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Ron Paul: is the Fort Knox gold gone?

And should America return to a gold standard?

According to CNN and others, Ron Paul, a thoughtful, peace-loving, and freedom-loving 2012 U.S. presidential candidate, is worried that the gold bullion from the United States Bullion Repository in Fort Knox, Kentucky is gone. Or it's been replaced by gold-coated wolfram bars.



He proposes a bill that will verify whether the gold is there. His worries are based on internet rumors that were actually being resent by many powerful people in the financial world - so it wasn't just about some fringe homeless hacks. A few years ago, it was found out in Hong Kong that some of the gold bars were actually tungsten (wolfram) steel bars coated by gold.

These fake golden bars were produced during the Clinton years, about 15 years ago - I don't want to call them Summers years because it could have been before Larry Summers, too.




Now, the Treasury people are saying "don't look here, it's a waste of money!" They say that it would cost $60 million to test the gold. Paul says that he was informed by their colleagues that the price of the operation would be only $15 million.

Of course, it's a question whether you want to believe the Treasury people who have had access to the depository. The mainstream attitude is surely to believe them. However, there could be good reasons why you may want to be more cautious. For example, their comments about the required "assaying" sound excessively uninspired.

They say that the only way to figure out whether it's gold it to destroy the bars by drilling holes into them! Wow. Physics knows other methods besides drilling and looking! ;-)

Distinguishing real and fake gold

Remarkably enough, gold is very heavy. Its density is 19,300 kg/m3, 19.3 times heavier than water. You see that iron only has 8,000 or so. Is there a mundane enough element or compound that could resemble gold?

Note that I have used Wolfram Alpha to obtain the right figures. You might think: what about wolfram himself? You may ask Wolfram what is the density of wolfram and the answer is 19,250 kg/m3. Wow. It's almost precisely equal. The numbers are so close that Wolfram Alpha forgets its legendary accuracy and when you calculate the ratio of these two numbers, it boldly claims that the ratio is equal to 1. ;-)

Wolfram is 0.25% lighter than pure ("24 carat") gold. However, it's several percent heavier than the more common "22 carat" (91.66%) gold which is used to produce some standard golden coins. At any rate, it is de facto indinstinguishable when it comes to weight. The density could be measured up to the 0.25% precision but it could be tough etc. because slight adjustments of the claimed purity of the gold bars could explain any difference anyway.

However, physics doesn't end with weights!

For example, there are electromagnetic phenomena. Take, for example, electric resistivity. Gold has 22 nanoohm meters while wolfram has 49 nanoohm meters, more than twice higher! Gold is a better conductor and even if you replaced "just" the bulk by wolfram, you could measure the different resistivity (or conductivity).

I am confident that this would cost far less than $60 million. And one could design even better tests. The people at the Treasury could ask a committee of Princeton, Harvard, and Stanford physics grad students to design a good method - for free - and this method could be applied to the gold reserves. They could end up sending sound waves (Gene's preferred solution: see the comments) and electromagnetic waves of various frequencies etc. directly to the depository and from the profile of the response, they could immediately tell you everything. The operation could really cost $15 thousand, if you did it well, not $60 million.

So I think that Ron Paul's worries are potentially serious and there are cheap ways to eliminate the doubts - at least the most radical doubts such as the hypothesis that most of the gold in Kentucky is actually wolfram (or air). ;-)

Gold standard

Ron Paul also proposes to return to the gold standard - which is why he's worried about Fort Knox. Gold is a great and beautiful material but I think that such proposals are anachronisms as of 2011.

How much gold does the U.S. actually possess?

The Fort Knox depository contains 5,046 tons of gold (hopefully) - while the underground vault in Manhattan - supervised by Federal Reserve Bank of New York - contains 7,716 tons. In total, that's 12,762 tons of gold which is about 6% of all the gold ever refined throughout the human history (the latter is about 200,000 tons - or 30 grams per person who lives today). There are probably other places in the U.S. where gold bars (or fake gold bars) are being stored but let's neglect them and consider the two largest ones only.

What's the current market price of all this gold?

