PSA: Fractional and Federal reserves
Draco_2k
Evil Genius Join Date: 2009-12-09 Member: 69546Members
Evil Genius Join Date: 2009-12-09 Member: 69546Members
Hello,
I was hoping to outline a few boring concepts that I nevertheless find notable, about world's economy, on the off-chance that recent economic events or own curiosity haven't lead you to hear about those things already. I find them of some interest and, assuming I didn't completely fail at the task of describing them, and that you have the patience to read a small wall of text, I think you will too.
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<u><b>Fractional Reserve</b></u> refers to the practice of banks, when giving out loans, to keep a certain percent of their capital as "required reserve", where the rest of the capital is available to loan.
Fractional reserve is also, however, the implicit idea that the bank does not draw from its funds when offering said loan, but literally creates the required sum as bank credit and further that if and when said credit is deposited in the said bank, the new money is also available as basis for creation of loans. The interest is collected on all loans indiscriminately of whether they originated through this process or not.
<u>For example:</u> assuming fractional reserve requirements of 10%, a bank that initially has 100$ can lend out 90$. If this money is deposited back into it, it can now use the available 90$ to lend out 81$ more, and so on. Given enough time and re-deposits, the mathematical average of such practice in an active economy is that the sum of banks operating under the same system can loan out 10 times more money than they have in their vaults, while also collecting interest on the whole loaned sum.
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<u><b>Federal Reserve</b></u> refers to government practice of money creation, where, upon need for creation of new money, the government exchanges treasury bonds that it produces itself for actual money produced by private banks which is legally treated as an act of loaning the money - the government promises to return the created capital, plus the interest on it, whether or not the end sum exceeds total money supply available at the end of operation.
Federal reserve is also an entity comprised of a number of selected private banks that are authorised to loan money to government in aforementioned process, usually regulated by a committee of bankers that oversee said banks themselves.
<u>For example:</u> the government wants to create 100$. It sends out a request to treasury to print 100$ in government bonds to treasury and then exchanges them for 100$ in real money, promising to return - assuming interest rate of 10% - 110$ at certain later date. Most likely the government will legally relegate paying the created debt and interest to taxpayers or foreign loans.
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The consequences of either of those things are yours to imagine.
Now, the title and description refers to the system officially implemented in the US ("Federal Reserve"), but it is common, if not universal, throughout rest of the world ("Central Bank", "Federal Bank", "Government reserve", etc.) at the moment. You can try to specifically research state of affairs for your region, but chances are, it won't be easy. This is also the reason I can't give any sources or more detailed information, indeed you will only have my word for it that I'm not making this up.
Thank you for your attention.
<!--coloro:#696969--><span style="color:#696969"><!--/coloro-->---<!--colorc--></span><!--/colorc-->
<!--coloro:#696969--><span style="color:#696969"><!--/coloro-->Addendum:<!--colorc--></span><!--/colorc--> <u><b>Inflation</b></u> refers to increase in the total amount of money in circulation, and resulting increase in prices of goods.
An inflation rate of 2% implies that someone created 2% more money to go around, and it - after some time - will result in rise of prices of all things 2%, in a process of natural adjustment of the free market: because the amount of goods does not increase with creation of new money, the market will simply adjust to new size of money supply. Newly created money - inflation - will, so to speak, draw a share of value from other money that already exists. One important thing to note here is that this usually describes a <i>trend</i>, not a single-use static number, and not a total.
<u>For example:</u> assuming yearly inflation rate of 2% and tax rate of 50%, it would take inflation 50 years to overcome taxation in terms of loss of purchasing power for the taxpayer: 50 years of 2% inflation a year is 100% inflation total, now there's twice the money to go around, and so each coin is worth twice less.
I was hoping to outline a few boring concepts that I nevertheless find notable, about world's economy, on the off-chance that recent economic events or own curiosity haven't lead you to hear about those things already. I find them of some interest and, assuming I didn't completely fail at the task of describing them, and that you have the patience to read a small wall of text, I think you will too.
