Could Someone Please Explain the Money Supply?

[Copernicus]

Thanks to Andy Fox for tracking this paper down

In my example the government already had the gold, it just hadnt issued the paper money in that quantity. It might have acquired that gold by its own mining operations, by conquest etc.

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I don't understand. After the gov't gives some tax revenue to the Fed to cover the bonds, the Fed will still have gotten something for nothing - even assuming that the money printed doesn't exceed the governments ability to tax and cover that money.


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Maybe your confusion is coming from the thin separation between the Fed and the Government? Forget the Fed...lets just say its a government that issues its own money. It has an asset that is backing the money it issues. It may have 50 trillion in bullion and only issued 40 trillion in paper money, or it might have the ability to tax its citizens for 50 trillion, even though its currently only taxing them for 40 trillion and issued that much paper money.

The following from Sproul might help as well, since your "getting something for nothing" is equivalent to claiming that the dollar is fiat money.

"JIMB:
Some reasons to doubt the existence of fiat money:
1) It creates a free lunch for its issuer, which would attract rival moneys. For example, if Mexico gets a free lunch by issuing pesos, then the US could take that free lunch away by circulating dollars in Mexico. The more dollars invade, the bigger the US free lunch, and the lower the peso falls, with no stable solution short of zero. But if you recognize that the peso's value is equal to its backing, this puzzle disappears.
2) If money is unbacked, why do all banks hold assets (gold, bonds, etc) against the money they issue? Why not just print it and spend it?
3) The only justification ever given for claiming the dollar is fiat money it the fact that the dollar is physically inconvertible. That completely ignores the fact of financial convertibility, and the fact that there is a clear difference between being inconvertible and being unbacked.
Fiat money sounds an awful lot like phlogiston, ether, and caloric, which don't exist either."