Cowen on money

More monetarist hooey that fails for the same reason that the "Kudlow Creed" does: namely, because Cowen and Roberts are "wrong on the money," they are "wrong on business" and "wrong on America."

To begin with, money, properly speaking, is not just a medium of exchange; it is a GOOD used as a medium of exchange. And simply put, because "green pieces of paper" are not goods, they are not real money. Instead, they are counterfeit money, the inflation that inexorably results from their issuance being a "stealth tax" that robs Americans day in and day out, year in and year out, to the point that a "dollar" in 1913 is worth less than a nickel today. Thus is the entire discussion based not only on a false premise; it is based on the perpetuation of a fraud -- indeed, the most massive fraud in the history of the world -- that is unraveling even as I write.

Moreover, whereas as rising prices, the inevitable result of monetary inflation, are always bad, falling prices, which are NOT deflation, are always good. As George Reisman makes clear in this brilliant piece -- http://www.mises.org/journals/qjae/pdf/qjae3_3_...

"Such falling prices are not deflation, because they result neither in a reduction in the average nominal rate of profit on capital in the economic system nor in any generally greater difficulty in repaying debts, which are two essential symptoms of any genuine deflation. In a genuine deflation, profits are sharply reduced, perhaps even wiped out altogether, and, at the same time, debt repayment becomes so difficult that widespread insolvencies and bankruptcies occur.

Take the computer industry, for example. Because of the productivity increases arising from the relentless application of Moore's Law -- computing power doubling every 24 months (or less) -- prices are essentially halved within this period of time. Yet as obviously good as this is for consumers, it is no less so for computer manufacturers, else they would be "wiped out." They aren't, of course, and are instead profiting handsomely (e.g., Apple), constantly cranking our more and more powerful devices at lower and lower costs.

Not so for those industries -- i.e., virtually all others -- that don't enjoy the enormous productivity gains of the computer industry. Instead, because their productivity gains are relatively small, they can't overcome the effects of monetary inflation. Hence, their prices rise inexorably, even as Americans' purchasing power declines.

Lastly, just as the US government has become a slave to debt, so have the American people, each essentially relying on the kindness of strangers to fund their consumption. And as this state of affairs is unsustainable, be assured that will end and end badly, as the greatest debtor nation in the history of the world experiences the same fate of its predecessors.

And shame on Cowen and Roberts -- who surely have Hayek turning in his grave -- for perpetuating this crime against humanity.

I'm in David's corner on his take on fiat money...except for his falling prices routine

any one having a debt during deflationary times would have a harder time meeting that debt as his(her) wages would fall ... and David manages not to mention that small detail..

em butler:

You obviously didn't read Reisman's article, as he his absolutely clear on this point:

"Under a 100-percent-reserve gold standard both

phenomena — falling prices caused by an increase in production and supply and an elevated rate of profit and greater ease of repaying debt caused by an increase in the quantity of money and volume of spending — exist together, side by side, at the same time."

Actually if inflation is running at 2 to 3% (and I'm talking nett inflation = more dollars - more good and services) how are people being hung to dry? There's plenty of time to invest or buy precious metals. Then again how is fiat currency combined with the right to buy and own precious metals any different from the gold standard? If you personally own the physical metal ingots then you're actually safer than with a dollar bill that is supposed to be 'redeemable' - after all you don't know if the money is actually redeemable until you, well, try and redeem it.

By the way the computer analogy is still relatively stale. The main driving force behind shifting hardware is similar to that of fashion - 'out with the old, in with the new'. Which is to say the main reason old hardware is cheaper is because there's new and better hardware displacing it. Hence for some six months (in 2005) when next-to-no new CPUs were coming out prices were surprising stable. Similarly it seems to me that prices aren't falling as fast they were in the '90s. Perhaps a big reason is that computers aren't 'out of date' in six months anymore and has to with superfast computers are only required for the latest games and high-def. digital video whereas mediocre computers now have lasting power for humdrum home and business applications.

Falling prices under a stable monetary system are a result of increasing productivity. Producers in such a system are encouraged to save rather than go into debt.

