# Money creation/Gold Standard **URL:** \ **Category:** Great Debates\ **Created:** [November 29, 2007, 2:41pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176 "2007-11-29T14:41:03Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [November 29, 2007, 2:41pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/1 "2007-11-29T14:41:03Z")
In [this thread about Ron Paul](http://boards.straightdope.com/sdmb/showthread.php?t=445782) there was an interesting sidebar regarding the Gold Standard. I must admit I understand little about “money creation” through a fractional reserve system, the potential risks of fiat currency, the role of central banks, and the potential consequences in today’s world of a commodity based currency system such as the Gold Standard. I have no position at this point but I am shocked to discover that the arguments for a gold standard do not actually sound so looney when I hear them out. I’m not convinced by them, mind you, but would love to read a good debate by those who understand these issues better than I. Thank you. ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [November 29, 2007, 4:38pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/2 "2007-11-29T16:38:30Z")
The Gold Standard is not intrinsically a disaster, but it makes the monetary system less flexible and more tied to commodity markets. That can be rough, and I think virtually every nation on earth has abandoned it for those reasons. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [November 29, 2007, 5:12pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/3 "2007-11-29T17:12:39Z")
[Interesting relevant CS thread.](http://boards.straightdope.com/sdmb/showthread.php?t=397032) ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [November 29, 2007, 5:23pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/4 "2007-11-29T17:23:19Z")
[And another such, more recent.](http://boards.straightdope.com/sdmb/showthread.php?t=435473) ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [November 29, 2007, 6:26pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/5 "2007-11-29T18:26:21Z")
Probably a good start to see exactly what a Gold Standard is. Found this article on [about.com](http://economics.about.com/cs/money/a/gold_standard.htm) which is fairly good: > [@](#): > > What Was The Gold Standard? > > The Gold Standard vs. Fiat Money > [Q:] I saw the term “Gold Standard” mentioned in one of my textbooks. What was the gold standard and how does it differ from today’s system of money. > > [A:] Excellent question! First we’ll have a quick history lesson, then we’ll see how it works and how it differs from fiat money. > Definition of the Gold Standard > My normally extensive Economics Glossary does not have an entry on the gold standard, so we’ll have to look elsewhere for a definition. An extensive essay on the gold standard on The Encyclopedia of Economics and Liberty defines the gold standard as "a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. > > National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price." A county under the gold standard would set a price for gold, say $100 an ounce and would buy and sell gold at that price. This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold. Other precious metals could be used to set a monetary standard; silver standards were common in the 1800’s. A combination of the gold and silver standard is known as bimetallism. > > A Very Brief History of the Gold Standard > If you would like to learn about the history of money in detail, there is an excellent site called A Comparative Chronology of Money which details the important places and dates in monetary history. During most of the 1800s the United States was had a bimetallic system of money, however it was essentially on a gold standard as very little silver was traded. A true gold standard came to fruition in 1900 with the passage of the Gold Standard Act. The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelery). The Bretton Woods System, enacted in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. “The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce. At that point for the first time in history, formal links between the major world currencies and real commodities were severed”. The gold standard has not been used in any major economy since that time. > > What Do We Use Today? > Almost every country, including the United States, is on a system of fiat money, which the glossary defines as “money that is intrinsically useless; is used only as a medium of exchange”. We saw in the article “Why Does Money Have Value” that the value of money is set by the supply and demand for money and the supply and demand for other goods and services in the economy. The prices for those goods and services, including gold and silver, are allowed to fluctuate based on market forces. Next we’ll look at how the monetary system used can change other variables in the economy. > [@](#): > > What Was The Gold Standard? > The Benefits and Costs of a Gold Standard > The main benefit of a gold standard is that it insures a relatively low level of inflation. In articles such as “What is the Demand for Money?” we’ve seen that inflation is caused by a combination of four factors: > > 1. The supply of money goes up. > 2. The supply of goods goes down. > 3. Demand for money goes down. > 4. Demand for goods goes up. > > So long as the supply of gold does not change too quickly, then the supply of money will stay