Dutch, you make a point that has largely been lost: much of the financialization trickery we now reckon is "the way it is" was illegal a generation or two ago. Things really started unraveling IMO when "corporate raiders" displaced industrial capital as the "driver" of the economy. The Industrialists were interested in building things and monuments such as public buildings in their home cities. Financiers (Boesky et al.) were only interested in borrowing money from Wall Street (courtesy of the Fed) at low rates, leveraging a private buyout of a company, stripmining it of assets, loading it up with debt and then taking it public again to offload the carcass on unsuspecting "investors." Highly profitable, so that meant it was "capitalism at its finest."
Or not.
BJ, IMO history supports the idea that the "best system" isn't ideological in nature, it's a system with numerous competing interests: in the modern era, this included industrialists, farmers, labor unions, banks, and financiers / Wall Street speculators, who justify their predation as "allocating capital."
When any one interest-group (or individual) gains too much political power, then the system loses the dynamic homeostasis / balance generated by no one groups wresting control.
IMO the financial interests became dominant in the 1980s and the nation suffered the consequences: "global mobile capital" is now called "private equity" but the dynamic is the same: they have no national or local interests, only quick profits, so offshoring production regardless of national interests became the de facto financier policy.
What to do with the Fed? As I tried to explain, financial panics, bubbles and depressions are part and parcel of any financial system, and so central banks were seen as the "solution." But central banks are of course banks and so they see finance as the core of the economy: they have a hammer so everything is a nail. Could Treasury departments replace central banks as "lenders of last resort" in panics? I think the answer is yes/ Then we could get rid of the artifice that central banks are "independent."
Thank you for all the excellent comments. I'm going to make some general observations / claims.
What I was trying to address is the unexamined belief that is dominant in economics, that money and finance can fix all our problems. This is the result of living in a zeitgeist dominated by finance. Nobody asks "what kind of monetary system would serve the common citizen rather than the state, the banks and the wealthy?"
The Overton Window on money is incredibly narrow. We've got gold, bitcoin, the Fed, banks, fiat, etc. Isn't there any other possibilities? I've made a case for 8 years that "money" could be "created" solely by human labor rather than by banks or "mining" bitcoin. OK it's "crazy," but money is a social contract, nothing more. There is nothing intrinsic about money.
We all know the State will never let go of its monopoly on "money," and so even a gold standard claim would be manipulated. A wise State (does any such thing exist?) would allow non-state "money" to compete with its own "money." This is why precious metal coinage :works," its value is independent of the State.
As I tried to explain recently, IMO any useful commodity can act as "money" or "back money."
My friend John D. mentioned in an email that what we're discussing here is Trust with a capital T. In societies with low trust, you have to carry a scale to weigh that "silver" coin--nothing can be trusted. The trade fairs "worked" because there were trusted intermediaries. If social trust is eroding, "money" erodes along with it.
My reading of history is that there is no one "solution" to "money," and trying to combine "store of value" with "medium of exchange" generates problems that can't be solved with one form of "money." This is why it's probably wiser and more practical to have a transparent market for all kinds of money and let people choose what form works best for them in a particular situation. The Chinese issued paper money as a medium of exchange, not a store of value. That's an idea that runs through history. Maybe we could learn from it.
Sad but true. That being the case, how can ANYONE be trusted with the concentrated power of government (at any level)? That should apply especially to those who seek out such power. The reality is, we do not, and have never needed such power structures. Thoughtful cooperation and peaceful trade should be the norm. Absent those with a will to power, they would be. One can have rules, without Rulers.
@CHS - While I concede that money is complicated, there is one change that would make a tremendous difference, and enable us to evolve our system in a much more rational and accelerated way. That change would be to eliminate the secrecy about how the money system works, the deception about the flows of money and related metrics (such as the consumer price index), the owners of certain institutions (such as the true owners of the "Federal" Reserve). In some respects DOGE is already using this approach to create massive shifts. If we bring transparency to these and other aspects of the money system, then abuses and out-of-balance conditions are much more likely to be resolved before they get out of hand. If we bring transparency to these aspects of the money system, then the immoral or unfair aspects are exposed and soon after righted by popular demand.
