History of money, 20th century and earlier

[Bomb#20]

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.

... But traveller's checques issued by private banks nd even their customer's personal checks also act as money. ...

I've read that in the 1800s, actual dollars nearly all remained where most of the economy was, in the eastern U.S.; so legal U.S. currency was typically in short supply on the frontier. People in the old west reacted by signing over personal checks as if they were currency. It was normal for a check to change hands many times; when a check finally cleared at an actual bank it would have a dozen endorsement signatures on it.

 

[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...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"?

Even Lincoln's greenbacks were marked as promissory notes. They were "fiat", if you will in the sense of untrustworthy, but to the extent they were promises, they were promises to pay in precious metal. [ETA: Promises to EVENTUALLY pay]

The distinction I'm making is among

• Bank-created promises to pay in units of a Monetary Base, to wit precious metal.
• Bank-created promises to pay in some bank-created money.
• Bank-created promises to pay in some "fiat" money.

Many will be happy to ignore any difference between the 2nd and 3rd types shown here. (And the distinction of 1st type might have mostly only historic interest.)

As far as "What is a Bank" I will say that ANY central bank worthy of the name will act much like a private bank, though with a special charter.
Government entities other than a central bank, will sometimes function like banks, and sometimes function as an issuer of fiat-money.

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.

That's your opinion. For my intended purpose -- clarifying the exact source of "money" -- the distinction works well. The thread is of "20th century history" but I'll guess most of you will be happy to ignore any U.S. banknote type other than FedRes note.

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.

The main "promisors" in U.S. are one of

• Government resources in the case of government-issued fiat money.
• The banking system generally. Credit card agencies like Visa. Et cetera. The system, at least in the U.S., is operated almost entirely by private companies. Essential insurance may be an exception -- let's stick that on the taxpayer!
• The FedRes Banks, while nominally owned by its member banks, and keeping books just like a private bank, operates under a special charter.

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 if 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.

Stocks and bonds and mortgage paper, etc. are NOT money. (For definiteness we'll use FedRes's M1/M2 measure specifically to define money.)

Digression: Am I being pedantic to insist on details when discussing money creation? No, the exercise arises with the possibility of re-invention of a money definition. As you know the mechanics of BitCoin are very different from any 20th-century system.

And I, for one, am happy to go on record in OPPOSITION to any cryptocurrency plans, at least in the short term. For starters, it's almost certain there would be some form of very large and inhumane "rent" charged by the mechanisms.

... 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.

Recall that that other scholar stated that Roman's coins were in proportion to their ACTUAL precious-metal content. And don't forget that creating a few extra trillion dollars -- depending on how it's done -- may have LITTLE effect! The Velocity of Money simply adjusts to maintain whatever a rate of commerce.

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".

I bought only the Abridged Gibbon's and didn't read most of that. Do we need a sub-thread?

 

[Swammerdami]

... legal U.S. currency was typically in short supply on the frontier. People in the old west reacted by signing over personal checks as if they were currency. It was normal for a check to change hands many times; when a check finally cleared at an actual bank it would have a dozen endorsement signatures on it.

If the paying bank ultimately rejects the check, it might need to be backtracked or unwound -- (at least in principle) -- through several endorsers! I wonder how often something like that happened?

 

[Swammerdami]

A key point implicit in my discussion, but perhaps not yet explicitly mentioned is that government-issued fiat money and central-bank-created money have very different characters when, e.g. risks of currency devaluation are considered.

The Central Bank does NOT issue money directly!(*) The banknotes and deposits at FedRes that private banks have USE that private bank's assets or capital. Neither government nor central bank manipulate the inflation rate. This is in sharp contrast to "printing-press money" as has shown up in Zimbabwe or Venezuela or 1945 Hungary. U.S. governance may or may not compare with Zimbabwe's but I for one am grateful the U.S. uses only bank-created money rather than government-issued fiat.

* - In 21st-century, FRB has created a few trillions(?) of liquidity via QE program. But that is unprecedented -- it didn't occur at such magnitude during the 20th century.

 

[bilby]

Recall that that other scholar stated that Roman's coins were in proportion to their ACTUAL precious-metal content.

What is that precious metal ACTUALLY worth though?

I contend that it is worth exactly what people think it is worth, and that almost all of its worth comes from the expectation that others will value it.

It has a tiny value as a utilitarian object - something people want to keep, rather than to trade.

As a raw material, gold has few uses and is in massive oversupply; If there were twice as much of it, we wouldn't see twice as much used (rather than stored), because people don't have much non-monetary use for the stuff.

It's good as money because it has little "intrinsic" worth; It's basically useless.

It's proof against inflation, because it's very difficult to increase the amount of it that exists, and in this respect it is just like Bitcoin. And just like Bitcoin, this is a bug, not a feature, and makes it a poor choice as money in any economy whose rate of growth isn't linked to the rate at which it can be obtained.

The existence of scholars who fail to grasp that precious metal has little value other than that "people imagine that other people will also value it" isn't evidence that precious metal is valuable in some bizarre "intrinsic" sense.