relatively stable. The gold standard prevents a country from printing too much money. If the supply of money rises too fast, then people will exchange money (which has become less scarce) for gold (which has not). If this goes on too long, then the treasury will eventually run out of gold. > > A gold standard restricts the Federal Reserve from enacting policies which significantly alter the growth of the money supply which in turn limits the inflation rate of a country. The gold standard also changes the face of the foreign exchange market. If Canada is on the gold standard and has set the price of gold at $100 an ounce, and Mexico is also on the gold standard and set the price of gold at 5000 pesos an ounce, then 1 Canadian Dollar must be worth 50 pesos. The extensive use of gold standards implies a system of fixed exchange rates. If all countries are on a gold standard, there is then only one real currency, gold, from which all others derive their value. The stability the gold standard cause in the foreign exchange market is often cited as one of the benefits of the system. The short answer to your OP is that a Gold Standard is fairly inflexible, and it doesn’t work well in a rapidly changing environment. It doesn’t react very well to change, especially rapid change…and it’s very limiting on your economy for all those (and other) reasons. I think people look back on a Gold Standard the same way they look back on any perceived golden age (heh)…through rose colored glasses. -XT ---
**Author:** ![Rysto](https://avatars.discourse-cdn.com/v4/letter/r/ecccb3/32.png) [@Rysto](https://boards.straightdope.com/u/Rysto)\ **Post date:** [November 29, 2007, 6:47pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/6 "2007-11-29T18:47:12Z")
> [@](#): > > So long as the supply of gold does not change too quickly, then the supply of money will stay relatively stable. The gold standard prevents a country from printing too much money. If the supply of money rises too fast, then people will exchange money (which has become less scarce) for gold (which has not). If this goes on too long, then the treasury will eventually run out of gold. That’s only half of the story. Inflation is not solely determined by the rate of growth of the money supply. The rate of growth of the economy is another huge factor. If the growth rate of the economy outstrips the growth rate of the money supply – and the real price of gold has been rising steadily for decades now, which indicates that the growth rate of the supply of gold is indeed being outstripped by the rate of growth of the economy – then you get deflation, and all of the problems associated with that. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [November 29, 2007, 7:00pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/7 "2007-11-29T19:00:02Z")
[QUOTE=Rysto] That’s only half of the story. Inflation is not solely determined by the rate of growth of the money supply. The rate of growth of the economy is another huge factor. If the growth rate of the economy outstrips the growth rate of the money supply – and the real price of gold has been rising steadily for decades now, which indicates that the growth rate of the supply of gold is indeed being outstripped by the rate of growth of the economy – then you get deflation, and all of the problems associated with that. [/QUOTE] Inflation can also be spurred by real costs to the economy. In the 1970s, the U.S. had inflation because the price of imported oil went up – which, since all production/distribution/provision of goods and services in this country depended (and still depends :eek: ) ultimately on automotive transportation at one or several points along the line, indirectly raised the price of **everything** else. It had nothing to do with an expanding money supply, nor with real economic growth – in fact, that was the era when the term “stagflation” was coined. That will happen again. Soon. ---
**Author:** ![Digital\_Stimulus](https://avatars.discourse-cdn.com/v4/letter/d/aeb1de/32.png) [@Digital\_Stimulus](https://boards.straightdope.com/u/Digital_Stimulus)\ **Post date:** [November 29, 2007, 7:01pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/8 "2007-11-29T19:01:03Z")
Thanks, **xtisme**. That was very educational for being so concise. While I can appreciate the idea of placing limitations on TPTB concerning the money supply as an inflation control, it seems to me that the gold standard steps away from the conceptual beauty of currency; that is, money is simply an abstract representation of value that provides a common unit of exchange for goods and services. My economics knowledge is rather sparse, so I’d appreciate any input on the following. If the primary benefit of the gold standard is to control the money supply (i.e., one source of inflation), wouldn’t a comparable solution be to enact such a control through legistlation? That is, place caps on the [in|de]crease of the money supply in a given time frame, probably as some percentage of the GDP. Is that a stupid idea? If so, why? On preview, I note **Rysto** ’s point. But I think that caps tied to the GDP would take care of it. Also, now that I think about it, isn’t the amount of gold in the world fixed (not that there is no more to be mined, but that there are constraints imposed by having to retain a physical repository of any resource, be it mining more, securing it, transporting it, etc.)? Or is that easily solved by something I’m not seeing? ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [November 29, 2007, 7:18pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/9 "2007-11-29T19:18:13Z")
