Deflation and Bitcoin, the last word on this forum

[muyuu]

I don't remember discussing it with you. A quick check of posting history suggests all you've done is dismiss it because it's "too complicated". If you want to have relative stability even in the face of market expansion, which imo is a very necessary thing if you want businesses and people to use your money, you are going to have to really gut the ideas of bitcoin and start over. So, again imo, it is worth it to gut the rest of the crap that is inefficient while you're at it. Nobody presumed bitcoin was possible until Satoshi did it; it's really not that far-fetched to rework the same idea from the ground up. And it's a lot easier if there are multiple people involved.

Actually there already were some ideas lingering before bitcoin. Most notably: http://www.weidai.com/bmoney.txt  (1998)

I don't dismiss it, I simply have my own ideas on how a complete rework should be. Since this topic is long and has multiple considerations, I'd rather discuss on concrete stuff like money supply (as when I opened this thread: https://bitcointalk.org/index.php?topic=108964.0 ). I sincerely believe time-based reputation is in general counter-productive. Anyway if there was something concrete I'd be willing to give it a look. I'm sceptical that a blockchain currency can be secured properly without proof of work, I'd like to see that working. Note that if the system can be feasibly gamed it will be.

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[Etlase2]

Actually there already were some ideas lingering before bitcoin. Most notably: http://www.weidai.com/bmoney.txt  (1998)

It's one thing to write a proposal and it's another thing to do it. Trust me, I know.

I don't dismiss it, I simply have my own ideas on how a complete rework should be.

Well I don't know what your goals are, and your money supply thread didn't really elucidate that either.

I sincerely believe time-based reputation is in general counter-productive.

Time-based reputation is only a monetary incentive (and disincentive for doing bad things) as well as applying to a few other minor things. The majority of the security rests on buying shares. Want to approve a double or a bad spend? Well ok it will cost you $3,000 and however many months or years of reputation incentive that you've earned. And the odds if being able to pull this off and actually work are as difficult if not much more difficult than a finney attack as nothing can be done in secret.

I'm sceptical that a blockchain currency can be secured properly without proof of work, I'd like to see that working.

I'm not. I've spent hundreds of hours coming up with these ideas, coming up with potential attacks, rearranging the ideas to avoid those attacks, and so on. There are, in my mind, only a few questions that need to be answered via testing, and these are of a low-impact variety (like how will latency affect certain processes).

Note that if the system can be feasibly gamed it will be.

See above. A lot of my time has been devoted to figuring out how it can't be gamed; up to and including making ASICs essentially useless.

As always, feel free to ask questions in the thread and I will give you a very detailed response.

[Dusty]

...
Deflation brings in the fresh winds of the free market."

How does free market currency = deflation?

Historically, free people that could explore and freely choose the money they want, went for precious metals like silver and gold.
And those are deflation currencies because their supply is limited, while technological progress is continuos and makes the price of goods and services fall down in time.

The Dollar, Euro and all the other fiat money has been issued by the states and has not been choosed freely by the people.
The use of that money gives big advantages to some (the tip of the pyramid), while robbing all the others.

Anyways, I don't have time to critique some tard who writes an article on the internet.

If you don't understand the basics of economics I suggest you to start studying some Austrian economics, it should help.

[Etlase2]

Historically, free people that could explore and freely choose the money they want, went for precious metals like silver and gold.

Historically, you're wrong. Or at least conveniently forgetting about half the story. Wampum, salt, grain, cattle, etc. have all been used as currency in a free market. Some are less fungible than others, but there is no "history chooses gold!"

Is there some reason you ignored my next sentence asking if he was referring to gold? The author only ever mentions gold under point #3, I'm not sure why. But as I said, a free market currency implies a competition between currencies; again, gold can't compete with itself. Presumably banks would issue regional or national currencies and they would have to compete with other banks to maintain their value in a free market system.

If you don't understand the basics of economics I suggest you to start studying some Austrian economics, it should help.

Yeah, I'll stick to reading Hayek's work, you know, that guy who won a nobel prize and who wasn't stuck in 19th century economics like Mises or the boy wonder who wrote that article riddled with begging the question fallacies.

http://mises.org/daily/3204

"I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value, provided both the issuer and the public understand that the demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind."


http://www.cato.org/pubs/journal/cj19n2/cj19n2-4.pdf
http://marketmonetarist.com/2012/03/02/mises-was-clueless-about-the-effects-of-devaluation/

If you want me to find more criticisms of Mises I can do that for you. But Mises economics is not Austrian economics as a whole, so please do not assume it as such. Otherwise I might have to insult your apparent lack of knowledge on the subject.

[JoelKatz]

How does free market currency = deflation?

