Loading ...An Alternate View of the “Sound Money ” Debate
Sound Money – There is No Golden Age of Peace and Prosperity when Money was “Sound”
BOOM is constantly surprised by people who think that money should be “backed” by a rare or relatively rare commodity, such as a stash of gold, kept safely in a vault somewhere in a remote fortress and priced by either a very clever tyrant or a very clever committee of economists equipped with a crystal ball or a whole series of crystal balls. For many, this is an article of faith. However, let’s think about the consequences of “sound money” policy, firstly from a theoretical viewpoint and then from a historical viewpoint.
Boom Financial
https://boomfinanceandeconomics.substack.com/p/sound-money-there-is-no-golden-age
So he tries to blame wars throughout history because money was sound backed by gold and silver. Since the fiat experiment over the last 55 years there have been plenty of wars. As long as you have humans, with differing cultures and religions and political systems they are going to fight and want control and attempt to take others resources regardless of whether you have sound money or not. The guy is theorizing and blaming the ills and human condition on using gold and silver as money. Yes, with gold and silver you have booms and busts, that is what capitalism is about. Economic periods of prosperity with needed corrections along the way. By going to fiat and having no discipline you get no built in market based corrections. Only the accumulation of debt and the political corruption and waste fraud and abuse that got us here. Capitalism has worked for centuries based on sound money, it isn’t perfect and has problems but that is reality, utopia doesn’t exist but socialists and Keyensians will keep believing in fairy tales.
The essay is long and convoluted but his main point is that restrcting the Money Supply leads to all manner of destruction
Here is his conclusion for those who dont want to read the whole essay
CONCLUSION
In BOOM’s view, national currency volumes should never be restricted by the supply of a single, rare commodity, such as gold or silver. History teaches us that. It is akin to putting your money supply (and your economy) into a straight jacket. Economic constriction will inevitably occur due to a collapse in new money volume creation while old credit money is disappearing due to bank loan repayments. Such a deliberate, restricted money supply will reduce economic growth, slow money velocity and ultimately result in economic depression. An endlessly contracting economy is not a pretty sight. And it is one from which the road back to growth and dynamism is long and tortuous.
Such a money system (linked to a volume of a single, rare commodity) is deflationary in essence and especially so if the price of the commodity is incorrectly fixed. Finding a skilled committee of learned and wise economists to “fix” the price of gold (or silver) perfectly in the national currency is always an impossible task. Such economists do not exist in any volume.
If the price of the selected commodity is not fixed but allowed to float freely on a global market, then speculators will rush to dominate the ownership of it. By doing so, they will rush out of any cash holdings they have and then adopt derivative plays to capture any future supply of the commodity which, by its very nature, has a limited supply. Very few will be sellers of the commodity.
The obvious alternative is to fix the price of the commodity. Fixing the price is an extremely difficult task. In such a system, the price of the single commodity (limited in volume) has to be fixed by an all seeing, all knowing, all intelligent committee of economists. Where do you find these “experts” with their crystal balls? BOOM is not confident of finding even one, let alone a group of them. The alternative is to have a tyrannical dictator to set the price (or a tyrannical political party). Such a person is usually a psychopath or sociopath and not naturally inclined to consider the welfare of the people under their control.
BOOM cannot find an example of an economy with a “sound” money system that has proved itself over the long term. Not only are they plagued by deflationary forces, economic contraction and pricing problems, they also inhibit entrepreneurship (except in warfare), economic complexity, equality of opportunity and, ultimately, prosperity. Thus, warfare and colonialism becomes the only way to achieve growth and wealth. Entrepreneurs quickly realise this and embark upon military expansion of the domestic economy. Robbery and slavery is inevitable in such a situation.
The history of the planet over many centuries bears witness to such dynamics. “Sound”, commodity backed money does not result in economic or social nirvana. No jumbo jets. No welfare state. No vast infrastructure projects. No national healthcare systems. All of those things, which we all take for granted in the advanced economies today, simply cannot be funded by a restricted money supply.
Money is like water for a garden. It is of no use to the garden if it is trapped in a dam. It must flow and be renewed.
MORE (RECENT) HISTORY
The British Empire abandoned the Gold Standard in 1931.
Here is the Treasury Statement for the Press on Britain leaving the Gold Standard, dated 20th September 1931.
Transcript PRESS NOTICE
“His Majesty’s Government have decided after consultation with the Bank of England that it has become necessary to suspend for the time being the operation of Subsection (2) of Section 1 of the Gold Standard Act of 1925 which requires the Bank to sell gold at a fixed price. A bill for this purpose will be introduced immediately and it is the intention of His Majesty’s Government to ask Parliament to pass it through all its stages on Monday, 21st September. In the meantime the Bank of England have been authorised to proceed accordingly in anticipation of the action of Parliament.