[QUOTE=Digital Stimulus] Also, now that I think about it, isn’t the amount of gold in the world fixed . . . [/QUOTE] Pretty much, but the amount of gold on the **market** is not. Most of the world’s gold, I think, is in vaults such as Fort Knox where it just sits around being as auraceous as it can be – but from which it could be sold off at any time. ---
**Author:** ![Digital\_Stimulus](https://avatars.discourse-cdn.com/v4/letter/d/aeb1de/32.png) [@Digital\_Stimulus](https://boards.straightdope.com/u/Digital_Stimulus)\ **Post date:** [November 29, 2007, 7:22pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/10 "2007-11-29T19:22:05Z")
[QUOTE=BrainGlutton] Inflation can also be spurred by real costs to the economy… [/QUOTE] So, again I have to proclaim my economics ignorance and am looking for some education. Wasn’t the solution to stagflation put in place by Volcker at the end of Carter’s administration? IIRC, it was to severely restrict the money supply, right? More to the point of this thread, would being on a gold standard have changed the situation in any appreciable way? (Or was your post simply a clarification/expansion concerning possible reasons for inflation?) ---
**Author:** ![Rysto](https://avatars.discourse-cdn.com/v4/letter/r/ecccb3/32.png) [@Rysto](https://boards.straightdope.com/u/Rysto)\ **Post date:** [November 29, 2007, 7:26pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/11 "2007-11-29T19:26:51Z")
[QUOTE=Digital Stimulus] My economics knowledge is rather sparse, so I’d appreciate any input on the following. If the primary benefit of the gold standard is to control the money supply (i.e., one source of inflation), wouldn’t a comparable solution be to enact such a control through legistlation? That is, place caps on the [in|de]crease of the money supply in a given time frame, probably as some percentage of the GDP. Is that a stupid idea? If so, why? On preview, I note **Rysto** ’s point. But I think that caps tied to the GDP would take care of it. Also, now that I think about it, isn’t the amount of gold in the world fixed (not that there is no more to be mined, but that there are constraints imposed by having to retain a physical repository of any resource, be it mining more, securing it, transporting it, etc.)? Or is that easily solved by something I’m not seeing? [/QUOTE] It’s not a stupid idea. This type of monetary policy is call “Monetary Targeting” and it was a popular idea among economists in the 1970’s. In the most part it ended up being a huge failure in practice. The exact reason for the failure is not known but there seemed to be some kind of feedback loop in the economy that was very difficult to predict. The US and UK missed their targets repeatedly against all known theory, and in Canada they hit their targets but inflation stayed out of control. In my opinion, one of the problems with monetary targeting is that it confuses means with ends. Controlling the money supply should not be considered the goal – controlling inflation is the goal. Therefore, monetary targets should be thrown out the window and the Central Bank should instead focus on direct inflation targets. In answer to **BrainGlutton** ’s point, I should point out that when I’m discussing inflation I mean long-run inflation. In the long-run, people can substitute away from oil if the prices rise too much. Short-run inflation is a much more chaotic force in the economy and focusing on it tends to be counter-productive. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [November 29, 2007, 7:43pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/12 "2007-11-29T19:43:55Z")
[QUOTE=Rysto] In the long-run, people can substitute away from oil if the prices rise too much. [/QUOTE] 😕 No, they can’t – not without completely rebuilding our national transportation infrastructure, demolishing all the sprawlburbs and rebuilding everything more compact and walkable – a process which itself would consume a lot of oil and is probably politically and economically impossible anyway. (Hint: There isn’t going to be any “hydrogen economy.”) ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [November 29, 2007, 8:03pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/13 "2007-11-29T20:03:14Z")
[QUOTE=Digital Stimulus] Wasn’t the solution to stagflation put in place by Volcker at the end of Carter’s administration? IIRC, it was to severely restrict the money supply, right? More to the point of this thread, would being on a gold standard have changed the situation in any appreciable way? (Or was your post simply a clarification/expansion concerning possible reasons for inflation?) [/QUOTE] Stagflation did not end because of anything done in the U.S., it ended because the oil-exporting nations opened their spigots again. From [_The Geography of Nowhere,_](http://www.amazon.com/Geography-Nowhere-Americas-Man-Made-Landscape/dp/0671888250/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1196366425&sr=8-1) by James Howard Kunstler, Chapter 6, “Joyride”: > [@](#): > > Whether any actual oil shortage existed during those autumn weeks of 1973 is arguable, but the distribution and pricing apparatus certainly went amok at the threat of one. Since World War II, America’s oil use had shot up so steeply that by the seventies many old American oil fields were