Comment by mathguy
2012-06-01 12:55:55
“Incorrect again Darrel, it IS the gov’t mandate that gives money the value.”
Then what is that value?
“If you want to prove it to yourself and not make me make the argument for you, just walk through the short history of paper money in the US.”
I am well aware of the history of paper currency. The first national bank of the USA had assets, issued paper notes. People deposited those notes into accounts, and the notes were loaned out. The moment the loan was made, the underlying asset was promised to two people, the person with the ledger entry in their account and the person holding the note that was loaned back out.
What backed the ability to promise the asset to two people was that in addition to the actual asset, the bank also had the promise of the person that borrowed the notes, to repay them.
People didn’t get it, that even though your note said “silver certificate”, there wasn’t actually enough silver to cover the notes and ledger entry accounts if the debt was not repayed.
When things went bad, people ran to the banks to get their promised assets that backed their money, only to find the assets were not actually in the bank. I the immortal words of George Bailey, you’re money is not here, it is his house, and his house, and his house….
EVEN in the days when money was defined as gold or silver, there was far, FAR more money than the underlying assets supported, and that extra money actually had value because of the promises of those that had taken out loans, to do work in the future, to repay the loans.
After there were a few runs on the official central bank of the USA, congress decentralized and let lots of individual commercial banks do the printing of the notes. This way, a run on one bank (that did not have enough hard assets covering the notes and ledger entries) would not spill over into a larger run on the system as a whole.
In this era we were in recession or depression about half the time, including the long depression.
We decided that thousands of little banks issuing lots of notes, issuing loans, did not resolve the underlying issue that the vast majority of money was NOT backed by physical assets, but rather, were borrowed into existence and were backed by the promise of the borrowers to do work in the future to repay those loans.
We created a new central bank, to issue notes so that they were portable, and to pool the reserves. A run on one bank could be covered by using the reserves of other banks.
Then, even this system collapsed in the great depression when there were too many losses on too many banks, creating too many runs.
So, we created things like FDIC. Do not worry… if the people that borrowed the money from your bank do not pay, then the government will assume that debt and ensure you can always get (at least X amount) of the money back.
I wish that more people would understand that even in the time that a dollar note could be exchanged for .773 oz of silver, there was NEVER enough silver for everyone to actually convert all of their paper currency and ledger accounts, into silver. The vast majority of money was created by loans, and was given value by the people promising to do labor in the future in exchange for getting the money back so they could repay their debts.
“Was it always a FIAT currency?”
The only fiat now is that it can be used to repay loans.
“At any point was there paper money backed not by debt, but by assets and commodities?”
Never was ALL the money, paper plus bank account balances that could be converted into paper money, backed by hard assets. NEVER. This is what people fail to understand. This is why there were runs on banks, booms and busts, debt bubbles and collapses, EVEN in the days of the dollar being defined as .773 oz of silver.
“Why did this change?”
Because trade imbalances was putting pressure on exchange rates, which didn’t work when both countries defined their currency as the same precious metal. The exchange rates caused metals to flow from one country to another.
Countries broke the lock to precious metals so that exchange rates could float. The hope was that exchange rates would be sufficient to counter trade imbalances. However, countries worked to ensure favorable exchange rates were maintained, allowing trade imbalances to persist, and unsustainable debt buildup in the nations on the negative side of these trade imbalances.
“Were people happy about it?”
No, because they did not understand that most of the money was ALREADY backed by nothing but debt, and that removing that last anarchic throwback to a barter economy was disfunctional in a global market where monies needed to be able to float.
“Why was the change accepted? (Hint: what would have happened if the people didn’t accept it?)”
New money was issued without the “silver certificate” and the government stopped exchanging the existing bills for the precious metals.
People accepted the new bills because they retained the majority of their value, that ability to use them to repay debts, creating demand for the new bills.
“As you go though these simple bits of history, maybe you will start to understand why there is a call to end our FIAT system of money,”
Oh, I get it. Most people fail to understand that the vast majority of money, since LONG before there was a United States, was backed by the debt that was created when the money was borrowed into existence.
“why (some) people keep a portion of their assets in physical commodities,”
I get it… you guys don’t understand that there was never enough physical commodities in the bank’s vault, to cover all the money in the accounts and the issued currency.
“and why the rich love having people too busy watching Oprah to care about the system of currency used. And you will understand why “debt is money” is correct, and not “money is debt”. Remember Mammal is Dog.”
Debt is not money. Debt is the promise of future labor. Money is the claim on that future labor.
Commodities are the result of past labor. Commodities have not been used as money for almost 100 years. Time to step out of history. Stop pretending that money has value by some government fiat OTHER than the government’s fiat that it can be used to repay debt, and it is actually the people trying to get the money to repay their debt that gives the money value.
Accept that EVEN in long ago historical times, every loan a bank made, created new money, backed not by commodities, but rather by the promise of the borrower to repay the loan.
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