There are plenty of very serious and well respected scholars who believe in gods, so finding one who believes that the value of useless metal exists independently of the beliefs of those trading in it isn't surprising, even if it is disappointing.

Gold has a tiny utilitarian value, plus a huge and entirely arbitrary value derived ONLY from the expectation that other people will accept it in exchange for things of genuine utilitarian worth. This has been true since the very first use of gold as money.

Banknotes are in no way different from gold, other than in having a supply that can be increased without digging a really big hole first, or stealing them from the natives of the New World.

If Roman gold coins had value that was "the actual value of the metal", how is it that the number of loaves of bread or pints of beer that one can exchange for a given amount of gold is wildly different today than it was in 100CE? Has the "actual" value of eating changed so radically in two millennia?

 

[lpetrich]

That's why I specified "non-monetary" instead of "intrinsic" - I wanted to avoid that issue.

 

[Swammerdami]

Worth is an OPINION. Inanimate objects do not have opinions, and as such cannot have intrinsic worth.

I worry about Whatshisnames Law. Does anyone -- even bilby -- defend this quotation?

 

[bilby]

As far as I can tell, the point of this thread is:

a) Bankers control the money supply, and this is bad because they aren't trustworthy and could fuck us all over for their own personal advantage; and

b) Therefore it would be far better if we put control of the money supply in the hands of miners and conquistadores.

a) Is a case of "probably true, but there's nothing better we could reasonably come up with"; and

b) Particularly not that, are you crazy??

 

[bilby]

Worth is an OPINION. Inanimate objects do not have opinions, and as such cannot have intrinsic worth.

I worry about Whatshisnames Law. Does anyone -- even bilby -- defend this quotation?

That's not a quotation; It's a quote of something I said myself. I don't pretend to be an authority; It's not right because I said it, it's right because it's true.

And it's self evident practically to the point of tautology.

My question is: Does anybody, even Swammerdami, have a reason not to agree with it?

Is worth not an opinion?
Do inanimate objects have opinions?
Does "intrinsic" not mean 'internal to the object under discussion'?

What, exactly, is in dispute here?

 

[steve_bank]

In the modern economies inflation is a dynamic structural part of the free market system where prices and wages vary IAW supply and demand, as well as the money supply.

Demand goes up for goods and services, demand for labor goes up and wages go up. Wages go up adding liquidity to the economy. Prices rise. Buying power goes down. The cycle repeats.

In a good economy wages stay ahead of inflation as the economy and population grows.. Nothing is static.

Today's economy has never existed before, this is all new territory.

 

[Swammerdami]

As far as I can tell, the point of this thread is:

You are wrong.

a) Bankers control the money supply, and this is bad because they aren't trustworthy and could fuck us all over for their own personal advantage; and

Never wrote that. Never implied that.

b) Therefore it would be far better if we put control of the money supply in the hands of miners and conquistadores.

Never wrote that. Never implied that.

are you crazy??

Self-reflection?

Worth is an OPINION. Inanimate objects do not have opinions, and as such cannot have intrinsic worth.

I am mildly curious whether other Infidels would agree with this peculiar claim. Certainly the scholar on Roman monetary history with whom bilby claims to agree, does not agree:

However, in antiquity economic systems relied on the value of the intrinsic metal of the coin rather than credit.

Or are we now going to spend another dozen posts debating the distinction between "value" and "worth"?

But it really doesn't matter. That bilby claims to believe this, and can plainly see that I use the word differently mean that he has ranted and ranted on and on and on and on and then ranted some more, and more, and more, about NOTHING to do with the thread's topic. What blather! What useless gibberish!!

Sheeeesh!

I worry about Whatshisnames Law. Does anyone -- even bilby -- defend this quotation?

That's not a quotation; It's a quote of something I said myself.

Bragging about not knowing what "quotation" means? Is this the best sort of contribution you can offer?

I don't pretend to be an authority; It's not right because I said it, it's right because it's true.

It's wrong despite that you said it. Or, given your track-record in this thread perhaps it's wrong BECAUSE you said it!

And it's self evident practically to the point of tautology.

Not self-evident. Evidently false.

 

[bilby]

about NOTHING to do with the thread's topic

Perhaps if you were to stop bloviating and drop your condecension for long enough to spell out clearly, without massive preamble, what the fuck the topic actually IS, I might be able to meet your criteria for staying on topic.

As you have yet to provide any information on this, other than bald and unhelpful assertions that my guesses about what the fuck you are trying to say are wrong, it's pretty much impossible for anyone to not be off topic.

You appear to be incensed at my reasonable claim that value is an opinion; But simultaneously unwilling to explain why you think this is wrong. Perhaps you could answer my simple questions:

Is worth not an opinion?
Do inanimate objects have opinions?
Does "intrinsic" not mean 'internal to the object under discussion'?

What, exactly, is in dispute here?

 

[bilby]

And it's self evident practically to the point of tautology.

Not self-evident. Evidently false.

Then provide the fucking evidence!

 

[Swammerdami]

Inflation hasn't been mentioned yet; a summary is needed for on-going discussion.