---
<u><b>Fractional Reserve</b></u> refers to the practice of banks, when giving out loans, to keep a certain percent of their capital as "required reserve", where the rest of the capital is available to loan.
Fractional reserve is also, however, the implicit idea that the bank does not draw from its funds when offering said loan, but literally creates the required sum as bank credit and further that if and when said credit is deposited in the said bank, the new money is also available as basis for creation of loans. The interest is collected on all loans indiscriminately of whether they originated through this process or not.
<u>For example:</u> assuming fractional reserve requirements of 10%, a bank that initially has 100$ can lend out 90$. If this money is deposited back into it, it can now use the available 90$ to lend out 81$ more, and so on. Given enough time and re-deposits, the mathematical average of such practice in an active economy is that the sum of banks operating under the same system can loan out 10 times more money than they have in their vaults, while also collecting interest on the whole loaned sum.
---
<u><b>Federal Reserve</b></u> refers to government practice of money creation, where, upon need for creation of new money, the government exchanges treasury bonds that it produces itself for actual money produced by private banks which is legally treated as an act of loaning the money - the government promises to return the created capital, plus the interest on it, whether or not the end sum exceeds total money supply available at the end of operation.
Federal reserve is also an entity comprised of a number of selected private banks that are authorised to loan money to government in aforementioned process, usually regulated by a committee of bankers that oversee said banks themselves.
<u>For example:</u> the government wants to create 100$. It sends out a request to treasury to print 100$ in government bonds to treasury and then exchanges them for 100$ in real money, promising to return - assuming interest rate of 10% - 110$ at certain later date. Most likely the government will legally relegate paying the created debt and interest to taxpayers or foreign loans.
---
The consequences of either of those things are yours to imagine.
Now, the title and description refers to the system officially implemented in the US ("Federal Reserve"), but it is common, if not universal, throughout rest of the world ("Central Bank", "Federal Bank", "Government reserve", etc.) at the moment. You can try to specifically research state of affairs for your region, but chances are, it won't be easy. This is also the reason I can't give any sources or more detailed information, indeed you will only have my word for it that I'm not making this up.
Thank you for your attention.
<!--coloro:#696969--><span style="color:#696969"><!--/coloro-->---<!--colorc--></span><!--/colorc-->
<!--coloro:#696969--><span style="color:#696969"><!--/coloro-->Addendum:<!--colorc--></span><!--/colorc--> <u><b>Inflation</b></u> refers to increase in the total amount of money in circulation, and resulting increase in prices of goods.
An inflation rate of 2% implies that someone created 2% more money to go around, and it - after some time - will result in rise of prices of all things 2%, in a process of natural adjustment of the free market: because the amount of goods does not increase with creation of new money, the market will simply adjust to new size of money supply. Newly created money - inflation - will, so to speak, draw a share of value from other money that already exists. One important thing to note here is that this usually describes a <i>trend</i>, not a single-use static number, and not a total.
<u>For example:</u> assuming yearly inflation rate of 2% and tax rate of 50%, it would take inflation 50 years to overcome taxation in terms of loss of purchasing power for the taxpayer: 50 years of 2% inflation a year is 100% inflation total, now there's twice the money to go around, and so each coin is worth twice less.
Comments
Given that, I find it hard to have any faith in a stable economy, just hope it doesn't break and don't be too suprised when it does.
At its most simple, money is just an I-owe-you. You do some work for me in exchange for a slice of my gold brick. However, you decide that you don't want to carry a bit of gold around with you, so instead I write out a few I-owe-yous (hereafter referred to as "money") that add up to the value<!--coloro:grey--><span style="color:grey"><!--/coloro-->*<!--colorc--></span><!--/colorc--> of the gold you are entitled to. You can come back and exchange any amount of money for the corresponding amount of gold at any time, but you're carrying around some slips of paper which are more convenient. Also, if your bit of gold is worth 1000 money and a loaf of bread is worth five money, shaving off the exact amount of gold to pay for it could be tricky. As long as everyone agrees that I am an honourable man who guarantees to exchange the money I issue for gold on demand, the worthless pieces of paper you carry around represent an object with actual value and can thus be used to pay for goods and services.
