Ben Bernanke indicating how long the current fiat money system will last. In a truly free market, fiat money would never come into existence though. In the context of monetary history, here is some further reading: 1.
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Sure previous attempts at fiat money systems failed, but so did previous attempts at manned flight, or circumnavigating the globe. A few points on the purported downsides to fiat currency systems: — boom bust cycles: humans seem to prefer these actually, over steady state monotony.
Inflation is anyway generally correlated most strongly with birth rates, not monetary aggregates — just look at Japan. Excellent historical review, Pater.
As an interested lay-person, I found it extremely informative. Thanks for this. Serious question. In that context, what purpose can gold reserves possibly serve? I enjoy your posts. There are a few issues that Austrians I am one have not come to terms with, however, and your post would be better if it took these into account.
Crusoe-Apple economic models are not as informative as we used to think. Complex social-credit relations, not barter writ small, govern a lot of what appears to be exchange to economists.
People simply do not revert to barter in economies of limited ambit. We it turns out are much more complex than that. Projecting our understandings down to micro-markets is the reverse of the aggregationist fallacy that we always complain about — you cannot draw robust conclusions about aggregate markets from individual market-driven behaviors.
Historical evidence is quite clear that the goldsmiths started fractional reserve banking is something of a myth.
You focus on Charles venality, but it is equally likely that the driving force is the general lusting after interest, or free money, among the creditors, facilitated by the sovereign debtor. The sovereign is at fault.
You treat discount like interest. These are not the same thing. Perhaps you do not hold with Fekete that discount on what amounts to gold-backed bearer bonds is not inflationary, while speculative interest is. It is worth. Just as the free market has always chosen gold as the most monetary commodity, so has it always chosen a government.
At least, no free market that has existed historically has existed without a government. It stands to reason that a free market requires a government. We Austrians would be better off focusing the argument on what kind of government that is exactly, rather than demonizing the whole institution.
I know this is a hard bone to swallow for Randists, but swallow it we must. The free market requires a government!!? Please tell me what free market has existed with a government. He is right on this one although I have trouble understanding his other points. You cannot have a free market without enforcement of the property rights — and for that you need a government.
That, and the protection of the national borders are probably the only two useful functions a government has — but they are useful and it is needed to provide them. In short, property rights are only asserted on what can be physically defended, and militia have defended borders more of ten than governments.
When trust among participants is strong, participants tend to formalize property demarcations and propose mutual organizations to maintain such clerical functions. When market participant trust is weak, government is proposed to impose authoritative proclamations. Sorry, I typed it a little fast, I can see that some sentences are fragments and rather wordy ones at that. This is obvious to us Austrians when debating neo-classical projections from micro to macro. It should be obvious to us when doing the opposite.
Primitive economies do not barter. Their relationships are much more complex than that, far more complex than what we moderns call money. Point 2 is simply history, not economics really. This myth of the dishonest goldsmiths is oft repeated, but not investigated. It appears to be false. Point 3 was intended not to rebut but to soften the tendency to find all evil in the government authority and none in the market.
Charles is at fault, surely, but those who lent him money coveted the interest most venally. The creditor government is not the cause of the sin, but the enabler. There is plenty of blame to go around, sovereign and market alike if the two can even be separated, see point 5. Point 4 is technical, suffice to say that, if one accepts some sort of real bills doctrine, a proliferation of short term real bills by commercial discount banks is not inflationary, while maturity mismatch on longer term loans from shorter term deposits can be some here would say is for sure.
You are slightly misrepresenting him, as he espouses private property within an enforced legal framework. Private property is an institution, not a holy writ. At all events, your assertion about trust is tautological.
But that is not what we mean by a market. A market arises precisely at the line where familiar trust is diminished but exchange with relative strangers is beneficial. It is plain to see why some sort of guarantor is necessary to a market. My property is more than what I can physically defend with fists, nails, knives and guns and I want it protected. I prefer to live in a reasonably free and civilized society — not in a barbaric jungle where everyone is for himself and no one can own more than he can physically protect.