Money to a physical economy - goods and services - is like blood to a body.
Bodies have evolved with homeostasis to regulate blood quantity. Society needs sociostasis to limit money to financing physical needs and wants and a few percent for speculation.
The excess money in the hands of the rich is like our organs being oversupplied by 100% and the excess excess forming large blood blisters anywhere and everywhere.
Simple John, What is a society? A club like the Drama Society? I'm not a member of any society.
What is "excess money"? How much money is excess? Every new business is speculation. Would you limit the capital needed to invest in new businesses, products, and services?
Most of the money held by the rich is invested in businesses. This is how businesses improve their products and services. Do you want to dig ditches with a shovel or a backhoe?
Good article. Austrian economists believe in sound money, not money based on debt or credit. Fractional reserve banking is a fraud. Banks create money out of thin air.
The secret to money is to let the free market, people, decide what is money and create it themselves. To let the government have a monopoly on money creation leads to war and the impoverishment of the working class.
Prices go down with sound money. Wars aren't necessary for the working class. They end up fighting and dying in them. The ruling class loves fiat money and war.
Expansion of an economy using debt returns less and less each time debt is used to expand the economy. Eventually, you end up with a crack-up boom where people lose all faith in the money. We all know the examples of this.
As for the Pareto Principle, that's human nature, and there is no changing that no matter what is used for money.
You are quite right. The problem isn't (only) money. Its governments involvement. "I'm shocked! Shocked!"... :) Murray Rothbard wrote a very interesting and educational book in 1963 titled What has government done to our money? https://mises.org/library/book/what-has-government-done-our-money
Money itself isn't all that complicated. How humans relate to it and each other regarding it is.
Are you familiar with the money speech from Ayn Rand's Atlas Shrugged?
Given that much of the world has been distorted, disrupted and corrupted in the pursuit of money, one would think that more people what have a clear idea of what it is, and isn't. One obviously would be wrong.
what if the Fed, rather than tinker with interest rates, just adjust money supply based on the price of gold? Iow, if the price of gold rises, reduce the money supply and vice versa.
I think the problem that would happen is that reducing the money supply will increase the relative price of gold. This would cause the resulting bubbles to be more extreme.
In this monetarist system, you would want the bank to do the opposite; ie, if the price of gold rises, you want to INCREASE the money supply, and if the price of gold falls, you want to DECREASE the money supply. How fast the reaction would happen is debatable, but you want to have your money and gold move in opposite directions to maintain balance.
Kevin I was thinking rather than back the dollar with gold which is deflationary, if the relationship between the dollar and the gold price is announced at some level, then I believe, contrary to what you wrote, that if the gold price rises, that is an indication that the market likes gold better than the dollar (too many dollars floating around?), so the Fed would then shrink the dollar supply to make them more scarce which should increase the demand, hence the value of the dollar; and vice versa.
Why allow the fed to set that? Let the market set what the price of anything is. Not to mention, that there should be a market place for money as well. Various forms for various market sectors. That alone would act to prevent the plague that is inflation and the concentration of power. Look at the trend line in consumer electronics. More capability for less price. Now add in the return to reputation being critically important, and many of our current problems resolve themselves.
Real competition is the key to better quality in goods and services.
You audit and then end it. It should never have existed in the first place. If you examine the history of central banks, they have allowed governments to engage in countless wars and horrible policies for centuries. The Fed is the 4th attempt at foisting a central bank on the US. The three prior to this failed. If you look at their history there is a common theme behind the scenes.
I’m no fan of the Fed or floating fiat currencies, but until I see the Fed closed, I think the best way to deal with the money supply is as I described above. Let the market decide on interest rates.
Dutch, you make a point that has largely been lost: much of the financialization trickery we now reckon is "the way it is" was illegal a generation or two ago. Things really started unraveling IMO when "corporate raiders" displaced industrial capital as the "driver" of the economy. The Industrialists were interested in building things and monuments such as public buildings in their home cities. Financiers (Boesky et al.) were only interested in borrowing money from Wall Street (courtesy of the Fed) at low rates, leveraging a private buyout of a company, stripmining it of assets, loading it up with debt and then taking it public again to offload the carcass on unsuspecting "investors." Highly profitable, so that meant it was "capitalism at its finest."
