Not true. Depending on the credit worthiness of an IOU, it may be very valuable and others may accept the IOU in exchange for things to eat. If my uncle Frank gives you an IOU, you might not want to take it. If Wal-Mart gives you an IOU, you would have pretty good reason to believe that they are financially able to honor it.
It turns out that U.S. Government IOUs have the best creditworthiness in the history of the world, so much that we all accept their IOUs in exchange for pretty much anything.
If for some reason the creditworthiness of the U.S. Government goes down the toilet, then gold is not what you need. You need guns, ammunition, and canned goods.
Unfortunately, you have come to an incorrect conclusion from my post. Your original request asked to show one instance where IOUs (or something equivalent) were used as currency. I showed that there was one instance; however, this does not mean that it is the only instance. I had hoped that knowing you were factually wrong might prompt you to look into it further to see how deeply you are wrong on this particular issue. There are more than a few instances of IOUs (or something equivalent) being used as currency. I am not going to enumerate them all, if you are sincerely interested in improving your knowledge you will look into it more deeply. However, I will give you an example just so that you can see there is in fact more than one: IOUs were also used in the Tang Dynasty China as currency [1].
[1] Xueyi, Z., Zhang, Y., & Whalley, J. (2010). Monetary Theory from a Chinese Historical Perspective (No. w16092). National Bureau of Economic Research.
You are misunderstanding the phrase “the exception proves the rule” but many people do.
The “proves” is better rendered in current English as “proofs” or "probes,’ meaning that the apparent exception, when examined, demonstrates the truth of the rule.
Of course IOUs aren’t money, any more than gold is money. But IOUs can be used as money, just like gold can be used as money.
Anything can be used as money, provided more than one person agrees to use it as money. Are giant stone disks money? Are cacao beans money? Are cigarettes money? Are cows money? Are cowrie shells money?
None of those things are money, but they can be used as money. And a promise to pay someone cacao beans tomorrow can be used as money, provided the person who extends the promise and the person who accepts the promise agree to treat the promise as if it were money.
Reminds me of a story I read about the Yap islanders, the ones who exchange those giant stone disks. Those disks had to be quarried on other islands and brought home by boat. And so they were pretty expensive. But if you had one you could exchange ownership for other expensive stuff, like boats or what have you. And the disk wouldn’t change position, just the owner.
Well, one time they were bringing one of those stones home by boat, but there was a storm and the stone disk sank into the ocean. But that disk was still treated as money! Everyone knew where it was–at the bottom of the ocean. It had owners, the guys who quarried it. And it could change ownership just as easily as a disk sitting on the beach. And so that lost stone could still be used as money, even though it was sitting under 500 feet of water.
Note that paper money backed by gold is almost exactly the same sort of thing. The only difference is that the Yap islands are so small that everyone knows who owns what disk, there isn’t any need to carry around a piece of paper that says you own a particular disk. Paper money backed by gold is exactly the same, except the society is large enough that we can’t keep track of who owns what gold bar, so we create a paper IOU that says the bearer of the IOU is entitled to a certain amount of gold. Except as we see from the Yap island example, you don’t actually need the gold or the stone disk in hand to exchange the gold or the disks. In fact the gold could be sitting in a vault or at the bottom of the ocean, and you can still exchange ownership of it, as long as everyone agrees that the gold is valuable despite being completely impossible to actually possess.
So dump all the gold in Fort Knox into the ocean, and it’s exactly as useful as it was sitting on a shelf in Fort Knox. You can still have a piece of paper that says you own such and such gold bar sitting on the ocean floor, and it doesn’t matter that you can’t actually put your hands on that bar as long as other people are willing to treat your piece of paper as if it were money.
And so fiat money. Take all that gold and toss it in the ocean, and it doesn’t matter. You have a piece of paper that says $1. That paper doesn’t represent anything, but it doesn’t matter as long as people will take the paper in exchange for goods and services then it really is worth something. And you can, in fact, take that paper and exchange it for gold after all. So it really is worth something. You can exchange the paper for gold! Which means, since everyone knows you can in fact exchange the paper for gold, they’ll also exchange it for all sorts of other goods and services.
