Just What I Needed

Anonyman writes that the CORRECT answer for investment, and monetary policy, in my Fox Business fiasco, would have been something like this. So, let me address the gold / silver / fiat money question.

I have just never understood why there is so much concern over currency, as if this were the number one problem. No question that a fiat money does in fact give the government enormous power. But the currency is more a reflection of power the state already has, rather than a cause of it. Three short points:

1. If the currency is "backed," or convertible, then the government has to store a gigantic amount of physical bullion as a reserve. But then the government can easily devalue the currency by changing the official, as opposed to black market, exchange rate of dollars for gold. There is no protection there, none. And you can't fix the exchange rate, because the value of gold as a commodity and investment in its own right fluctuates, a lot. That means the actual value of dollars would fluctuate with a commodity. That's not stability, that's giving government more power than it had before.

2. If the currency is actually made up of a certain amount of gold or silver alloy, then again its value would fluctuate with the price of the commodity. Worse, it would be heavy, inconvenient, and would wear out over time, wasting tons of gold each year rubbed off on the inside pockets of consumers. How would credit cards work? Very little of our money is currency. You can't possibly have real metal money, because that would (again) be more of a restriction on liberty than the current system.

3. We could get rid of fiat money altogether. Just private money. But the transactions costs of doing that, worrying about inflation and fluctuating exchange rates between different private currencies, would be enormous.

Here's the thing: the government doesn't control the money supply NOW. If you have a credit card, or several, you can create large amounts of new money, all by yourself. Anytime you secure a new line of credit, and actually spend it.... there goes the money supply. And if the government buys bonds, in "open market operations," that doesn't mean that banks will lend. The velocity of money is endogenous, as we have seen recently as credit dried up and people (and banks) held much larger cash balances in the forms of savings and reserves.

Again, I'm not denying that a fiat money creates enormous power for the state. Of course it does. But the war on drugs, the war in Iraq, the Patriot Act, restrictions on the right to marry, restrictions on hiring, regulations and taxes on small business, involuntary annexation....I could go on. Why would you start with money, as the number one problem?

And if you DO think that money is the problem, why not work on fractional reserve banking, derivatives, restrictions on competition in insurance, and so on? The obsession with the currency.... I don't get it.