Or not.
BJ, IMO history supports the idea that the "best system" isn't ideological in nature, it's a system with numerous competing interests: in the modern era, this included industrialists, farmers, labor unions, banks, and financiers / Wall Street speculators, who justify their predation as "allocating capital."
When any one interest-group (or individual) gains too much political power, then the system loses the dynamic homeostasis / balance generated by no one groups wresting control.
IMO the financial interests became dominant in the 1980s and the nation suffered the consequences: "global mobile capital" is now called "private equity" but the dynamic is the same: they have no national or local interests, only quick profits, so offshoring production regardless of national interests became the de facto financier policy.
What to do with the Fed? As I tried to explain, financial panics, bubbles and depressions are part and parcel of any financial system, and so central banks were seen as the "solution." But central banks are of course banks and so they see finance as the core of the economy: they have a hammer so everything is a nail. Could Treasury departments replace central banks as "lenders of last resort" in panics? I think the answer is yes/ Then we could get rid of the artifice that central banks are "independent."
warm regards, charles
Thank you for all the excellent comments. I'm going to make some general observations / claims.
What I was trying to address is the unexamined belief that is dominant in economics, that money and finance can fix all our problems. This is the result of living in a zeitgeist dominated by finance. Nobody asks "what kind of monetary system would serve the common citizen rather than the state, the banks and the wealthy?"
The Overton Window on money is incredibly narrow. We've got gold, bitcoin, the Fed, banks, fiat, etc. Isn't there any other possibilities? I've made a case for 8 years that "money" could be "created" solely by human labor rather than by banks or "mining" bitcoin. OK it's "crazy," but money is a social contract, nothing more. There is nothing intrinsic about money.
We all know the State will never let go of its monopoly on "money," and so even a gold standard claim would be manipulated. A wise State (does any such thing exist?) would allow non-state "money" to compete with its own "money." This is why precious metal coinage :works," its value is independent of the State.
As I tried to explain recently, IMO any useful commodity can act as "money" or "back money."
My friend John D. mentioned in an email that what we're discussing here is Trust with a capital T. In societies with low trust, you have to carry a scale to weigh that "silver" coin--nothing can be trusted. The trade fairs "worked" because there were trusted intermediaries. If social trust is eroding, "money" erodes along with it.
My reading of history is that there is no one "solution" to "money," and trying to combine "store of value" with "medium of exchange" generates problems that can't be solved with one form of "money." This is why it's probably wiser and more practical to have a transparent market for all kinds of money and let people choose what form works best for them in a particular situation. The Chinese issued paper money as a medium of exchange, not a store of value. That's an idea that runs through history. Maybe we could learn from it.
warm regards, charles
Broad socialization of losses (e.g. bailouts), unlimited corporate liability protection, captured regulatory bodies, selective law enforcement etc. undermine trust. Humans' simply cannot be trusted.
Sad but true. That being the case, how can ANYONE be trusted with the concentrated power of government (at any level)? That should apply especially to those who seek out such power. The reality is, we do not, and have never needed such power structures. Thoughtful cooperation and peaceful trade should be the norm. Absent those with a will to power, they would be. One can have rules, without Rulers.
Couldn't agree more. To be clear, I meant humans cannot be trusted with power.
@CHS - While I concede that money is complicated, there is one change that would make a tremendous difference, and enable us to evolve our system in a much more rational and accelerated way. That change would be to eliminate the secrecy about how the money system works, the deception about the flows of money and related metrics (such as the consumer price index), the owners of certain institutions (such as the true owners of the "Federal" Reserve). In some respects DOGE is already using this approach to create massive shifts. If we bring transparency to these and other aspects of the money system, then abuses and out-of-balance conditions are much more likely to be resolved before they get out of hand. If we bring transparency to these aspects of the money system, then the immoral or unfair aspects are exposed and soon after righted by popular demand.
Money to a physical economy - goods and services - is like blood to a body.
Bodies have evolved with homeostasis to regulate blood quantity. Society needs sociostasis to limit money to financing physical needs and wants and a few percent for speculation.
The excess money in the hands of the rich is like our organs being oversupplied by 100% and the excess excess forming large blood blisters anywhere and everywhere.
