History of money, 20th century and earlier

[lpetrich]

I have used "intrinsic-worth money" for gold and silver coins, while you use the term "commodity-money." (Actually you write "commodity-based money" which might include bank-created money denominated in a commodity.) Did my terminology annoy or confuse you, @lpetrich ?

 Commodity money - something traded at its non-monetary value. That's what you mean by intrinsic worth, I think, worth when not treated as money. That article lists

Examples of commodities that have been used as media of exchange include gold, silver, copper, salt, peppercorns, tea, jewellery (watches, spectacles, etc.) decorated belts, shells, alcohol, cigarettes, silk, cereal, candy, nails, cocoa beans, cowries, barley, coupons; (Canadian Tire "money"), canned food, fast-food items; (burgers, sandwiches, fried chicken, etc.), pornographic material, detergents; (laundry, dishwasher, soap), clothes; (shirts, socks, hat, shoes), fuel (coal, gasoline, batteries, etc.)

 Representative money - as I noted, two main types.

Commodity-based money or commodity-backed money is something different from plain commodity money. It is money that is essentially IOU's for some commodity.

 Fiat money - I lumped together government central-back money and bank-loan money because these are simply different entities saying "fiat haec pecunia", "let this money exist".

 

[Swammerdami]

 Fiat money - I lumped together government central-back money and bank-loan money because these are simply different entities saying "fiat haec pecunia", "let this money exist".

Traditionally (prior to 1930-1933), bank-created money (i.e. created via a loan) was an implicit promise to pay precious metal. (And therefore NOT fiat money.) Traditionally, central bank-created money had the same character.

Central bank-created money underwent two profound changes, first in 1933, then in 1971. It is almost a mystery how these profound changes had only minimal effect on world finance. When I started this thread I thought it might be interesting and useful to discuss that "mystery." (But the thread did not develop as intended! )

 

[steve_bank]

Community barter has been around since the 90s at least.

A community createds a script. Do some painting on somebody's house and you are paid in a script. Businesses that participate will trade goods for scripts.

Part of the motivation was not having to declare income if somebody pays you to help them

Community Currency: Meaning, Example, Pros And Cons

Community currency is a form of paper scrip issued by private entities or community organizations for use at local participating businesses.

www.investopedia.com

There are onlne barter sites.

 

[bilby]

Traditionally (prior to 1930-1933), bank-created money (i.e. created via a loan) was an implicit promise to pay precious metal. (And therefore NOT fiat money.) Traditionally, central bank-created money had the same character.

A promise isn't metal though. Fractional reserve banking creates money, but cannot create gold; A bank's promise to pay gold that it doesn't have in its vaults isn't commodity based money, it's just fiat money pegged to a commodity, and backed by the expectation that few people will try to convert their notes to gold at the same time.

Central bank-created money underwent two profound changes, first in 1933, then in 1971. It is almost a mystery how these profound changes had only minimal effect on world finance.

Those changes really weren't profound; The money supply had outstripped the gold supply long before 1933, so the changes had already occurred, and 1933 and 1971 were merely formal recognition that those changes were real and significant, and that pretending that they were not was needlessly harming economic stability and/or growth.

Pegging ones currency to a commodity whose rate of increase in supply is unrelated to the rate of economic growth is a recipe for disaster. The industrial revolution made doing so increasingly harmful; The massive increases in technological innovation and growth caused by the two World Wars hammered the final nails into the coffin; The recessions of the early '30s and early '70s finally forced governments to drop their act, and admit that gold was no longer helpful as a monetary base.

 

[Swammerdami]

Is the American (or Australian) $100 bill you hold in your hand "bank-created money" or is it "fiat money"? There is no clear answer. The money was "created" by a "bank" so the answer may seem obvious, but it is NOT a promise to pay precious metal or anything except more bank-created money. Thus it is generally called "fiat money." Since we like to be VERY careful with wording here at IIDB I will call it "BCF money" -- Bank-Created Fiat money.

I will also speak of MTSCIWM -- "Money That Swammi Calls Intrinsic-Worth Money." PLease start a new thread if you STILL do not understand what MTSCIWM is.

