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I was watching

and the question that arose in my mind was how would the rest of the world respond to a country that allowed the open printing of its currency?

as a further question why not just institute a 100% reserve requirement and keep currency printing in the hands of the federal government?

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I was watching
and the question that arose in my mind was how would the rest of the world respond to a country that allowed the open printing of its currency?

as a further question why not just institute a 100% reserve requirement and keep currency printing in the hands of the federal government?

Such a requirement doesnt' do that right, unless you control the entire supply of gold.

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I was watching
and the question that arose in my mind was how would the rest of the world respond to a country that allowed the open printing of its currency?

Just a thought but if the currency was objectively backed, the market for any one currency wouldn't be as a source of security but only to facilitate trade.

Today we have countries on the dollar standard. Certainly if open, uncontrolled printing of dollars were allowed, then other countries would probably cease to use that currency as a standard, but that's not the case that woudl be proposed.

For any currency on the gold standard, any other country is indifferent to whether they back they currency with gold or with the other currency. They are always translatable.

But 100% reserve requirement would prevent banks from making profit altogether, wouldn't it?

How so?

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Well, with 100% reserve requirement all deposits would be just lying in banks' vaults. So banks would be able to actively use only those money they got from selling their bonds, and that's not too much considering all the expenses. Am I right?

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Well, with 100% reserve requirement all deposits would be just lying in banks' vaults. So banks would be able to actively use only those money they got from selling their bonds, and that's not too much considering all the expenses. Am I right?

Well that depends on if we're talking reserves on deposits or reserves on gold. I believe that zip is talking about gold reserves.

But no, eliminating fractional reserves would not eliminate the ability to make profits. There are several threads that discuss what the "natural" reserve rate would be if it was allowed to float due to market forces.

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Just a thought but if the currency was objectively backed, the market for any one currency wouldn't be as a source of security but only to facilitate trade.

I understand what you are saying and it is an interesting byproduct of the GS policy but your statement presupposes that the entire system has changed from fiat currency to the gold standard, so the question remains. With one country on a gold standard and permitting private banks to print currency as reserves allow what would the reaction be to that nation?

The pessimist in me says that there would be a hue and cry from the collectivist nations and organizations like the WB saying that the nation on the GS had "lost control" of it's monetary system, and that would be disastrous. It's a question of trust. People and nations and organizations trust state controlled systems. No, Nations and organizations trust state run systems, and many, many people trust the state and organization. I imagine that in spite of the GS that currency would be devalued significantly or just become unacceptable in many places due to the loss of "control".

Today we have countries on the dollar standard. Certainly if open, uncontrolled printing of dollars were allowed, then other countries would probably cease to use that currency as a standard, but that's not the case that woudl be proposed.

I think you are underestimating the suspicion such a system would create outside of that country's borders.

For any currency on the gold standard, any other country is indifferent to whether they back they currency with gold or with the other currency. They are always translatable.

But then there is the question turned on its head. In the Objectively managed economy with the GS, fiat money would be severely undervalued devalued due to the lack of any real wealth backing it up. Without the gold to back it most money is just paper, and that idea would be inescapable in the GS country.

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A question bothers me: if a country would abolish national currency and allowed banks to print their own, what would be effects on that nation's economy? IMO, that would raise transact expenses tremendously. So is it rational to do so? And if Central Bank and Treasury are inappropriate, what system do you suggest instead?

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Because with many currencies it is very hard to track their value and exchange rates. Additionally, many local currencies would be rejected by shops two states away. One of the most important aspect of money is that everyone in a country accepts them as money, and local currencies lack it. That would turn trade between states - sometimes even between adjacent cities - is handicapped by the need to constantly exchange currencies, and that would be real pain with about 100 currencies in the US.

The only real way to keep privately emitted currencies while keeping trade intact would be to use symbolic or natural money, abolishing credit money. But that's comparable pain.

Edited by lex_aver

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Ok, I understand your point. My guess is that there will not be too many popular currency-issuing banks. The desire to use the currency of a few banks that are considered ultra-reliable would be strong. I would guess that day-to-day currency that circulates would be from a small handful of banks. Chances are that they will exchange at near-par with one another if they are based on the same commodity [par in terms of the quantity of the underlying commodity... e.g. a 10 gram note of Bank of America would be equal to a 10 gram note of Wells Fargo Bank]. If smaller banks exist, they might have to use the currencies of a bigger bank, and have some bigger bank guarantee their checks.

This is all speculative, of course. They right way would be to study the history of private currencies that have been used in the past, and to glean lessons from there.

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Because with many currencies it is very hard to track their value and exchange rates. Additionally, many local currencies would be rejected by shops two states away. One of the most important aspect of money is that everyone in a country accepts them as money, and local currencies lack it. That would turn trade between states - sometimes even between adjacent cities - is handicapped by the need to constantly exchange currencies, and that would be real pain with about 100 currencies in the US.

The only real way to keep privately emitted currencies while keeping trade intact would be to use symbolic or natural money, abolishing credit money. But that's comparable pain.