Gil:

Yes, there's plenty of time to invest in precious metals -- including a great buying opportunity right now, as central bank gold price suppression attempts to shake out the speculators. But if you think that inflation's running 2-3%, then you're even shy of the government's own CPI, which at 4% is still half of what real inflation is running -- http://www.shadowstats.com.</p>

Do the math on that and wages are in no way keeping up, nor can investors make any money unless their earning over 20% before taxes.

Lastly, are you suggesting that consumers are paying for computing power than they were a year ago?

No way. They might be holding on to their computers a little long, but they're still getting more for the same money each time they buy. Which would be true for all goods in a sound-money economy.

100% reserve gold standard proponents:

Suppose

1) The local bank has 1000 ounces of gold.

2) A house is worth 100 ounces of gold.


3) I'm a home builder with twenty houses for sale.


4) Twenty prospective buyers want credit to buy my houses.

The bank lends 1000 bank notes, each promising redemption in an ounce of gold, to ten home buyers. These home buyers give the notes to me to buy ten houses. I claim 1000 ounces of gold from the bank, and the bank has nothing left to lend. Right? The original depositors of the gold are now at risk if the borrowers don't repay. Right? Do I understand your system?

I still have ten more houses, but the bank can extend no more credit, so I redeposit my gold in the bank. The bank then lends another thousand bank notes to another ten home buyers who give the notes to me to buy the remaining houses. I reclaim the gold from the bank.

What happened here? Can't I redeposit my gold in the bank over and over again and sell as many houses as I please this way?

Suppose I forget about the bank and simply tell each prospective buyer, "You may occupy a house as long as you pay me ten ounces of gold per year, and if you pay me for ten years, you'll own the house." Can't I extend as much credit as I please this way? What's the difference?

Martin Brock:

With a 100% reserve standard, depositors don't earn interest; rather, they pay to warehouse their property. The warehouse (bank) is then free to lend ITS property at interest, just as you are free to lend yours. (And I'm pretty sure you wouldn't lend it without something down, rather than the 100% financing that you have been brainwashed into believing is perfectly rational. Try buying stocks that way.)

Centralized, fractional-reserve banking is based on something so alien to this very common-sense concept (common-sense because "commoners" can easily understand it) that it results in the incomprehensibility (think derivatives) that Cowen himself admits is part and parcel this absurd system.

Here's the master on the subject:

http://www.mises.org/rothbard/genuine.asp

David,

I don't mention any interest, and you don't address my question.

If I'm selling these houses, can't I extend as much credit as I please without involving any bank? Can't I extend the credit, even at interest, without any gold at all? Isn't it the value of the house that I'm lending and not the value of any gold?

And if you owe me a hundred ounces of gold or equivalent value, can't I barter with your indebtedness? Don't I create something I can exchange by extending you credit on the house, without bartering with the house itself? Haven't I created money in the process?

Gold is not money. Gold is a commodity. Money is an entitlement to consume. It's a credit. A gold standard is a monetary policy fixing the price of gold. No gold standard has ever created a strict, one-to-one correspondence between units of currency and units of gold. Only the price of gold is standardized.

I've read Rothbard's essay and reply to it here.

http://amateureconblog.blogspot.com/2005/05/case-for-100-percent-gold-dollar-mises.html

I just don't think Rothbard ever understood the gold standard. "Redeemable for gold" doesn't mean that a unit of gold exists in a bank vault for every unit of currency redeemable in gold. A fixed price of gold does not imply this correspondence between bank notes and banked gold. Trying to fix the money supply this way makes no economic sense and couldn't possibly work. It's not just that the policy would be deflationary. It would ultimately break down as people adopt other forms of money.

If I can't lay my hands on gold, I'll extend credit anyway, and extending credit is paramount to creating money. There's nothing you or Rothbard or anyone else can do to stop it. The system you imagine is not "free money" at all. It's incredibly restricted money. You'd need to shoot people for engaging in commerce without the permission of gold holders to make it work.

Martin:

Did I mention gold in my last reply? No, I spoke solely of property. You are welcome to lend your property to whatever extent you wish, and in a free market, you can even engage in fractional-reserve lending, so long as you don't commit the fraud of concealing this fact.