It's once we start all these financial shenanigans that "create money out of thin air" without anything to back it that ###### gets complicated (and potentially disastrous).
<!--sizeo:1--><span style="font-size:8pt;line-height:100%"><!--/sizeo--><!--coloro:grey--><span style="color:grey"><!--/coloro-->* Of course, I deduct a small amount as my fee for hanging on to your gold. I'm a banker now!<!--colorc--></span><!--/colorc--><!--sizec--></span><!--/sizec-->
Kind of like a note or coin then?
Its only value is that you can swap it for something useful, which is the same value as a note, as long as people believe notes are valuable you can swap them for good stuff, as long as people continue to believe gold is valuable, you can swap that for good stuff. You can't do anything else with gold or notes, except maybe wear them although wearing banknotes is apparently not fashionable for some reason.
Gold just seems to be easier to believe in a value for, although honestly bacon sandwiches are far better, and because they're perishable it solves the problem of inflation.
Shiny things simply seem to be more commonly percieved as valuable is all.
Arguably all value is percieved but some things are universally valauble, like food, or strong metals, or tools, you can take them anywhere and they will still be useful unless that place has something that does what they do better, in which case that thing is even more valuable. Shiny things are only valuable if you're in a position to spend time looking at them, which I suppose gives them slightly more value than non-shiny things as you can't really look at banknotes, but then most people don't look at jewelry either, not very often anyway compared to the price of it. Mostly it just seems to be held on to for a few years and then sold when the owner inevitably dies, kind of like very slow money.
Paper money worth is currently based on speculation about the economy, if the economy goes down the paper money is worth less despite a continued level of rarity or lack thereof. Back when it was in relation to gold (as in guaranteed to be able to be exchanged for X gold) it wasn't based on the economy and was more stable.
The problems highlighted in this thread is that the paper based economy is like speculation on finding more gold. It is lended out with an expectation of being paid back by issuing loans based on projected increases in the total amount of money. When companies are allowed to issue value without shuffling around the paper notes that the value is based on the link to the foundation of value is doubled. Banks are loaning based on speculation of increased value of paper money which is based on speculation about how the economy will proceed. This pattern means that the banks actually have a strong influence on the economy by being the ones who issue the value as well as collect on it.
There are many things wrong with current society that allow for a massive collapse of the economy through manipulation of the base system of value. This is dangerous, as shown by the recent collapse of many big banks due to this exact issue, where they gave value to something based on subjective value based on another subjective value. The economy would have to fail completely to replace this system though, and I expect that to be in the distant future after multiple recessions and depressions and I think people will still work their way back to this system.
A market driven by either of those things can be manipulated, wittingly or unwittingly: in gold market, you can control the value of gold by simply hoarding it, or giving it away; in a fiat (non-backed currency) you can control the value of money by, again, printing or withdrawing it. More importantly, both of those systems are relatively agnostic towards the concepts brought up in OP, both can be manipulated simply issuing IOUs, loans or other forms of credit without check with base capital, both can be used to cheat real value by simply creating virtual one on paper (forgery is the more intuitive term for this). Both are susceptible to accumulation of credit irrespective of any value given to society or even self as well.
This isn't as much an exploit in any current system as it is in general concept of money, a consequence of assigning value to something worthless.
In my humble opinion, of course.
Paper money worth is currently based on speculation about the economy, if the economy goes down the paper money is worth less despite a continued level of rarity or lack thereof. Back when it was in relation to gold (as in guaranteed to be able to be exchanged for X gold) it wasn't based on the economy and was more stable.