pumped dry, and nearly half our petroleum was coming from overseas. The short-term result of the embargo was a sudden near-breakdown of the whole automobile system in America. Erratic deliveries of gasoline caused local supply shortages. Lines formed at pumps everywhere, people panicked, fistfights broke out, work schedules were disrupted, vacations were canceled, and nobody knew if the country would be able to carry on as before. A longer-term result was the rising cost of practically everything, otherwise known as inflation, since the price of all commodities were linked, through manufacturing or distribution, to the price of oil. The oil shock also temporarily discouraged more migration to the new outer limits of the urban fringe. For instance, the trip from Mira Loma to downtown Los Angeles might take only fifty minutes, but who was crazy enough to move that far when an Arab could shut the oil spigot any time they pleased? In short, the Great Enterprise of continued suburban expansion suddenly lost its plausibility. And the whole economy went to hell – in a strange new way. > > Economists scratched their heads as if it was the world’s most baffling math problem. Inflation, they reasoned, was generally the result of an overheated economy, not a stagnant one. How could this be? Finally, they pronounced the mess “stagflation.” President Nixon was too preoccupied with the scandal that would drive him from office to face effectively the questions raised by the Arab Oil Embargo. Under his successor, Gerald Ford, high oil prices shoved the country into the worst recession in thirty years, and Ford’s accidental administration was shown the door. Along came President Jimmy Carter. The oil cartel inflicted a second oil price hike on the United States during his single term, and it led to another round of inflation and stagnation. Carter told Americans the truth and they hated him for it. He eclared the “moral equivalent of war” on our oil addiction, and diagnosed the nation’s spiritual condition as “malaise,” suggesting, in his Sunday School manner, that the nation had better gird its loins and start to behave less foolishly concerning petroleum. The nation responded by tossing Mr. Carter out of office and replaced him with a movie actor who promised to restore the Great Enterprise to all its former glory, whatever the costs. > > Aside from being nearly killed by an assassin early in his first term, Ronald Reagan was the luckiest President of the century. The oil cartel fell apart while he was in office without America’s having to do a thing. Greed, desperation, and a war between Iraq and Iran that spanned both of Reagan’s terms, foiled the oil cartel’s ability to operate in concert and keep prices jacked up. The poorer oil nations, like Nigeria, tried to undersell the others, while the richest ones, like Saudi Arabia, could not resist the temptation to compete by overproducing, thereby glutting the market. Hence, the price of imported crude oil dropped steadily during Reagan’s tenure and he abandoned the alternate-energy research programs that Carter had started. ---
**Author:** ![Freddy\_the\_Pig](https://avatars.discourse-cdn.com/v4/letter/f/a587f6/32.png) [@Freddy\_the\_Pig](https://boards.straightdope.com/u/Freddy_the_Pig)\ **Post date:** [November 29, 2007, 8:04pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/14 "2007-11-29T20:04:26Z")
Most people would agree that the primary criterion by which a currency scheme should be judged is price stability. Price stability facilitates borrowing, lending, and long-term contracts, all of which conduce to a thriving economy. It isn’t obvious whether specie or fiat money wins based on this criterion. Consider changes in the [Consumer Price Index](http://www.minneapolisfed.org/Research/data/us/calc/hist1800.cfm) and its predecessors since 1800. In the short run, specie prices can be very unstable–up 3.7% in 1847, for example, and then down 7.1% in 1848. Not so hot if you’re trying to figure out a fair return for a 12-month CD. In the long run, however, specie is just swell, and fiat money is awful. The CPI was 51 in 1800, 41 in 1932 . . . and 618 in 2007. Not so hot if you’re trying to figure out a fair rate for a 30-year mortgage. However, in all honesty, I don’t see us ever going back to a system in which prices _might_ go up 4% next year, or down 8%, depending on how much the economy grows and how much gold is mined. People won’t accept it. People prefer the chronic but relatively predictable (at least since 1982) inflation of fiat money. ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [November 29, 2007, 8:09pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/15 "2007-11-29T20:09:12Z")
Thanks for the explanations so far. **BG** plenty of other alternatives that use much less oil. Buying smaller cars, switching to the new diesels, hybrids, PHEVs, soon to be available Extended Range EVs (EREVs), BEVs, heck even biking more in nice weather! Can I have some explanation of the risks and benefits of fractional reserves and how it expands the money supply, effectively creating money that isn’t really there? ---