The greatest danger for your private property and personal security is your government. Government power attracts worst people in our societies. While government indeed attracts such people and government does a lot of evil things, a total lack of government means chaos and lack of civilization.
If this is what you prefer, feel free to move to Somalia or some other such place. Government is evil — but it is a necessary evil. It has two useful functions — protection of the national borders and enforcement of the property rights. We just need a society that restricts the role of the government to these two functions alone. Gold and silver only were the choice of international trade for hundreds, if not thousands, of years. All sorts of mayhem occurred due to the attempt to fix convertibility between the different metals.
In short forced valuation only works under force. Honest money must be the unit where the ruler itself does not change shape. It will tell you today there is an abundance compared to yesterday , that you may profit from that. Those that are able and prudent will have a reserve of that money to profit from increases in productivity say , and a shortage of produce will be signalled clearly by rising prices.
To counter your argument on hoarding. Imagine a fisherman catches one fish a day , always. He trades it for an apple when he chooses. The apple farmer introduces heightened productivity, and what do you know , the fisherman is able to purchase two apples with his fish , should he want. Are you going to criticize the fisherman also? Pater , and others , are busy looking at , and pointing out , the errors that are occurring due to the inherent manipulability of paper money.
He is pointing out the direct, often hidden, interaction that occurs with social and political affairs. Who is to say how the world , societies , should manage or be managed? No one maybe , but at least a true and honest perspective brings with it the ethic of accountability and the possibility of a fairer understanding. But I see a problem with 2.
Your fisherman example has the apple farmer suddenly being able to produce 2 apples. I asked for examples when gold and silver were naturally as money chosen by the free market, as opposed to declared so by a sovereign.
Individual merchants from different countries freely agreed on some medium of exchange, yes, but it was again some sort of state money which both sides trusted. I am not aware of any chase when international trade between individual merchants was set in terms of weights of precious metals. I am not sure I see the relevance of your answer to 2 , either. I have no problem with money that encourages savings which are equivalent to investing.
My problem is with money that encourages hoarding, as in taking money out of circulation and being rewarded for it with the increased buying power over time of that money. It has nothing to do with productivity. Levine, D. Asset trading mechanisms and expansionary policy. Magill, M. Theory of incomplete markets, Volume I. Molico, M.
The distribution of money and prices in search equilibrium. Monroe, A. Monetary theory before Adam Smith. New York: Kelley. Ostroy, J. The informational efficiency of monetary exchange. American Economic Review — Patinkin, D. The invalidity of classical monetary theory. Redish, A. Bimetallism: An economic and historical analysis. Cambridge: Cambridge University Press. Renero, J. Does and should a commodity medium of exchange have relatively low storage costs?
Samuelson, P. Foundations of economic analysis. Cambridge: Harvard University Press. What classical and neoclassical monetary theory really was. Canadian Journal of Economics 1: 1— Sargent, T. The big problem of small change.
A model of commodity money. Shi, S. Money and prices: A model of search and bargaining. A divisible search model of money. Econometrica 75— Shubik, M. Commodity money, oligopoly, credit and bankruptcy in a general equilibrium model. Western Economic Journal 24— Smith, B. Taking intermediation seriously. Starr, R. Exchange in a network of trading posts. In Markets, information and uncertainty: Essays in economic theory in honor of Kenneth J.
Arrow , ed. To answer that question, we need to take a brief look at history. He simply ordered the mines to overproduce silver in an attempt to finance the empire that had grown greatly under Cesar and himself. When this overproduction began to have inflationary effects, Augustus wisely decided to cut back on the issuance of coins. This was the last time that a Roman emperor attempted to honestly correct a monetary policy blunder, aside from a brief flashing up of monetary rectitude under Aurelius some years later.