The problems highlighted in this thread is that the paper based economy is like speculation on finding more gold. It is lended out with an expectation of being paid back by issuing loans based on projected increases in the total amount of money. When companies are allowed to issue value without shuffling around the paper notes that the value is based on the link to the foundation of value is doubled. Banks are loaning based on speculation of increased value of paper money which is based on speculation about how the economy will proceed. This pattern means that the banks actually have a strong influence on the economy by being the ones who issue the value as well as collect on it.
There are many things wrong with current society that allow for a massive collapse of the economy through manipulation of the base system of value. This is dangerous, as shown by the recent collapse of many big banks due to this exact issue, where they gave value to something based on subjective value based on another subjective value. The economy would have to fail completely to replace this system though, and I expect that to be in the distant future after multiple recessions and depressions and I think people will still work their way back to this system.<!--QuoteEnd--></div><!--QuoteEEnd-->
How does gold help though? If the only thing gold does is guarantee you can swap money for it then how does that help you? That just means that you can reliably buy gold from the bank with your money, and as I said, gold is pretty useless. You can't even buy anything with it, nowhere is going to give you change for a gold brick, the best you could hope for is selling the gold somewhere but then you'd just get a measly amount of money, which is supposed to be worthless at this point anyway.
All it does is add the percieved value of gold to the percieved value of money because the two are interchangeable, but the same can be done with anything, you could guarantee that you can swap money for bacon sandwiches and as eveyone can see the value of bacon sandwiches, money would stay valuable, or you could even just say that 'look, you can go into a shop and buy anything with your money, so money has value' which is what you do most of the time.
Gold is not special in giving money value, it's just shinier than most other things that do it.
<!--quoteo(post=1766312:date=Apr 12 2010, 07:13 PM:name=Draco_2k)--><div class='quotetop'>QUOTE (Draco_2k @ Apr 12 2010, 07:13 PM) <a href="index.php?act=findpost&pid=1766312"><{POST_SNAPBACK}></a></div><div class='quotemain'><!--quotec-->Money is a medium of trade. Anything can act as money, but out on top usually come scarce things over anything else: gold, while having little intrinsic value, can't be picked out of the dirt, it's in limited supply. Reliance on it is somewhere between blind faith and reasonable necessity; to this end gold is almost equal in every regard to securely manufactured paper currency as long as neither are excessively mined nor printed in addition.
A market driven by either of those things can be manipulated, wittingly or unwittingly: in gold market, you can control the value of gold by simply hoarding it, or giving it away; in a fiat (non-backed currency) you can control the value of money by, again, printing or withdrawing it. More importantly, both of those systems are relatively agnostic towards the concepts brought up in OP, both can be manipulated simply issuing IOUs, loans or other forms of credit without check with base capital, both can be used to cheat real value by simply creating virtual one on paper (forgery is the more intuitive term for this). Both are susceptible to accumulation of credit irrespective of any value given to society or even self as well.
This isn't as much an exploit in any current system as it is in general concept of money, a consequence of assigning value to something worthless.
In my humble opinion, of course.<!--QuoteEnd--></div><!--QuoteEEnd-->
I would concur with that, I just think that flaw is pretty major and kind of drowns out any other stability a given economic system might have.
If your entire concept of value relies on people believing something worthless has worth then that belief is going to falter sometimes and break your concept of value.
Gold doesn't rust, so it can be stored easily.
While you do pick gold out of the dirt (lol draco) it is hard to do so, which means that in an economy with X amount of gold it is likely that this amount won't change much.
It is soft and malleable, so can be used easily, partitioned easily to divide payment by weight and reformed into various shapes like coins and jewelry.
It is just easy to use, doesn't go bad and can therefore easily be used as a currency, that is why it has been used for millennia. A bacon sandwich isn't comparable as trade currency because it can go bad. If barter items didn't go bad, there wouldn't be a need for currency, which as noted, is simply a way to offset barter by allowing trade at different times between different people through currency.
