A fractional Reserve

[DougShrapnel]

It seems that more and more respected experts are coming around to the fact that a fiat money system is unsustainable. However I don't really see I a need for a 100% backed money system. What is a good fractional reserve? Or why wouldn't a fractional reserve work?

[Bedreviter]

It seems like this is an issue only in the US, and no other modern industrialized nations with a fiat money system have much opposition to the current system.

[JayTee]

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It seems like this is an issue only in the US, and no other modern industrialized nations with a fiat money system have much opposition to the current system.

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I would definitely like to see an explanation for this. I am assuming that the fiat system only becomes bad when you have large-scale counterfeiting such as our government has done to monetize war debt and other wasteful spending. Do other countries have balanced budget laws or anything preventing their governments from creating whatever money they need to monetize debt?

[Bedreviter]

Im not sure why this is so, but I guess that why it is an issue right now in the US is because og the huge public debt. Less people worried about it when everything was going ok, and few people argue against the fiat money system in a time when that money system is occuring in a time of clear visable growth. The growth in the economies in the western world during the time of fiat currency has been unprecedented to any other time in history, would this growth have been ashuge if the money supply was limited?

Other countries have had big debts as well, Sweden have managed to bounce back from their considerable debt in the mid 90s without chaninging their money system, and I believe France, Germany and Japan are not that much better off than the US is debt-wise.

The need of a federal bank and fiat money is as far as I know a non-issue in Europe, and people look elsewhere to explain why the economy sometimes go downhill.

[lehighguy]

Our previous posistion as worlds reserve currency allowed us, for a temporary time, to engage in wildly more reckless behaivor then any other fiat currency ever could. In 20 years the same could happen to Europe. It all depends on the policies implemented.

[Bedreviter]

But thats more of an argument against how the government have spent their money, not how the money is "made". If you suggest that you need a gold-backed currency (or something similar) to limit the governments spending it seems like the government and not the currency is the problem. Implementing rules related to how government can spend their money could solve much of those problems without having to get rid of fiat money.

[lehighguy]

I would certainly love rules to prevent government spending, but the reality is that governments respond to the will of the people. The inflation tax is often invisible to the vast majority of the electorate. They don't understand how fiat currency works and it is much harder for average people to link a 5% price increase to government as opposed to a 5% income tax. This is especially true in the current enviornment where the fed can literally export inflation to other countries. Now you can increase the money supply without inflation even fully showing up in the economy, at least until they sell those dollars back.

The central bank is the great enabler of destruction. And in a democracy I would argue that it will inevitably become an enabler. Either purposely and malicously, or through the simple fact that central bankers are unable to set proper interest rates based on market demand.

[Bedreviter]

How does the gold-backed currency help the economy? If we assume that all the gold in the world are accounted for (which it isnt) we can determine how much gold=1 (goldbacked) dollar. That dollar will buy you a certain amount of goods.

Over time there are more goods being produced, and more people are coming into society/economy, so more goods will be sold but the amount of money stay constant. So if 1kg gold=1 car now, over time more cars are in the market, and cars have to be sold for 1/2 kg of gold, or else there will not be enough gold or cars for everyone wanting to buy a car. The price of gold will rise, wages have to go down or stay constant, and the money supply per capita declines every day.

I might be very wrong here, but thats my understanding of how a gold-backed currency would work. How is this profitable for the economy? If Im sadly mistaking please correct me in a manner that does not make me seem like an idiot (thats my job).

[lehighguy]

For simplicity lets state that the supply of gold is constant. This is close enough to true that it shouldn't be a problem as new gold mined only creates a small amount of inflation and can't be increased on demand.

If you have a one-to-one relationship between gold and money, this means the money supply will be constant. It will never increase or decrease.

Let's take your example of the expanding economy with only one good, cars. In year one we produce 100 cars and in year two we produce 105 cars. Meanwhile, the money supply remains a constant $100. In year one a car will cost $1, and in year two the car will cost $(1/1.05). That's right, prices went down.

Deflation was an ordinary sign of economic progress before the establishment of the fed. As incomes remained constant peoples standard of living increased as prices fell.

Deflation rewards savers. If you save your money you will be able to buy more goods and services with it tommorrow. Inflation rewards debtors, so it is no wonder why the US has steadily become the largest debtor nation in history.

So why have a fiat currency, who benefits? The people who get the money first benefit. I.E. the government, bankers, and the private parties that recieve money from the government. This effect is especially potent if the public believes inflation will be lower then it actually is.

[Bedreviter]

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Deflation rewards savers. If you save your money you will be able to buy more goods and services with it tommorrow. Inflation rewards debtors, so it is no wonder why the US has steadily become the largest debtor nation in history.

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Wouldnt this lead to less spending---> less production ---->less jobs?