Learning from Europe while it is , in effect, on a gold standard

[samjones]

You understand the minute you put it in the bank that they'll create more dollars out of thin air and loan them out.

No. They don't "create dollars out of thin air" when they loan them out. They loan dollars. The dollars they loan they don't have any more. I'm fully aware of conventional uses of M0, M1, etc. You don't need to convince me that a strict specie standard would be impractical.

I am merely pointing out that this is what the man considers a "gold standard" and what have conventionally been "gold standards" are 2 different things. If the government chooses to not print certificates for some of the gold it holds in the treasury then that is currency manipulation. If it chooses print certificates not for gold it has, but for gold it promises to obtain should someone redeem the certificate then that is currency manipulation.

It doesn't make it "liberal fiat" like Ed says, but he is correct in saying that it is currency manipulation and it is a primary cause of the Great Depression.

I don't see the harm in acknowledging that.

 

[EdwardBaiamonte]

You understand the minute you put it in the bank that they'll create more dollars out of thin air and loan them out. That's what banks do, and it means the quantity of dollars is no longer fixed on the quantity of gold deposits. It also means higher inflation and deflation than anything we've ever had with FRN's because that's how it worked before '33 with gold certificates.

I'm lost there. A bank loans out more than it has to pay interest, to make money for itself, to pay bills, and to grow the economy. This seems like a good thing. Ideally, its interest rate will reflect how good it is at making loans and how many loans it makes. The more loans outstanding though the more reserves it will be required to borrow through the inter bank market thus keeping the entire system stable with the same ratio of paper to gold.

Without this mechanism the economy could grow only as the gold supply grew, deflation occurred, or the gold/paper convertibility ratio was changed. None of those methods is superior to the flexible fractional reserve banking system.

 

[expat_panama]

...My concern is that they'll they'll decide some particular goofy scheme is 'true' enough, and then get someone like Ron Paul to push though. What, Ron Paul is too weird and gold standard is too stupid? How about Obama and Obamacare?

As though my questioning the GOLD standard somehow make me supportive of Obama care?...

LOL! I'll agree with you that whatever you support is very important, but I need to confess that your existence never entered my mind. Sorry.

Let's realize that while you and I both know the gold standard is stupid and Ron Paul's a nutjob, that it doesn't mean Paul can't get elected and ram a gold standard through congress during some midnight session. That stuff happens and we have to be aware that the possibility isn't all that remote.

 

[expat_panama]

...the minute you put it in the bank that they'll create more dollars out of thin air and loan them out.

No. They don't "create dollars out of thin air" when they loan them out. They loan dollars. The dollars they loan they don't have any more...

Sure they do, and that's how banks have worked for centuries.

A depositor puts 100 gold dollars in the bank, a borrower mortgages a farm worth 200 golds and floats a loan for 100, and the gold standard money supply just doubled because both the borrower and the depositor are now able to spend 100 golds each. Before the bank made the mortgage loan the gold lettering on the bank window said "Assets: $100 gold", and after it gets changed to "Assets: $300 gold".

The bank created $100 gold out of thin air and increased its assets by $200.

 

[expat_panama]

...The more loans outstanding though the more reserves it will be required to borrow through the inter bank market thus keeping the entire system stable with the same ratio of paper to gold...

Doesn't work that way.

With the example in my post 284 above, the money supply of 100 gold dollars is backed by the 100 deposited coins. After the mortgage loan is made the 200 gold dollar money supply is backed by the 100 coins plus the farm worth $200 gold.

...None of those methods is superior to the flexible fractional reserve banking system.

That's just it, the fractional reserve banking system is how banks have been working for hundreds of years --both with the gold standard and with FRN's. The only thing gold pegging did was give us double digit inflation one year and double digit deflation the next. That's unstable pricing. CPI-pegging gives us a couple % per year and that means stable currency.

 

[samjones]

A depositor puts 100 gold dollars in the bank, a borrower mortgages a farm worth 200 golds and floats a loan for 100, and the gold standard money supply just doubled because both the borrower and the depositor are now able to spend 100 golds each. Before the bank made the mortgage loan the gold lettering on the bank window said "Assets: $100 gold", and after it gets changed to "Assets: $300 gold".

The bank created $100 gold out of thin air and increased its assets by $200.

No. The bank didn't.

Assuming that this is the totality of the banks balance sheet the bank has

$Zero gold
$100 gold in oustanding loands
A lien on a farm valued at $200 gold.

The system that you outlined only really works if the bank acts as an arbitrageur of a pool of unlimited money. In other words, the bank borrows money from the Fed (ultimately) to loan to the actual borrower and the Fed will order as many printed dollars as the borrowing public can stand..... okay - so I know that paragraph doesn't *exactly* outline how that process works, but I offer it for your consideration anyway.

How can the Treasury have unlimited money? Easy... they corner the market on gold and then the offer to sell it *only* and expressly at a rate that is above market value. At that point they don't even really have to have the gold. They can get it if somebody decides they want it. All they really need to do is have enough on hand to control the market price.