Well, that's easy to calculate. One ounce - 31.1 grams - costs 1500-1550 U.S. dollars. That's almost exactly $50,000 per kilogram (calculate how many kilograms of gold your wealth may be converted into and if it is heavier than you, please send me a few dollars by the PayPal button below haha) or $50 million per ton. If you multiply it by those 12,762 tons, you get about $0.64 trillion dollars.

It's a remarkable amount of wealth from an individual's viewpoint. On the other hand, it's just a third of the (last) annual U.S. budget deficit! Every four months, the U.S. debt is increased by the equivalent of all the major U.S. gold reserves. ;-) Even if all the gold were stolen, it would still be 3 times smaller a problem than 1 year of the budget deficits. In other words, the gold in the two depositories is just $2,000 dollars per U.S. citizen (including infants).

The childhood days of the financial system were connected with precious metals. Those were romantic times and the market economy existed in its primordial, cute form. Things and coins were readable, solid, robust, reliable. I am sure that Ron Paul's heart is impressed just like mine - or the heart of any free-market advocate.

On the other hand, the current world is different, at least when it comes to the technical details. The amount of wealth on the Earth is just vastly greater than the price of all the gold we have ever possessed. Gold is simply not "everything we have": it has become a tiny part of it. I could say that our knowledge, know-how, and organization of the society and the economy is much bigger a part of our wealth. But even if I remain very material, those $0.64 trillion in the two major U.S. gold reserves represent just a tiny portion of our wealth - a tiny fraction of the price of all houses that people possess, a tiny fraction of the people's annual income, and so on.

So it's obvious that it is impossible to "back up" all of our wealth by actual gold. This problem with gold is perhaps even more serious than the complaints that its price is really variable because new gold may be found - and maybe artificially produced in a cheap nuclear way in the future which could really destroy Ron Paul's system. ;-) (A diamond-based currency may almost be destroyed using the technologies that exist today: we may produce artificial diamonds at an acceptable price.)

(Some media including Russia Today have speculated that the war in Libya had to erupt because Gaddafi wanted to introduce a pan-African gold-backed currency, a dinar, which would be very bad for the U.S. because of America's lower gold/dollars wealth ratio.)

I have mentioned all the required numbers so let me just multiply them. Because those $0.64 trillion are 6% of all the gold ever refined throughout the human history, the current market price of all the gold ever refined in the human history is about $10 trillion dollars. That's the GDP of the world for two months or so! Clearly, we're producing much more wealth every year than all the gold we have ever had.

Quite generally, it is unrealistic to back up all assets by gold - and it is equally unrealistic to back them up by any other actual commodity because every particular commodity is just a tiny fraction of our wealth! People's wealth is inevitably composed of many components - whose price ratios are inevitably fluctuating. The more advanced the civilization becomes, the higher is the number of the "types of things" which may contain a part of our wealth. But if you want the most constant unit of wealth, well, the fiat money is the best thing that people have discovered. The fiat money is relatively stable because its value is linked to the price of many things - via inflation that is meant to be fixed (and low) - and the relevant basket contains many things. Because it's so inclusive, the value of the fiat money is naturally "less fluctuating" than any individual thing in the basket.

Different currencies still have wildly fluctuating exchange rates. That makes them less constant - it's impossible to say that all of them are constant - but this variability is very important for the market to readjust itself, too. The precious metals were no different: the gold/silver price ratio has wildly fluctuated, too.



It's very common for the gold-to-silver price ratio to double - or drop to one-half - within 5 years. In fact, this change occurs almost in every 5-year period.

Fiat money: issues

When you accept the fiat money, there's of course the question how the central banks should regulate its value - inflation etc. - primarily by the interest rates. There's a lot of conceptual things and technical details to say about these matters. Should they just try to keep a constant low inflation? How do you exactly define the inflation given the evolving types of wealth that may exist - that appear and disappear? What's your basket now and how will you update it? Shouldn't you include houses and stocks in it, too? But in principle, this system works and is inevitable for a modern multi-dimensional economy such as the economy of the world in 2011.