Central bank-created money underwent two profound changes, first in 1933, then in 1971. It is almost a mystery how these profound changes had only minimal effect on world finance.

Those changes really weren't profound; The money supply had outstripped the gold supply long before 1933, so the changes had already occurred, and 1933 and 1971 were merely formal recognition that those changes were real and significant, and that pretending that they were not was needlessly harming economic stability and/or growth.

This is partly true, but confused. In 1932 Gold could still be purchased in New York City for $20.67 -- the statutory price. And in 1967 Gold still traded throughout the world for almost exactly $35.00 -- the new statutory price. In what sense do you contend that "the changes had already occurred"?

You ARE correct that the economic need for money had outpaced the supply of gold, and that this was the underlying reason why the gold standard -- at least at the statutory prices -- was no longer tenable.

Why then did I write that "It is almost a mystery how these profound changes had only minimal effect on world finance"? Severing the money from any underlying MTSCIWM was not an experiment that had ever gone well. In Weimar Germany, people had to carry fiat money around in wheelbarrows just to make small purchases!

Ancient Rome was a very powerful Empire with great wealth but it also ended up with a fiat money that led to severe inflation. The Emperor Diocletian introduced reforms that allowed alleged "price-gouging" to be punishable by death. Rather than lowering prices, some vendors just stopped selling at all.

For, if the raging avarice ... which, without regard for mankind, increases and develops by leaps and bounds, we will not say from year to year, month to month, or day to day, but almost from hour to hour, and even from minute to minute, could be held in check by some regard for moderation, or if the welfare of the people could calmly tolerate this mad license from which, in a situation like this, it suffers in the worst possible fashion from day to day, some ground would appear, perhaps, for concealing the truth and saying nothing; ... but inasmuch as there is only seen a mad desire without control, to pay no heed to the needs of the many, ... it seems good to us, as we look into the future, to us who are the fathers of the people, that justice intervene to settle matters impartially, in order that that which, long hoped for, humanity itself could not bring about may be secured for the common government of all by the remedies which our care affords.... Who is of so hardened a heart and so untouched by a feeling for humanity that he can be unaware, nay that he has not noticed, that in the sale of wares which are exchanged in the market, or dealt with in the daily business of the cities, an exorbitant tendency in prices has spread to such an extent that the unbridled desire of plundering is held in check neither by abundance nor by seasons of plenty!

Did Diocletian's Edict have its intended effect?

Only one question remains for us to answer. Did Diocletian succeed in his bold attempt to reduce the cost of living? Fortunately the answer is given us by Lactantius in the book which he wrote in 313-314 A.D., "On the Deaths of Those Who Persecuted (the Christians)." The title of Lactantius's work would not lead us to expect a very sympathetic treatment of Diocletian, the arch-persecutor, but his account of the actual outcome of the incident is hardly open to question. In Chapter VII of his treatise, after setting forth the iniquities of the Emperor in constantly imposing new burdens on the people, he writes: "And when he had brought on a state of exceeding high prices by his different acts of injustice, he tried to fix by law the prices of articles offered for sale. Thereupon, for the veriest trifles much blood was shed, and out of fear nothing was offered for sale, and the scarcity grew much worse, until, after the death of many persons, the law was repealed from mere necessity." Thus came to an end this early effort to reduce the high cost of living. Sixty years later the Emperor Julian made a similar attempt on a small scale. He fixed the price of corn for the people of Antioch by an edict. The holders of grain hoarded their stock. The Emperor brought supplies of it into the city from Egypt and elsewhere and sold it at the legal price. It was bought up by speculators, and in the end Julian, like Diocletian, had to acknowledge his inability to cope with an economic law.

Yet, contrary to the experience of earlier experiments with fiat money, inflation (as measured by the U.S. dollar) has remained relatively modest during the 90+ years since the gold windows were closed in the 1930's. This LACK of inflation is the "mystery."

 

[steve_bank]

By the definition the US dollar is fiat money. Fiat money is currency not backed by a physical asset, like gold.

It works in the long run because now there is global monetary policy and controls. It works most of the time but not always.

If I have 100kg of gold as a reserve and I print 100,00 units of paper currency there is a value of 100kg/100,000.