And that's exactly what Nixon failed to do.

Ed is offering up a more utopian, egalitarian approach to monetary policy. Brilliant in its simplicity and highly protective of the rights of the working man.

Simply revert to a specie standard. No government hoarding of gold. No government manipulation of the valuation of the metal.

It's easy. Just declare all fiat money null and void as of 1/1/13. Take your gold to the mint and they'll hand out notes to you. 11 grains of gold will get you ten 1 grain notes.

 

[expat_panama]

...Before the bank made the mortgage loan the gold lettering on the bank window said "Assets: $100 gold", and after it gets changed to "Assets: $300 gold". The bank created $100 gold out of thin air and increased its assets by $200.

No. The bank didn't. Assuming that this is the totality of the banks balance sheet the bank has

$Zero gold
$100 gold in oustanding loands
A lien on a farm valued at $200 gold.

Let's look at the bank balances before and after the mortgage:

Before

Assets: $100 gold in the vault.
Liabilities: $100 demand deposits
Net Worth: $0
​

After

Assets: $100 gold in the vault +
Title lien bond worth $100 backed by $200 farm
=$200
Liabilities: $200 demand deposits.
Net Worth: 0$​

The bank manager's happy because she's got one gold in monthly mortgage interest coming in for paying off the 2 silver coins in deposit interest. The bank clients are happy because they went from having $100 for spending to $200. The confusion may be because along iwth that $100 created out of thin air the town also got $100 in debt created, so the town's net worth hasn't changed. What's changed for the better is the town's monthly profitability.

 

[samjones]

Let's look at the bank balances before and after the mortgage:

Before

Assets: $100 gold in the vault.
Liabilities: $100 demand deposits
Net Worth: $0
​

After

Assets: $100 gold in the vault +
Title lien bond worth $100 backed by $200 farm
=$200
Liabilities: $200 demand deposits.
Net Worth: 0$​

The bank manager's happy because she's got one gold in monthly mortgage interest coming in for paying off the 2 silver coins in deposit interest. The bank clients are happy because they went from having $100 for spending to $200. The confusion may be because along iwth that $100 created out of thin air the town also got $100 in debt created, so the town's net worth hasn't changed. What's changed for the better is the town's monthly profitability.

Works for me, but I fail to see how having $200 in demand deposits and $100 in the vault equals "creating money out of thin air".

That equals "lending money to somebody and hoping they'll pay it back".

You will surely counter that the bank would simply seize the $200 farm if the farmer did not repay the loan, but the problem is that it isn't a $200 farm that they loan $100 on to begin with. It's a $112 farm.... and they use mark to market accounting which means that post 2008 the farm lists for $89 and good luck finding a buyer.

The problems between the bank and the farmer - this is BAU in finance and none of us need cry over the poor farmer who lost the farm or the banker who lost money.

That guy who, in good faith, put $100 in the bank in the first place and that set off this whole chain of events..... he's getting maybe .... maybe $70 on his deposit after the dust settles... and it's going to take a good long time for the dust to settle.

Cuz that air wasn't so thin after all.

 

[expat_panama]

...I fail to see how having $200 in demand deposits and $100 in the vault equals "creating money out of thin air"...

Bank deposits are money and when bank deposits double the amount of money doubles.

...problems between the bank and the farmer - this is BAU in finance and none of us need cry over the poor farmer who lost the farm or the banker who lost money...

People talk that way but in real life for decades and centuries there's been enormous wealth created by bankers and farmers working together.

 

[samjones]

Bank deposits are money and when bank deposits double the amount of money doubles.

Not M0.... and this is a thread about the gold standard.

 

[editec]

Contentious as t6his subject is, I want to commend most of our fellow posters for a least trying to stay on subject and for not turning the thread into a one or two or three people having another pointless flame war.

 

[expat_panama]

...want to commend most of our fellow posters for a least trying to stay on subject and for not turning the thread into a one or two or three people having another pointless flame war.

Agreed. Those two or three person flame wars are bad enough, but when it degenerates into a one person flame war it really frosts my cake...

 

[expat_panama]

Bank deposits are money and when bank deposits double the amount of money doubles.

Not M0.... and this is a thread about the gold standard.

Hey guy, we first got into this merry-go-round when you said the gold standard meant--

...You put your twenty, your ten and your five in the bank. They put it in the vault...

 

[samjones]

Hey guy, we first got into this merry-go-round when you said the gold standard meant--

...You put your twenty, your ten and your five in the bank. They put it in the vault...

Yeah, yeah, I know, but if you look at the context I was only saying that this appears to be what Ed considers to be the only "true" gold standard..... or rather if you read the original post that I made the statement in you'll see that's the case.

This seems to be why he says that "liberal fiat" money caused the Great Depression. Because the gold standard they had at the time wan't up to his standards so he calls it "liberal fiat" money.

The content of Ed's posts are so divorced from reality sometimes that you have to read really hard and kind of figure what he's probably meaning to say. I believe that he's calling for a simpler, less manipulatable gold standard. And I have to agree with him that virtually every gold standard that I've heard creates a currency whose value is pretty easily manipulated.