The current banking system makes currency out of thin air in large amounts, like being able to weave straw into gold.
It isn't just that gold has these properties, it is that NO other metal has them.
it is malleable, resistant to corrosion, resistant to tarnish.
it is available everywhere but requires huge amounts of work to produce.
it is perfect for jewelery but requires massive labour to produce in usable quantities - which is more or less that makes a commodity valuable.
So if you are looking for something that doesn't lose its intrinsic value over time then gold is about the best option around.
<!--quoteo--><div class='quotetop'>QUOTE </div><div class='quotemain'><!--quotec-->The current banking system makes currency out of thin air in large amounts, like being able to weave straw into gold.<!--QuoteEnd--></div><!--QuoteEEnd-->
It's a lot more complicated than this. They don't make money out of thin air, they create inflation out of thin air. You cannot look at national currency reserves like you do your own bank account. Nations back their wealth by the labour and production of their society and they can arbitrarily attach a value to it that other people can then value themselves.
You can have 10 trillion dollars in circulation in an economy of size X and that will cause the value of a dollar to fluctuate based on the perceived wealth in that economy. Why arbitrarily fix the value of a currency to the amount of a shiny metal buried in a bunker somewhere? How do you account for the massive capability a society has to produce value from the currency in circulation?
As noted in the OP, the original capital is created as debt (by government to the bank), bank loans are created as debt (by people to the bank), personal loans and transactions likewise - just like when you use it to pay for something, you exchange money as measure of satiating debt - in fact I believe most money notes have this purpose stated on them outright, "good for payment of all debts", or something to that effect. Unlike most financial jargon, debt is very easy to understand and to spot, and there you have it.
It's confusing because we generally think of money in terms of property or value but, as mentioned in the OP, neither is actually the case.
<!--quoteo(post=1766329:date=Apr 12 2010, 09:57 PM:name=Chris0132)--><div class='quotetop'>QUOTE (Chris0132 @ Apr 12 2010, 09:57 PM) <a href="index.php?act=findpost&pid=1766329"><{POST_SNAPBACK}></a></div><div class='quotemain'><!--quotec-->I would concur with that, I just think that flaw is pretty major and kind of drowns out any other stability a given economic system might have.
If your entire concept of value relies on people believing something worthless has worth then that belief is going to falter sometimes and break your concept of value.<!--QuoteEnd--></div><!--QuoteEEnd-->
We all know this, too. We know money tends to corrupt people, we know what atrocities people are willing to conduct for profit, we even understand that it's no more than paper, and yet we still base our civilisation on it.
<!--quoteo(post=1766535:date=Apr 13 2010, 04:08 PM:name=snooggums)--><div class='quotetop'>QUOTE (snooggums @ Apr 13 2010, 04:08 PM) <a href="index.php?act=findpost&pid=1766535"><{POST_SNAPBACK}></a></div><div class='quotemain'><!--quotec-->The current banking system makes currency out of thin air in large amounts, like being able to weave straw into gold.<!--QuoteEnd--></div><!--QuoteEEnd-->
Basically yes. One important thing to note here is the issue of collateral: creating money on its own will draw value from currency at large, but loaning out more than there is money to pay back with means there will always be someone unable to reconcile with their debts. Getting back to the original point, it's less weaving gold and more issuing debts.
You can have 10 trillion dollars in circulation in an economy of size X and that will cause the value of a dollar to fluctuate based on the perceived wealth in that economy. Why arbitrarily fix the value of a currency to the amount of a shiny metal buried in a bunker somewhere? How do you account for the massive capability a society has to produce value from the currency in circulation?<!--QuoteEnd--></div><!--QuoteEEnd-->
Tying it to shiny metal means that no matter how often the circulated paper gets traded it retains the intrinsic value of the metal it represents because it can be exchanged directly for that metal. I'm not saying that is the best way to do it, just that the stability is based on the solid exchange method that has worked instead of basing the value of a dollar on how often it trades hands.