**Author:** ![Digital\_Stimulus](https://avatars.discourse-cdn.com/v4/letter/d/aeb1de/32.png) [@Digital\_Stimulus](https://boards.straightdope.com/u/Digital_Stimulus)\ **Post date:** [November 29, 2007, 8:21pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/16 "2007-11-29T20:21:26Z")
[QUOTE=BrainGlutton] Stagflation did not end because of anything done in the U.S., it ended because the oil-exporting nations opened their spigots again. [/QUOTE] Thanks for the quote; seems about right to me (particularly the bit about Reagan…I was a wee lad in the early '70s). However, isn’t part of “Along came President Jimmy Carter” what Volcker did? According to [Wikipedia](http://en.wikipedia.org/wiki/Paul_Volcker): > [@](#): > > Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s by limiting the growth of the money supply, abandoning the previous policy of targeting interest rates. So, while I can’t confirm which is more correct (since it’s not really an either/or), it’s nice to see that my memory isn’t totally off. ---
**Author:** ![Digital\_Stimulus](https://avatars.discourse-cdn.com/v4/letter/d/aeb1de/32.png) [@Digital\_Stimulus](https://boards.straightdope.com/u/Digital_Stimulus)\ **Post date:** [November 29, 2007, 8:39pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/17 "2007-11-29T20:39:16Z")
[QUOTE=Rysto] It’s not a stupid idea. This type of monetary policy is call “Monetary Targeting” and it was a popular idea among economists in the 1970’s. [/QUOTE] Thanks for the vote of confidence. What you describe isn’t quite what I was thinking, however. From what I gather, what was implemented was more like a central planning office or an algorithmic control of the money supply. I was thinking more along the lines of keeping the Fed as it is now, but with caps on what they can do. Granted, so long as the chairman is monetarily conservative, such caps shouldn’t ever be invoked, but much like presidents, there’s no telling what future policies (or chairmen) will be. Of course, such legislation also assumes that current understanding of economics will be applicable; if stagflation was “new” at the time, there are surely other situations that are currently undreamed of. I can see where it would be bad to tie the hands of the institution entrusted to enact monetary policy in the first place. ---
**Author:** ![Freddy\_the\_Pig](https://avatars.discourse-cdn.com/v4/letter/f/a587f6/32.png) [@Freddy\_the\_Pig](https://boards.straightdope.com/u/Freddy_the_Pig)\ **Post date:** [November 29, 2007, 8:59pm UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/18 "2007-11-29T20:59:25Z")
[QUOTE=DSeid] Can I have some explanation of the risks and benefits of fractional reserves and how it expands the money supply, effectively creating money that isn’t really there? [/QUOTE] Fractional reserve banking arises out of a mismatch between the needs of lenders and borrowers. Borrowers want to borrow money with a fixed payback period–you want to know when you have to pay back a loan. _Some_ lenders are willing to loan fur a fixed term, but many more aren’t–people will loan (put in the bank) a great deal more money if they know they can get it back whenever they want. Fractional reserve banking finesses this mismatch by pooling and lending _most_ of the money from a large pool of small depositors, knowing that some will want it back every day, but by the law of large numbers they won’t all want it back at once. You can probably see the advantages and disadvantages of this without me even pointing them out. The advantage is that society mobilizes a huge pool of additional capital which would otherwise be unavailable to finance investment, which spurs economic growth. The disadvantage is that sometimes everybody _will_ want their money at once–panic is contagious–and when that happens both the depositors and the bank are SOL. Fractional reserve banking complicates monetary policy, because “demand deposits” (backed only by fractional reserves) are so closely equivalent to currency that they must be classified as money. From the standpoint of this thread, however, note that fractional banking can and has operated alongside both specie and fiat currency. ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [November 30, 2007, 2:50am UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/19 "2007-11-30T02:50:15Z")
**Freddy** , I’m more interested in the consequences of how the system creates money. The[wiki entry](http://en.wikipedia.org/wiki/Money_creation#How_the_fractional_reserve_system_can_turn_.241.2C000_into_.244.2C570.50) illustrates how $1000 turns into $4570.50. ---
**Author:** ![MilTan](https://avatars.discourse-cdn.com/v4/letter/m/71e660/32.png) [@MilTan](https://boards.straightdope.com/u/MilTan)\ **Post date:** [November 30, 2007, 3:21am UTC](https://boards.straightdope.com/t/money-creation-gold-standard/428176/20 "2007-11-30T03:21:25Z")
[QUOTE=DSeid] **Freddy** , I’m more interested in the consequences of how the system creates money. The[wiki entry](http://en.wikipedia.org/wiki/Money_creation#How_the_fractional_reserve_system_can_turn_.241.2C000_into_.244.2C570.50) illustrates how $1000 turns into $4570.50. [/QUOTE] Well, it’s important to note that the system can’t create an _infinite_ amount of money; in the Wikipedia example, the most money that can ever be in the system due to the original $1000 is $5000. The difference between specie currency and fiat currency isn’t that there’s all of a sudden 5x as much money in the system. The difference is where that original $1000 comes from. In a specie system, there’s $1000 of gold sitting somewhere in the Fed’s vaults. In the fiat system, there’s a piece of paper saying the US government owes the Fed $1000. [Next page](https://boards.straightdope.com/t/money-creation-gold-standard/428176.md?page=2)