Nor did I speak of "free money." On the contrary, commodity money is restricted by definition to the commodity the money is backed by. It is FIAT money that is "free," it costing the US government around two cents to print a dollar bill that could just as easily be a hundred, thousand, million, billion, or trillion dollar bill.

We can obviously go around and around on this, but the bottom line is that as apologists for the status (as in statist) quo, Cowen and Roberts are perpetuating the fraud that is on full display in the financial markets today and that will soon be the ruin of this country.

In fact, to look at the debt slaves waddling through malls here, there, and everywhere is to know that the country is already ruined. Or to quote Ben Franklin:

"When the people find that they can vote themselves money [the checks are in the mail, right?], that will herald the end of the Republic."

David,

You linked Rothbard's "Case for a Genuine Gold Dollar".

No fraud is necessary to extend credit. It happens every day. A monetized market is a community of people agreeing to accept one another's credit. Banks are institutions supposed to ensure that borrowers are credit worthy.

The cost of printing a dollar bill is irrelevant, because extending credit values the collateral, not the currency. If a grocer gives you a coupon for a carton of milk, the cost of printing the coupon is irrelevant, because the coupon values the grocer's credibility. If the grocer is credible, the coupon is as valuable as a carton of milk. If not, the coupon isn't worth the paper it's printed on, because a blank piece of paper is more valuable.

Recognizing that money is credit does not apologize for any particular monetary authority. We're obviously seeing evidence of poor regulation, and I don't think we've seen the end of it. A gold standard is no cure for this ill. Regulators of a gold standard are no more apt to be credible.

Oh, dear, gold standard fanatics.

What is gold? It's a nice commodity because it's very durable. It's also a nice decorative metal because it's very malleable.

But does it have any intrinsic value that makes it a natural money standard? No--that's silly.

The amount of money the economy can handle is based on the productivity of the economy. Sure, the government can screw things up really badly by dramatically inflating (or deflating) the money supply. But that's why the Fed is structured to be protected from public pressure--and since it's shifted to a monetarist approach under Volcker, it hasn't done too badly (not perfectly, but as Friedman pointed out, humans will never get it just right).

Of course gold standard advocates are Fed haters, so David White won't accept this argument. But his argument requires that we believe that we are constantly getting poorer through the Fed's horribly inflationary policies. The clear empirical evidence is that we are not, because the relatively steady change in the money supply--along with the Carter/Reagan economic deregulations--have given businesses the ability to plan ahead and be more and more productive, with their enhanced productivity more than outweighing the small errors (plus or minus) of the Fed.

Gold standard advocates are to economics what creationists are to biology.

It is also absurd to suppose that the FED is immune to political pressure.

What is the M3...isn't that the one the FED stopped reporting?

Then again how is fiat currency combined with the right to buy and own precious metals any different from the gold standard?

In many ways, Gil, this is precisely my philosophy, but with one small point: gold coins are not, by most definitions, a monetary standard. Walmart is unlikely to accept my k-rands, as is their prerogative. But then again, they probably wouldn't accept pesos, either. But I can trade the pesos or gold for FRNs. Simple.

I'm not about to stand around demanding the state tell me what money is. Martin's narrow definition is even less relevant to my life. If I trade something for a commodity (in this case, gold) with the expectation that others will value it & I can trade it with these people for other goods & services, then it functions the same as money & for all practical purposes it is money. The opinions of some politicians in DC, or Martin, or some other politicians in 1792, do not have to match the opinions of those involved in the transaction. The only opinions that matter are mine & the opinions of those people with whom I plan to trade. If no one values my coins as much as I do, that's my toughie.

& James, perhaps you could elaborate on how your own faith in the Fed translates into some other people being analogous to creationists.

Money is an entitlement to consume. It's a credit.

Martin, I'm unclear on this point. A credit for what, exactly? & if no one wants to trade me anything for my dollar, what exactly does it entitle me to?

"If the grocer is credible, the coupon is as valuable as a carton of milk. If not, the coupon isn't worth the paper it's printed on, because a blank piece of paper is more valuable."

This reminds of people who'd say something about when paper money will be as worthless toilet paper. However, I think most people want toilet paper to soft and absorbent (and even have a pleasant scent) hence toilet paper would in fact be more valuable.

