A New Kind of Money

[BaalChatzaf]

I propose that we transition to commodity backed money. Two commodities suggest themselves; gold and oil. So we have currency that represents so many bbl of oil and currency that represents so many troy ounces of gold. The question is what shall we call the units of currency. I suggest that currency back by gold be called The Trojan because it equates to so many Troy ounces of gold. The oil backed currency should be called the Sheik since it equates to a product produced in Arabia.

Then as we look at our wallets filled with Sheiks and Trojans we will know exactly what the banks and OPEC are doing to us.

Ba'al Chatzaf

[merjet]

A commodity-backed money is ideal. (How to make the transition is another matter.) However, in my view a basket of commodities would be far better. The currency unit would be an amount gold plus an amount of oil plus some other commodities. The price of such a basket (versus other goods and services) would be far more stable than any money based on a single commodity and entail far fewer (non-productive) transactions trying to play one currency against another.

I think a great opportunity was missed in the late 19th century when many (like William Jennings Bryan) were advocating the monetization of silver. The best course would have been to define the dollar as an amount of gold plus an amount of silver. It could have been the first step to a basket as described above.

Edited January 25, 2008 by Merlin Jetton

[Michael Stuart Kelly]

How would you guys deal with debt-backed money?

Michael

[Brant Gaede]

How would you guys deal with debt-backed money?

Michael

That's what we now have, courtesy of legal tender laws. People need dollars to pay off their mortgages and other debts. Hence, a demand for dollars.

--Brant

[Brant Gaede]

I think you guys are assuming a government money monoply.

--Brant

[Michael Stuart Kelly]

Brant,

That is what we are going to have if we maintain fractional reserve banking laws. I am wondering if our new OL currency designers of the the new assets-backed currency will propose some legal reform to outlaw fractional reserve banking. Otherwise, how will they tie one barrel of oil to the equivalent of 100 IOU's for it in the marketplace and make that work?

Michael

[sjw]

Fractional reserve banking isn't inherently bad as long as it's not coercively instituted, whether through fraud or through government force. If we had governments that respected individual rights there would probably be one major currency and many competing currencies, with the potential for the market to choose new and better ones over time.

What's important is to get the government out of the currency business and to legalize other currencies so the market can select the best one for the times. There's nothing magical about gold or silver, what's "magic" is to let people be free to enter contracts, including those represented by currency. Ron Paul wants to take a small step in that direction by making it legal for us to exchange gold. In the long run though it should be legal to exchange whatever we want.

When you think about it it's asinine to even be having to have such a discussion. If two people want to trade rocks for service, it's none of anyone else's business, least of all the government's. It is a testament to the destructive power of religion that people are so low in self-esteem that they let other men dictate what they will and will not be able to trade with one another.

Shayne

[Michael Stuart Kelly]

Shayne,

We acually have many currencies if you include all the IOU's out there, including treasury bonds, bonds of all kinds, stocks, safekeeping receipts, debentures, certificates of deposit, plain old IOU's, and the whole merry-go-round, including the outright transfer of debt contracts of third parties. Almost all of these have been used as capital (currency, like dollars) during mergers and sell-offs of companies, sale of real estate, etc. (This doesn't even start to deal with FOREX.)

So we have a whole lot of currencies already in use. We just pretend there is only one.

All money instruments, including currency, are nothing more than fancy forms of IOU's. That's it.

I agree with you about free trade. It is nobody's business what people want to trade if rights are not violated. But I do not agree that the problem is religion or self-esteem. The problem is that men want their IOU's paid when due and some who owe don't want to cough it up. Clubs and guns are needed to exact payment.

Enter the government. It doesn't take too long for some government ruler or other to figure out that he can club both owner and ower. Off goes the government making plans all over the place. "I'll do the money thing," it says with a fatherly pat on the head of everyone and the club behind its back in the other hand.

Enter smart bankers. They loan and even give currency (of all sorts) to the owners of the clubs and guns. They know that owners of clubs and guns like to buy stuff like crazy, especially more clubs and guns. All the bankers need is a special privilege here and there...

That is Kelly Economics 101 (and that is not even terribly original).

Michael

[merjet]

I see nothing inherently wrong with fractional reserve banking (usual meaning). Firstly, a fractional reserve requirement is designed to better assure liquidity -- having enough money on hand to pay off depositors (a bank's liabilities) in the event of a run.

