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Mr. Billion
The First USA Noel


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Here's my understanding of it: Money used to be specie, generally coins made out of shiny metals that were considered to be inherently useful.

Then somebody came up with the idea of using bank notes and checks instead of cold hard shiny cash, and this eventually became the practice of considering a dollar bill to be worth a certain amount of gold.

In the U.S. in the '70s, we switched the value of money from being based on a percentage of the country's gold to being based on... What? As near as I can tell, it's based on faith, fiat, and tradition. Today we accept money as having value because everybody else does, so it works.

Somebody just told me that the U.S. currency is somehow tied to the value of land. I've read that the French had a system using the assignats where money was tied to land instead of metal during the French Revolution, but I've never heard of anything similar for the United States. Is this true about America, or does this guy not know what he's talking about?

Other questions:

Does any country in the world still use specie? If not, when did the last one switch over?

Does the rest of the world use the same system of money as the U.S., or do some countries still tie their money to metals?

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"For the U.S. to get involved militarily in determining the outcome of the struggle over who's going to govern Iraq strikes me as a classic definition of a quagmire." ~Dick Cheney.

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Gydna
I'm Dreaming of a White Sale


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To my knowledge you are quite right in thinking that money, these days, is nothing more than "faith, fiat and tradition" In truth it was nothing more than that when it was tied to precious metals as the precious metals had no inherant use to anyone other than looking nice. This is why Countries and Governments need to be very careful over inflation and deficits etc because it is possible for peoples confidence in money to collapse e.g. Germany in the 1920s, Hungary in the 1940s.

Our whole economic system and prosperity depends on us continuing to accept that these pieces of paper mean something.

You are right in saying that the French tried to tie the value of their money to land during the Revolutionary period. They were called Assignats and they collapsed quite quickly because there was no faith in them. I can't say I've heard of the US doing anything similar but I could be wrong.

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Churchill drank, smoked and was a successful amateur painter. Hitler was a teetotal, vegetarian, animal loving failed professional painter. Draw your own conclusions!

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jw
The First USA Noel


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Three families and their friends were shipwrecked on a desert island.

The DeCourcy's, had a box of gold and stationery which they had saved from the ship.
The Smith's were tradesmen, and they had saved all the tools from the ship.
The Murphy's, were peasant hard workers.

In order to start building, the Murphy's needed the Smith's skills & tools. In order to get things built the Smith's needed workers.

In stepped DeCourcy who offered to form a bank and create money based on the value of the gold.
They loaned Murphy 1000 at a rate of interest of 10%, which he gave to the Smith's for the use of the tools, and the hire of their tradesmen.
The Smith's borrowed 500 from the DeCourcys, so that they could pay Murphy labourers, also at a rate of 10%.
They both gave their earnings to DeCourcy to 'mind' and he gave them 5% interest on this.

The system worked so well that the two families continually went back to DeCourcy's bank to fund their expansion.
But eventually the Smith's and the Murphy's got agitated when they saw that the DeCourcys were living in a big house with the best views, and didn't have to do much work.

They went to DeCourcy and demanded to see his gold, on which his bank was founded.
Decourcy ran them from his office, telling them he wouldn't loan them any more money if they kept up the agitation.
But Murphy and Smith were not to be deterred so they decided to break into DeCourcys office and find the gold.
Upon entering they found a box marked 'Gold'.
Murphy prised it open with one of Smith's tools
and found no gold, only worthless rocks.

Surely DeCourcy's banking days were over?

They approached DeCourcy the next day with their findings.
DeCourcy told them that the banking system would collapse, and that they would lose all their assets if the gold was stolen, so he had hidden it elsewhere.

Murphy and Smith thought about how the collapse of the banking system would ruin them, so they went away safe in the knowledge that their assets were in safe hands, and thanked DeCourcy for his foresight.
DeCourcy went away, safe in the knowledge that his 'rocks' would keep him in the style he had grown accustomed to.

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On my old guitar sell tickets, so someone can finally pick it.