Cafe Hayek and you don't have e-gold?

The fiat dollar is a barbarous relic.

Hans:

Martin's narrow definition is even less relevant to my life.

I dispute "narrow". My definition doesn't exclude gold or some other durable commodity as money, but if people use gold as money, the gold is not money because it's a durable commodity. It's money because it's a widely accepted credit or token of entitlement to consume (a chartal).

A true gold standard is impractical, because we can't expect gold to be in the right place at the right time to extend credit when credit is needed. If I'm selling corn or quilts or haircuts, why do I need gold to extend anyone credit? If all the gold finds its way out of my neighborhood, my neighbors and I just do without money until we find some more? Of course not. We use something else as money, and we get on with it as soon as possible.

That's basically what you go on to say after calling my definition "narrow", so we don't really disagree.

A credit for what, exactly? & if no one wants to trade me anything for my dollar, what exactly does it entitle me to?

If no one wants to trade anything for your dollar, it doesn't entitle you to anything, and it's not really a credit for anything, and it's not really money. If people generally accept dollars for everything, the dollars are an entitlement to anything at the current price. Dollars are money precisely because people accept them for anything at some current price.

That prices rise gradually over time makes no difference. It's a currency, not a futurcy or a permanency. Gradually rising prices are useful in various ways (heavy emphasis on "gradually"). Rising prices cost you something only if you stuff money in a mattress. Don't do that. Money must circulate to be money. If you want to stuff something in your mattress or bury it in your garden, gold is fine for that, but it ain't money.

Free market capitalism ideally makes you continually seek profit. It doesn't entitle to profit. A statutory "store of value" that's always increasing in value is a frightening prospect really. That's a TIPS. It's precisely the opposite of what I expect to work as money. Money is not what you have. It's what you chase, or it's how you chase what you want.

I don't want your money to work for you. I want you to work for your money. That's what we used to call the "work ethic", and if we lose it to an entitlement ethic, we'll suffer. Like Paul says, if you don't work, you don't eat. You're welcome to your gold, but you certainly can't eat it.

But does it have any intrinsic value that makes it a natural money standard? No--that's silly.

Gold does have intrinsic value, and that's why it's not money. Money is a sign of entitlement to consume, like my signature on a credible check. It's not the ink that's valuable, and it's not the paper. It's the credibility of my signature.

If our banking system polices credit properly, our currency is credible for this reason. The problem now is that we have a lot of con men policing us, and the Bushtapo at the top of the pyramid is the prime example. All this talk about "miraculous" compound interest doesn't help either. Properly operating capitalism is not a miracle. It's a lot of work.

You're welcome to your gold, but you certainly can't eat it.

You can't eat FRNs, either. Or coupons. Or pencils. I always hated the "you can't eat gold" canard. Lots of things aren't food. So what?

When push comes to shove, I'm not sure we disagree on any of the facts here. We certainly disagree on how we use the various words involved. Things (gold for example) are only money while they're functioning as money, true, & when other things (promissory notes, for example) are functioning as money, they then become money, until you cease to use these things as money. I'm not sure making these distinctions add anything useful to the discussion, though.

Gold does have intrinsic value, and that's why it's not money. Money is a sign of entitlement to consume, like my signature on a credible check. It's not the ink that's valuable, and it's not the paper. It's the credibility of my signature.

Wait. Maybe we do disagree on facts. Or you're just redefining words without cluing the rest us in on your new meanings, so that your statements only appear to be demonstrably false.

Dollars are money precisely because people accept them for anything at some current price.

Precisely why can you not say the same thing about gold?

For the record, I don't advocate a gold standard or any other government monetary standard. If a standard develops freely & organically, that's totally cool. Competing currencies? Also cool. Whatever's free & voluntary is fine with me.

Wait. Maybe we do disagree on facts. Or you're just redefining words without cluing the rest us in on your new meanings, so that your statements only appear to be demonstrably false.

You don't demonstrate any falsehood. You only describe your subjective impression, but your subjective impression only indicates inconsistency with other propositions you accept. It's possible that these other propositions are the falsehoods.

My definition of "money" is the standard one in fact. As you note yourself, gold is not commonly accepted as a medium of exchange, so it's not money.