Simple John, What is a society? A club like the Drama Society? I'm not a member of any society.
What is "excess money"? How much money is excess? Every new business is speculation. Would you limit the capital needed to invest in new businesses, products, and services?
Most of the money held by the rich is invested in businesses. This is how businesses improve their products and services. Do you want to dig ditches with a shovel or a backhoe?
Good article. Austrian economists believe in sound money, not money based on debt or credit. Fractional reserve banking is a fraud. Banks create money out of thin air.
The secret to money is to let the free market, people, decide what is money and create it themselves. To let the government have a monopoly on money creation leads to war and the impoverishment of the working class.
Prices go down with sound money. Wars aren't necessary for the working class. They end up fighting and dying in them. The ruling class loves fiat money and war.
Expansion of an economy using debt returns less and less each time debt is used to expand the economy. Eventually, you end up with a crack-up boom where people lose all faith in the money. We all know the examples of this.
As for the Pareto Principle, that's human nature, and there is no changing that no matter what is used for money.
You are quite right. The problem isn't (only) money. Its governments involvement. "I'm shocked! Shocked!"... :) Murray Rothbard wrote a very interesting and educational book in 1963 titled What has government done to our money? https://mises.org/library/book/what-has-government-done-our-money
Money itself isn't all that complicated. How humans relate to it and each other regarding it is.
Are you familiar with the money speech from Ayn Rand's Atlas Shrugged?
https://capitalismmagazine.com/2002/08/franciscos-money-speech/
The You Tube version.
https://www.youtube.com/watch?v=u-T0ey0IKDA
Given that much of the world has been distorted, disrupted and corrupted in the pursuit of money, one would think that more people what have a clear idea of what it is, and isn't. One obviously would be wrong.
BJ, Good comment. For me, money is security, independence, and a tool to use. That's it.
Exactly. Its a tool. As such it can be used and abused. Its a medium of exchange. But its become an obsession to a vast number of people.
An old book I get wisdom from says "trying to get rich quick is evil"
It also says "do not move an ancient boundary stone"
It follows then that the problem of money is the love of it.
"What does it profit a man to gain the world and lose his soul?"
Perhaps sound hard coinage type currency is better at constraining the pace of speculation.
As we bump into resource constraints and notice that energy = economy at 99% correlation, perhaps ungrowth and contentment is the "cure"
what if the Fed, rather than tinker with interest rates, just adjust money supply based on the price of gold? Iow, if the price of gold rises, reduce the money supply and vice versa.
I think the problem that would happen is that reducing the money supply will increase the relative price of gold. This would cause the resulting bubbles to be more extreme.
In this monetarist system, you would want the bank to do the opposite; ie, if the price of gold rises, you want to INCREASE the money supply, and if the price of gold falls, you want to DECREASE the money supply. How fast the reaction would happen is debatable, but you want to have your money and gold move in opposite directions to maintain balance.
Kevin I was thinking rather than back the dollar with gold which is deflationary, if the relationship between the dollar and the gold price is announced at some level, then I believe, contrary to what you wrote, that if the gold price rises, that is an indication that the market likes gold better than the dollar (too many dollars floating around?), so the Fed would then shrink the dollar supply to make them more scarce which should increase the demand, hence the value of the dollar; and vice versa.
Why allow the fed to set that? Let the market set what the price of anything is. Not to mention, that there should be a market place for money as well. Various forms for various market sectors. That alone would act to prevent the plague that is inflation and the concentration of power. Look at the trend line in consumer electronics. More capability for less price. Now add in the return to reputation being critically important, and many of our current problems resolve themselves.
Real competition is the key to better quality in goods and services.
Yes, I believe in the market being the best arbiter of prices, but then what do you do with the Fed?
You audit and then end it. It should never have existed in the first place. If you examine the history of central banks, they have allowed governments to engage in countless wars and horrible policies for centuries. The Fed is the 4th attempt at foisting a central bank on the US. The three prior to this failed. If you look at their history there is a common theme behind the scenes.
I’m no fan of the Fed or floating fiat currencies, but until I see the Fed closed, I think the best way to deal with the money supply is as I described above. Let the market decide on interest rates.