It was Nero who first came up with the idea to actually debase coins by reducing their silver content in AD 64 , and it all went downhill from there. It should be mentioned that Mark Anthony of Hollywood fame financed the army he used in his fight against Octavian — then later Augustus — also with debased coinage. In AD Aurelius entered the scene with a well-intentioned monetary reform, which fixed the silver-copper content of the then most widely used coin the Antonianus at — however, just as soon as this reform was instituted, the silver content resumed its inexorable decline.
Left: Emperor Diocletian the price fixer. Merchants began to hide their goods rather than accept the edict to sell them at a loss. This is of course why price controls are always doomed to failure.
Does this sound vaguely familiar? There are two distinct intertwined historical developments that led ultimately to the present system. The idea of fractional reserve banking was first introduced by the forerunners of our modern day banking system, the goldsmiths. It followed that one could temporarily lend deposits out and collect interest on such loans.
So far so good — this is the legitimate business of banks. But the goldsmiths decided to go one step further, issuing additional receipts for gold, even if they were not actually backed by a deposit. Obviously this is fraud. Nowadays, no such fear exists. In essence, a de facto insolvent banking system is supported by this trick.
Taxes in the largely agricultural economy of the Middle Ages were usually paid in the form of goods, and these payments were recorded with notches on wooden sticks that were then split length-wise one half remained with the tax payer serf, as proof of payment.
This was an ingenious method of avoiding counterfeiting. In AD , King Henry the First ascended the English throne, and adopted the tally stick method of recording tax payments. By the time of Henry II, taxes were paid twice a year, and the tally sticks recording the partial tax payment made at Easter soon began to circulate in a secondary discount market — i.
By , the English monarchy , after a brief hiatus of experimentation with a pseudo-republican government under Cromwell, was reinstated and Charles II began his reign but with vastly reduced powers, especially in the realm of taxation.
Since Charles had to beg for tax money from the parliament, he struggled mightily with paying his vast pile of bills. Whenever Charles wrangled permission to raise taxes from parliament, he immediately went to cash in the future tax receipts by selling tally sticks to the goldsmiths at a discount.
This necessitated the introduction of previously referred to method of making such debt payable to the bearer, which allowed the goldsmiths to sell it in the secondary market to raise funds for more lending to the King. They also began to pay interest to depositors, in order to attract still more funds. At that stage of the game, the goldsmiths had a good thing going for them, since the King was the equivalent of a triple A rated sovereign borrower, who could always be relied upon to cover his debt with future tax receipts.
No one thought it problematic that the vaults soon contained more wooden sticks than gold. There was an active market in this government debt, and the goldsmiths profited handsomely. Naturally, Charles was more than happy to exchange wooden sticks for gold, and not surprisingly, soon kicked off a veritable credit boom by upping his wooden sticks production.
Well, you would be merry too if you could kick off an enormous credit boom by exchanging sticks for gold. So what does a king do with all that gold he received for sticks?
Of course, there was a natural limit to this debt expansion. Once all the money attracted from depositors had been transferred to the King, additional deposits could only be acquired by means of offering higher interest rates than previously.
With all his recent loans carrying a far bigger discount, he simply declared the debt illegal, and stopped payments on it with a few judiciously selected exceptions. Left: Charles II as he is apparently remembered today — a knight in shining armor, not the tyrannical thief that he really was.
Although tally sticks were still used until the early 19th century, and even formed part of the capital of the Bank of England when it was founded in , the secondary market never truly recovered from this blow. To add insult to injury, he even gained a propaganda victory, as the public tended to blame the goldsmiths for the mess they were of course not entirely innocent, and above all had been quite gullible.
It was a Scotsman — John Law — ironically born in the very year when Charles defaulted on his debt, who tried the first great fiat money experiment inspired by these ideas. Together with John Law, they combined to economically wreck France. His ideas can be found in a treatise he published in entitled Money and Trade Considered.
A greater quantity [of money] employs more people than a lesser quantity.
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