For any entities already operating globally, this is already the case. We have numerous currencies globally, most of them are fiat money and so shift constantly. We don't seem to have much probably keeping track and managing the transaction expenses. You already have a working example of the thing you think is too cumbersome to exist.

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For any entities already operating globally, this is already the case.

International trade is being made in gold, AFAIK. For imports and exports, only two currencies are involved for huge markets of US, EU, UK and Japan. So no, it's not the case.

My guess is that there will not be too many popular currency-issuing banks. The desire to use the currency of a few banks that are considered ultra-reliable would be strong. I would guess that day-to-day currency that circulates would be from a small handful of banks.

Maybe it's possible. I'm not very familiar with issues of emitting money, so I can't say for sure.

Edited by lex_aver

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Because with many currencies it is very hard to track their value and exchange rates. Additionally, many local currencies would be rejected by shops two states away.

Do you trust cashier's checks? They are issued by banks, yet for most purposes, they are treated as equivalent to cash. If you trust a cashier's check, why wouldn't you trust a gold certificate from Visa, Chase, or JP Morgan? Note that in the 21st century, any check can be instantly electronically verified, so there is no longer even a need to trust the reputation of the bank's name.

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By the way, you can buy virtual gold certificates at websites like egold.com. The transaction fees "vary on a sliding scale from about 5% for spending 0.1 grams of gold to 1% for 5 grams of gold." That is competitive with credit card transactions.

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International trade is being made in gold, AFAIK. For imports and exports, only two currencies are involved for huge markets of US, EU, UK and Japan. So no, it's not the case.

huh? it certainly is the case.

Isn't this an example of exactly what would happen in a free market for currency? For any single trade, only one currency is used, and it is decided on by the parties involved. If one of the parties doesn't normally deal in that currency they they have to go to the currency market and they bear the risk of exchange (unless contractually agreed to otherwise). For minor currencies, thier "value" on the international currency market is the extent to which they compare in stability and reliability to the numerous "standard" currencies, and a market is "made" for that currency on the currency markets. To the extent that one or a few currencies becomes more prevalent it is to the extent that I prefer and hence demand it in my contracts. Rather than the fact that it is forced on my by law. Thsi is how the system would end up looking as well if you allowed private currency printing (backed by an objective standard like gold) Certain currencies would be preferred based upon the credibility and the safety of the issuing bank, and it's gold reserves. All others would make a market for their own currency relative to other currencies and based upon any vairablity in risk or backing credibility might trade at a slight discount even if the certificate has the exact same quantity of gold backing it.

International trade is certianly NOT done primarily in gold. There is an underlying gold market, but I'll be damed if I've ever make a contract with anyone outside the US denomiated in gold (including Russia).

You do understand that in terms of liquidity (i.e. number of trade and volume of trade) the currency markets, as financial markets are SIGNIFICANTLY larger than the trade even in equities? By at least 1 if not 2 orders of magnitude (factors of ten). If equities daily volume is in the trillions, currency daily volume is in the quadrillions!!! Transaction costs are negligible in the currency markets, and I have a hunch that all but the most of obscure of currencies have fairly liquid markets for them.

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GreedyCapitalist, we are talking about currencies, not about marks of gold. I believe you can tell the difference between the two.

Kendall, what you're writing makes sense, and I tend to agree with you. I still need to think it over, though.

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GreedyCapitalist, we are talking about currencies, not about marks of gold. I believe you can tell the difference between the two.

Money is a medium of exchange - and gold certificates make much better currency than dollar bills. Measuring the value of currency in grams is far superior to an arbitrary constant such as "dollars" or "euros."

That's why a British Pound used to mean one troy pound (about 500 grams) of silver, and the Dollar meant by an "Act of April 2, A.D. 1792 of the Senate and House of Representatives of the United States of America in Congress assembled, Section 9) a unit of measure of 371 4/16th grains of pure silver or 416 grains of standard silver." It was only once the respective governments decided to rob the population by inflating the money supply, that they tried to erase all traces or the origin of those words.

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Um, I've come in a bit late to this discussion, but I'd like to comment on the original question if I may.

Why does it matter how other countries would react to the country or countries that took away arbitrary and irrational restrictions on the printing of currency? Setting someone else's reaction as your moral compass in monetary policy is no more rational than using, say, Muslim ideas of jurisprudence in determining whether or not wife-beating is permissable under the law.

It is a simple fact that banks *do* print currency today--in the form of cheques, money orders, wire transfers, etc. So having one country switch to a rational currency plan is not likely to cause any appreciable problems whatsoever.

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Money is a medium of exchange - and gold certificates make much better currency than dollar bills.

Gold certificates are not currency, this term only applies to credit money, AFAIK.

Measuring the value of currency in grams is far superior to an arbitrary constant such as "dollars" or "euros."

Do you really think that a gram of gold has intristic value? The fact that gold has value even while not being used as money doesn't mean much by itself. So far I fail to see why gold certificates are better than credit money.

It was only once the respective governments decided to rob the population by inflating the money supply, that they tried to erase all traces or the origin of those words.