You don't have to account for the value from how often it is traded, when the value of the currency vs available items is stable. The reason that additional currency should be introduced is simply to allow for more exchanges by additional people, not because the current money exchanges hands more often.
I'm more bothered that people think that gold itself is worth something because it is rare than understanding why it is used as a stable basis for trading.
Six trillion dollars is a lot of money, but nowhere near enough to cover the entire global economy.
Not that I'm arguing for gold backed currency, but 6 trillion dollars would be exactly enough to run the world economy if a dollar was worth (world economy)/(6 trillion)
(Except you can, but you need to be subtle about it so nobody notices that this is what you're doing. Claiming that your gold is suddenly ten times as value won't cut it.)
That's a weird thought. Surely whether or not it can be used depends on physical amount of metal, not it's value in paper money?
Actually this somewhat illustrates one of the implications of the OP: there's much more credit in the world than there are tangible goods - or, to be more precise, value in money of something doesn't represent it's actual value - which is only possible in a system of constant inflation and forced manipulation, as otherwise one would naturally gravitate to fit the other through exchange in commerce or subjective judgement.
Six trillion dollars is a lot of money, but nowhere near enough to cover the entire global economy.<!--QuoteEnd--></div><!--QuoteEEnd-->
For everything else there is barter, but that would make taxes so much harder to collect.
It's not a particularly weird thought. That value is presumably set by supply and demand, as is the value of the global economy. Currently, the value of the global economy is set as (significantly) greater than the value of the global gold supply. Since the global gold supply is severely limited, the price is adjusted by demand. Unless demand were to suddenly sharply increase, there would be little to no backing for an increase in the gold price - if I raise the price of my gold, buyers will simply buy from other sellers.
I think I see where you're coming from, you assume switching currency while maintaining the old one?.. That's basically the same thing as it is today, between dollar, Euro and any local currency. In that case, yes, quite true. But supply and demand are subjective measure of goods, if we're talking about something qua currency - didn't think I'd ever get to use this word - it doesn't really even enter the picture. I.e. how much is paper money worth?..
Probably another thing to note: supply and demand are not objective measures of value - in extension of this, nor do they result in price equilibrium - as we often assume. It shouldn't be too hard to piece together why that is.
How much is paper money worth? As much as whatever backs it. If this is a commodity, the value of the paper money fluctuates with the commodity. If this is something more ephemeral, like a promise? Pff, anyone's guess!
And yes, value of paper money is speculative. What I was getting at, it's not measured in money because it *is* money. Likewise, if gold was used as currency, supply and demand for it would be just as irrelevant as they are for paper currency. Probably the key point to this being, what we use as currency has nothing to do with it's value, only it's physical properties at best.
Gold doesn't rust, so it can be stored easily.
While you do pick gold out of the dirt (lol draco) it is hard to do so, which means that in an economy with X amount of gold it is likely that this amount won't change much.
It is soft and malleable, so can be used easily, partitioned easily to divide payment by weight and reformed into various shapes like coins and jewelry.
It is just easy to use, doesn't go bad and can therefore easily be used as a currency, that is why it has been used for millennia. A bacon sandwich isn't comparable as trade currency because it can go bad. If barter items didn't go bad, there wouldn't be a need for currency, which as noted, is simply a way to offset barter by allowing trade at different times between different people through currency.
The current banking system makes currency out of thin air in large amounts, like being able to weave straw into gold.<!--QuoteEnd--></div><!--QuoteEEnd-->
Most other things don't last as long true, but they don't need to.
Normally money is backed by the economy itself, the wealth of the nation who uses it. And that IS constant. For every perishable item that is destroyed another is made, so there are always a number of those items in existence. The difference between economies and gold is that if you base your currency on gold the only way to get more currency is to find some more gold somewhere, otherwise you devalue your currency a lot because you have to print more of it but you have nothing to back it with.