If I double the amount of currency in circulation the value of a unit of currency against the asset goes down by 1/2.

There are are probably die hard Americans who want to go back to the gold standard. I don't see how that protects them against economic forces.

What Country Has the Most Gold? The country with the most gold is the United States, with 8,133 metric tons in the American gold reserve. This amounts to a value of $480.84 billion, going by the price of gold at the beginning of January 2023.

 

[Loren Pechtel]

 Fiat money - I lumped together government central-back money and bank-loan money because these are simply different entities saying "fiat haec pecunia", "let this money exist".

Traditionally (prior to 1930-1933), bank-created money (i.e. created via a loan) was an implicit promise to pay precious metal. (And therefore NOT fiat money.) Traditionally, central bank-created money had the same character.

Central bank-created money underwent two profound changes, first in 1933, then in 1971. It is almost a mystery how these profound changes had only minimal effect on world finance. When I started this thread I thought it might be interesting and useful to discuss that "mystery." (But the thread did not develop as intended! )

Because the promise got it accepted for use. Once it was widely accepted for use the fact that it was widely accepted was enough, the promise that started it was no longer needed. What's actually needed is a standard.

 

[Loren Pechtel]

Community barter has been around since the 90s at least.

A community createds a script. Do some painting on somebody's house and you are paid in a script. Businesses that participate will trade goods for scripts.

Part of the motivation was not having to declare income if somebody pays you to help them

Community Currency: Meaning, Example, Pros And Cons

Community currency is a form of paper scrip issued by private entities or community organizations for use at local participating businesses.

www.investopedia.com

There are onlne barter sites.

The IRS considers this tax evasion.

However, there are similar things I believe the IRS doesn't frown upon--cases where it's time-shifting. Baby-sitting cooperatives, there is a currency that you trade for baby sitting, but you get the currency by baby sitting.

 

[Swammerdami]

Traditionally (prior to 1930-1933), bank-created money (i.e. created via a loan) was an implicit promise to pay precious metal. (And therefore NOT fiat money.) Traditionally, central bank-created money had the same character.

Central bank-created money underwent two profound changes, first in 1933, then in 1971. It is almost a mystery how these profound changes had only minimal effect on world finance. When I started this thread I thought it might be interesting and useful to discuss that "mystery." (But the thread did not develop as intended! )

Because the promise got it accepted for use. Once it was widely accepted for use the fact that it was widely accepted was enough, the promise that started it was no longer needed. What's actually needed is a standard.

Assuming we consider the Dollar, Euro et. to be "fiat money" the question is: Why haven't these currencies been devalued? Almost every previous experiment with fiat money has led to inflation or hyperinflation. (And of course there are financial pundits predicting such a result in the future.) Borrowing, whether by governments, corporations or households, is at all-time highs; this means that many players are inherently HOPING for devaluation.

Some will say that inflation DID happen and DOES happen. The dollar in January 1992 was worth only 27.3¢ in buying power relative to the dollar 20 years earlier. (That's an average annual inflation of 6.7%.) And inflation was much worse than this in some other developed economies also using central-bank money.

Of course we know that the U.S. central-bank has successfully combated inflation and Loren's "the promise got it accepted for use" suggests the reason. But I don't think this relative stability was accomplished easily, nor am I certain that it can be relied on in future.

I wondered what the inflation rate was during high-inflation periods of the Roman Empire, but such figures seem hard to come by, for reasons suggested by the following comment by a scholar of the Roman monetary economy: (Some Infidels may prefer NOT to read this excerpt as she uses the word "intrinsic.")

Today, we think of inflation as the general and continuous rise in the prices of goods, services and factors of production. However, in antiquity economic systems relied on the value of the intrinsic metal of the coin rather than credit. How can we expect the characteristics of modern inflation to apply in the economic structure of an ancient society? It seems that, during the Principate, the legal value of a coin (silver or gold) was defined by the value of the metal inside it. ‘Inflation’ would probably take place only if the Roman state guaranteed a legal value of coins that did not coincide with their real value.

 

[steve_bank]

I don't see how banks create money. They buy money from the central bank. That is one f the few controls the FED has on the economy, the cost of money.

