was legally valued by nominal mass at 15 times silver coin. As market forces changed the actual value of gold in relation to silver, one coin would become overvalued in reference to the other. For example, suppose there were two coins, a shilling being 6 grams of fine silver, and a sovereign being 8 grams of fine gold. If the unit of account were the shilling, then the legal value of a sovereign would be 20 shillings, and a debtor could discharge a debt of 100 shillings with five sovereign coins or 100 shilling coins, at his option. Debtors will nearly always choose the cheapest way to discharge their debts, and this results in the constant threat of demonetisation of a legally over-valued metal. Token coinage adopts the coins of the higher value metal as the monetary standard, and limits the lower value metal coins to fractional currency. This is done by deliberately over-valuing the legal tender value of the lower value metal coins and limiting the total amount for which they can be legal tender in any one payment. For example in 1816 the English silver currency was lightened by 6% and the limit of the legal tender of 40 shillings per payment was imposed. Such token currency is clearly fiat currency, as it is only by government fiat that the coin can be received at its legal value.

Over time multi-metallism was replaced by gold mono-metalism, via composite standards where gold coin was unlimited legal tender and silver and copper coins were lightened, limited and converted into tokens.

Bank notes as legal tender by government fiat originate from the advent of central banking. Central banks are banks of issue that are owned, sponsored or favoured by the government. Bank notes are negotiable instruments, being promissory notes issued by a bank and payable to bearer on demand. Central banks are generally favoured with monopoly rights to issue bank notes, and/or for these notes to have the status of legal tender. Alternatively, currency notes can be issued directly by the government or its non-bank agencies, and/or the government can favour selected commercial banks by making their notes legal tender (as in Hong Kong). It is important to note that paper money and fiat currency are not the same. For example, Scottish commercial banknotes act as money, but are not legal tender and therefore not fiat currency.

The first historical example of paper as fiat money was in China. Chinese governments would produce “notes of credit” which were valued as tender for limited periods of time, in order to prevent inflation. The Song Dynasty (960–1279), however, created unlimited legal tender paper money, good throughout their empire, as a way of centralizing financial control, and preventing external trade. This money, however, was only as stable as the mandarinate that enforced it, and only as safe as the rigidity and integrity of the people who created it. Since it was easy to counterfeit and communication was slow, the Song experiment with paper money collapsed, as individuals preferred doing business through bank drafts or cheques, which were backed with gold or silver.

In the 19th century, there was an increasing demand for international trade, which made monetary standards based on more than one kind of specie less and less stable, as individuals would take advantage of government determined exchange rates to buy silver where it was cheap, and then redeem it for gold where it was overvalued. This led to the gradual adoption of the gold standard among industrialized nations. While exact dates are often hard to fix, Britain’s adoption of the gold sovereign in 1816 began their move to a gold standard, and 1844 is generally dated as the establishment of the practical gold standard in the United Kingdom. Previously, silver had been the standard against which gold was measured, because Europe had had an influx of silver from mines in Germany and silver looted from the Inca and Aztec empires. The word “dollar” comes from the name “tolar” for a silver coin from the mines near the town of Jáchymov in Bohemia. These mines were the first significant discovery of silver in Europe since antiquity.

Governments would often produce notes which were fiat currency, with the promise to allow holders to pay taxes in those notes, in effect, assuring at least one future trading partner for the note. These notes were also referred to as “debt-based” money, and included the issuance of notes in the British colonies in America, particularly in Virginia and Massachusetts. Such debt-based money was sold at a discount of silver, which the government would then spend, and would expire at a fixed point in time later. However, even this more restricted form of fiat money was prone to inflationary or deflationary cycles, as those entities which could tax in specie would do so, leaving the debt based money to be devalued as its expiration grew nearer.

The repeated cycle of deflationary hard money, followed by inflationary paper money continued through much of the 18th and 19th centuries. Often nations would have dual currencies, with paper trading at some discount to specie backed money. Examples include the “Continental” issued by the U.S. Congress before the constitution; paper versus gold ducats in Napoleonic era Vienna, where paper often traded at 100:1 against gold; the South Sea Bubble, which produced bank notes not backed by sufficient reserves; and the Mississippi Scheme of John Law. The abuse of paper money led most industrialized nations to either outlaw private currency, or strictly regulate its printing, such as the United States National Banking Act of 1862.

Each cycle of inflation and panic would leave citizens vowing never to allow inflation again, until the next round of bone-crushing deflation caused business failure and squeezed borrowers who had to pay back in much harder money than they had borrowed, with a good example being the abolition of the “Bank of the United States” by Andrew Jackson, where he declared paper money backed by the government “unconstitutional”. The two temptations to create inflationary currencies repeatedly hobbled economic stability.

It was World War I which was the collision between specie currency and fiat money. By this point most nations had a legalized government monopoly on bank notes and legal tender thereof, and in theory governments promised to redeem notes in specie on demand. However, the costs of the war and the massive expansion afterward made governments suspend redemption in specie. Since there was no direct penalty for doing so, governments were not responsible for the economic consequences of “running the printing presses”, and the 20th century found itself facing a new economic terror: hyperinflation.