The reasons which have led to this decision are as follows. Since the middle of July funds amounting to more than £200 million have been withdrawn from the London market. The withdrawals have been met partly from gold and foreign currency held by the Bank of England, partly from the proceeds of a credit of £50 million which shortly matures secured by the Bank of England from New York and Paris and partly from the proceeds of the French and American credits amounting to £50 millions recently obtained by the Government. During the last few days the withdrawals of foreign balances have accelerated so sharply that His Majesty’s Government have felt bound to take the decision mentioned above.
This decision will of course not affect obligations of His Majesty’s Government or the Bank of England which are payable in foreign currencies. The gold holding of the Bank of England amounts to some £130 million and having regard to the contingencies which may have to be met it is inadvisable to allow this reserve to be further reduced.
……… during the last few days the International financial markets have become demoralised and seem bent on liquidating their foreign assets in a spirit of panic. In the circumstances there was no alternative but to protect the economy of this country by the only means at our disposal.
……… The ultimate resources of this country are enormous, and there is no doubt that the present exchange difficulties will prove only temporary.”
Reference: https://www.nationalarchives.gov.uk/education/resources/thirties-britain/votes-peace/
Despite the last statement of intention, Britain never returned to the Gold Standard. The straight jacket had been removed.
Forty years later, the Gold standard was effectively cut for the US Dollar in 1971 when Nixon abandoned it. The next 10 years were fraught with rising CPI inflation as banks loaned credit money into existence rapidly, unshackled to any fixed gold stores. However, in 1981, the head of the US Federal Reserve (the central bank) raised the overnight target interest rate to 20 %. Profligate bank lending was halted. That stopped the rising CPI in its tracks.
Massive complexity and prosperity has occurred in the last 50 years since the Gold standard was abandoned and since the events of 1981. Jumbo jets, airports, computers, massive infrastructure developments and huge ships all combined to build our modern, advanced economies. For example, Look at China which has a fiat money system and where they understand money supply growth very well indeed and perhaps better than any other nation. Their central bank is extremely well run and thoughtful in managing the supply of money. Show me any society in history that has achieved what they have for 1.5 Billion people since 1981. In BOOM’s opinion, their economists are clearly the best on Earth but nobody acknowledges them. They use the principles of both communism and capitalism in managing their money system. They certainly don’t restrict the creation of their money supply to production and storage of a single commodity.
Sound money is a cult with dogma and mantras. It cannot possibly support such rapid growth, complexity and prosperity which we have today because, in a sound money system, the money supply is always restricted to the supply chain of a single, rare commodity.
The last 50 years is a shining light in economic history but especially since 1981. No other era in history has been so liberating economically with China being the greatest example in history. But the USA, Japan and Western Europe have also grown into complex, prosperous economies. And our life expectancy has been vastly improved over the last 50 years, especially for men. This is the triumph of fiat money.
As that famous American philosopher, Roseann, said “I’ve been rich and I’ve been poor. And rich is better”.
Many critics will point to examples of Hyperinflation events in history and state “all fiat money systems eventually collapse”. But BOOM will counter that argument by stating that Hyperinflation events can only exist when alternative currencies are tolerated and allowed to circulate inside a nation. That lesson has been (largely) learned and most modern, advanced economies will not allow other currencies to be used domestically.
BOOM is waiting for an example of a sound money nation where the perfect society existed, free of conquest, warfare, death, thievery and slavery. Some may venture Tibet or Bhutan as examples. However, if readers research the Wars of Tibet, the Tibetan Empire or the History of Bhutan they will find that any peaceful existence in isolation is a myth.
There is Money. And there is Credit.
Maybe I’m Underthinking it, but Money used to BE gold or silver or other articles that were scarce.
But there was always Credit, and that used to be backed by Collateral. (your child even)
In poor and rural communities, one person’s loan used to buy and raise chickens, would be backed by the rest of their extended family (or the whole neighborhood), none of whom could borrow more until the first loan was repaid. That’s apparently how some communities organized to buy their first cell phones.
Yes, its limiting.
Anyone ever calculate the cost of the downturn of a major credit cycle?
I’d like to second “Credit used to be backed by Collateral”
The US does not have Collateral, they only have the threat of military action against those who challenge the veracity of the fiat and central bank system (hopefully Trump can change that but so far the status quo).
Consider what is ‘backing’ the huge sums put into DEI/USAID, globalist initiatives and all WASTE and malfeasance which is actually an economic cancer. Answer: NOTHING but a “promise to pay” based on faith and credit. What resources would those entities draw or grow from if it were truly backed with a FINITE or SCARCE asset that requires labor/effort to obtain?
I’ll say it again, the ONLY thing keeping confidence in the system is the US STock market which is fed by an ever increasing collaboration between BANKS and Politicians to serve as a parasite which has ONE MISSION only – DONT KILL THE HOST.
About BOOM finance – IMO this is crap trying to sell the idea that MMT works (without actually calling it MMT).