The FED rate goes up, banks pay more for money to loan, loan merest rates go up, economy slows down. The rate goes down, loan interest rates go down, people buy more cars. economy goes up.

Prime Rate: Definition and How It Works

The prime rate is the interest percentage that commercial banks charge their most creditworthy borrowers.

www.investopedia.com

Banks are required to have as a minimum a percentage of accounts as cash on hand.

I don't see checks as money, it is a draft note with a promise to pay on demand. to the bearer.

 

[bilby]

Is the American (or Australian) $100 bill you hold in your hand "bank-created money" or is it "fiat money"?

I haven't routinely handled cash for several years. I think the last time I touched a banknote was our last trip overseas.

My money is electrons in a bank computer. It's both fiat money, and created by fractional reserve lending; these are not mutually exclusive.

 

[Swammerdami]

I'm going to respond to a few recent posts. NOT to teach you guys about money -- I've largely given up on that! -- but to illustrate why this all becomes amusing and annoying!

And it is especially amusing to see how resistant many people are to even learning the very first thing about money!

I don't see how banks create money. They buy money from the central bank. That is one f the few controls the FED has on the economy, the cost of money.
. . . I don't see checks as money, it is a draft note with a promise to pay on demand. to the bearer.

You "don't see how banks create money." I don't know whether to treat this as a plea for help -- "Show me how to find the Wikipedia page for 'Money'" -- or as just an arrogant boast -- "I'm a stable genius (everybody says so) the definition of money used by EVERY economist is wrong; I got my PhD at Wharton!"

Banks are required to have as a minimum a percentage of accounts as cash on hand.

Nitpick: This is true, if a requirement of Zero is considered a "requirement."

As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.

Is the American (or Australian) $100 bill you hold in your hand "bank-created money" or is it "fiat money"?

I haven't routinely handled cash for several years. I think the last time I touched a banknote was our last trip overseas.

Oh!!! Maybe I should have mentioned this in OP. Oh wait, I did!

One innovation that arose in the 20th century but is still very recent is the use of "electronic transfers" to replace paper checks. But conceptually this money operates much like paper checks; if you think it needs special attention discuss it in the 21st century thread.

Perhaps I should have sprinkled the word "intrinsic" here and there in the paragraph, so bilby would see it.

My money is electrons in a bank computer. It's both fiat money, and created by fractional reserve lending; these are not mutually exclusive.

Oh really? Maybe I should have mentioned that too! Wait a moment . . .

Is the American (or Australian) $100 bill you hold in your hand "bank-created money" or is it "fiat money"? There is no clear answer. The money was "created" by a "bank" so the answer may seem obvious, but it is NOT a promise to pay precious metal or anything except more bank-created money. Thus it is generally called "fiat money." Since we like to be VERY careful with wording here at IIDB I will call it "BCF money" -- Bank-Created Fiat money.

If I double the amount of currency in circulation the value of a unit of currency against the asset goes down by 1/2.

Wrong again. Googling "Velocity of Money" MIGHT help you understand one reason why you're wrong, but we're still waiting for you to Google "Money" itself.

 

[bilby]

Some Infidels may prefer NOT to read this excerpt as she uses the word "intrinsic."

She is right, though, where you are wrong.

value of the intrinsic metal of the coin

A gold coin IS intrinsically metal.

Note that she did NOT talk about it having intrinsic value; "intrinsic value" cannot be a thing. You can make coins out of metal; You cannot make coins out of value.

 

[Swammerdami]

Some Infidels may prefer NOT to read this excerpt as she uses the word "intrinsic."

She is right, though, where you are wrong.

value of the intrinsic metal of the coin

A gold coin IS intrinsically metal.

Note that she did NOT talk about it having intrinsic value; "intrinsic value" cannot be a thing. You can make coins out of metal; You cannot make coins out of value.

I'm not sure if you're trying to be silly. Or need basic lessons in English.

 

[bilby]

it is especially amusing to see how resistant many people are to even learning the very first thing about money!

It's especially amusing when people come to these boards with their religious beliefs, and think that condecension is a sound alternative to evidence and reasoning.