Dollars are money precisely because people accept them for anything at some current price.

Precisely why can you not say the same thing about gold?

Precisely because I cannot go to Walmart with a bag of gold dust and expect to walk out with whatever I want.

If a standard develops freely & organically, that's totally cool.

I don't observe standard money developing this way. I think the FBI should return Liberty Service's assets forthwith, but I never saw a single Liberty Dollar change hands, and I don't much expect them to become common regardless of the FBI. Most people don't want a lot of competing currencies. I travel a lot myself, and I have half a dozen currencies in a drawer, some of which I'll probably never spend. I don't much want to deal with money this way within the United States.

It is possible that the Congress has so mucked up its authority to coin money (in league with the Fed and the corporatist state) that we'll be soon be hauling the currency in wheel barrows, but I don't expect this outcome. Seventies style stagflation is bad enough, and I am worried about that. If the rate is two or three percent, I don't care, because it only affects the hundred bucks I keep in my wallet. That's the price of standardization.

You can't eat FRNs, either. Or coupons. Or pencils. I always hated the "you can't eat gold" canard. Lots of things aren't food. So what?

But I can trade FRNs for food at Kroger. Lots of things aren't gold, but money denominates the value of everything; otherwise, it's not "money".

Things (gold for example) are only money while they're functioning as money

Right. "Money" describes the function, not the things. Most money these days hardly exists materially at all. It's literally never anything but a bit of memory. We can record credit in gold ink on parchment or chiseled on gold tablets or with stacks of gold coins, but the record of credit is the money, not the gold. Integrated circuits use a little gold for doping the silicon, I think. That's where gold's utility as money is going, for better or for worse.

If we focus on the outcome, inflation as measured by prices, we will always be susceptible for justifications, both politically and otherwise. The problem is that the underlying assumption is that these "baskets" of prices are a valid indicator of inflation. I have serious reservations of this line of logic. Indulging my conspiracy theorist side, these are highly "fudgible", in the sense of who is to say we don't swap out higher priced goods, for lower priced goods to manage the "inflation". Additionally, I am very skeptical about the ability of the ability to capture the real effects of inflation in any basket of prices. It seems to me the it would be nearly impossible to capture. If this is true, then we should be focusing on the money supply alone because it is the input that we know causes inflation ("inflation is always and everywhere a monetary phenomenon"). If this is the case then I have not confidence in a human system, nor is there a necessity for one. A strictly mechanistic approach such as the one proposed by Milton Friedman of a set increase in money supply every year would eliminate the political influence on inflation, and would eliminate human error. I think arguing over a gold standard distracts us because essentially with a gold standard you are trying to constrain the power of the federal reserve to debase the currency. If you simply replace the federal reserve we limit the transition costs. The issue should be the validity of price index and that we could never capture the true cost of inflation this way. Focus on the input.

James Hanley:

"Gold standard advocates are to economics what creationists are to biology."

The human world has been on a fiat standard -- the creation of money out of thin air -- for 37 of its roughly 5000 years of recorded history. And it is the proponents of this folly who are the creationists, not those who are biologically attuned enough to know that you can't fool Mother Nature.

Which is to say that the Federal Reserve Note will not see its hundredth birthday.

You don't need a government for standardization to occur. There are much more widely used standards in the world than currencies which did not gain traction because of any government (such as HTTP). Disagreements over the proper implementation of standards (which is common in HTTP) is what allows those standards to evolve rationally.

Once a monetary standard (say, bank notes representing shares of a commodity index) was established, currencies could compete within that standard without a lot of confusion. Individuals would be free to refuse those currencies which they felt were too confusing.

Fiat standards combined with the ability to buy and sell commodities are not the equal of any commodity standard because of the significant transaction costs (including taxes) involved in transforming dollars into commodities. Without knowing exactly what the federal government would do, no bank is going to try to create their own currency. The risks would be tremendous, as congress would likely to decide to shut them down.

Martin understands the function of money perfectly well.

Money is a portable, anonymous, fluid accounting system.

Like water, the value of money comes from the flow as it enables the transfer of the value we create without the constraints of commodity barter.

The problem gold advocates are attempting to address is monetary inflation by political agency. How can we deal with that problem?