A legal requirement for 100% reserves would be a huge constraint on banking. To keep it simple, suppose money is simply gold. If depositors have the ability to withdraw their gold at any time, then a bank could lend only under the condition that it could recall its loans in gold at any time. Does that sound conducive to a business that wants to borrow money in order to make a long-term capital investment in goods? Alternatively, a bank might take only time-deposits, under which terms the depositors could not redeem their gold until the end of the time period. In order to maintain full liquidity, the bank could only loan for time periods that do not exceed those of its depositors. Again, this would likely not be very conducive to businesses that want to borrow money in order to make long-term capital investments in goods.

Having a 100% reserve requirement in a different sense is that a bank is required to have assets equal to its deposits plus capital. This is a solvency rather than a liquidity requirement. Depositors could have full redeem-ability, but they may have to wait until the bank can liquidate sufficient assets, most likely by calling in loans it has made.

Edited January 26, 2008 by Merlin Jetton

[sjw]

So we have a whole lot of currencies already in use. We just pretend there is only one.

Not that I'm an expert, but I think you are mistaken. If we trade in gold, we have to pay taxes on that trade. If we trade money, we don't.

Shayne

[Michael Stuart Kelly]

Not that I'm an expert, but I think you are mistaken. If we trade in gold, we have to pay taxes on that trade. If we trade money, we don't.

Shayne,

Say what?

Either you are not clear or you are clearly mistaken about the capitals market. It is all taxed.

Michael

[Michael Stuart Kelly]

Depositors could have full redeem-ability, but they may have to wait until the bank can liquidate sufficient assets, most likely by calling in loans it has made.

Merlin,

Loans are assets? Heh. We are talking about physical assets here for backing currency (at least we were). What if those borrowers can't or won't pay? What kind of so-called asset is that?

Incidentally, I am not against fractional reserve banking if done without the governement. Flakey institutions will sink quickly on the open market. I am just wondering how to enforce physical assets-backed currency and still have fractional reserve banking. I see lots of jail time for lots of bankers in this case and I don't think either bankers or government rulers will ever stand for that, even in the best of all possible worlds.

Michael

[sjw]

Not that I'm an expert, but I think you are mistaken. If we trade in gold, we have to pay taxes on that trade. If we trade money, we don't.

Shayne,

Say what?

If I take a $100 bill and trade it for 10 $10 bills, then no tax need be paid. However, if I trade some gold for some silver, then there'd be sales tax. Right?

Shayne

[Michael Stuart Kelly]

Shayne,

I don't think that is an apt analogy. You are merely exchanging the form of the dollars, but they are still dollars. If you traded some gold for some gold, I don't know if that would be taxed. I don't think it would be, but I am not sure.

I do know if I trade my dollars for yours, but give you time to pay me, I usually pay tax on the interest I charge for doing that.

Michael

[sjw]

Shayne,

I don't think that is an apt analogy. You are merely exchanging the form of the dollars, but they are still dollars. If you traded some gold for some gold, I don't know if that would be taxed. I don't think it would be, but I am not sure.

I do know if I trade my dollars for yours, but give you time to pay me, I usually pay tax on the interest I charge for doing that.

Michael

I'm pretty sure there'd be tax on the gold even if we exchanged ounce for ounce.

It's not an analogy and I don't know why you're downplaying the issue. Liquidity is essential. If I can't put the gold in the bank and withdraw it in different increments then that's a severe impediment to using it as a medium of exchange.

Shayne

[Michael Stuart Kelly]

If I can't put the gold in the bank and withdraw it in different increments then that's a severe impediment to using it as a medium of exchange.

Shayne,

I agree. That is as it should be.

I even believe there are places in the world where you can do that tax-free, but I will have to check. It has

been a while since I messed with international banking laws and structures.

As to exchanging a lump of gold for smaller lumps, but all weighing the same (and only weight being the money factor, not decorative shape), I am not sure if this is taxed. We should check.

Michael

[merjet]

Loans are assets? Heh. We are talking about physical assets here for backing currency (at least we were). What if those borrowers can't or won't pay? What kind of so-called asset is that?

Yes, a loan is an asset of the lender and a liability of the borrower. Suppose you have $X in cash, an asset. Then you lend somebody $Y cash. Would you then regard your assets as $X - $Y or still $X?

Re post #9 when a depositor puts gold in the bank, the amount becomes both an asset and a liability to the bank. The liability is to the depositor. The depositor still views his receipt for the gold deposit as an asset, even though he doesn't have the gold any more. (The same holds for the bank when it makes a loan.) In effect, the depositor lends the gold to the bank and has an IOU from the bank.