At this point, I should try to give a lecture about the money supply and its different types - with an ever smaller degree of liquidity, including debts that have an increasing risks that they will never be repaid. Those things may look messy and people could have a tendency to eliminate those things altogether. But it's not possible. These different types of the money supply are just a manifestation of the hierarchies, complexities, and huge extent of the wealth in the present world. Those hierarchies are not diseases: they're inevitable by-products - and, in some sense, even the main products - of the functioning free markets.

The less liquid types of the money supply are generally connected with longer time scales - a sort of classification that physicists are familiar with from the Renormalization Group. And it is damn reasonable for the society to have "different levels of the money" much like it is reasonable for an underlying ultraviolet law of physics to have various effective descriptions that are appropriate for various energy (or time) scales. The "slower money" create a sensible, nearly constant environment for all the "faster transactions". But the "slower money" must also be in the state of motion and this motion has to obey the rules of the market.

At the end, the money at all levels should allow the people to have what they need to be happy and what they need to work as efficiently as they can - and they should also naturally encourage them to do things that are valuable or useful for others. Any kind of theft or transfer of the money - at any level - that is uncorrelated with bringing the "deserved" subjects the wealth they deserve inevitably reduces the efficiency of the system. By "theft", I also mean the bailouts for those who shouldn't get them, and so on. Those things have to be fought against; it's naturally the "deserved" owners who fight for their own interests.

However, it's natural and inevitable that at different levels of the money supply and debt, there exist different standards how obligations are enforced, and so on. There should exist some kind of justice - but it is only natural to expect this justice or "universal standards" how the debt has to be repaid etc. when we compare the debts of comparable forms or the money supply at the same level.

So I could understand if there were an automatic formula or algorithm that dictates what the interest rates should be - instead of the constant emotional talk about "exceptions we must make to support the economy" and all this stuff which is nothing else than distortion of the optimum rules, usually for someone to be likable (if not a "savior") in the short run - although in the longer run, it becomes obvious that it was just a counterproductive distortion. But if you agree that the fiat money with an algorithmically preserved value of the money is good enough a concept, I would still claim that the real-world systems are actually not that far from it.

I like Ron Paul's general libertarian opinions about the market and other things - but I am afraid that he is pretty naive about the diversity of the financial tools that are genuinely needed for a sophisticated economy such as the the world economy 2011 to operate well - and which have pretty much naturally evolved in order for various things to work at many scales for the individual scales to communicate with each other constructively.

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reader Peter Wardle said...

$15 million? Haven't they hear of Archimedes?


reader mrflickr said...

there are many valid criticisms of the gold standard, but im afraid these do not include the ones you have posted.

the value of gold can and would change to accommodate the value of the assets it is backing. there is absolutely no reason to peg the dollar at current gold prices.

the production and discovery of gold is also not a reason to immediately discredit it either. dollars are backed by federal reserve debt, which is constantly expanding as well.

there are issues with the value of gold being able to adequately adjust to changes in demand for money, but these are unrelated from the points you have raised.

otherwise, keep up the great work with your blog!


reader Luboš Motl said...

Dear Peter, your general comment that they're exaggerating the price of the verification, is valid. But your detailed technical point shows that you haven't read my article.

Archimedes' law depends on the density and the tungsten steel inserted into the fake gold bars has the same density as nearly-pure gold. So the counterfeiters *have* made their method safe against your test.


reader Luboš Motl said...

Dear mflickr,

thanks for your compliments but I think that you misunderstand what kind of constancy is important for a stable, well functioning economy - and for an investor himself.

Of course that the price of gold in your economy would be constantly readjusted - by definition. But what wouldn't happen is constant prices of products and commodities and stocks and housing prices and everything else when expressed in gold. Their ratios would be fluctuating at least as strongly as the current prices in dollars do.

Also, the ability to reduce the value of the "universal currency" wouldn't be in the hands of indirectly elected people such as Bernanke but in the hands of a few people who happen to be gold miners (or nuclear physicists who produce it from lead in 2040). ;-)

Moreover, if no new gold were found, the expansion of the economy would only occur if it is accompanied by a drop of prices of the same magnitude, when expressed in gold. So a 3% GDP growth (which is common) would inevitably mean a 3% deflation because the constant existing mass of gold would have to match the other wealth that has increased by 3% or so (at least the newly produced one did). That would make people delay consumption and buying - almost everyone would be waiting when the prices drop even more. A 3% deflation is arguably hurtful for the economic growth.