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pinqy
Ding Dong! Merrily on High Definition TV


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Cribbing from Macroeconomics (Second Edition) by Gregory Mankiw, the progression goes basically like this...
Barter is an inconvenient method of allocating resources. Money serves the functions of Store of Value, Unit of Account, and Medium of Exchange. Store of Value means you carry over your purchasing power through time. Unit of Account refers to the way prices and debts are kept and quoted. Medium of Exchange is what we use to actually buy goods and or services.

So, the most common historical form of money was commodity money: the money itself had intrinsic value. Gold has been the most common form. The advantages are that gold has its own use and is widely desired enough that even if you don't want to use the gold directly, someone else will so you can trade your gold for their goods.

Let's start with raw gold. They buyer of a good has to measure out the gold, then the seller has to verify the purity and quantity. That's a pain. So the government steps in to regulate money by minting gold coins that have a guaranteed quality and weight. But even that can be a bit difficult and bulky, so the government can move on to printing gold certificates...promising to redeem the paper with gold. If the people believe the promise, then the paper is as good as gold.

Now here's the trick, we've gotten to the point where no one carries around gold anymore, just the paper. And the paper serves all the functions of money. So if no one ever bothers to redeem the certificates for gold, why bother having that as an option? As long as people continue to use it and it fulfills the functions, fiat money works perfectly well.

US money has never been tied to land. I'm not aware of any country that currently backs its money with gold.


pinqy

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Winter Solstice Hanukkah Christmas Kwanzaa & Gurnenthar's Ascendance Are Coming!

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Troberg
Angels Wii Have Heard on High


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Yep, it's correct, there is no "real value" in money anymore.

As long as everything is fine, this works nicely. However, if there should come a big depression, the "solid gold foundation" would have acted as a brake and minimized the damage. Without one, when people lose confidence in the value of money, the bottom will fall out of the bucket and the economy will crash harder.

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/Troberg

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Methuselah
Happy Holly Days


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quote:
Originally posted by Troberg:
Yep, it's correct, there is no "real value" in money anymore.

As long as everything is fine, this works nicely. However, if there should come a big depression, the "solid gold foundation" would have acted as a brake and minimized the damage. Without one, when people lose confidence in the value of money, the bottom will fall out of the bucket and the economy will crash harder.

That's a bit of a fallacy, as gold and/or silver backed currency has been in use in both the U.S. and U.K. at times of severe economic depressions. Gold-standard valuations created extremely high interest rates and a contraction of money supply. The Gold-backed currency also tends to lead to economic inequality and consolidation of national wealth due to the non-liquidity of the standard. Gold-standard valuation, in essence, slows the "speed" of currency.

This was the very reason for the formation of the "Greenback Party" and the Populist Party towards the end of the 19th century here in the States.

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"The true soldier fights not because he hates what is in front of him, but because he loves what is behind him." - G.K. Chesterton

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Troberg
Angels Wii Have Heard on High


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quote:
That's a bit of a fallacy, as gold and/or silver backed currency has been in use in both the U.S. and U.K. at times of severe economic depressions. Gold-standard valuations created extremely high interest rates and a contraction of money supply. The Gold-backed currency also tends to lead to economic inequality and consolidation of national wealth due to the non-liquidity of the standard. Gold-standard valuation, in essence, slows the "speed" of currency.
Quite possible, I'm no expert. Still, it makes sense to me that a tangible value would be more stable than trust only in a situation where the trust in currency has broken down.

But, I'm no economist and failed or almost failed all classes related to economy and finance, so I may be wrong. I much prefer real mathematics. If it was up to me, your value as a person would be based on the number of remote controls you own. [Smile]

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/Troberg

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Methuselah
Happy Holly Days


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quote:
Originally posted by Troberg:
But, I'm no economist and failed or almost failed all classes related to economy and finance, so I may be wrong. I much prefer real mathematics. If it was up to me, your value as a person would be based on the number of remote controls you own. [Smile]

What if you only own one remote control...but it's really, really big? [Big Grin]

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"The true soldier fights not because he hates what is in front of him, but because he loves what is behind him." - G.K. Chesterton

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Delta-V
Xboxing Day


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quote:
Originally posted by Troberg:
Quite possible, I'm no expert. Still, it makes sense to me that a tangible value would be more stable than trust only in a situation where the trust in currency has broken down.