The problem is that there is no 'real' reference.

Gold advocates are merely wanting to use gold as a reference of value and the main reason it appears to be a useful reference is the 'undisciplined' use of the printing presses by the money monopoly.

Sam Grove,

Yes, it's a matter of discipline, as a much younger but more principled Alan Greenspan well knew:

"Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

http://www.usagold.com/gildedopinion/greenspan.html

"The human world has been on a fiat standard -- the creation of money out of thin air -- for 37 of its roughly 5000 years of recorded history"

I have to admit to some confusion over your above ramblings, but this statement is blatantly false. There has been currencies approximately as long as there has been civilization.

"if no one wants to trade me anything for my dollar, what exactly does it entitle me to?"

They have to. Dollars are legal tender, requiring traders to accept them.

Of course, if there are no one willing to trade anything, the Dollar doesn't help you, but neither does any other currency of any origin.

In the monetary debate, it's important to distinguish two separate questions:

1. Should we have an official currency?

2. If so, should there be a monopoly on the official currency?

I think it's safe to assume that most here would answer no to #2, but lumping them together, which a lot of the comments above have done, confounds the debate.

They have to. Dollars are legal tender, requiring traders to accept them.

You aren't obliged to accept dollars in trade. You must accept them as payment of a debt owed you by a U.S. citizen, but you aren't obliged to extend credit to a U.S. citizen.

Suppose I operate a credit accounting service. I issue credit cards, and merchants agree to accept the cards. My service is not what you might imagine. I don't lend money to the card holder and pay the merchant for goods charged. Instead, I extend credit on the merchant's behalf.

The merchant swipes the purchaser's card and surrenders a good. As the purchaser gradually pays the debt with interest to my service, I gradually pay the merchant with a bit less interest. The difference pays for my service.

The purchaser doesn't repay a loan of money from me, because I never lend him any money. I'm a professional accountant managing the merchant's agreement to allow the purchaser to pay on time with interest.

Suppose I do lend the purchaser money to pay for the good. The purchaser pays for the good with money borrowed from me, and the merchant deposits this money in a bank to earn interest on it. I happen also to be the banker.

As the purchaser repays my loan, I pay the merchant interest on his deposit. This interest is the same as the interest I pay the merchant in the first scenario.

I borrow the money that I lend the purchaser from another bank, the Central Bank. The Central Bank requires timely repayment but charges no interest. As the purchaser repays me, I repay the Central Bank. The difference between the interest I receive from the purchaser and the interest I pay the merchant on his deposit, is my interest. This interest is the same as the interest I receive in scenario one.

What's the difference?

There is no difference. Extending credit is indistinguishable from creating money to lend it and then removing the money from circulation as it is repaid.

Money is credit. Money has always been credit. Money was credit under the gold standard as much as it is now.

I stand corrected.

Are you saying that money must always only be credit? I just want to be clear. If so, why?

Are you saying that money must always only be credit? I just want to be clear. If so, why?

Practically everything we commonly call "money" today is credit to someone at some point, and money was the same in the nineteenth century under various gold standards.

"Money must always be credit" is largely a matter of nomenclature. You can call gold in a vault "money" if you want. You can even call gold in the ground "money", but I say this usage confuses gold with something else. Why not call silver and platinum or land and houses or even labor "money"?

Under a gold standard, gold is a commodity with a fixed price. Fixing the price is the gold banker's duty, and this duty limits his extension of credit, but it doesn't prevent him from extending credit for goods exceeding the value of his gold reserve. It can't possibly, because this credit really has little to do with his gold reserve.

We're all buying on credit all the time. We don't always realize it. If you work for a company, the company might borrow your wages, expecting customers to repay the company as you produce goods. The company might borrow this money from a bank or directly from the customer. When you spend this money, you're really spending credit, even though you didn't borrow the money personally.

Here's the key point. Money is not a durable good. It does not obey some law of conservation, like conversation of mass. Gold does. Money doesn't. Just look at the example above. Money appears and then disappears as the merchant extends credit and the purchaser pays for the merchant's good. Even if no Central Bank "creates money" by handing currency to the banker to hand to the purchaser, money is still created in this transaction.