Just like the Yap islanders can exchange ownership of a rock at the bottom of the ocean for valuable goods and services.
Interesting about the Yap Islanders’ money! Milton Friedman wrote a chapter about it (PDF) drawing an analogy between Germany’s imposing a temporary fine on Yap (by drawing X’s on some stones) and the labeling of physical gold in the FRB’s New York vaults.
I know a guy who is convinced that U.S. currency will soon hyperinflate so he put his extra money into gold. I just assumed he had gold coins or gold bars in a safe or a bank vault somewhere, but a few years ago I was talking to him and he showed me “certificates” that there was a certain amount of gold on deposit in his name in some bank in the Cayman Islands.
This type of thinking astounds me. He does not trust U.S. currency, backed by the full faith and credit of the strongest nation in the history of human civilization, but he trusts the contractual agreement of a private entity under the laws of a foreign island nation. Not only that, but he believes he is investing in “hard” money.
[parody] Government, even when “of the people, by the people and for the people” is an evil monster which confiscates your hard-earned wealth at gunpoint to pay for the votes of parasites and lazy government workers, and to enrich secret Illuminati coffers.
Private entities, OTOH, are benevolent institutions that exist to serve humanity — in the rare event that they defraud it’s always due to government over-regulation. Yes, each individual player is motivated by greed, but like the mathematical theorem that a triangle’s angle sum to 180°, so it’s a theorem that the private actions sum to the best outcome for all of humanity. … Or rather would be optimal if the evil government could get it through its thick head that its only function is to drop H-bombs on communists.
Of course, if it turns out the Cayman Island Gold Depositary disappears (due to government over-regulation), with its owner drinking piña coladas in Tahiti with your friend’s money, that friend has only his lack of due diligence to blame. He could have hired a team of private investigators, a team of lawyers, and insurers and reinsurers to help protect him from loss.
Actually, the US has has two periods of high inflation due to gold strikes: the California/Australia rush and the Yukon (which, incidentally, ended Bryan’s presidential aspirations). Which means that under the gold standard we’ve had two periods of inflation worse than the worse inflation under fiat (the 70’s stagflation).
Which is yet another illustration on why it’s a fundamentally bad idea to base the total size of an economy on the amount of metal that can be scratched out of the ground.
When people actually agree on things, you might have a point. Except, that isn’t how it worked is it? In the 1930s the US, the government defaulted on their gold bonds, forbade banks paying out their deposits and confiscated several thousand tons of coins and made the holding of gold illegal in any kind of quantity, and made gold clause contracts illegal. Then they essentially said you must accept funny pieces of paper as the equivalent, because we say so.
Who is “we”, Kemosabe? LOL
One attribute of money, is that it will hold its value, as a store of value. That’s not to say it can’t become worth less, but it can’t be made worthless, as is the case with pieces of paper or the like. The value remains to some degree regardless of the entity that issues it. Even if that government entity disappears. $20 gold coins unearthed in a coffee can will have a certain value, paper currency, may have virtually none.
Why can’t money be made worthless? If I have a coffee can full of cowrie shells that I dig up after it was buried for 200 years, are those cowrie shells still money?
No, those cowrie shells are not money, even if they were used as money 200 years ago. They did not hold their value. And this is with commodity money, the sort of money you think you want.
Gold coins are an example of commodity money. That is, you use a valuable good as money. And it turns out that gold has some properties that make it very useful as commodity money, that’s why over and over throughout history lots of people used it as money. Are you in favor of using gold coins as money?
Because none of you gold bugs will answer this question, and you all constantly conflate gold coins with a gold standard.
Let me, once again, repeat that a piece of paper that says it’s worth a certain weight of gold can easily lose 100% of it’s value, if the entity that printed the paper will no longer honor the promise. There used to be any number of banks that would issue paper money backed by gold, and today those certificates only have value as curiosities. They cannot be exchanged for gold at the issuing bank, because the issuing bank no longer exists.