The problem there is that gold itself is almost as lacking in tangible value as money. Aside from some limited use in industry, it's primary uses are investment and adornment. Both of those are linked to the economy, and your economy is then linked to the supply and demand of the gold market. Everybody with the gold standard has their currency linked whether it's advantageous or not, which is blamed by some economists for the propagation of the Great Depression. And then the 'gold standard' is only as good as how and how well the government actually adheres to the 'standard'.

Here's a short summary.

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"My neighbor asked why anyone would need a car that can go 190 mph. If the answer isn't obvious, and explaination won't help." - Csabe Csere

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GenYus
Away in a Manager's Special


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The other problem with the gold standard is that there is not enough gold. There is about $750 billion in US currency in circulation. To back that with gold would require 50,000 tons of gold (at $625 a troy ounce). That much gold would be a cube about 43 feet on each side.

According to the US Mint, Ft Knox has about 6,100 tons of gold. That could "cover" about $92 B or about 1/8 of the outstanding US currency.

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IIRC, it wasn't the shoe bomber's loud prayers that sparked the takedown by the other passengers; it was that he was trying to light his shoe on fire. Very, very different. Canuckistan

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Errata
Happy Xmas (Warranty Is Over)


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quote:
Originally posted by Mr. Billion:

In the U.S. in the '70s, we switched the value of money from being based on a percentage of the country's gold to being based on... What?

I think we actually abandoned the gold standard and became a fiat currency during the great depression. But it wasn't until the 70s that we totally stopped redeeming cash for gold.
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pinqy
Ding Dong! Merrily on High Definition TV


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Oh, I just realized we haven't discussed the definitons of Money yet.

C (aka M0) is Currency. Not generally used as a measure of money.

M1 is the sum of Currency, demand deposits, traveler's checks, and other checkable deposits.

M2 is M1 plus savings deposits, small time deposits, and retail money market mutual funds.

M3 adds on large time deposits and term repurchase agreements. The Fed no longer publishes information on M3 as it didn't change much and nobody really found much use for it.

L adds on savings bonds, short term securities and other liquid assets. Not published by the Fed either. I'm not really sure that anyone uses L...my book is a little old.

pinqy

--------------------
Don't Forget!
Winter Solstice Hanukkah Christmas Kwanzaa & Gurnenthar's Ascendance Are Coming!

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Elwood
Little Sales Drummer Boy


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I haven't read it in 15+ years, but I seem to recall Pat Robertson (I know) arguing in New World Order that virtually all banks are now entirely insolvent. IIRC, his hypothesis was basically that banks loan more than they have, essentially counting on the fact that there is no way everyone will withdrawl their accounts simulataneously, and thus creating currency in the process apart from the Federal reserve. IOW, if everyone tried to convert their desposits to cash, every bank and banking firm in the country would come up short.

This seems highly fishy to me and I hope I'm not misrepresenting him. I just found the dusty paperback on my basement shelves. If I can get past the mold, perhaps I can find the reference and see if my memory is vaguely in line with the actual text.

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"If I didn't see it and didn't know it was a real news report, I wouldn't believe it. I mean, how nutty can you get?"-Pat Robertson Oct 26, 2006.

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Elwood
Little Sales Drummer Boy


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Ah, here it is. Funny the things that jar your memory. I had actually highlighted this some 16 years ago as a big?????

quote:
All banks today use what is called fractional reserve banking. That means with starting capital of $1 million, they can reserver $50,000 and loan out $950,000. Assuming their borrowers redeposit the money they borrow, the bank then reserves 5% of the $950,000 and loan out the rest.

As depositors place money with the bank, the bank in turn reserves 5 percent, and loans out the rest, continuing the process as long as deposits of fresh capital is available. Therefore, by using fractional reserves a bank can ultimately pyramid modest capital into enormous sums of money. . . .with capital of $5 million and reserves of $45 million, a bank can support a loan portfolio of $1 billion that would normally net. . .about 1 percent, or $10 million annually. This means that the bank has been receiving about $90 million in gross interest on money which it has created out of nothing.