The economy however tends to grow as do all things, more people are born, they create more things of value, more things of value in the country means the country has more wealth, and you print some more money to reflect that.
There are also quite a few other things which have the same properties as gold, like uranium, which is pretty tough, doesn't go anywhere, isn't dangerous if you store it in the kind of secure environment you store gold in, and which can actually be used to provide nuclear power which is extremely valuable. Same goes for other metals like titanium which doesn't exactly grow on trees but which can be used as an additive to make strong alloys, or aluminium which is used in practically everything.
You don't normally think 'oh well I can always swap my cash for GOLD at the bank so I believe it has value' you think 'the man at the shop will give me something in return for this so it has value' value is not a function of some shiny metal in a vault somewhere, it's a function of the faith of people, and that faith can come from anywhere, gold is a rather silly place for it to come from because it has the aforementioned problem of being useless, and something useless to most people has no value to them <i>except</i> in the sense that it can be swapped for something else, like money can. Which is why if you're trying to get people to have faith in gold, you may as well get them to have faith in things which you can make more of instead, like money or some other valuable producable goods.
In <i>recent history</i> money is backed by the economy. Gold WAS money for the longest time, along with other desirable non-consumables (even if put into jewelry or coin it could easily be traded by weight). There was a reason that original coinage was made of precious metals like gold and silver, the coin was simply a standard weight making the money <i>worth the gold it was made from</i>.
The advent of paper money was an evolution of written notes that promised a value in gold, and have had very shaky results throughout history because people couldn't trade the notes in for the standard value they represented. The current banking situation is the same issue: Since banks are able to loan on predictions in value instead of actual value, if everyone wanted to get the money from the bank at the same time it would collapse. That is an unsound basis for an economy, as shown in the US in the 30's.
Paper money really is worth the paper it is printed on. Electronic money is worth even less. If all of the banks lost their records of who has what, the economy could not possibly recover like it could if the currency was based on a precious metal that can be recovered because it cannot be destroyed (sure you can send it into orbit but lets be realistic).
Backing is the ability to be exchanged for tangible goods - for instance, if you can exchange money for gold, food, bonds, etc., that's backing, regardless of whether backing measure itself is worth anything: if you could, for example, exchange your money for some part of country's economy at any moment, that'd be backing. Without this condition, however, it's faith value alone, in full sense of the word: an unjustified belief. It's a common misconception, even some economists talk about "backing" in this sense (or maybe it is indeed used in that sense, I don't know).
Or, to be more concise, it's important to know the distinction between faith value and tangible value, more so that they're so often confused.
Neither gold nor paper money have any actual (comparative) value, or ever did, whereas food, water, machines, knowledge and so on do and always have. A more intuitive way to understand this is simply to remember what exactly money is used to obtain in the first place.
<!--quoteo(post=1766861:date=Apr 14 2010, 05:54 PM:name=snooggums)--><div class='quotetop'>QUOTE (snooggums @ Apr 14 2010, 05:54 PM) <a href="index.php?act=findpost&pid=1766861"><{POST_SNAPBACK}></a></div><div class='quotemain'><!--quotec-->The advent of paper money was an evolution of written notes that promised a value in gold, and have had very shaky results throughout history because people couldn't trade the notes in for the standard value they represented. The current banking situation is the same issue: Since banks are able to loan on predictions in value instead of actual value, if everyone wanted to get the money from the bank at the same time it would collapse. That is an unsound basis for an economy, as shown in the US in the 30's.<!--QuoteEnd--></div><!--QuoteEEnd-->
Exactly. If I may, I'd put it: as a result of all involved factors banks loan more than they have, and demand more than everyone has.
Gold is actually pretty useful and would be seen a lot more in manufacturing if it wasn't so expensive.