People would store their last savings as gold, in the basement because it would be safe enough - it's like a 3% real interest rate. Consequently, other people couldn't borrow this gold - no one would give it to them because a 3% interest rate is good enough for the holders of gold.

What would ultimately happen, of course, is that the actual GDP growth rate would drop towards 0 percent which is the equilibrium value at which this gold system is sustainable. A 0% GDP growth rate is when my argument above goes away.

In the past, people used gold as a payment method but there was still a huge economic growth - e.g. in the 19th century. But this growth wouldn't exist if everything had to be backed up by gold. In reality. people were already using "paper money" in the form of contracts and agreements about loans.


reader Luboš Motl said...

This was an inevitable development in the free-market economy - one that requires people to trust their business partners a bit (or trust the enforcement mechanism that will make them behave if they misbehave) - and it's totally necessary for a modern economy to operate, too.

Even if gold is ultimately underlying the "money", people may still agree with other people about borrowing of this money (because both sides may benefit and often do benefit), and then they can deal with these contracts about borrowing and treat them as real assets - or real money. After all, the U.S. dollar banknotes still say that they're contracts with the bank that that bank can pay you gold for them. In this way, the total money supply is inevitably much higher than the gold that is ultimately backing it up - even if it is. You can't avoid it and it's not bad in any sense. The only way how you can avoid it is to prevent people from making any contracts, transactions, and treaties with others! The only way to avoid the fact that most of the wealth will ultimately be held in "indirect", paper form is to introduce terror that bans capitalism. So in this sense, people who believe that the state must guarantee that all/most of the wealth is equal to the actual "material" reserves are actually hardcore communists and capitalism haters because capitalism guarantees that this can't be the final outcome.

However, this actual backing by a metal is just a naive materialistic idea - it is not necessary for the functioning of the economy in any way. And it is, in fact, harmful. What people actually care about is that the money they possess won't lose (much) value when you consider how many things that people want to buy they will be able to buy (food, cars, houses, land, whatever). Gold was playing this role in an acceptable way but the fiat money backed by laws and rules that the central banks keep inflation low and fixed are actually much better and more accurate in playing this role!

There's a lot of confusion about the debt being a bad thing, a fraud, and so on. But this is just bullshit. Debt at many levels of liquidity is totally paramount for the economy to work well at many time scales etc. Various levels of debt gradually evolved - they didn't exist from the first day when people began to pay each other - but this evolution of more complex forms of debt etc. was as natural and "positive" as the evolution of mammals or humans from more primitive life forms. The system that does contain these new hierarchical and indirect tools (and "derivatives", to use an even newer term for another level) just works more efficiently and allows the people to do many things that they couldn't otherwise do - like building new companies.

All the best
LM


reader Kamil said...

I don't thing that returning to gold standard is a good idea, mainly because the economy would be inflexible to changes.

But I have a great problem with today's money creating. Banks have the ultimate right to create money from debt and money is destroyed by failing to repay the debt usualy to private banks.

Is it fair that private corporations (banks) can determine the future of the country's economy? They can make bad lending and fail like Lehman brothers and throwing the whole economy to recession. Also they make a big profit out of creating the money, their reserve ratio is about 9:1. They only need to hold 10% of created money to 90% of debt.

I would suggest 100% reserves for private banks. Money would be created in a public bank, with elected leader. Created money could go for investments, eg. roads, rails, industry, ... . Money would be destroyed if needed by storing a portion of tax money until required.
The economy would be flexible and the money supply would be controlled by the public, not by banks.

http://www.youtube.com/watch?v=rCu3fpg83TY


reader VangelV said...

I have a few minor problems with the comments. I will deal with them in no particular order.

First, Dr. Paul is not worried that there is no gold in the Fed's vaults or at Fort Knox. He wants an audit to determine who owns that gold because there is evidence that the US government sold a great deal of its gold in the open market via swaps with other countries.

Second, there is no problem backing the currency with a certain amount of gold or some other commodity. The price would simply have to go up so that there was a balance between the reserves and the outstanding currency and currency-equivalent substitutes.