The first thing to know about money is that all value is a matter of opinion. Nothing has any value to a person who doesn't want that thing. Not even gold.

Given your resistance to learning this first thing, it seems less and less likely that you have anything whatsoever to teach.

Though you seem to have been leading up to "Fractional reserve banking is a scam and/or evil"; Which it certainly can be, in the right (or rather wrong) regulatory environment.

In a regulatory environment with suitable protections against its potentially inflationary effects, it can do far more good than harm.

 

[bilby]

Some Infidels may prefer NOT to read this excerpt as she uses the word "intrinsic."

She is right, though, where you are wrong.

value of the intrinsic metal of the coin

A gold coin IS intrinsically metal.

Note that she did NOT talk about it having intrinsic value; "intrinsic value" cannot be a thing. You can make coins out of metal; You cannot make coins out of value.

I'm not sure if you're trying to be silly. Or need basic lessons in English.

Says the man who is struggling with grasping the difference between "intrinsically valuable coins" and "intrinsically metal coins".

Nobody doubts that a gold coin is made of metal. Only a fool would insist that it is made of value.

 

[Swammerdami]

@bilby -- Here again is the quote from Constantina Katsari. Paraphrase her words that I've bolded without using the word "intrinsic." Do you really not see she's making the same point I've been making?

Today, we think of inflation as the general and continuous rise in the prices of goods, services and factors of production. However, in antiquity economic systems relied on the value of the intrinsic metal of the coin rather than credit. How can we expect the characteristics of modern inflation to apply in the economic structure of an ancient society? It seems that, during the Principate, the legal value of a coin (silver or gold) was defined by the value of the metal inside it. ‘Inflation’ would probably take place only if the Roman state guaranteed a legal value of coins that did not coincide with their real value.

Your claim is that the phrase "value of the intrinsic metal of the coin" does not imply the metal of the coin has value? Don't you see her meaning, that the essential worth of the coin was its precious metal content, and NOT a government fiat?

(What do you think she means by "intrinsic metal"?)

 

[Swammerdami]

Says the fool who believes gold to be "intrinsically valuable".

It's especially amusing when people come to these boards with their religious beliefs,...

Though you seem to have been leading up to "Fractional reserve banking is a scam and/or evil"; ...

Ah ha! I rather suspected this was your problem. You are so eager to jump to judgement that you think others have the same flaw.

In another thread, if someone writes that the world economy would be more sustainable in the event that the human population weren't so high, you are eager to accuse them of advocating some form of genocide.

You pretend not to even understand what I write. In this thread I try to explain the use of valuable commodities -- tobacco, peppercorn and, yes, precious metals -- as money and you jump to conclusions about me. I link to a book which demonstrates that the bankers of Northern Italy were vital to the Commercial Revolution, but you ignore that -- presumably just skimming for your bugabear word ("intrinsic") -- and now you pretend to believe I think banking is a scam and want to return to the Dark Ages. Insult after insult, but nothing at all of substance.

 

[Swammerdami]

Rereading my previous post, I can see that the comments directed at one or more Infidel might almost be considered rude. For that I sincerely apologize. Let me address some of steve's questions.

Let's start with a screen-shot from  Money Supply: You will see that M1, M2, M3 form a series of what economists call "money." M2 and M3 are like M1 except that time deposits are included. Such deposits are cash-like, though you may be left not fully satisfied if you withdraw prematurely.

First notice that M1 is precisely the sum of government-printed money (FedRes notes and coins) PLUS bank-created demand money (Traveler's checques and checking accounts. Savings account -- here instead of in M2 -- are a recent addition) EXCEPT money of ANY sort that is held in the vaults of the FedRes or the vaults of (regulated) banks, or on electronic books of the central bank or of a private bank. MB is a special term which DOES include vault cash, etc. This is called "monetary base" but to treat it specially may be to fall for fiction(s).

I don't see how banks create money. They buy money from the central bank.

Assuming you mean "borrow" money, they typically don't borrow it from the FedRes; they borrow from another private bank. If they can't find another bank that will trust them for the money overnight, then it's time for a "Houston we have a problem" phone-call.

Of course this is no longer a problem for any bank regulated by the Feds as the Reserve Requirement was reduced a few years ago to ZERO and AFAIK been left at that low level.