In a healthy economy, rational people should prefer a slightly deflationary currency if they have a free choice. Basically, someone would prefer to hold an asset that was increasing in value if they had a choice. A free market economy should only produce predominantly inflationary currencies if there is somehow too much long-term investment and not enough short-term consumption. This could happen due to a crisis such as a collapse in the housing market. It's hard to say though because we've never had such a market. Perhaps the demand will create a new kind of currency (like Bitcoin was a new kind of currency) that can tap into supply and demand to optimize its inflationary/deflationary characteristics to balance investment, consumption, and savings. To date, currencies for modern economies have always been fixed or centrally controlled. Free market currencies are in their infancy.

[Etlase2]

In a healthy economy, rational people should prefer a slightly deflationary currency if they have a free choice. Basically, someone would prefer to hold an asset that was increasing in value if they had a choice.

But slightly deflationary would be up to and controlled by the issuer. That deprives them of the opportunity to create new currency. You have to, I suppose, think about the currency market as a form of business. Contrarily, a free market currency has to avoid inflation so as not to lose its customers to a competitor.

A free market economy should only produce predominantly inflationary currencies if there is somehow too much long-term investment and not enough short-term consumption.

I'm not sure I follow this. Too much long-term investment would presumably (according to Hayek) lower the interest rate and promote non-consumption growth. But non-consumption growth inevitably leads to consumption growth. And lower interest rates mean that fewer people will look to long term investment over short term consumption. So it works itself out. Everyone seems to keep forgetting that a stable price currency may just be possible in a competitive market.

Perhaps the demand will create a new kind of currency (like Bitcoin was a new kind of currency) that can tap into supply and demand to optimize its inflationary/deflationary characteristics to balance investment, consumption, and savings.

I think the easiest way to do that is to maintain a stable price level and let the free market interest rate sort out consumption and savings/investment. Hayek talks about stability in free market currencies in the mises.org link in my post above yours. And *I* think it can be done in a cryptocurrency too.

[Dusty]

Historically, free people that could explore and freely choose the money they want, went for precious metals like silver and gold.

Historically, you're wrong. Or at least conveniently forgetting about half the story. Wampum, salt, grain, cattle, etc. have all been used as currency in a free market. Some are less fungible than others, but there is no "history chooses gold!"

Yes, it is. As you correctly stated a wide range of money has been explored, precious metals and gold in particular has been selected after many, many years of trial&error.

Is there some reason you ignored my next sentence asking if he was referring to gold? The author only ever mentions gold under point #3, I'm not sure why. But as I said, a free market currency implies a competition between currencies; again, gold can't compete with itself.

I'm sorry I'm unable to understand what you are asking (I'm not a native English speaker), please reword your question, and in particular the fact that "gold can't compete with itself".
Also, as you stated, it's correct that a free market implies a competition between currencies.

Presumably banks would issue regional or national currencies and they would have to compete with other banks to maintain their value in a free market system.

Exactly, as Hayek explained.
And that means that that currencies, probably backed by some hard asset like gold, will be deflationary.

http://mises.org/daily/3204

"I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value, provided both the issuer and the public understand that the demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind."

If you want me to find more criticisms of Mises I can do that for you. But Mises economics is not Austrian economics as a whole, so please do not assume it as such. Otherwise I might have to insult your apparent lack of knowledge on the subject.

I don't know why you are telling me that: I told you to check Austrian Economics, and not only Mises.
Hayek was in fact one of the best Austrian Economics exponent and built his work on that of Mises.

I completely agree with Hayek's thesis about free market currencies competition, and that's why I think Bitcoin has quite a possibility in this world.

So, if you agree with I'm telling, just say it directly, and please show me where people freely choose an inflationary currency.

[Etlase2]

Yes, it is. As you correctly stated a wide range of money has been explored, precious metals and gold in particular has been selected after many, many years of trial&error.

The Roman and British empires both used a form of fiat, yet they were the biggest empires history has known. Gold did not explode as a currency of international trade until fractional reserve and fiduciary media (deposit notes) existed. You claim that the "free markets" have chosen gold, yet there are only a few examples of free market currency in recorded history, and when there has, it has typically not been gold. Gold only became the de facto currency of trade when people could borrow it with fiduciary media.

So no, precious metals have not in particular been selected after many years of trial and error.

I'm sorry I'm unable to understand what you are asking (I'm not a native English speaker), please reword your question, and in particular the fact that "gold can't compete with itself".
Also, as you stated, it's correct that a free market implies a competition between currencies.

You're obviously a fan of bitcoin, so you understand that a currency does not need to be backed by something. Therefore, there is no particular reason why free market currencies would choose to be backed by gold. If that were the case, the creators of these free market currencies would once again be bound to the gold and not to the economy, regardless of the deleterious effects. The only possible difference one currency could have over another is the amount of gold behind it, which means it just boils down to another case of fractional reserve banking. Which means all the problems of fractional reserve banking combined with gold will rear their ugly heads again, and a central bank will be suggested as the solution. We've done this before.

Exactly, as Hayek explained.
And that means that that currencies, probably backed by some hard asset like gold, will be deflationary.

No, it doesn't mean that. Did you read my quote?

"I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value, provided both the issuer and the public understand that the demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind."