Third, Dr. Paul is not naive at all and does not suggest that the US goes on a gold standard. He says the market should decide by freeing the money supply from the central bank monopoly and let people choose what they wish to use as a medium of exchange. While he believes that in the end gold will prevail as it always has he does not discount the possibility of other media of exchange co-existing or winning out.


reader VangelV said...

Is it fair that private corporations (banks) can determine the future of the country's economy?

Actually in a free market the private banks would not be able to have the same capacity to damage the economy as they do now. The problem that we have is the lack of free markets.

They can make bad lending and fail like Lehman brothers and throwing the whole economy to recession.

Yes they can. And in a free market they would be allowed to fail. Such risk would limit their ability to do damage because their depositors would be a lot more careful about where they open deposits.

Also they make a big profit out of creating the money, their reserve ratio is about 9:1. They only need to hold 10% of created money to 90% of debt.

You can thank the regulators and the current system for that. What you have today is a monster created by government that gives monopoly power to a central body, which controls the banking system.

The answer is simple. Take away the power to inflate from government and get government out of the money business. Money is too important to have government control it. Let individuals choose what to use as money and how to handle transactions and let the courts protect individuals against force or fraud.


reader ThePeSla said...

Hmmm,

What about a Wolfram Standard?

In any case if we went on the Platinum standard the USA would be the world's financial superpower backup of all the world's economy.

Same with the Helium standard.

But maybe the sense of wealth just depends on the Uranium standard.

ThePeSla


reader الرجل ذبح بعضهم البعض ولكن الخيول باهظة الثمن said...

Wolfram (ou tunga) density, similar to that of gold, allows tungsten to be used in jewelry, but in gold bars?

19,30 in gold 19,25 in W volfram

in a 12,5 kg gold bar 27.5 pounds



only if the gold is low grade gold
central banks und bullion dealers use 400 oz bars... nominal weight. However, the gold content is permitted to vary in some nations

or nuclear physicists who produce it from lead in 2040...and the isotope rate is...?

au 196 Decay properties?
3,99...Bequerel/g of gold

a nice prospect


reader الرجل ذبح بعضهم البعض ولكن الخيول باهظة الثمن said...

Kankan Chadash
"Rebbi Meir says: Do not look at the DEBT vessel, but what is in it; there is a new vessel (DEBT) filled with old DEBT and an old DEBT that does not even contain new DEBT" (but this evolution of more complex forms of debt etc. was as natural and "positive" as the evolution of mammals or humans from more primitive....aliens? 5:27)
Yom ha'Shoah

jews rule....in debt and war
except in the last one in Lebanon


reader الرجل ذبح بعضهم البعض ولكن الخيول باهظة الثمن said...

at least gold bullions in this country have 99,5% of gold and 12,5kg

the 19,25 (98%/19,30(coating this admixture would be appreciated


if....in Hong Kong the chinese used to be good at gold purchase


reader Kamil said...

The answer is simple. Take away the power to inflate from government and get government out of the money business. Money is too important to have government control it. Let individuals choose what to use as money and how to handle transactions and let the courts protect individuals against force or fraud.

Free market is nice, but no control of goverment means to me no money at all. People would be trading only goods and services. A wise man would estabilish a bank and create money. There would be money based on goods like gold, silver, copper, ... . International trade would be realized only in key comodities. That was already in place and failed to sustain.

I would prefer a digital dollar, same as paper dollar. Its value would be guaranteed by 1 hour of the standard human work. eg. digging a hole with a shovel. The value of other work and goods would be derived from this basic unit. The goverment should aim to sustain this value of 1 dollar, with printing money or destroying it.


reader VangelV said...

I would prefer a digital dollar, same as paper dollar. Its value would be guaranteed by 1 hour of the standard human work. eg. digging a hole with a shovel. The value of other work and goods would be derived from this basic unit. The goverment should aim to sustain this value of 1 dollar, with printing money or destroying it.

First, there is no such thing as one hour of STANDARD human work. Second, digital dollars are easy to overissue unless they are backed by something tangible in reserve. The medium of exchange should be determined by a free market.


reader VangelV said...