That is one f the few controls the FED has on the economy, the cost of money.
. . . I don't see checks as money, it is a draft note with a promise to pay on demand. to the bearer.

If they need to BORROW, e.g. to cover anticipated withdrawals or to comply with mandated reserve requirements, the bank may borrow from another bank -- there are big markets for 7-day money, or overnight money, etc. The central bank itself primarily serves as a "Lender of Last Resort". For example - In 2007 Bear Stearns was voted "the most admired securities firm" but by early 2008 The Fed (with assistance(*) from Jamie Dimond) was turning on the cash spigots to ensure Bear Stearns liquidity.

Do you agree that an AmEx traveller's cheque is money? I've used them in 19 countries. In the U.S. I've seen cashiers accept such a checque just like they'd accept a $100 bill. I had to tell them to ask me for the counter-signature.

If the AmEx checque has been printed but is still unused in a cabinet in the bank's vault, it doesn't count as money. Nor do U.S. FedRes banknotes count as money if just sitting in (ANY!) bank vault.

The U.S. has minted various coin denominations of various metals (copper, steel!, nickel, silver, gold for examples) and AFAIK ALL remain legal tender. The U.S. has issued gold certs, silver certs, US notes and FedRes notes. But traveller's checques issued by private banks nd even their customer's personal checks also act as money. Today most in Thailand just flash their phones at each other. But they are also using bank-created money.

 

[Bomb#20]

Is the American (or Australian) $100 bill you hold in your hand "bank-created money" or is it "fiat money"? There is no clear answer. The money was "created" by a "bank" so the answer may seem obvious, but...I will call it "BCF money" -- Bank-Created Fiat money.

Yes. Like you said, "Fiat money and bank-created money (typically paper) are valuable when we believe the promise of a government or bank" So it seems to me if there is no clear answer to whether a $100 bill is "bank-created" or "fiat" it's because there is no clear answer to "What's a bank"? The thing that created it was no ordinary bank; it was the central bank of a government. So the $100 bill was created by a bank and by a government, so it is both "bank-created" and "fiat". This suggests that the categorization itself could stand to be improved.

In the trichotomy of money people accept without a promise, money people accept because of a type-B promise, and money people accept because of a type-F promise, perhaps it would be more useful to focus on what it takes to make the promisers keep their respective promises. Specifically, if you sue the promiser for breaching its promise, does the judge work for the promiser? In the case of what people normally call "bank-created money", the bank is a private party. The complaint will be brought in a government court: a court with no automatic conflict-of-interest interfering with its willingness to rule against the bank if it in fact broke its promise. From that point of view, the $100 is unambiguously "fiat money", the same as it would be if it were a private promissory note from Wells Fargo Bank that could only be arbitrated in Wells Fargo Bank's own in-house customer disservice department.

... Who is of so hardened a heart and so untouched by a feeling for humanity that he can be unaware, nay that he has not noticed, that in the sale of wares which are exchanged in the market, or dealt with in the daily business of the cities, an exorbitant tendency in prices has spread to such an extent that the unbridled desire of plundering is held in check neither by abundance nor by seasons of plenty!

Did Diocletian's Edict have its intended effect?

And when he had brought on a state of exceeding high prices by his different acts of injustice, he tried to fix by law the prices of articles offered for sale. Thereupon, for the veriest trifles much blood was shed, and out of fear nothing was offered for sale, and the scarcity grew much worse

Yet, contrary to the experience of earlier experiments with fiat money, inflation (as measured by the U.S. dollar) has remained relatively modest during the 90+ years since the gold windows were closed in the 1930's. This LACK of inflation is the "mystery."

I don't think that's the mystery. The determiner is not whether money is fiat but whether its supply increases too fast. Dollar inflation has remained relatively modest simply because the U.S. government hasn't been irresponsible about it, except maybe when the Johnson administration decided it could buy itself a major war without raising taxes to pay for it.

No, the mystery is why Diocletian believed folks who were peaceably exchanging their own property to voluntary buyers were "plundering" and the emperor making his subjects give up their property by force for currency he himself had irresponsibly debased was not the one "plundering".