Do you understand that "keeping its value constant" does not mean "deflationary"?

I don't know why you are telling me that: I told you to check Austrian Economics, and not only Mises.
Hayek was in fact one of the best Austrian Economics exponent and built his work on that of Mises.

But by agreeing with the link you quoted on deflationary myths, you are agreeing mostly with the philosophy of Mises. You are also agreeing with a guy who made this statement: "If they anticipate a future decline of their selling proceeds, they will bid down present prices of factors of production, thus assuring profitable production and paid employment for everyone willing to work. This is exactly what happened in the few periods of modern history in which deflation was not prevented through inflationist counter-measures." Beyond this gross misrepresentation of history, I watched his video where he claims that producers can anticipate deflation and account for it. Yet the foundation of Mises' economic theory, praxeology, is that you cannot predict the greater human action by empirical study, so how will producers correctly anticipate deflation?

Hayek disliked deflation and did not believe it is the answer. Hayek probably changed his opinion on the matter over time, post-Mises influence, as he came to the understanding that deflation is no more ideal than inflation. The article I linked was written by Hayek in 1977, so it was very late in his career as an economist. If you believe I am misinterpreting Hayek's stance on the matter, I will be happy to find quotations for you to back this up.

So, if you agree with I'm telling, just say it directly, and please show me where people freely choose an inflationary currency.

You are making the assumption that a currency can only be deflationary or inflationary. This is a false dichotomy that denies the obvious middle ground of a currency with a stable value.

[MoonShadow]

Yes, it is. As you correctly stated a wide range of money has been explored, precious metals and gold in particular has been selected after many, many years of trial&error.

The Roman and British empires both used a form of fiat, yet they were the biggest empires history has known. Gold did not explode as a currency of international trade until fractional reserve and fiduciary media (deposit notes) existed. You claim that the "free markets" have chosen gold, yet there are only a few examples of free market currency in recorded history, and when there has, it has typically not been gold. Gold only became the de facto currency of trade when people could borrow it with fiduciary media.

There is a whole lot of misinformation right here in this one paragraph, so let me break it down a little at a time...

The Roman and British empires both used a form of fiat,

Fiat only in the sense that the standard units were fixed by a matter of edict, not that they were not related to a fixed exchange rate or predominately credit/debt based mediums of exchange.  So while the statement is literally true, it is misleading in our modern context of what a fiat currency is or how it functions.

yet they were the biggest empires history has known.

And in both cases they each became empires only by abandoning many of their early principles in favor of military and economic domination of other cultures.  It is just as ligetimate to say that the debasement of each of those nations' currencies were one consequence of expansionism, not a cause, regardless of whether or not said empires are actually desireable.

Gold did not explode as a currency of international trade until fractional reserve and fiduciary media (deposit notes) existed.

This is actually false, and provablely so.  While the common man traded in silver and rarely (if ever) saw a gold coin, national soveriegns most certainly did trade in gold well in advance of fractional reserve lending's rise to common acceptance.

You claim that the "free markets" have chosen gold, yet there are only a few examples of free market currency in recorded history, and when there has, it has typically not been gold. Gold only became the de facto currency of trade when people could borrow it with fiduciary media.

Likewise provablely false.  International trade was (arguablely) a "free trade zone" clear upt to at least 1880, and the defacto international currency of such trade was gold, even if the majority of such trades were conducted as "letters of credit".

Considerin that this was just the first paragraph in this post, I see no value in continuing to read your long winded post.

[Etlase2]

Fiat only in the sense that the standard units were fixed by a matter of edict, not that they were not related to a fixed exchange rate or predominately credit/debt based mediums of exchange.  So while the statement is literally true, it is misleading in our modern context of what a fiat currency is or how it functions.

The romans used price fixing (though the effectiveness is in question), the brits, AFAIK, did no such thing. It was just a matter of paying taxes. Although I did not completely provide my reasoning, I was trying to point out that gold has never by itself led to any kind of economic prosperity. That only happened after FRB and deposit notes, when the "supply" of gold expanded immensely. Currencies do not need to be backed by precious metals to be useful for economic growth. There is no reason that modern economies use a credit/debt based medium of exchange other than governments gave up their power to print money to private banks, so that is irrelevant.

And in both cases they each became empires only by abandoning many of their early principles in favor of military and economic domination of other cultures.  It is just as ligetimate to say that the debasement of each of those nations' currencies were one consequence of expansionism, not a cause, regardless of whether or not said empires are actually desireable.

Tally sticks were never debased, they were replaced by the Bank of England. Do you know your currency history, MoonShadow? Or do you think you can just sound like you do to make you sound right?

And as for the Romans, from wikipedia:

"The exact reason that Roman coinage sustained constant debasement is not known, but the most common theories involve inflation, trade with India, which drained silver from the Mediterranean world, and inadequacies in state finances.
...
Another reason for debasement was lack of raw metal with which to produce coins."