For those who are interested in this topic, I highly recommend you read G. Edward Griffen's book "The Creautre from Jekyll Island: A Second Look at the Federal Reserve". It filled most of the gaps in knowledge I had about the history of gold backed currencies and our current, near global fiat currencies. He makes a very strong argument against the use of fiat currencies as they encourage war, grow government, enable confiscationary inflation of the lower classes, and allowing manipulation of the currency to primarily benefit the banking elite.
It also covers many of the aforementioned topics and arguments in great detail as:
"We can't go back to gold, there isn't enough to support the world economy"
"Gold backed currencies are antiquated, and we can't build great societies without fiat money"
"The history of fractional reserve banking in America, and its institutionalization under the Fed. Reserve System"
"John Maynard Keynes and his ideology concerning economics and the world banking system"
"Monetary policy makers are better suited to control interest rates than the free market"
"The Federal Reserve's currency monopoly is superior to free market currencies that usually end up favoring gold backing"
and a lot of related issues:
"Why democratic, strict constitutional republics (not democracies) with fully gold backed currencies are the most fertile for maintaining liberty and freedom"
"The functions of the World Bank and IMF in detail"
"Why the U.S. dollar is accelerating towards hyperinflation and economic disintegration as the inevitable cycle of fiat currency devaluation ends"
etc etc...
It's pretty thick but it is well written and researched, and reads like a detective novel. I've been pretty much able to predict the policies the Fed will pursue (zero reserve bank loans, massive bailouts) just by studying its history, and the men who designed it.
Well it doesn't tarnish easily which is helpful, but it's heavy as hell and very weak structurally.
I would imagine in most situations it would be easier to just use aluminium or stainless steel, both of which are lighter, stronger, mass producable, and have similar nonreactive properties as far as most things are concerned.
<!--quoteo(post=1766882:date=Apr 14 2010, 05:14 PM:name=Draco_2k)--><div class='quotetop'>QUOTE (Draco_2k @ Apr 14 2010, 05:14 PM) <a href="index.php?act=findpost&pid=1766882"><{POST_SNAPBACK}></a></div><div class='quotemain'><!--quotec-->Backing is the ability to be exchanged for tangible goods - for instance, if you can exchange money for gold, food, bonds, etc., that's backing, regardless of whether backing measure itself is worth anything: if you could, for example, exchange your money for some part of country's economy at any moment, that'd be backing. Without this condition, however, it's faith value alone, in full sense of the word: an unjustified belief. It's a common misconception, even some economists talk about "backing" in this sense (or maybe it is indeed used in that sense, I don't know).
Or, to be more concise, it's important to know the distinction between faith value and tangible value, more so that they're so often confused.
Neither gold nor paper money have any actual (comparative) value, or ever did, whereas food, water, machines, knowledge and so on do and always have. A more intuitive way to understand this is simply to remember what exactly money is used to obtain in the first place.<!--QuoteEnd--></div><!--QuoteEEnd-->
That's my point though, you <i>can</i> exchange it for valuable goods, you do it every day. The reason you can do that is because people believe money has value, if people didn't believe money had value you wouldn't be able to exchange it for anything.
All value is based on faith, you can have faith in the value of gold or you can have faith in the value of the interchange of goods and services which occurs all the time in all countries, which I for sake of ease would define as 'the economy'. The useful, consumable goods themselves give the money its backing because you can always buy them and use them.
I don't see the difference between the government believing that money and gold have value and thus promising to give you gold in exchange for money and vice versa, and people believing that money and food/clothes/materials have value and promising to give you one in exchange for the other, except for the fact that food/clothes/materials can be used and not just traded, whereas gold cannot. Money for gold is just a currency swap. The only reason it's useful is if you wanted to spend the money in another country because other countries might think gold is more valuable than your currency, and if everyone goes and does that then the economy has still collapsed because everyone just took the stuff you back your currency with and went abroad, it does nothing to protect the economy of the country using it. It would also mess with the economy of any other country which backed its currency with gold if everyone took their gold there because it would inflate the gold-currency of that country which I'm sure isn't a good thing.