So are you in favor of gold standard money? Or gold coin money? Because they’re not the same. A certificate that says “I owe you some gold” is not the same as gold, is it? A certificate that says “I owe you some gold” cannot be buried in a coffee can and dug up 100 years later. Cowrie shells, cacao beans, cattle, cigarettes, buckskins, and all sorts of commodity money can’t be buried in the ground for 100 years. Neither can bitcoins. Gold, silver and copper could be, but the problem with burying your coins in the back yard for 100 years is that you’ll be dead before the 100 years are up. So what are you saving the coins for? Your grandchildren? Except what if they forget where the gold coins were buried?
This is why over in Europe they sometimes dig up treasure hordes with gold and silver coins, from 2000 years ago. Some Roman, fearing bad times, buried his treasure. And then died, and the treasure stayed buried in the ground for 2000 years, until some farmer turned it up.
Was the gold buried in the ground money, when it was buried in the ground? No it was not. It was just a rock.
If you want to use gold coins as money, feel free. But the problems with using physical gold coins are will known. It makes using a credit card impossible, because a credit card is just a way of promising to pay someone. You promise to pay the card issuer, and the card issuer promises to pay the merchant. You could SAY you were promising to pay in gold coins, but are you actually exchanging gold coins? No, you’re exchanging promises, which are only as good as the promises. They’re mere words. Like, you know, fiat money.
So which is it? Gold commodity money, or paper money “backed” by a promise to redeem a coupon for gold?
Lemur, I think Mr. Tater addressed your question in his first post:
I don’t want to put words in his mouth, but I guess gold, conch shells, clams or mayonnaise — material goods of varying values — are “real money” by his definition, but promises to pay gold or mayonnaise are not. (Since this is opposite to Webster’s definition of “money” I’ve invented the term “real money”; I hope Mr. Tater tells us what term he’d prefer. — Certainly “money” isn’t it, until the IRS starts rejecting paper money, asking for mayonnaise instead.) Of course the ratio of gold-to-clam value is likely to vary much more than the ratio of a consumer basket-to-paper dollar, but it is OP (Zero-syde) who is especially concerned that money have a stable value, not Mr. Tater.
I think. I’m confused about Mr. Tater’s real concerns, and he has declined to answer my questions intended to reveal those concerns. BTW, I wonder if he considers the immovable stones on Yap Island to be real money?
Apologies in advance if this question has been answered, I did not read most of this thread.
If you are a proponent of being able to use gold as currency, going back to a government backed gold standard, or anything like that, why don’t you personally just do it? Go and spend most of your worthless inflationary paper that you get every two weeks on buying gold bullion or other things like jewelry that have a high gold content and hoard it?
When the tax man comes, or you need to purchase something larger, pull out the gold from your safe deposit box, shave some off of your bullion, sell the flakes to a gold buyer for the now (apparently, almost assuredly) even higher market value that it has vis-a-vis the price that you bought it at a year ago, and smile at how you turned $250 into $1200 just by letting a troy ounce of gold sit in a vault for 10 years through gold’s natural appreciation.
That’s a good question, and one I asked several times in this thread.
If you want to convert your fiat dollars to gold, go right ahead, you can buy physical gold at any coin shop in America and take your gold home and put it under the mattress, or wherever else you keep your treasure where neither moth nor rust doth corrupt, and where thieves do not break through nor steal.
I guess the objection I’ve gotten is that when the dollar devalues against gold, and you go to sell the gold, you’ll have to pay tax on the paper profit you’ve made on the increase, which you shouldn’t have to do since the gold is exactly the same.
Re-taxing on the conversion between gold and paper every time is true for any good or service, right? I buy a car for 10k, the dealer takes the tax hit on earning that much, I re-sell the car for 5k and I have to pay taxes on the 5k “earnings” …unless I have a paper trail that I can show to an auditor that I in fact lost 5k through the life of the car while it was mine?.. (is that how taxes work? Or do I just keep getting hit multiple times if I want to keep buying and reselling the same car? Not through the immediate sales tax, but through the big end of year tax return).
Either way, I agree that the fewer conversions that are done, the better. But people still play the stock market, and that place eats an automatic $7 per trade on top of everything else. As well as playing with world currency arbitrage. Gold looks no different than that to me.
