No Penny Needed

2008-2-28 05:20:00

Larry quoting JJ:

"It took power from the bankers because the greenbacks were printed by the government and not private bankers. Lincoln this skipped the step of paying the bankers to print the money for the government and saved the country the interest normally charged for creating the money."

Larry the writes:

"Let me see if we can fully understand your reasoning here:

"1. The Legal Tender Act of 1862 created new 'greenback' dollars which were simply printed by the U.S.

"2. The bankers and creditors were however guaranteed by this act to be paid in gold.

"3. The masses got inflated paper greenbacks.

"4. However the U.S. saved some interest since it did not technically go into debt for these greenbacks.

"So the rich got gold, the poor got inflated paper, and the U.S. didn't have to pay interest.

"Whatever your reasoning is, I am not impressed. It just sounds to me like you keep repeating your mantra, 'The US saved a lot of bucks!'"

JJ:

Whatever your reasoning is, I am not the least impressed either.

Of course the bankers did not want paid in greenbacks as they hated the idea because it took away much of their power. It was also viewed as a bold experiment so of course some creditors wanted to play it safe and demanded to be paid in the old money.

This quote expresses the alarm of the world at the greenbacks:

"If this mischievous financial policy, which has its origin in North America, shall become endurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe."   (Hazard Circular - London Times 1865)

As soon a Lincoln was out of the way the bankers placed every conceivable pressure to withdraw the greenbacks and continue as if they had never existed.

True there was inflation during the Civil War The greenbacks backed only by labor suffered a 80% inflation rate while the confederate money backed by cotton was inflated a whopping 9000 percent by the end of the war and of course became worthless after the war. Looks like Lincoln's fiat greenbacks fared a lot better than the commodity backed money of the South. There was a glut of cotton on the market which helped destroy the confederate dollar. The same could happen with gold sooner or later.

Larry:

"I am reasonably certain you are neither inspired, nor speaking immortal [eternal] words when you talk on economics."

JJ:

Two hundred years from now when a stable money system is in play the people of the world will look back on this day and think to themselves how silly it was to consider spending so much time and effort to obtain gold to back money when that same effort could create goods and services to enrich mankind. In that day and ages hence my parable will be quoted and people will be left wondering why this obvious truth was not apparent in our age.

In a previous post Larry said:

"When I argue for the gold standard I am not really arguing that the United States can revert to the gold standard. I expect that would be very difficult."

I replied:

"That's one of the reasons I have maintained the gold standard is impractical. I'm glad we are on the same page here."

To this Larry replies:

"We are not on the same page. The gold standard is not impractical and if you had a smidgen of knowledge of the history of free markets and the gold standard in the 19th century you would know something of that.

"What is difficult is retroactively fixing the results of nearly a century of deficit spending."

JJ:

WOW! I agree with you and for doing so you insult my intelligence. You're better than that Larry. Let me repeat your words where I was on the same page with you:

"When I argue for the gold standard I am not really arguing that the United States can revert to the gold standard. I expect that would be very difficult."

Now I agree with this statement. For agreeing with you I haven't a "smidgen of knowledge of the history."

Let me repeat what you said that I agreed with. You said that you're not arguing for the United States to return to the gold standard as that would be very difficult. I am on the same page as you on this as I do not argue for the United States to return to the gold standard as this would be difficult. Where are we not on the same page on this point? I was trying to find a point of agreement here and I still think we I have one if you meant what you said -- and then you insult me. I do not insult your intelligence and I do not expect you to insult mine.

Larry quoting JJ:

"Then we are back to the situation of the parable."

Larry then states:

"In your imagination only. Zion could be based on a gold standard."

JJ:

It could be if we wanted to be like the first group and spend twice the needed time to build it by first running down all the gold we need for money.

Larry:

"Then what do you have, an old tired system that never worked before? That is my guess."

JJ:

No more tired than Capitalism. Ayn Rand was right in that true Capitalism has never been tried. Does this mean that it is a tired old idea we should abandon? No. Instead, we should try it in pure form to give it a real chance of success.

The same goes for responsible fiat money. It has never been tried except in limited arena. If it is issued by the government without paying interest to bankers and overspending controlled then it can work indefinitely. Our Congress has never even passed a law requiring them to balance the budget. Because of human nature we will be in trouble no matter what money system we use unless spending is controlled by force of law.

Larry:

"One of the purposes of a banking system is to 'put on the brakes' by raising interest rates when the economy is 'overheated' (demand for new financing is unjustifiably high given economic circumstances). But your system would just keep pressing down on the gas pedal as long as there is demand."

JJ:

It is overspending and adding too much or not enough money to the system that causes bankers to do the song and dance. We can continue to press down on the gas as long as there is a demand and the price will remain stable.

Suppose I am a farmer and one year there is a demand for 1000 pounds of my carrots so I produce 1000 pounds. But the next year there is a demand for 10,000 pounds so I produce that much. In both years the price of carrots remained stable because the supply and the demand were equal. The same principle would apply to a million pounds.

Larry:

"This is of course one of the factors that has recently led up to the current mortgage crisis -- government encouraging borrowing by keeping interest rates low which is precisely the idea of the 'money supply adjust[ing] to demand.'"