Inflation is a curse of modern monetary system, but money emission is not its greatest cause.

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Gold certificates are not currency, this term only applies to credit money, AFAIK.

Money is anything which is widely accepted as a store of value. Sea shells, cigarettes, rice, and large rocks have all been used as money.

Do you really think that a gram of gold has intristic value? The fact that gold has value even while not being used as money doesn't mean much by itself. So far I fail to see why gold certificates are better than credit money.

Nothing has intrinsic value, since all material values must be a value to someone. Precious metals are a good candidate for money because they are rare, easily divisible, and have other utility besides currency. Fiat money is a bad candidate because it is not precious, and so is easily devalued by printing more currency.

Inflation is a curse of modern monetary system, but money emission is not its greatest cause.

By definition, inflation is an increase in the money supply, created by printing more currency.

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Inflation is a curse of modern monetary system, but money emission is not its greatest cause.

I'm curious what you believe the greatest cause of inflation is. (I'm using the colloquial sense here, that is, "price inflation.")

The government has the most to gain from currency inflation: first, by spending printed money at current value; second, by decreasing the real value paid back for loans (this benefits all borrowers); third, by increasing the apparent capital gain subject to taxation; and fourth, by forcing citizens into higher tax brackets. The gov't has a strong incentive to devalue currency, and, given the almost complete lack of understanding of the origins of price inflation, virtually no incentive to hold prices level.

As for commodities and commodity-backing; true, no commodities have intrinsic value, and it is only through general agreement as to their value that people are incented to accept currency backed by a given commodity. Ironically, currency itself does have intrinsic value, due to the efficiency gained in trade regardless of the value of the traded goods to any individual. The question that naturally follows from recognizing this is: is commodity-backing necessary to effective currency? The answer, I believe, is: no. In fact, a good argument can be made that backing currency with an (arbitrary) commodity results in an artificial shifting of the value of that commodity, such that the value no longer reflects the non-currency, or underlying, value of the commodity. Clearly the resulting reduction of open market supply of the commodity results in some level of inefficiency introduced into the economy, as valuable commodity capital is diverted into backing for exchange. Why not just agree on a currency standard and allow, gold for instance, to reach its natural price in open and free exchange?

The problem is that only fiat (that is, a gun) can force people to accept an unbacked currency, and, there is no natural way to prevent a gov't from printing unwarranted amounts of money for its own gain. Of course, that problem exists also with (ostensibly) backed currencies, as we saw early in the last century. A potential solution is to establish an unbacked currency, by consent and mutual agreement of the citizenry, as part of the government charter, with the necessary requirement to constrain the government's ability to print money, so that a sufficiently representative basket of commodity goods maintains a constant currency value. The basket would buffer the economy from upsets in any one commodity.

This would allow the money supply to exactly (within the fidelity of the commodity basket) track the real economic growth of the economy, and provide stability in costs to aid the economic decisions of all individuals.

The justification for gov't's role in currency control would be similar to that for law enforcement, military and justice: that is, the assurance of fair, voluntary exchange between free citizens. This includes protection from fraudulent private currency providers (which is hard to write with a straight face).

The problems we see today in fiat currency are common to all areas of legitimate gov't control. They are due, in large part, to the situation in which our three branches of government are enmeshed in a conspiracy of graft, unaccountable and out of control, openly offering their services (i.e., our property) to the highest bidders.

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What about these concerns about the implementation of the GS itself.

* The total amount of gold that has ever been mined has been estimated at around 142,000 tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4 trillion. This is less than the value of circulating money in the U.S. alone, where more than $7.6 trillion is in circulation or in deposit (although international banking currently practices fractional reserves). Therefore, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications.

* Fluctuations in the amount of gold that is mined could cause inflation, if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the Great Depression, although the US was already off the gold standard at that time. and events during it.

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Zip,

With regards to your second bullet, we have indeed seen inflation when gold has suddenly become more common. When the Spaniards brought vast amounts of gold back from the recently-conquered Inka empire, there was a fair amount of inflation in Europe, in fact I've heard it said that the inflation is part of the reason Spain began to decline as a world power.

However the US was not "already off the gold standard" during the Great Depression. The Great Depression started in lat 1929, and we did not abandon the gold standard until 1933. Actually we technically maintained a gold standard until the 1970s. Foreign governments could convert gold to dollars and vice versa at the fixed rate of $35 for a troy ounce. We individuals, of course, were forbidden to hold gold (with some exceptions; jewelry, coins with significant numismatic value, etc). What happened in 1933 was that the government confiscated all gold coinage (minted at the rate of $20.67 per ounce) and devalued the dollar to $35 to the ounce.

Lex_Aver:

Many currencies *are* basically named after units of weight. The Pound Sterling started out as one troy pound of 0.925 pure ("sterling") silver. The Mark was also a unit of weight (consisting of 24 Karats). Obviously it didn't help keep those currencies from degenerating into colorful pieces of paper of no "intrinsic" value (they aren't even absorbent enough to use for toilet paper). (In most places I would not have had to put "intrinsic" in quotes; here there is risk of confusion.)

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