Furthermore, isn’t the fact that you don’t know if everyone you want to do business with will accept X amount of gold at that day’s market value and sign a contract to that effect to show you have fully paid X amount at Y rate as payment for goods or services or debts proof that gold is not in fact money in every instance nor an eternal store of value anymore than Yap island stones or lead or a mating pair of goats? If I go to Togo’s and bring a flake of gold worth, that day, $8.50, will I be assured a sandwich? Will the police be called on me if I try to pay for a car with jewelry?
Respectfully, this is a very short-sighted view. You have taken one single instance from U.S. history, during a severe depression where strong executive action was arguably needed to stop the bleeding, and projected that as something that is or will be commonplace.
Further, nobody was required to accept “funny pieces of paper.” I could own a haberdashery and demand payment in silver coin, coal, cigarettes, chickens, antique books, three-legged dogs, or musical instruments. If you wanted a derby from my shop, you could meet my terms or go to the place down the street that accepted your paper money.
Yes, it is very true that one could no longer demand gold in exchange for the bank notes, but why the need? Those pieces of paper could buy any consumer good or service in the country in 1934. Then and now, it is not an illusory promise. If someone would hand you a stack of 1,000 $100 bills, would you scoff and declare that it is just paper? Of course not. You and your family would probably be very excited.
The important point is to determine why you would be excited. You, after having declared that these bills are just “funny pieces of paper,” would be very excited upon seeing them. Now you can even buy gold with them. In 1934, you could buy anything in the world except gold, even “hard” money like silver and the like.
It seems that your only objection to fiat money is that it does not retain its value over hundreds of years, or may not retain its value after being unearthed. That is a legitimate interest in what we define as money. However, it is hardly exclusive or remotely near the most important reason. We could have a Twilight Zone invention where gold can be synthesized or have a zombie apocalypse where canned goods or ammunition would be better to be unearthed.
In short, and respectfully, your focus is very narrow. I need something to act as a store of value for next week or next year. For fifty years from now, I rely on the full faith and credit of the U.S. Government. If you do not share in my faith, then a better investment than gold would be remote land in the wilds of Montana, defenses around the compound, and an adequate supply of food. If the U.S. Government fails, then your needs will be food and not gold. You can’t eat it.
“We” is the collective pronoun in English, meaning you, I, and other people in the group to which I am referring.
The fact is that every sane person, including you, considers U.S. corrency to be money. That is why it is money. I can, incidentally, prove that you consider it to be money.
That is not true, sorry. Being a permanent, endless store of value is not, in fact, an attribute of money. A valuable attribute of money is that it not lose it value quickly.
In fact, I’d say storing value is the opposite of money’s purpose. Money is a tool to help facilitate the transfer of goods and services. Its entire purpose is to be spent. Money that’s just sitting there and retaining its value is missing the entire point.
I was wondering whether the central bank and the govt. can secretly collude to erase debt (or not report it).
Central bank holds large part of Govt. debt. Debt as the percentage of GDP is growing bigger and bigger. But how much ever the debt grows, the inflation is not growing in the richer world (USA, EU, Japan etc). But the large debt requires repayment by the Govt. and also, it looks bad as the percentage of GDP.
I was wondering since inflation is not growing much, would it harm the richer worlds’ governments if they secretly keep increasing the budgetary expenditure but do not show it on the books.
The main cause of inflation is too-much-money chasing too-few-goods. That problem could exist (ignoring psychological effects) whether the U.S. keeps its printing-press activities secret or not. We’ve had threads discussing why that new money isn’t causing inflation; a main reason is that much of the new money is still just sitting in F.R.B. computers as “excess reserves.”
But inflation policies and government fraud may be beyond the scope of this thread. A gold standard is no panacea — aren’t there some who think the U.S. government has replaced the gold in its vaults with gold-plated tungsten?
[trivia note] The Federal Reserve still has about 11,000 tons of gold bullion backing part of their dollar issue (though redemptions aren’t allowed ) . The gold is shown on their books at the old $35 price. A quick $380 billion profit is available by “marking to market” that gold, but so what?
) . The gold is shown on their books at the old $35 price. A quick $380 billion profit is available by “marking to market” that gold, but so what?