What are the causes of money becoming LESS valuable:

• Devaluation by lowering the weight or quality of precious-metal coins.
• Devaluation, using base metal as fiat money. (Of course I exclude seignorage of small-change coins. Nor need we mention negative seignorage as with today's nickel.)
• Devaluation via money-changing shenanigans.
• Adding zeroes to new (or deleting zeroes from old) fiat money.
• Fluctuations downward in value of precious metal, if any.
• Price increases happening in the real economy.
• Inflation effected by central bank action or announcement.

What are the causes of money becoming MORE valuable:

• Fluctuations upward in value of precious metal, if any.
• Price decreases happening in the real economy.
• Deflation effected by central bank action or announcement.

In the late 19th century, increased silver production caused Western countries to change to a gold-only standard. In hindsight I think this might have been OPPOSITE to best practice. Instead a new gold:silver ratio could be imposed, near 25 or 30 say would have INCREASED the availability of precious-metal metal. Many of the financial panics from this era can be traced to shortage of physical gold.

So I've browned out those and boldened only points relevant to the post-Roosevelt American money system. Note that the central bank can partially counter EITHER inflation or deflation by action or even simple announcement. I write "partially" because many price changes are inevitable and/or irreversible and/or immune.

We do NOT consider devaluations to be "inflation", though the net effects may be similar. (There was some Mediterranean country they gave demand deposits some sort of haircut.)

I like the following post, and found it very articulate!

It's not quite aimed at the history or definition of money, which are the topics of this thread. but the definition of money is IMPORTANT to today's complex economies and, if we are to pursue some new type of money, we want to understand its effect on the well-being of the economy and the society.

In the modern economies inflation is a dynamic structural part of the free market system where prices and wages vary IAW supply and demand, as well as the money supply.

Yes. Private banks play an important role in this, incentivized to create and loan money to businesses prudently. ("Prudently" may not apply when the bank's management is corrupted against its stockholders.)

Demand goes up for goods and services, demand for labor goes up and wages go up. Wages go up adding liquidity to the economy. Prices rise. Buying power goes down. The cycle repeats.

In a good economy wages stay ahead of inflation as the economy and population grows.. Nothing is static.

All good points, if not always 100% applicable.

Today's economy has never existed before, this is all new territory.

Yes.
One difference shows up in the above listing of inflation/deflation causes. With the precious metal standard, sometimes desperate governments suspended redemption of paper money. But in U.K. or U.S. at least, prior to 1931 the paper money was eventually redeemed. The central banks thus seemed helplessly committed to the price of gold. And yet the price and market value of gold were constrained by feedback via governments' power.

Now severed from gold or silver, the dollar's value is determined by a complex system involving economic players here and abroad, the banking systems and the FRB itself. Separate from FRB, the U.S. government plays a big role, especially since its large-scale borrowings can be well viewed as a form of fiat money creation.

 

[Swammerdami]

Neil Irwin's The Alchemists: Three Central Bankers and a World on Fire offers a detailed look, not just at the 2007-8 crisis, but at the whole history of central banking. Here is an excerpt. If there's interest, perhaps I'll post some more.

To a degree that’s rare among high public officials, central bankers feel connected to the long thread of history. The successes of their predecessors made the world as we know it. The Bank of England played a crucial, if often overlooked, role in creating the stable financial system that allowed Britain to rule vast swaths of the world in the nineteenth century. The creation of the Federal Reserve enabled New York to supplant London as the world’s financial capital in the years after World War I, enabling the rise of the United States as global superpower and setting the stage for a generation of prosperity that followed the Second World War. The (belated) achievement of the Fed and other world central banks in defeating the inflation of the 1970s laid the groundwork for a quarter century of stable prices and global prosperity—one that started crashing down on August 9, 2007.
. . .
Bernanke and other Fed officials understood all too well the United States’ aversion to the type of centralized political control embodied by a central bank. The lack of a central bank in the nineteenth century had meant that banking panics were an almost constant feature of the American economy. Even farmers’ predictable need for cash each harvest season routinely brought the nation to the brink of financial shutdown. Yet the battle to establish the institution that Bernanke would one day lead was exceedingly bitter. The compromises needed to gain Congress’s support resulted in an unwieldy structure that would be a challenge to lead, especially as those old arguments against centralized power reemerged a century later.

The men who led the global economy in the crisis that began in 2007 had come of age in the 1970s, when central bankers were so fearful of an economic downturn—and the political authorities—that they allowed prices to escalate out of control. “I knew that I would be accepted in the future only if I suppressed my will and yielded completely—even though it was wrong at law and morally—to his authority,” wrote Fed chief Arthur Burns in his diary in 1971. “He” in this case was Richard Nixon, who insisted that Burns keep interest rates low and the U.S. economy humming in the run-up to the 1972 election. Prices rose so fast that steakhouses had to use stickers to update their menus according to that week’s cost for beef. Central bankers have been vigilant about inflation ever since—for better and, especially in the 2000s, for worse, when some saw inflationary ghosts where there were none.