If the bank lends the gold to somebody who doesn't repay it, it's a loss to the bank but not necessarily to the depositor. Any asset, even gold, has a risk of loss. Somebody could steal your gold.

[Michael Stuart Kelly]

Merlin,

As the economy is now discovering, loans are very shaky assets.

I still don't see how physical assets backing currency would work with fractional reserves. Loans depend on it, so I understand that part.

Michael

[Brant Gaede]

If I can't put the gold in the bank and withdraw it in different increments then that's a severe impediment to using it as a medium of exchange.

Shayne,

I agree. That is as it should be.

I even believe there are places in the world where you can do that tax-free, but I will have to check. It has

been a while since I messed with international banking laws and structures.

As to exchanging a lump of gold for smaller lumps, but all weighing the same (and only weight being the money factor, not decorative shape), I am not sure if this is taxed. We should check.

Michael

The bank has gold deposits. It issues receipts to the depositors. The receipts are paper money. The depositors pay the banks to safeguard/warehouse their gold. This is a kind of negative interest.

--Brant

[Michael Stuart Kelly]

Brant,

We were not talking about receipts, but actual gold.

Right before I came back to the USA, it became possible in Brazil to purchase gold that was forged into weighted measures. They came in small rectangular bars with the weight stamped on them. I can't say for sure, but I believe that exchanging several of the smaller ones for a larger one and vice-versa (when they all came to the same weight) all took place without tax.

Like I said, I will have to look.

Michael

[Brant Gaede]

Brant,

We were not talking about receipts, but actual gold.

Right before I came back to the USA, it became possible in Brazil to purchase gold that was forged into weighted measures. They came in small rectangular bars with the weight stamped on them. I can't say for sure, but I believe that exchanging several of the smaller ones for a larger one and vice-versa (when they all came to the same weight) all took place without tax.

Like I said, I will have to look.

Michael

I was talking about receipts for "actual gold."

--Brant

[Michael Stuart Kelly]

Brant,

I have seen what receipts for "actual gold" are. They are about 100 to 1, also, doing a fractional reserve thing, even though the receipts strongly insinuate and even state the contrary.

I would never store gold in a bank. I forgot the technical terms (I can look them up later if you like), but the only way to guarantee your gold (at least by law, but I wouldn't count on it) is to stipulate that the physical gold you put in the bank is to be kept separate from the other gold in the bank. Separate vault or storage area only for that one account. Otherwise, good luck if the bottom falls out.

Michael

[Brant Gaede]

Brant,

I have seen what receipts for "actual gold" are. They are about 100 to 1, also, doing a fractional reserve thing, even though the receipts strongly insinuate and even state the contrary.

I would never store gold in a bank. I forgot the technical terms (I can look them up later if you like), but the only way to guarantee your gold (at least by law, but I wouldn't count on it) is to stipulate that the physical gold you put in the bank is to be kept separate from the other gold in the bank. Separate vault or storage area only for that one account. Otherwise, good luck if the bottom falls out.

Michael

Okay, I'll build my house outta gold brick then sell it off for receipts!

--Brant

[merjet]

Obviously a bank could promise to only keep a depositor's gold in the vault and not lend it out. The bank would more likely than not charge for such service. On the other hand, probably many depositors would prefer getting a positive return on their gold by allowing the bank to lend the gold to others. Such depositors would have to forgo instant access to the actual gold at any time in exchange for only occasional access, e.g. a time deposit, or instant access contingent on the bank having a sufficient supply in the vault. Most of the time their gold receipts would function just as well or better than the actual gold. Far more likely than not, a secondary market in the bank's gold receipts would develop. Even if the bank declined to redeem the receipts for gold early, the depositor could probably get gold from another bank or person in exchange for the gold receipt.

Many people prefer exposure to a loss with a very small probability in order to get a small gain with near certainty. Of course, there will be a wide variety of choices on this risk/reward spectrum.

Edited January 26, 2008 by Merlin Jetton

[BaalChatzaf]

Then as we look at our wallets filled with Sheiks and Trojans we will know exactly what the banks and OPEC are doing to us.

Ba'al Chatzaf

Ye gods and small fish! Did anyone read this sentence? No more satire for you guys!

Ba'al Chatzaf

Edited January 27, 2008 by BaalChatzaf