I have a good idea of how it works, but I need to put it in simple terms for my conservative friends out there.

Basic; paper issued to facilitate trade among consumers, not backed by any actual commodity. Used to be the currencies of the US were gold backed, you could turn in your paper and obtain metal. There is not any metal value behind the federal reserve fiat ‘float’. Yet they print more daily, and as a result, the quantity in circulation dilutes the trading value. That’s fiat currencies, basic.

Many people claim the gold standard is better than the current fiat currency and fractional reserve banking system used in most developed countries, since it would limit the government’s ability to print money. However the gold standard failed to meet the demands of the expanding world’s economy in the early 20th century.

How do the supporters of the return to Gold Standard offer to solve the main problem in the need for the economy to expand while the whole amount of gold and it’s price are set to a relatively fixed amount?

Very good question.

Even with continued mining a gold standard would see currency become scarce compared to goods. So we’d see a deflationary pressure. It’d be harder to come by a dollar but our dollars would be able to purchase more.

It’s far easier to convince someone of a pay raise than convince them of a pay decrease so we’d probably see layoffs as well. In other words companies would have to sell their products for less. To cut costs they’d likely introduce layoffs. Rising unemployment has historically accompanied periods of deflation.

On the other hand a fiat currency runs the risk of central bankers printing too much money and causing large inflation. With the way the Fed’s been pumping out dollars recently I don’t see how we can avoid double-digit inflation sometime in the next year or two.

I personally would like to see a fiat system where the only priority of a central bank is to keep the monetary supply proportionate to GDP and keep prices relatively stable. In the US the Fed’s priorities are sometimes conflicting. If price stabilization was the only priority it’d be a lot easier to plan one’s life or plan one’s business.

I didn’t answer your question exactly. But it got me thinking.

I have been wondering how financial markets would function with a gold backed currency. I have studied economics and already have a decent understanding of currency and finance, however none of my old text books really go into depth on the issue.

Can any one recommend a book that covers gold based currency and financial markets?? I’ve searched Amazon with out much luck.

Thanks!

in essence, the issue is one of the demand for and supply of money.

fixing the value of money in terms of gold has the effect of fixing the cost of mining further gold using whatever means are currently most cost efficient.

given multiple mines all working, standard micro ec tells us that gold will be produced at all of them that can meet the cost equal to value equation.

if the deposits are fairly homogeneous, this means that profitability will be fixed [as long as the deposit lasts] and thus output will also be fixed for any single mine. [because the milling plant's size is fixed based on the characteristics of the deposit.]

it follows that increasing the rate at which money is added to the economy becomes dependent on finding new deposits.

it also follows that if significant new cheap deposits are found that the volume of money in circulation will increase in proportion to the size of the deposits found and profit to be made, irrespective of the growth of demand for money in the economy.

thus, the supply side of the demand/supply balance becomes uncontrollable and the fiscal authorities must use other means to regulate the volume of currency in the economy. [taxation was a favorite.]

***
what you might want to read about is the inflation that wracked all of Europe beginning in the 16th century. Spain looted and took back to Europe so much gold from the Americas that there was too much money chasing too few goods.

Since more gold added wealth and power in Spain, she had incentives to keep looting more. Meanwhile, the other nations were unable to control their money supply [Spain kept buying up goods with the gold] and thus their inflation rate.

expansion of goods produced was more limited — it wasn’t worth hauling most goods from the Americas even if they were available [which they weren't ... few settlers yet].

the number of workers does not change quickly, and, in the 16th century, neither did the stock of capital goods nor the productivity of labor [that requires inventing new methods and/or vastly increasing specialization of labor which is dependent on improved transportation].

[not to mention that Europe was about recovered from the Black Death by then and thus unused arable land wasn't readily available -- thus increases in production of food were limited as long distance transportation wasn't very easy nor were spoilage losses easily controlled.]

GL in finding sources — I have read about the period’s economics but it was quite a while back and I’ve forgotten the titles and authors.

Do you think the general welfare clause or whatever else you could manipulate would be what they had in mind?
It is not skewed. They were well aware of the possibilities. Read what they wrote about that sort of thing.

Borrowing money and debt is nothing new, and was an art form in the 1700s.
But do you know how ENORMOUS our economy is?
Do you think having that much gold lying around or in Fort Knox is either practical or safe?
Answer: NO.

http://en.wikipedia.org/wiki/Bank_of_england

http://en.wikipedia.org/wiki/Fiat_currency

You could use the above links as a starting point.
Good luck

From your treasury to central bank to the banks. the banks will be your medium to circulate the new currency.

It serves to fight endless war and grow the government to the point of collapse. The dollar has lost 95% of its value, and probably more than that since the War on Terror, bailouts, stimulus, and the upcoming ObamaCare. The founders put the gold and silver clause in the constitution for a reason. It restrains government from debasing the currency for welfare and empire.

http://www.examiner.com/x-11888-Pittsburgh-Republican-Examiner~y2009m6d30-Abolishing-the-Federal-Reserve-for-your-benefit

In this case history doesn’t matter because it will be different this time. It could never happen to us.