JJ:

This is entirely incorrect. It was not low interest rates or money supply adjusting to the demand that created the problem. What created the problem was irresponsible lending which again can be traced back to government meddling. There were complaints from the left that the poor were denied the opportunity to get in on the housing boom and pressure was put on the banks to make things easier for them. They this created adjustable rate mortgages that allowed the "poor" to qualify for loans that they could not afford once the mortgage was adjusted. They relaxed qualifications so it became easy to buy with no money down. I knew we were in big trouble when a friend who hasn't had a job for over ten years bought a house with nothing down and even had his closing costs paid from the loan.

Larry:

"So how do you claim that your system is based on labor, that is, that your system is based on a 'labor standard' where the average hour of labor cost $20 when you take no steps to adjust the currency to keep the average value at that level?"

JJ:

If the right amount of money is released to satisfy the needs of production and consumption with no overspending, then the money should remain stable with little or no inflation.

Larry:

"Again what if the average value drops $10 per hour, or jumps to $30 an hour? What is your policy?"

JJ:

The value of the dollar would go up or down just as it would on the gold standard if the price of gold went up or down. Normally the value of an hour's wage will go up over time as technology makes things more efficient.

Larry:

"People will often 'demand' (e.g., try to borrow) and often for schemes that are going to fail. One of the purposes of a professional banking system is to evaluate that demand, the qualifications of the borrowers, and to adjust interest rates appropriately.

"That is a proven system. It does tend to fail when governments interfere."

JJ:

This is an obvious truth. Why are you telling me this?

Larry:

"Even if that is true, it still makes no sense to fix the interest rate that banks charge. Banks should properly change the interest rate based on the economic situation (as illustrated above)."

JJ:

I've never said anything to contradict this.

Larry quoting JJ:

"It's not central planning."

Larry then writes:

"Yes it is. Seven people setting around a table making decisions about how much money to print for the next 90 days is central planning."

JJ:

Central planning is usually associated with the planing of work projects, not giving out money. If I go to my banker with a business plan it is me that is doing the central planning, not the banker. I guess technically every person in the world has to do some central planing concerning his job. I think you are splitting hairs to continue the argument here.

Larry quoting JJ:

"A just government just issues money to accommodate the need."

Larry then says:

"Ayn Rand accurately described your procedure as 'putting a penny in the fuse box.' Fuses in an electrical circuit are safety devices. If you put in a penny and short circuit the proper protection sooner or later you will have a fire."

JJ:

I believe it was Alan Greenspan that originated this thought, not Ayn Rand.

Under a responsible plan you will not have a crisis so no penny in the fuse box will be necessary.

Larry:

"I have read your plan, or at least what you claim to be a plan. I agree with Ayn Rand. People with your kind ideas in economics should be kept well away from having any ability to implement them."

JJ:

Sounds like you would have sided with the British Monarch who forcefully took away the colonists fiat money which in many cases was working fine.

By the way, do you believe every word Ayn Rand has written? Tell me something of hers you have questioned.

Larry:

"A far better scheme is where individual bankers, thousands of individual bankers, make individual decisions on applicants for credit and interest rates to charge. In that much smaller scope they are quite competent to make decisions."

JJ:

But this is what is done in there present fiat system which you despise.

Larry:

"Instead of having a small group -- seven -- I think in JJ's scheme -- you have thousands of highly interested and competent individuals making decisions on the small part of the arena that they know intimately."

JJ:

Wow, I can't believe how much you misunderstood me. The seven would only estimate how much money is needed for the whole, but of course they would not make decisions for individual banks or people getting loans. They would be facilitators, not micromanagers.

Larry:

"At root of JJ's simplistic fallacy is his concept that labor is the principle behind money. I intend to write more on that when I have the time."

JJ:

It's the principle behind money right now. We do not have to wait for this principle to apply. The problem is that money is not tied to a stable value in labor.

Larry:

"No standard can ever protect people against a looter government or a government determined to transfer wealth from the politically disfavored to those who are favored. This is not an argument against the gold standard. The gold standard can only protect the wealth of citizens if it is itself protected constitutionally and the people insist that the government obey the constitution."

JJ:

It sounds like you have an argument against any kind of money here.

I believe we are entering an age where the commodity backed system of money is impractical and a workable fiat system can be created. Its success does not depend on having enlightened people at the helm but the force of law to prevent overspending and the creation of too much or too little money.

Whether you like it or not the fiat system is the future so we might as well create one that will work. Believe me when you come back in a lifetime or two you will not be spending gold backed money but will be spending money backed by the most eternal of commodities -- labor.

Then eventually we shall evolve into a society which will function with no money at all.

Larry:

"If as you predict this Zion arose on floating cities then one product that it could offer would be a banking system and currency backed by gold that could be available to the citizens of the world. It could literally become a universal currency.

"In this way, and as I said before, the streets of Zion would be metaphorically paved with gold because gold would be at the foundational level, at the level of principle that supports it."

JJ:

I understand your thinking and there will be gold in Zion. We will eventually have all the gold we desire, but it will not be the money we generally use with each other, but with the outside world to import certain materials and services. Then as the labor backed dollar proves itself gold will no longer be necessary -- except to literally pave the streets.