true enough, until the borrower becomes insolvent

I like the Austrian perspective, however, I don’t think it gives sufficient weight to the idea of new credit preceding new money.

When you start putting nails in the coffin, use this title. We all know what happened when the little boy who would have grown up to be a CPA cried “wolfriedman.”

(people stopped reading his blog)

What Franklin as a printer and Washington as a surveyor both understood is that there had to reference point from which measurements were taken – otherwise prints would not register properly and surveys would be fictions. Money was the reference point. People would not be satisfied simply to hold money, to hoard. Their sense of enterprise would urge them to invest for gain. But, their sense of prudence would also urge them to hold a reserve. For those reserves only specie or a trusted certificate of deposit of specie could do because in panics only Money would do.

Our present panic has its source in the belief that the government can, by manipulation of Money’s value, make credit freely available for itself and selected groups of citizens, that no real reserve is required. The present rescue plans are based on the assumption that, by endorsing existing quasi-government credit instruments (bank deposits, Fannie and Freddie bonds, etc.) as Money, commerce can be restored. I doubt it. We have reached the point where people wonder if their Money itself can be devalued or appropriated by the click of a key and the stroke of a Presidential pen.

I agree 100%. The government is a long-term force for preventing assets being correctly evaluated.

Now, I actually believe that a correctly-run government would do this too – because I believe that stability is the most important thing that a government can bring, more important than growth or “prosperity” – because I believe that if you give me stability, I can make my own prosperity.

So it’s perfectly reasonable to me that a government might actually reduce liquidity in order to increase stability.

But the government isn’t doing this. They’ve historically been pushing “growth” (which means growth for one or two percent of the population and more work for the rest) at the expense of stability. We lose!

If the government cared about stability, they’d probably seize one or two dozen financial institutions that are “illiquid” right today.

There’s nothing morally wrong with that. They are taking a good that’s worth less than zero and purchasing it for zero dollars. The government is actually taking a loss – too bad for the investors and principals but your company is worth *less than zero dollars*. They’d actually mark everything to market, revealing exactly what securities were owned and inviting an independent evaluation of their value.

Now, a lot of rich people would lose a lot of money. But the “system” would continue to flourish. The big worry these days is that a lot of institutions will fail at once and then counterparties to a lot of “quantum” transactions like repurchase agreements (“repos”) will vanish and “the system” will simply grind to a halt.

If the government seized the illiquid (== worth less than zero) companies and guaranteed that they’d continue to be reliable counterparties in transactions like repos, the markets would be safe (and yes, that is a good thing) but we’d be able to systematically resolve the uncertainty, at the unfortunate cost of bankrupting a few thousand very rich people, who, when it came down to it *invested in something that did something economically unsound and thus by the laws of economics “deserve” to lose all their money*.

Gold is no less “fiat” than any other currency. You can’t eat gold, it won’t make your car run. I own no gold and there hasn’t been a day in the last many decades where I’ve needed gold. (I might have wished to have more economic value and believed that I could have captured that by investing in gold – but that’s hardly the same is it?)

A natural, healthy economy should be expanding in real terms by a few percent a year – because of the increasing population and the march of technology.

But the supply of gold is finite and fixed.

This means that the strategy of “hording gold”, something which actually generates no true economic value at all, becomes a very desirable strategy.

An economic system that encourages people to do things that don’t actually profit anyone is badly designed. Luckily for us, the usually-stupid movers and shakers were sort of forced into the realization above about 50 years ago.

A slowly but exponentially growing economic system that’s hitched to a fixed supply commodity like gold is rather like running an electric car with a long extension cord.

If we’re going to be rational here, we have to realize that “the gold standard” is every bit as religious as “Christ” or “Communism” or “Capitalism” (or “free markets” but that’s another essay).

Like it or not, a modern society will have a fiat currency. What you want is an honest currency, where liabilities are fully disclosed.

I can’t be the only one hesitating because the government is actually creating uncertainty.

Our present monetary system refuses to accept or even understand the difference between Money and credit. The Federal Reserve Note itself is evidence of the deliberate obfuscation. The United States could reestablish tomorrow Money that was exchangeable with the national Treasury for a measure of gold IF Congress had the humility to allow the credit markets to determine its price. That is their actual charge under the Constitution; they are to certify the physical properties of our national Money “and of foreign coin, and to fix the Standard of Weights and Measures.” Free exchange would determine the relative prices of monies just as it determined the discounts for lending and the value of merchant and banking bills and notes.

Intellectuals like Jefferson were furious at such a revolutionary idea. They still are. They reject the Constitutional premise that markets should control the price of money and people should be free to deposit and lend their Money as they choose. In the name of equality and authority, economists are, with rare exceptions, united in their belief that the government must determine the price of its own money AND the form and extent of credit for the good of all. That is why you, poor reader, must pay for your neighbor’s mortgage.