Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Worried about Fluctuating Money Values? Forget it! Start Worrying about Fluctuating Money!

Currencies / Fiat Currency Jul 25, 2011 - 08:48 AM GMT

By: Aftab_Singh

Currencies

Best Financial Markets Analysis ArticleThe great worry that hastened the establishment of the world’s central banks was that monies tended to fluctuate in value. Here, I explain how such ‘fluctuating money values’ came about and — importantly — how this attribute has since mutated. Hopefully, by the end of this article it should be clear that it is changing money, and not fluctuating money values, that one should be focussed on!


Exuberance & Regret in Redeemable Currency Systems: Unstable Money Values with by and large Stable Monies

In the redeemable currency systems of the past, paper banknotes were issued against gold at specific rates. Meaning, people held banknotes as a matter of convenience; they were free to take those notes to the issuing bank to swap their notes for gold coin (and/or bullion) at the agreed upon rate.

For anyone who’s even slightly familiar with the history of banking, the following should be unsurprising: Currency issuers (typically, banks) often noticed that large amounts of the specie in their vaults remained dormant for long periods of time. Consequently, they periodically succumbed to the temptation to issue more claims upon specie (banknotes) than could be honored given the amount of reserves in their vaults. As these inflations of banknotes were often hidden from the public eye (and didn’t endanger redeemability with immediate effect), the augmented supply of banknotes would tend to bid up the money prices of things. As the newly created banknotes most frequently entered into the economy via loans to businesses, the money prices of productive assets tended to rise first. Resultantly, established businesses would be often be surprised by the continual increases in the money values of their assets (i.e. their net asset values would surprise on the upside). The typical result would be a euphoric rise in general business conditions and a tentative euphoria among the working classes (tentative in the latter case because wages often lagged price rises).

However, all this time we must remember that the currency was unchanged in consistency (that is, the currency remained a redeemable claim upon a specific quantity of gold), it was only the excessive issuance of notes that had induced the boom. So, eventually, the outstanding stock of notes (claims upon gold) would increase to intolerable levels compared to the amount of reserves backing those notes. Resultantly, there would be a rush to redeem notes for gold, and — as banks rushed to recall their rogue excessive notes all at once — the money values of things would revert to their former levels. Thus, the cycle would complete. Although the money values of things often went on roller-coaster rides, the money itself would — usually — remain constant. The period would be characterized by exuberance and regret, but not an altogether changing money.

[Incidentally, modern-day financiers unaffectionately refer to this type of currency system as a 'currency peg'.]

Inviting Governments to Solve the Very Problems that it Created:

It should be noted that scenarios such as the one described above were only possible because of intervention by governments. In a free banking system, any given bank cannot expand its banknotes in excess of its specie without quickly being checked by other banks. For example, if a Bank A issued notes in excess of its gold with any gusto, those notes would eventually end up being exchanged among market participants and deposited into other banks. Upon the other banks receiving those notes, they would present them to bank A for redemption, thus forcing Bank A to reduce the degree of its monetary laxness. It was only by simultaneous expansion that banks were able to issue excess notes to any significant degree. Moreover, due to the fact that cartels don’t hold up without the threat of the gun, it was government intervention in the money production business that enabled long periods of inflation and deflation.

So, these periods of ‘fluctuating money values’ but ‘stable monies’ were — to be sure — by and large enabled by governmental intervention. However, governments and their democratic electors are renown for their attempts to have their cakes and eat them too. So, to combat the unpalatable circumstance where money values would fluctuate wildly, governments sought to fully cartelize their banking systems via the introductions of central banks. In this way, they pursued the folly of attempting to solve the unintended consequences of governmental intervention with governmental intervention.

Compartmentalized Thought & The Legacy of the Price Index

I find that the rudimentary problem behind this kind of thinking is the tendency to ‘compartmentalize’ various issues. In this case, governments and their pet academics honed in on what they perceived to be an undesirable thing about the former currency systems: fluctuating money values. Then they sought to attack it using any means possible but without considering anything else – meaning, without proper consideration of reality. In short, they looked at that ‘compartment’ of the world, isolated it into an imaginary vacuum, sought to ‘fix’ it (again in the vacuum scenario), and thus concluded what they thought was a suitable policy response for the real world. The misstep – if you will – was in assuming that they could apply their intellectual fantasies to the cold, hard and ontologically inflexible real world. Their great folly (that continues to this day) was to think that their intellectual convictions (derived in a vacuum) were applicable to reality. In other words, their great folly was acting on intellectual convictions that did not correspond to the objects to which they referred.