 

[Sundial]

...Before the bank made the mortgage loan the gold lettering on the bank window said "Assets: $100 gold", and after it gets changed to "Assets: $300 gold". The bank created $100 gold out of thin air and increased its assets by $200.

No. The bank didn't. Assuming that this is the totality of the banks balance sheet the bank has

$Zero gold
$100 gold in oustanding loands
A lien on a farm valued at $200 gold.

Let's look at the bank balances before and after the mortgage:

Before

Assets: $100 gold in the vault.
Liabilities: $100 demand deposits
Net Worth: $0
​

After

Assets: $100 gold in the vault +
Title lien bond worth $100 backed by $200 farm
=$200
Liabilities: $200 demand deposits.
Net Worth: 0$​

The bank manager's happy because she's got one gold in monthly mortgage interest coming in for paying off the 2 silver coins in deposit interest. The bank clients are happy because they went from having $100 for spending to $200. The confusion may be because along iwth that $100 created out of thin air the town also got $100 in debt created, so the town's net worth hasn't changed. What's changed for the better is the town's monthly profitability.

The math's off, because the bank doesn't own the farm. It owns a loan to the farmer. The value of the loan is the discounted value of the future payments, not the value of the farm.

Also, the profitability of the town hasn't changed. The increased profits of the bank are exactly offset by the increased costs of the farmer. The bank's better off, but not the town.

I'm curious, though, where the farmer gets the gold to pay the interest on his debt. If the gold's in the bank, he'll either have to rob the bank, or default. On the other hand, if he tries to sell his farm, the most he can get is 100 - which is already at the bank. It seems like as soon as the farmer borrows money, he's screwed.

 

[expat_panama]

...put your twenty, your ten and your five in the bank. They put it in the vault. End of story.

You understand the minute you put it in the bank that they'll create more dollars out of thin air and loan them out...

...he's calling for a simpler, less manipulatable gold standard. And I have to agree with him...

Gold advocates generally don't understand how banks and money work and keep pushing for things that can't be done and measures that could lead to a host of negative unintended consequences.

2012 Ron Paul fans remind me a lot of 2008 Obama fans. Child-like thinking that spells disaster in an adult world.

 

[expat_panama]

...The math's off, because the bank doesn't own the farm. It owns a loan to the farmer. The value of the loan is the discounted value of the future payments, not the value of the farm...

The math was fine. It was the html coding that was off:

Assets:

gold in the vault___________$100
bond backed by $200 farm____$100

________________________Total Assets = $200
​

Liabilities: demand deposits________________$200

Net Worth:____________________________________0$​

...the profitability of the town hasn't changed. The increased profits of the bank are exactly offset by the increased costs of the farmer. The bank's better off, but not the town...

Businesses like farms don't take out loans for some kind of welfare check, they borrow money for expanding the business understanding they can increase their profitability enough to not only pay back the loan but also make their effort worth while. Virtually all farmers borrow that way because the ones that don't aren't farmers for long.

...I'm curious, though, where the farmer gets the gold to pay the interest on his debt. If the gold's in the bank, he'll either have to rob the bank, or default. On the other hand, if he tries to sell his farm, the most he can get is 100 - which is already at the bank. It seems like as soon as the farmer borrows money, he's screwed.

The straight forward reply starts with how gold goes into the bank because it's heavy and can be robbed, and then how businesses raise capital for expansion. Bad idea; you're not asking questions, you're making statements that fit a chosen ideology and don't have to fit reality.

 

[editec]

Not even the most restricted GOLD STANDARD pour resident gold bugs can imagine can overcome a government intent on stealing the people though debt and currency manipulation.

If we want better government?

We need to stop electing crooks maquerading as businessmen.

 

[Sundial]

The straight forward reply starts with how gold goes into the bank because it's heavy and can be robbed, and then how businesses raise capital for expansion. Bad idea; you're not asking questions, you're making statements that fit a chosen ideology and don't have to fit reality.

The question's straightforward: how can the farmers pay back what they owe + interest unless the amount of money in the economy grows?

It has nothing to do with how productive they are or how much they expand; they owe money, not wheat or soybeans. In fact, the more productive they are the worse it is - the prices they get for what they grow fall that much faster. The debt, however, only increases.

 

[samjones]

The question's straightforward: how can the farmers pay back what they owe + interest unless the amount of money in the economy grows?

It has nothing to do with how productive they are or how much they expand; they owe money, not wheat or soybeans. In fact, the more productive they are the worse it is - the prices they get for what they grow fall that much faster. The debt, however, only increases.

That's not true. The banker simply makes a profit brokering loans between those who have the gold and those who need it. Those who need gold (like the farmer) typically need it to produce a good (crops) or to provide a service. The banker and the bankers depositors do not make a good or provide a service, save "lending" and so they will require that others provide that good for them. THey will use the profits made on the loan to buy crops from the farmer.

"Debt" is not "bad". Bad debt is bad. The type of debt used to finance productive enterprises is not.