-Pat Robertson, New World Order pp. 120-121

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"If I didn't see it and didn't know it was a real news report, I wouldn't believe it. I mean, how nutty can you get?"-Pat Robertson Oct 26, 2006.

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Mr. Billion
The First USA Noel


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quote:
Originally posted by Elwood:
Ah, here it is. Funny the things that jar your memory. I had actually highlighted this some 16 years ago as a big?????

quote:
All banks today use what is called fractional reserve banking. That means with starting capital of $1 million, they can reserver $50,000 and loan out $950,000. Assuming their borrowers redeposit the money they borrow, the bank then reserves 5% of the $950,000 and loan out the rest.

As depositors place money with the bank, the bank in turn reserves 5 percent, and loans out the rest, continuing the process as long as deposits of fresh capital is available. Therefore, by using fractional reserves a bank can ultimately pyramid modest capital into enormous sums of money. . . .with capital of $5 million and reserves of $45 million, a bank can support a loan portfolio of $1 billion that would normally net. . .about 1 percent, or $10 million annually. This means that the bank has been receiving about $90 million in gross interest on money which it has created out of nothing.

-Pat Robertson, New World Order pp. 120-121
Hate to say it, but Robertson is right. Not in his condemnation of the process, but in his idea of how it works. When people begin to get the idea that they might not be able to withdraw their money from the bank, they rush to the bank to withdraw before everybody else does. When they're confident that they can withdraw any time they want, they're not in such a hurry. Runs on the bank were cyclical until the Federal Reserve was established to regulate how much money a bank had to have on hand. The FDIC insurance of all bank deposits up to $100,000 further ensures that even if a bank is unable to pay, people can still withdraw their money. So there hasn't been a run on the banks in a long time.

But yeah, money is created out of nothing in the way Robertson described. I have no problem with it, though, because the modern system has changed the general population's economic situation. It's now relatively easy to get money because there's more of it. Also, if money can't be created in the modern way, there's a fixed amount of it. Today, one person having more money doesn't mean that another person has to have less.

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"For the U.S. to get involved militarily in determining the outcome of the struggle over who's going to govern Iraq strikes me as a classic definition of a quagmire." ~Dick Cheney.

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Silas Sparkhammer
I Saw V-Chips Come Sailing In


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I can actually think of one way in which "money is tied to land." The United States Federal Government owns enough land -- National Parks, military bases, etc. -- to be able to pay the National Debt, were it called for immediately.

Unlike the scenario of the banker on the small sandy island, the U.S. *does* have the ability (in the abstract!) to convert "rocks" to money.

(This isn't entirely an abstraction: a foreign company owns the tourism franchise rights to Yosemite National Park. They obviously don't own the land itself, but they run the hotels, gift-shops, etc.)

Silas

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Illuminatus
Jingle Bell Hock


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quote:
Originally posted by Methuselah:
quote:
Originally posted by Troberg:
Yep, it's correct, there is no "real value" in money anymore.

As long as everything is fine, this works nicely. However, if there should come a big depression, the "solid gold foundation" would have acted as a brake and minimized the damage. Without one, when people lose confidence in the value of money, the bottom will fall out of the bucket and the economy will crash harder.

That's a bit of a fallacy, as gold and/or silver backed currency has been in use in both the U.S. and U.K. at times of severe economic depressions. Gold-standard valuations created extremely high interest rates and a contraction of money supply. The Gold-backed currency also tends to lead to economic inequality and consolidation of national wealth due to the non-liquidity of the standard. Gold-standard valuation, in essence, slows the "speed" of currency.

This was the very reason for the formation of the "Greenback Party" and the Populist Party towards the end of the 19th century here in the States.

And of course, the Gold standard vs. Silver standard debate was made into the allegorical The Wizard of Oz, the movie version of which featured the hanging munchkin we snopesters hold so dear in our hearts.

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"DEAR APPALLED: I see no harm in a group of young women playing strip poker at an all-girl slumber party." -Dear Abby

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jw
The First USA Noel


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Having spoken to an economist friend, I can offer the following;
He tells me that currency in circulation is based on the GDP of the region. This to me makes sense, but I'm sure some of you will find fault.

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On my old guitar sell tickets, so someone can finally pick it.

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