The money supply "grows" because the volume of goods purchased grows, but money is continually created and destroyed regardless. We create it faster than we destroy it. That's all. If we don't grasp this point about money, we misunderstand the role of credit in our economy.

Henri Hein:

Yes, irredeemable paper currencies are nothing new, but a global financial system based entirely them is. And it began on August 15, 1971, when Nixon "closed the gold window" -- http://en.wikipedia.org/wiki/Nixon_Shock -- essentially declaring international bankruptcy (FDR having done the same thing domestically when he confiscated the people's gold in 1933 -- http://www.the-privateer.com/1933-gold-confisca...>

And both bankruptcies are now becoming starkly apparent to the rest of the world (if not to an American public that is too dumbed-down, docile, and dependent to have any idea what is happening).

Money is a function. Gold (or anything) is money when it is used to perform the function of money.

Money is a floating accounting system.

Sam,

You seem to have the last word on the subject. I agree.

Am I missing something? It seems to me that this issue is fairly simple. Why do we not apply the same economic truths to this issue that we apply to others?

The present monetary system is monopolistic and the setting of interest rates is akin to price fixing. We know that these features of a system are disastrous. The solution: Let a system of free voluntary exchange decide, not employees of the Federal Reserve (or for that matter a group of erudite Economics bloggers!).

Paul Clark:

That is precisely my point: Monetarism is statism and as such has nothing to do with the free market other than the subversion thereof.

As for gold, 5,000 years of "free voluntary exchange" have made it (and silver) the money of choice. And 37 years of globalized fiat currencies have only changed that to the extent that the longer this counterfeit monetary system continues, the worse the transition back to real money will be.

I agree with the above. Only I would say that it has been fewer than 30 years of global fiat standard. In fact many currencies retained a backing different to the dollar for several years after Nixon's move. SDRs were only accepted reluctantly by many. (even now almost nobody wants them)

And again to those that cannot envision money arising organically without any government backing... you are not only unworthy to be writing in a blog with Hayek's name on it, but also woefully ignorant of america's monetary history.

Please read about the mexican silver duro and Emergent order.

Martin Brock,

You do not need thought experiments to know how 100% reserve banking works. There is a historical record of several 100s of years of it working. Just study a bit about the Bank of Amsterdam or the swiss banking system.

Or get an e-gold account.

Antonio:

I won't argue your point and will only add that the shorter time frame for a global fiat standard reinforces my point that it is but a blip on the screen, historically speaking, reaching today's outrageous result in an even shorter time. And here's one of the country's most mainstream news sources on what it's leading to:

http://www.time.com/time/magazine/article/0,9171,1725094,00.html

Kudos, too, for pointing out the unworthiness of those who think they are supporting Hayek in rejecting a free market in money. Yes, he promoted fiat currencies but not as government-issued legal tender, least of all on a global scale, which he would surely denounce as the massive fraud that it is.

"Money is credit. Money has always been credit. Money was credit under the gold standard as much as it is now."

No it isn't. Fiat money has no counterparty -- it's just a piece of paper.

I was disappointed in Cowen's responses re the goold-standard. Can I suggest Nathan Lewis of New World Economics for a follow-up interview, so that you can cover the other half of the gold story? He's a very good advocate of hard money.

You do not need thought experiments to know how 100% reserve banking works.

I don't need any of your gold to extend credit. I don't need money at all for that matter, but it does simplify accounting.

No it isn't. Fiat money has no counterparty -- it's just a piece of paper.

The counter-party in my extension of credit is the person to whom I extend credit, not someone with a deposit in a bank. I don't need banknotes to extend credit at all. They're only a convenience I choose to use. I'm outsourcing an accounting service and joining an insurance pool. That's all.

If I extend you credit to purchase a loaf of bread, the thing of material of value for which I extend credit is the loaf of bread, not any gold anywhere. I expect you to pay me for the loaf of bread by producing anything of comparable value, not simply by searching for gold. I couldn't care less what you produce, as long as it has comparable value.

That's why the transaction involves "money" and not gold. Money is an accounting device that you present to me as evidence that you've produced something of comparable value and thus are entitled to claim my produce. I don't want your gold. You can keep that. Thanks.