Free market is nice, but no control of goverment means to me no money at all. People would be trading only goods and services.

This is contradicted by history, which shows that people used all kinds of media of exchange without the meddling of any government. I suggest that you rethink your position and do a bit of reading on the subject.


reader Kamil said...

This is contradicted by history, which shows that people used all kinds of media of exchange without the meddling of any government. I suggest that you rethink your position and do a bit of reading on the subject.

OK. Money can exists without government, but the banks needs security. This security is today provided by the government and courts. Lenders (banks) needs the executive branch of the government to enforce their request to pay back the loan or the collateral.
Without the government and the courts, the banks would simply default, because the borrowers wouldn't pay back the loan.
If the banks can borrow only limmited amount of money (practicaly can't borrow), they wouldn't make any profit at all.
Security is very important for banks and without government it is very hard to provide.

So there would be money, but the trade would be mainly in comodities.


reader VangelV said...

OK. Money can exists without government, but the banks needs security. This security is today provided by the government and courts.

This is an illusion. Do you really think that the governments can guarantee deposits for idiot bankers who have massive exposure to Greece, Ireland, Portugal, Spain, or GSE paper? It is this illusion of safety that allows people to be reckless with their deposits and open accounts with fools who make Ken Lay look respectable in comparison.

Without the government and the courts, the banks would simply default, because the borrowers wouldn't pay back the loan.

As David and others have shown we do not need government courts to settle disputes. Privately run courts would be much more effective and efficient.

If the banks can borrow only limmited amount of money (practicaly can't borrow), they wouldn't make any profit at all.

An honest banker can always make a profit by matching duration. Of course, depositors have to be told that when they buy a two year CD their money gets lent out for approximately two years or that they have to pay fees for demand deposit accounts.

I think that what you are suggesting is that to make a buck banks have to be willing to take large risks and not be entirely honest with the people that they deal with. You may wish to reconsider that position.

Security is very important for banks and without government it is very hard to provide.

Not at all. While it would be hard for some it would not be hard for those that knew what they were doing.

So there would be money, but the trade would be mainly in comodities.

Again you are ignoring history. It argues otherwise.


reader gato e botas said...

if your problem with the gold standard is that maybe gold can be made in a nuclear reactor ,what is you anser for the actual way of just print some money out of paper


reader Luboš Motl said...

Well, banknotes may be counterfeited. It is not easy if the banknotes have many protective features but it can be done.

However, it is crime. Pretending that a piece of paper is something it is not is the same crime as falsification of documents or anything else. That's why counterfeited money are arguably totally negligible.

If we could cheaply produce gold artificially, it would be totally insane to make it a crime because gold is a material with lots of advantages. It would have to be allowed. If we could make gold out of e.g. lead for $1,000 a kilo, it would be done everywhere and the "natural" gold would ultimately be a minority.

Distinguishing "artificially" made gold from the "natural" one would be really physically impossible - so it wouldn't be like banknotes which may always have some imperfection.


reader VangelV said...

That's why counterfeited money are arguably totally negligible.

Really? All fiat money is counterfeited because it is created out of thin air at whim by those that are given a monopoly over its production by the government. How are the central planners who meet behind closed doors and decide how much liquidity to add to the system or what short term interest rates should be any different than the central planners that made all kinds of decisions in the USSR or China? Money is too important to leave it in the hands of government.


reader Luboš Motl said...

Dear VangelV,

authentic money is defined as the money printed by the corresponding central bank, so your claim that central banks are counterfeiting money is invalid by the very definition of the money.

You don't have to use fiat money if you don't trust them.

Central planning in communism decided about every microscopic detail of what should happen; macroscopic monetary policy only decides about one number - the money supply - and moreover, this decision occurs pretty much according to totally objective criteria meant to preserve a constant value of the money.

So there's no communism and no "human factor" similar to the communist planning when it comes to guaranteeing a fixed level of inflation and your comparison shows that you have no understanding of economics.

Cheers
LM


reader VangelV said...

authentic money is defined as the money printed by the corresponding central bank, so your claim that central banks are counterfeiting money is invalid by the very definition of the money.

I disagree. I believe that what you have done is fall for the changes in the way that language is used. Surely someone who was born in an FSU country would be very familiar with how this works. (I believe that you have made this point on a number of occasions about the way that the environmental movement works.)

In a free society government does not get to create money out of thin air and call it authentic. Just as it cannot take a cat and call it an 'authentic' dog. In a free society all money has its origins in a commodity that has been chosen by the free market as a medium of exchange. In a free market there is no such thing as a monopoly on money creation given to a central bank, which is given the power to meddle with the markets.

You don't have to use fiat money if you don't trust them.

But I do. The words, 'this note is legal tender,' make it clear that no competition is permitted. I cannot use gold for purchases without paying taxes when the purchasing power of my gold goes up. (I certainly do not have to do that on those rare occasions when the purchasing power of my fiat money goes up.)

And let me point out that the so-called 'note' is really not a real note at all.

A legally valid 'note' is a signed, unconditional promise to pay to someone on demand at some specified time. The person that pays is the issuer and usually the holder is the person who gets paid.

In the old days a $20 note might say something like: Redeemable in gold on demand at the United States Treasury or in gold or lawful money at any Federal Reserve Bank. That is a real note because the Fed (or Treasury) promised to pay $20 to the bearer upon receipt.

Keep in mind that the word DOLLAR had a very clear definition that was linked to a particular weight of gold or silver. A dollar contained 23.22 grains of gold OR 371.25 grains of silver (plus an alloy). Of course, having a specified ratio of gold to silver caused a problem because when the market valued gold more than the specified amount of silver Gersham's Law went to work and all the gold coins disappeared from circulation, but that is a subject for another posting.

If you look around you will find that all of the major currency units began as a some specified weight of a commodity, usually gold. This is what the markets wanted and governments had no choice but to follow. History showed that when governments were given the chance to create purchasing power out of thin air they would so the markets restrained them and allowed protection for the people who worked and saved.

If you have the time and are interested there is a short piece on the subject of money by Murray Rothbard that will explain many of the things that our Marxist professors of economics somehow failed to mention.

Free E-Reader version:

What Has Government Done to Our Money?

Free PDF version:

What Has Government Done to Our Money?

HTML version:

What Has Government Done to Our Money?

Rothbard's arguments are very logical but many people have trouble with his libertarian free-market approach. Of course there are many other books on monetary theory that make the same arguments. If you are interested and have the time, I recommend Ludwig von Mises', The Theory of Money and Credit.


reader Luboš Motl said...

There is no monopoly. After all, there are many other currencies in the world (in countries like mine, you may have bank accounts express in any of them) and people like you may even you plastic money for the children.

I prefer to use the money for the adults and I have nothing whatsoever against your decision to use plastic coins for the children. Is that OK with you?

Any unit of wealth - whether it is a unit of currency, a gram of gold, or anything else - may fluctuate and its fluctuations may always depend on decisions of people, including the people in the government. If you think that this influence may be totally eliminated, then you are an extraterrestrial alien who has just fell from the Moon.

The only difference of fiat money supervised by an independent central bank is that their value is as constant, relatively to things one can buy, as possible. Everything else is less stable.


reader Kamil said...

The central bank is not independent. And the only value of money is in peoples confidence, purchasing power.

I believe that human work have a relatively constant vaule over time. So to me it makes sense fixing work with money to achieve a stable (relative to resources) economy.

But someone has to control the money supply, the crowd can't do it (o lot of diferent types of money). There are a lot of benefits of having 1 currency instead of many. You can see it today with the dollar being the reserve currency, used in international trade.


reader VangelV said...

There is no monopoly.

But there is. Only the Fed can issue FRNs in the United States. Only the BoJ can issue Yen in Japan. The fact that I can send packages by UPS does not mean that the Post Office does not have a monopoly on first class mail.

After all, there are many other currencies in the world (in countries like mine, you may have bank accounts express in any of them) and people like you may even you plastic money for the children.

Who gets to issue the currency in your country? I thought that it was the CNB, which has a monopoly on its issuance.

Any unit of wealth - whether it is a unit of currency, a gram of gold, or anything else - may fluctuate and its fluctuations may always depend on decisions of people, including the people in the government.

Either I was not being clear enough or you are confused about what I meant. Let me give you an example.

I ask you how much you weigh and you tell me 65 kg. I ask you how much you weighed ten years ago and you tell me that you were 85 kg. I know that you lost 85 kg because the meaning of the kilogram did not change.

I ask you how many Zimbabwe dollars you had in 2005 and you tell me $500 million. I ask how many you had in 1995 and you tell me $500. I have no idea what conclusion to draw because the unit does not have a fixed definition as a kilogram does.

That is why the free markets chooses gold, silver, or some other commodity. People know that when they have more gold, silver, or cows they are accumulating savings, even as the purchasing power changes slowly. They do not expect an unchanging purchasing power. They just know that the government is powerless to rob them of it as they can if they control the supply of money and credit.

Let me give you a historical example. The largest gold 'supply shock' that we know of was observed in the 19th century when large quantities of gold were found in California in the late 1840s. The California gold discovery led to a significant increase in gold output, which reduced the global purchasing power of the metal.

But just how large was price inflation and how does that compare to fiat standard inflation? When we look at the data compiled by Jevons we see that there wasn't much inflation at all. The general price index rose by 12.4% over an eight year period giving us a compound annual price inflation rate of around 1.5 percent. Twenty two years later the purchasing power of gold was exactly the same as it had been before gold was found in California. (Note that a lot of gold was also found in Australia around the same time and increased supply even further.)

Compare that to inflation episodes caused by printing fiat money and you should see my point. When governments are given power to rob savers by using the printing presses they will.

The only difference of fiat money supervised by an independent central bank is that their value is as constant, relatively to things one can buy, as possible. Everything else is less stable.

Nonsense. Under the classical gold standard the purchasing power of the Dollar, Pound, and other currencies linked to gold, went up modestly over about a century. Most of those currencies failed when they were taken off the gold standard, many of them several times. Even the USD is down more than 95% since the formation of the Fed, with most of the decline coming after Nixon closed the gold window at the NY Fed. I think that history is on my side of this argument.


reader VangelV said...

I believe that human work have a relatively constant vaule over time. So to me it makes sense fixing work with money to achieve a stable (relative to resources) economy.

Sorry but value is subjective. The labour theory of value does not hold up very well. Suppose I spent my entire life making an Elvis statue our of ear wax. Does the 'value' of that statue equal the time I put into making it? How about a Picasso sketch that took one minute to do? Should it sell for a fraction of one of the paintings I managed to do last weekend?

But someone has to control the money supply, the crowd can't do it (o lot of diferent types of money).

Why? Does someone have to control the cell phone supply? Do we all need the same type with the same features? Do we need someone to control the supply of automobile insurance policies? Or television sets? Or laptops? I think that the market does a fine job giving us what consumers want at the quality and price that they want.

There are a lot of benefits of having 1 currency instead of many. You can see it today with the dollar being the reserve currency, used in international trade.

Bad example. The US is exporting inflation abroad as it has leaned on the printing presses and taken advantage of the reserve currency status of the FRN. It has piled on more than $100 trillion in unfunded liabilities and accumulated Greed sized per capita debt that threatens the real economy.


reader Luboš Motl said...

Apologies, I don't have the time needed to read all this stuff again. But I am pretty sure that all your misconceptions and mistakes have been identified and corrected in my text above.


reader Kamil said...

Don't worry, if the total free market is better for humans it will be implemented. If the controlled government currency is better, we will use that. The evolution will solve it, the better remains. We might soon see it after the shock.


reader VangelV said...

Don't worry, if the total free market is better for humans it will be implemented.

I disagree. Human nature suggests that there will always be the thugs to try to live off the efforts of others by trying to control economic and social activities. Most of the population can be bribed or coerced to support those efforts so there will never be an entirely free market in any place where 'the government' runs the show.

If the controlled government currency is better, we will use that.

No. You will use it because the government will force you to use it. The thugs have no interest in the rights of interest of individuals. All they care about is their own power.

The evolution will solve it, the better remains. We might soon see it after the shock.

After the fall we may see even worse thugs. Just look to Wiemar Germany for a great example. Or France after the Revolution.