The economy worked perfectly fine with a currency whose value was determined to be much more than the content of its weight in gold, silver, or copper. It started failing because of trade deficits and lack of metal. This could have been solved by not constantly going to war.

The parallel that one can draw from that is in a free market, non-commodity based currency, governments would not have the power to do these things to debase the currency. But maybe you missed that point when your poorly founded accusations blinded you from being able to finish reading the post.

This is actually false, and provablely so.  While the common man traded in silver and rarely (if ever) saw a gold coin, national soveriegns most certainly did trade in gold well in advance of fractional reserve lending's rise to common acceptance.

Weren't we talking about free market currency? I dunno, I got distracted there for a second by your red herring.

Gold only became the de facto currency of trade when people could borrow it with fiduciary media.

Likewise provablely false.  International trade was (arguablely) a "free trade zone" clear upt to at least 1880, and the defacto international currency of such trade was gold, even if the majority of such trades were conducted as "letters of credit".

You say provably false yet you're agreeing with me that gold was the currency of free market trade after FRB and deposit notes. Ok.

[MoonShadow]

Fiat only in the sense that the standard units were fixed by a matter of edict, not that they were not related to a fixed exchange rate or predominately credit/debt based mediums of exchange.  So while the statement is literally true, it is misleading in our modern context of what a fiat currency is or how it functions.

The romans used price fixing (though the effectiveness is in question), the brits, AFAIK, did no such thing. It was just a matter of paying taxes.

The brits did try it at least once, and the results were about as effective.

 Although I did not completely provide my reasoning, I was trying to point out that gold has never by itself led to any kind of economic prosperity.

Of course not, neither has anything else.  While the chosen medium of exchange can become a burden upon the economy, it's not particularly helpful even under the best condtions.  The reason is that money, be it gold or silver or paper notes, is only an abstraction of wealth and not wealth itself.  Money is the corpse of wealth, as was so well stated in the book Cryptocromincon.  The wealth of a people is the products & services that they offer, the means of exchange simply facilitates trade & specialzation of labor.  Money is also the "most liquid good" which, historicly; has been gold, silver & copper.  Paper worked better, so long as it was not debased, because such cash transactions had less "friction" than metal transactions.  Bitcoin has less friction still, but paper currencies require trust in the issuing body.  Since eventually all governments default, all fiat currencies fail.  I'm not sure that bitcoin can fail, but if so it won't be because the people have lost faith in some government agency.

That only happened after FRB and deposit notes, when the "supply" of gold expanded immensely.

Again, that's not true.  I could provide a number of cases wherein FRB was not present within a gold standard & the economy at large boomed; if I were inclined to the trouble, but I'm not because I've already had enough conversations with yourself in the past to know that your worldview is as deep as dogma.

Currencies do not need to be backed by precious metals to be useful for economic growth. There is no reason that modern economies use a credit/debt based medium of exchange other than governments gave up their power to print money to private banks, so that is irrelevant.

Another falsehood.  Most central banks in our modern era are truly government owned, even if the Federal Reserve of the US is not.  And that is just a legal fiction anyway, necessary only because the constitution prohibits governments from issuing "debt instruments" i.e. FRN's lacking backing.

And in both cases they each became empires only by abandoning many of their early principles in favor of military and economic domination of other cultures.  It is just as ligetimate to say that the debasement of each of those nations' currencies were one consequence of expansionism, not a cause, regardless of whether or not said empires are actually desireable.

Tally sticks were never debased, they were replaced by the Bank of England. Do you know your currency history, MoonShadow? Or do you think you can just sound like you do to make you sound right?

Tally sticks weren't replaced, they were defaulted upon.  When the king of England stole the gold in the valuts of the goldsmiths, the government agents would carve the "King's debt" into both sides of a stick and then break it in half.  The agent kept the long end, and the goldsmith got to keep the short end as a recept of the theft, which supported the illutsion that it was a loan.  Eventually the king declared the debts to be "ursury" and therefore void, and teh theft was complete.  That is exactly where we get the term "left holding the short end of the stick".  And you would be wise to refrain from challenging me on my knowledge of any history, for that is one subject for which I will soundly beat you down with.

And as for the Romans, from wikipedia:

"The exact reason that Roman coinage sustained constant debasement is not known, but the most common theories involve inflation, trade with India, which drained silver from the Mediterranean world, and inadequacies in state finances.
...
Another reason for debasement was lack of raw metal with which to produce coins."

The economy worked perfectly fine with a currency whose value was determined to be much more than the content of its weight in gold, silver, or copper. It started failing because of trade deficits and lack of metal. This could have been solved by not constantly going to war.

That's a possible cause, but only one among many.  As with anything else, the causes of the decline of the Roman Empire are many and nuanced.  Still, this is not an argument, it's a conjecture with an 'appeal to authority' falacy thrown in for good measure.  And I, for one, don't consider Wikipedia an authority on much, even though it's a wonderful resource.

The parallel that one can draw from that is in a free market, non-commodity based currency, governments would not have the power to do these things to debase the currency. But maybe you missed that point when your poorly founded accusations blinded you from being able to finish reading the post.

Perhaps if you didn't start your arguments with such crap, I'd be more inclined to consider further.

This is actually false, and provablely so.  While the common man traded in silver and rarely (if ever) saw a gold coin, national soveriegns most certainly did trade in gold well in advance of fractional reserve lending's rise to common acceptance.

Weren't we talking about free market currency? I dunno, I got distracted there for a second by your red herring.

Not a red herring, very relevant.  The trade between soverigns was a free market.  Moreso than any of the markets within any particular borders, if for no other reason than there was no greater power to enforce trade regulations.  As I have already noted, international trade has been a free market, as a matter of reality, up until around 1880 or later.  Even then, Admarlaity law treaties really didn't have a significant effect on international trade for decades more.

Gold only became the de facto currency of trade when people could borrow it with fiduciary media.

Likewise provablely false.  International trade was (arguablely) a "free trade zone" clear upt to at least 1880, and the defacto international currency of such trade was gold, even if the majority of such trades were conducted as "letters of credit".

You say provably false yet you're agreeing with me that gold was the currency of free market trade after FRB and deposit notes. Ok.

http://en.wikipedia.org/wiki/Letter_of_credit

There, I did it too.  A letter of credit isn't Fractional reserve banking, and it's not a deposit note.   It's basicly a corporate check drawn on an international bank, or more accurately, it's the credit score that the bank is providing to the receiving company and the check.

[Etlase2]

The brits did try it at least once, and the results were about as effective.

But the amusing part is that the romans started by saying "this coin is worth 10x its weight in gold" or whatever, and that actually worked for a very long time. It was when they tried to fix it after initially making its value that things didn't work out.

Of course not, neither has anything else.  While the chosen medium of exchange can become a burden upon the economy, it's not particularly helpful even under the best condtions.

I disagree. The evolution of money has served, in general, to make trade easier. This is not a burden on the economy in any sense. The problem has always been the manipulation thereof.

The reason is that money, be it gold or silver or paper notes, is only an abstraction of wealth and not wealth itself.  Money is the corpse of wealth, as was so well stated in the book Cryptocromincon.

Lovely phrase that I was unfamiliar with. I will definitely keep it around.

Again, that's not true.  I could provide a number of cases wherein FRB was not present within a gold standard & the economy at large boomed; if I were inclined to the trouble, but I'm not because I've already had enough conversations with yourself in the past to know that your worldview is as deep as dogma.

Whatever, we can go back and forth on this issue nitpicking details here and there. I have the Roman Empire, the British Empire, and the industrial revolution (coincidence that it happened just as FRB took off, I'm sure) as my evidence. Yes, all three failed due to greed and monopolies (NB: referring to gold-backed paper for the third), but they also all succeeded for a very long time.

Currencies do not need to be backed by precious metals to be useful for economic growth. There is no reason that modern economies use a credit/debt based medium of exchange other than governments gave up their power to print money to private banks, so that is irrelevant.

Another falsehood.  Most central banks in our modern era are truly government owned, even if the Federal Reserve of the US is not.  And that is just a legal fiction anyway, necessary only because the constitution prohibits governments from issuing "debt instruments" i.e. FRN's lacking backing.

Another falsehood? If you want to agree to blur the lines between big finance and government, I'm all for it. But it is not a falsehood. Regardless if most central banks are privately or publicly owned, there is no need to create money as debt. This is just a historic policy of patting the wealthy on the back for generous donations to government officials, to the detriment of society as a whole. The US constitution (to which I assume you are referring) does not prohibit the government from issuing debt instruments--it gives them the power to coin money. This power is rightly interpreted to mean that the US government can create any money it so desires. "Coining" was just a phrase of the time and did not specifically refer to metal coins. Lincoln did not violate the constitution by creating greenbacks. You are "provably" wrong.

Tally sticks weren't replaced, they were defaulted upon.  When the king of England stole the gold in the valuts of the goldsmiths, the government agents would carve the "King's debt" into both sides of a stick and then break it in half.

Bro, you can't take one part of it and ignore the rest. One person took his personal need for conquest ahead of the society and caused the default after the system had worked amicably for hundreds of years. He only defaulted because parliament limited his powers, that's why he turned to selling debt for gold at a discount in the first place. It's always about greed and power.

When you have a set of free market, unbacked currencies, such a thing can't have wide reaching effects because people will simply stop using it in favor of another. Some balance of power may shift to the issuer ephemerally, but in the long run it will be for naught. They will always be better off competing rationally with other currencies.

Not a red herring, very relevant.  The trade between soverigns was a free market.  Moreso than any of the markets within any particular borders, if for no other reason than there was no greater power to enforce trade regulations.  As I have already noted, international trade has been a free market, as a matter of reality, up until around 1880 or later.  Even then, Admarlaity law treaties really didn't have a significant effect on international trade for decades more.

Then it is just as relevant as my examples of roman and british fiat as well as currency people actually used rather than nations. A free market currency isn't nearly as useful if only a certain class or caste can use it.

http://en.wikipedia.org/wiki/Letter_of_credit

There, I did it too.  A letter of credit isn't Fractional reserve banking, and it's not a deposit note.   It's basicly a corporate check drawn on an international bank, or more accurately, it's the credit score that the bank is providing to the receiving company and the check.

Again, see above. A letter of credit is useless as a form of money whereas deposit notes are not. Why do you not understand this distinction? Just because gold has been used does not mean it was an efficient medium of exchange. I never claimed that gold wasn't used. But it was not efficient until FRB and deposit notes, and ergo the expansion of the money supply to meet demand.

And you would be wise to refrain from challenging me on my knowledge of any history, for that is one subject for which I will soundly beat you down with.

Well it looks like you have beaten yourself, so I'll leave you to it.

[MoonShadow]

The brits did try it at least once, and the results were about as effective.

But the amusing part is that the romans started by saying "this coin is worth 10x its weight in gold" or whatever, and that actually worked for a very long time. It was when they tried to fix it after initially making its value that things didn't work out.

Of course not, neither has anything else.  While the chosen medium of exchange can become a burden upon the economy, it's not particularly helpful even under the best condtions.

I disagree. The evolution of money has served, in general, to make trade easier. This is not a burden on the economy in any sense. The problem has always been the manipulation thereof.

That "make trade easier" part is what economists use the term "frictionless" to refer to a currency, or more accurately "friction" is the total cost (monetary and otherwise) of a transaction in that currency.  No currency is truly frictionless, but Bitcoin is close.  Gold is not close, and you are correct in the sense that warehouse receipts were more convient to trade in, but they represented a defined amount of gold on depost.  Fractional reserve lending was fraud before 1913 in the US.  You cannot rationally make the argument that FRL resulted in economic growth when such an activity was a crime that should have been suppressed as far as possible during those eras.  The manipulation problem certainly has been the problem, and an unavoidable one.  Deflation resulting from a rigid monetary base was not.

The reason is that money, be it gold or silver or paper notes, is only an abstraction of wealth and not wealth itself.  Money is the corpse of wealth, as was so well stated in the book Cryptocromincon.

Lovely phrase that I was unfamiliar with. I will definitely keep it around.

Great book, too.  I highly recommend it.

Again, that's not true.  I could provide a number of cases wherein FRB was not present within a gold standard & the economy at large boomed; if I were inclined to the trouble, but I'm not because I've already had enough conversations with yourself in the past to know that your worldview is as deep as dogma.

Whatever, we can go back and forth on this issue nitpicking details here and there. I have the Roman Empire, the British Empire, and the industrial revolution (coincidence that it happened just as FRB took off, I'm sure) as my evidence. Yes, all three failed due to greed and monopolies (NB: referring to gold-backed paper for the third), but they also all succeeded for a very long time.

Yes, those empires did exist, and as far as one might consider an empire to be 'successful' they certain were, for a time.  If the laws of economics were not slow in action, even you wouldn't be advocating what you do.

Currencies do not need to be backed by precious metals to be useful for economic growth. There is no reason that modern economies use a credit/debt based medium of exchange other than governments gave up their power to print money to private banks, so that is irrelevant.

Another falsehood.  Most central banks in our modern era are truly government owned, even if the Federal Reserve of the US is not.  And that is just a legal fiction anyway, necessary only because the constitution prohibits governments from issuing "debt instruments" i.e. FRN's lacking backing.

Another falsehood? If you want to agree to blur the lines between big finance and government, I'm all for it. But it is not a falsehood. Regardless if most central banks are privately or publicly owned, there is no need to create money as debt. This is just a historic policy of patting the wealthy on the back for generous donations to government officials, to the detriment of society as a whole. The US constitution (to which I assume you are referring) does not prohibit the government from issuing debt instruments--it gives them the power to coin money. This power is rightly interpreted to mean that the US government can create any money it so desires. "Coining" was just a phrase of the time and did not specifically refer to metal coins. Lincoln did not violate the constitution by creating greenbacks. You are "provably" wrong.

"No State shall make any Thing but gold and silver Coin a Tender in Payment of Debts."

Article 1, Section 10, united States' Constitution

Really?  Is that what you're going with?

Tally sticks weren't replaced, they were defaulted upon.  When the king of England stole the gold in the valuts of the goldsmiths, the government agents would carve the "King's debt" into both sides of a stick and then break it in half.

Bro, you can't take one part of it and ignore the rest. One person took his personal need for conquest ahead of the society and caused the default after the system had worked amicably for hundreds of years. He only defaulted because parliament limited his powers, that's why he turned to selling debt for gold at a discount in the first place. It's always about greed and power.

His reasons for doing what he did were not relevant to the  point.  You claimed that they were "replaced", I said that they were defaulted upon.  The treasury sticks were deliberately burned to erase all evidence that a debt ever existed.  Are you actually incapable of seeing your own error?

When you have a set of free market, unbacked currencies, such a thing can't have wide reaching effects because people will simply stop using it in favor of another. Some balance of power may shift to the issuer ephemerally, but in the long run it will be for naught. They will always be better off competing rationally with other currencies.

In the long run, we are all dead.  It's the near run that often matters in economics.

Not a red herring, very relevant.  The trade between soverigns was a free market.  Moreso than any of the markets within any particular borders, if for no other reason than there was no greater power to enforce trade regulations.  As I have already noted, international trade has been a free market, as a matter of reality, up until around 1880 or later.  Even then, Admarlaity law treaties really didn't have a significant effect on international trade for decades more.

Then it is just as relevant as my examples of roman and british fiat as well as currency people actually used rather than nations. A free market currency isn't nearly as useful if only a certain class or caste can use it.

Whether or not you agree that gold was "useful" for the masses or not is also irrelevant.  I highlighted your error, and you dismiss it as not useful.  Priceless.

http://en.wikipedia.org/wiki/Letter_of_credit

There, I did it too.  A letter of credit isn't Fractional reserve banking, and it's not a deposit note.   It's basicly a corporate check drawn on an international bank, or more accurately, it's the credit score that the bank is providing to the receiving company and the check.

Again, see above. A letter of credit is useless as a form of money whereas deposit notes are not. Why do you not understand this distinction? Just because gold has been used does not mean it was an efficient medium of exchange. I never claimed that gold wasn't used. But it was not efficient until FRB and deposit notes, and ergo the expansion of the money supply to meet demand.

Where did you argue "efficiency" before I jumped in?  If you did, I missed it.  Of course, that would be easy since I tire of reading your BS.  I already am again.  I was not, and am not, arguing the relative "efficiency" of gold.

And you would be wise to refrain from challenging me on my knowledge of any history, for that is one subject for which I will soundly beat you down with.

Well it looks like you have beaten yourself, so I'll leave you to it.

Priceless.

[Etlase2]

Fractional reserve lending was fraud before 1913 in the US.  You cannot rationally make the argument that FRL resulted in economic growth when such an activity was a crime that should have been suppressed as far as possible during those eras.

Nowhere did I specifically refer to the US. The US had other things that functioned as money supply expansions such as the Bank of North America--funded on credit and issuing paper currency, silver, greenbacks, and fractional reserve notes from other countries.

Deflation resulting from a rigid monetary base was not.

Deflation itself wasn't a problem, just the panics every other year.

Yes, those empires did exist, and as far as one might consider an empire to be 'successful' they certain were, for a time.  If the laws of economics were not slow in action, even you wouldn't be advocating what you do.

All I am advocating is free market currency. Every single one of the downfalls of the aforementioned currencies falls on to the fact of monopoly control.

"No State shall make any Thing but gold and silver Coin a Tender in Payment of Debts."

Article 1, Section 10, united States' Constitution

Really?  Is that what you're going with?

What does a limitation on the states have to do with the federal government?

Article I, Section 8: Enumeration of Powers

"To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;"

There ain't no gold and silver clause there. Of course the exact meaning was and is up to the judicial system. But the founding fathers were well aware of the concept of paper money.

His reasons for doing what he did were not relevant to the  point.  You claimed that they were "replaced", I said that they were defaulted upon.  The treasury sticks were deliberately burned to erase all evidence that a debt ever existed.  Are you actually incapable of seeing your own error?

The tally sticks weren't defaulted on, it was the contract that was defaulted on by the king (he could have just as easily defaulted on gold). But the only real losers were the goldsmiths. Well, and the country at large for single-handedly ruining the image of what was probably the best system of currency in history. I should concede that it was debased though, but really only because it put gold in circulation as a replacement.

Whether or not you agree that gold was "useful" for the masses or not is also irrelevant.  I highlighted your error, and you dismiss it as not useful.  Priceless.

As I mentioned, you posed a red herring to the discussion. And you did so via your unwillingness to understand my argument (you admitted so yourself) because you would rather attack what you think threatens the foundation for your misguided logic in what could make a sound currency. Even though I have Hayek on my side. You did not highlight any error.

Where did you argue "efficiency" before I jumped in?  If you did, I missed it.  Of course, that would be easy since I tire of reading your BS.  I already am again.  I was not, and am not, arguing the relative "efficiency" of gold.

I argued the inefficiency of gold by arguing that the free market had not particularly chosen gold (or other PMs) as its currency of choice until the advent of fiduciary media. This, I believe (I am speculating), was due to a lack of availability more so than any other reason.

Priceless.

Agreed.

[muyuu]

How does free market currency = deflation?

In a healthy economy, rational people should prefer a slightly deflationary currency if they have a free choice. Basically, someone would prefer to hold an asset that was increasing in value if they had a choice. A free market economy should only produce predominantly inflationary currencies if there is somehow too much long-term investment and not enough short-term consumption. This could happen due to a crisis such as a collapse in the housing market. It's hard to say though because we've never had such a market. Perhaps the demand will create a new kind of currency (like Bitcoin was a new kind of currency) that can tap into supply and demand to optimize its inflationary/deflationary characteristics to balance investment, consumption, and savings. To date, currencies for modern economies have always been fixed or centrally controlled. Free market currencies are in their infancy.

The Gresham law works inversely. People would prefer to use the weaker currency and hoard the stronger one as a commodity. Basically one would become reserve and the other one actual currency. Now, what has more value, what people use or what people hoard? there is an equilibrium here as people need both reserve and currency. What is more useful, US$ or gold? as long as both are of use for a big enough number of people, you will be able to trade them at some relative price. However what happened historically with legally enforced currencies doesn't really tell what social forces would come into action in truly free currencies. As long as there's liquidity and real ways to use it, any currency can theoretically work.

[JoelKatz]

The Gresham law works inversely. People would prefer to use the weaker currency and hoard the stronger one as a commodity. Basically one would become reserve and the other one actual currency. Now, what has more value, what people use or what people hoard? there is an equilibrium here as people need both reserve and currency. What is more useful, US$ or gold? as long as both are of use for a big enough number of people, you will be able to trade them at some relative price. However what happened historically with legally enforced currencies doesn't really tell what social forces would come into action in truly free currencies. As long as there's liquidity and real ways to use it, any currency can theoretically work.

I don't understand why people would prefer to exchange something other than what they prefer to hold. Any argument that the additional hold value would make people less willing to part with it equally well argues that others would be more willing to offer them benefits in exchange for it. The added inefficiency of not exchanging a currency one likes to hold should tip the balance in favor of all parties preferring to exchange whatever is best to hold. (Since they can then either hold or exchange it with no conversion required.)

[muyuu]

The Gresham law works inversely. People would prefer to use the weaker currency and hoard the stronger one as a commodity. Basically one would become reserve and the other one actual currency. Now, what has more value, what people use or what people hoard? there is an equilibrium here as people need both reserve and currency. What is more useful, US$ or gold? as long as both are of use for a big enough number of people, you will be able to trade them at some relative price. However what happened historically with legally enforced currencies doesn't really tell what social forces would come into action in truly free currencies. As long as there's liquidity and real ways to use it, any currency can theoretically work.

I don't understand why people would prefer to exchange something other than what they prefer to hold. Any argument that the additional hold value would make people less willing to part with it equally well argues that others would be more willing to offer them benefits in exchange for it. The added inefficiency of not exchanging a currency one likes to hold should tip the balance in favor of all parties preferring to exchange whatever is best to hold. (Since they can then either hold or exchange it with no conversion required.)

The fact that there are buyer's markets and seller's markets for different things and different moments. People would offer something or ask for something, and deals would be agreed at different prices. There is an indifference curve for any pair of useful goods and every holder.

So yeah, the gold vs US$ is apt (except US$ is legally enforced). Say then, gold vs bread. Depending on your needs at a particular point you'd trade one for the other at some relative price. If you have plenty of gold and you're starving, you'd trade gold for bread (obviously if there is a market, you would do at the best price you can).

[MoonShadow]

How does free market currency = deflation?

In a healthy economy, rational people should prefer a slightly deflationary currency if they have a free choice. Basically, someone would prefer to hold an asset that was increasing in value if they had a choice. A free market economy should only produce predominantly inflationary currencies if there is somehow too much long-term investment and not enough short-term consumption. This could happen due to a crisis such as a collapse in the housing market. It's hard to say though because we've never had such a market. Perhaps the demand will create a new kind of currency (like Bitcoin was a new kind of currency) that can tap into supply and demand to optimize its inflationary/deflationary characteristics to balance investment, consumption, and savings. To date, currencies for modern economies have always been fixed or centrally controlled. Free market currencies are in their infancy.

The Gresham law works inversely. People would prefer to use the weaker currency and hoard the stronger one as a commodity. Basically one would become reserve and the other one actual currency. Now, what has more value, what people use or what people hoard? there is an equilibrium here as people need both reserve and currency. What is more useful, US$ or gold? as long as both are of use for a big enough number of people, you will be able to trade them at some relative price. However what happened historically with legally enforced currencies doesn't really tell what social forces would come into action in truly free currencies. As long as there's liquidity and real ways to use it, any currency can theoretically work.

Your understanding of Gresham's Law is incomplete.  While it's true that the law is often stated, "bad money drives good money out of circulation" the test is often assumed in our modern world, "whenever the relative exchange rate is fixed as a matter of law".  In a true free market, both currencies will float against each other and will be used for their own merits by different groups.

[muyuu]

Which is exactly what I said in my last two posts here.

[MoonShadow]

Which is exactly what I said in my last two posts here.

Oh, sorry.  I must have overlooked the later explaination.