Thus came the obsession with price indices. People loathed the fluctuations in the price level. So democratically elected officials and academics, in attempts to placate the ire of the masses, sought to ‘fix’ it. For the average guy, it was ‘consumer prices’ that mattered, so their great attempt shifted towards keeping those prices stable. Nowadays, it is said that an increase in the CPI is inflation. Is there any greater indication of the legacy of compartmentalized thought in monetary affairs?

Fluctuating money values were a sign of health!

In fact, fluctuating money values were a sign of health rather than illness! The drastic fluctuations in money values were a signal that the follies of the inflation had been purged. Those fluctuations honored the fact that each person owned himself/herself in addition to the property that he/she legitimately acquired. If monies were to be debased (that is, notes to be made ‘equal to’ a lesser amount of gold), then surely property would have been taken from the prudent to pay for the mistakes of the imprudent (a dastardly philosophy indeed!).

Periodic Debasement:

There was something quite open about the former redeemable currency systems. As was said above, it was often the case that the stock of notes (claims upon gold) would increase well in excess of the stock of gold backing those notes. Often, when this came to be realized, the subsequent deflation of money prices would prove too onerous for people empowered with democratic votes. That is, the people would say; ‘WE DON’T LIKE THIS!’. A way to get around the deflation in prices would be to debase the notes. Meaning, decrease the amount of gold that you can get with each note. This would imply that the stock of gold would be able to meet the outstanding stock of banknotes with greater ease.

Now, to be sure, the practice of ‘revaluing’ (aka debasing) banknotes was a debauched practice. It transferred wealth from the productive people in the economy to the unproductive: – thus endorsing the notion that idiots should survive at the expense of the intelligent and prudent. However, at least it had to occur out in the open. That is, the officials had to publicly announce their stupidity and indulgence for all to see. As is to be seen below, it is quite different these days…

Periodic & Open Monetary Debauchery Turned into a Secretive & Daily Affair:

With the passing into current irredeemable fiat currency systems of the world, this property of monetary debasement being an open and embarrassing ordeal disappeared. In irredeemable fiat currency systems, there is no ‘promise’ as such. Hence, each note in existence is an irredeemable claim upon a tiny slice of the entire portfolio of assets that backs it. Therefore, as the structure of the currency issuer’s assets and liabilities change, so does the money. That is, as central banks buy and sell securities, they alter the composition and size of their assets and liabilities, thus implying that each banknote in existence changes to an irredeemable claim upon a tiny proportfion of a quantitatively and qualitatively different portfolio of assets. In this way, any change to a central bank’s balance sheet can constitute monetary debasement. Hence, there are no formal and embarassing annoucements to go along with monetary debauchery. In modern day irredeemable fiat currency systems, monetary debasement is a daily and secretive affair!

In what sense can monies be said to be ‘the same’ through time?

So, if each Federal Reserve note, Pound Sterling note and Euro note is an irredeemable claim upon a tiny slice of the Federal Reserve’s, Bank of England’s and ECB’s portfolios of assets (respectively); and if those portfolios of assets are changing on a weekly basis, then in what sense can monies be said to be ‘the same’ through time?

Well, Jim Grant’s insight immediately comes to mind: that we are currently on a ‘PhD Standard’. The dollar is only a constant in the sense that it is constantly subject to the whims of the PhD overlords. Moreover, since currencies other than the dollar are by and large backed by the dollar, we have mini ‘PhD Standards’ all over the world that all bow down to the PhD-est of all PhD’s: the PhD’s at the Fed.

Conclusion:

There is a great intellectual legacy that pays a lot of attention to fluctuating money values. Particularly in our age, people discount things by the rate of change in the consumer price index; supposedly to get the ‘real‘ version of various calculations. Although this method has its uses, it misses the key point: in modern-day irredeemable fiat currency systems, the monies themselves are changing materially every single day! The only way that you can call – say – a dollar ‘the same through time’ is in the sense that its consistency is declared and decided by the same committee of bureaucrats!

Aftab Singh is an independent analyst. He writes about markets & political economy at http://greshams-law.com .

© 2011 Copyright Aftab Singh - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules