Why We Need a Fiat Currency..or Do We?

Fiat currency may be here to stay. It still isn't worth anything. It's a ponzi construct.

There are exactly zero specie backed currencies in the world. Hmm... I wonder why.

Oh, that's right. Because being on a specie backed currency means that your entire economy rises and falls based upon a specific good, thus exacerbating the bang-bust cycle and making lines of credit all but extinct, thus creating an even bigger divide between rich and poor.

bd,

so is basing your currency on a resource that has no inherent value. Scarcity is not a value, if nobody in the end wants it, then it doesn't matter how rare it is. (my cat's @!$%# is pretty rare, only my cat produces it, but nobody really wants pure cat @!$%#). The only reason why gold has some supposed value is because we attach a value to it.

Now you previously in another column talk about money that your family has lost recently. Well the reality is that if we were on the gold standard, your family more than likely would not have had that money to lose. The economy just would not have grown the way it has.

Ah, I see! The US Government was wrong to go off the gold/silver standard so that it could afford to fight the Civil War and rid the country of slavery.

Fiat money has allowed the US to sustain both guns and butter (when in history do people go to war yet have no tax increases?) up to now while hiding the true cost.

I would rephrase to state more accurately the illusion... up to now hiding the true cost. It hasn't sustained anything other than the illusion which is unsustainable.

Any warrior culture must first take care of its warriors. Warriors may be fooled some of the time, but notice the military is changing its political point of view. They are exchanging fiat dollars for a new president whose philosophy is to convert us to a gold standard.

Merry Christmas, my friend!

I'm afraid I must continue to disagree with you fundamentally on the nature of money! Your view is based on a misunderstanding of the nature of money versus currency, two very different things, and therefore your incorrect conclusion that "money equals debt".

To suggest that the Federal Reserve's sole obligation to the holders of Federal Reserve Notes to replace them on demand is something other than a simple exchange of one piece of paper for another is a "debt" seems on its face untenable - how can you make this leap? On what basis?

As I mentioned, its value as legal tender is that one must use it to pay US taxes.

Legal tender status is a far more universal construct than the mere payment of taxes, and it is this status that gives any form of money its value. And the intrinsic value of a dollar (or whatever) is determined in either a hard money or floating form, by the marketplace, not by some inviolate absolute (gold, for example, is literally less useful than a bag of rocks - it has value only because a social construct has established that it may be used as a store of value/medium of exchange - exactly the same reason a floating currency has value).

As to the idea of price stability, I would note that under an asset backed model, the value of the currency, and therefore the price of goods and services, will vary widely ON A SHORT TERM BASIS depending on the economic cycle. The short term volatility, being both deflationary and inflationary, WILL result, in the LONG RUN, in prices 5 or 10 or more years later being closer to the starting point.

What I referred to as "price stability" should have more clearly and correctly been described by me as "low short term price volatility". Long term, low rates of price inflation are preferrable to short term up and down price volatility.

But with respect to the aggregate economy, deflation and inflation have differing and unequal effects. During economic cycles, the enhanced short term volatility in hard money monetary value exacerbates swings. Price deflation, for example, creates an environment whereby holders of dollars reasonably decide it to not be in their interests to spend those dollars today, because they expect they can get more for the same dollar tomorrow. This deflationary expectation exacerbates economic downturns (such as in the broad economy during the Great Depression, and more discretely with respect to the current real estate depression).

Price inflation carries with it potential negatives of its own, but it does not creat the same pressure for a contraction of the overall economy, quite the opposite, it encourages economic growth, because holders of dollars will be most inclined to spend them sooner rather than later.

Of course, the effect on the supply side of the aggregate economy is the opposite (deflation encourages investment, inflation discourages it). But as we unfortunately see today, investment responds to the expections of investors with respect to demand also, and therefore those who may have money to invest and may be encouraged to do so by deflation (thereby stimulating demand as they invest in plant and equipment) will not do so without the prospect of a consumer demand recovery.

A floating monetary system is necessary to protect against the naturally depressive effects on demand of price deflation. A hard money system cannot achieve this imperative.

Don't you have a problem with that, once you cut through all the bs?

I do.

Finally...just on the face of it...I get to print however many piece of paper I wish, assign them no particular auditable value, and blatantly proclaim that over time I will make them worth even less than what I ask for them at the outset. Don't you have a problem with that, once you cut through all the bs?

If that were what we really had with the current system, I might have some problem with it, but your characterization is exaggerated at best.

Perhaps theoretically a central bank could "print however many pieces of paper they wish", but any cavalier "run the printing presses until they break regardless of the circumstances" policy would quickly result in that particular currency becoming worthless, or nearly so. What we actually have is a far more structured system that is far more accountable - primarily to the market, but also, there are more rules in place than your suggestion of a purely arbitrary system suggests. That, and as we've discussed, the currency is but a relatively small segment of the total money supply.

Whether a (paper) dollar is worth simply a dollar, whatever that means in the marketplace, or whether it is worth quantity "X" in gold, both are completely arbitrary measures of value, as I noted above, so omitting the "it's worth some gold too" does not make a dollar any more arbitrary a designation for the piece of paper.

The tiny levels of inflation that nearly every developed nation has maintained under floating currencies for the last 30 years again points to the exaggeration in your point regarding worth over time. The only holders of dollars who have been harmed in the slightest by inflation averaging less than 3% per year (for the last 20 years) are those who chose to sit on their dollars, rather than EITHER spending them on consumption OR investing them in productive endeavors. As I noted above, a monetary system which ENCOURAGES people to sit on their money is to the detriment of the economy as a whole.

Taking the period you discuss in aggregate, the current economy is the result of, not an exception to, the policies you mention. In other words, it’s all a part of one whole, not a series of little economic events.

First, I disagree with your premise that the current economy is the culmination of, and CAUSED by a floating monetary system - there is no evidence for this whatsoever. And even if that were the case, then you would have to ascribe the Great Depression to the gold standard currency in place up to, and through the initial years of that episode. To be clear, I did not mean to imply that I thought the gold standard CAUSED the Great Depression, only that its effects, particularly price deflation, exacerbated the downturn.

Finally, for now at least, commodity prices. One must be very careful in trying to correlate meaning between currency values and individual commodity prices over time. Most commodities have their own supply and demand fundamentals which are greater determinants of price over time (oil being the most obvious example - myriad factors influence its price, but given that the supply in terms of proven reserves has peaked and is falling, and the demand has risen exponentially, all else being equal, its price OUGHT to be much higher than 30 or 40 years ago).

Perhaps more importantly, though is that commodity prices are, to varying degrees, subject to speculation, not supply and demand. Gold is the most obvious example - having relatively little consumptive/industrial value, its price is almost totally driven by pure speculation. That its price has risen dramatically over the last few years is driven by the market psychology of those who choose to speculate in this market - if one is of the belief the the fiscal and monetary policies of the last few years must result in hyperinflation, one will choose to invest in gold - if not, one will choose other things to do with their money.

1. It goes to the very nature of how those notes are created. Simply put, FR notes are not simply printed and injected into the economy....

A. The FED purchases bonds with those dollars....essentially "buying government debt"... or loaning the government "money".

B. Banks create additional "dollars" through the loaning process...again debt.

The ONLY was to increase the "money supply" is though the creation of debt, under the present system.

But neither of these points make the connection you are trying to make that money itself under a fiat monetary system equals debt. Debt may be a mechanism by which the money supply is modulated by the Fed, but that does not mean that the money itself EQUALS debt. Money, of whatever form, is a tool - a medium of exchange and a store of value. I would note that both of the points you make are not unique to a fiat system, but are rather common to both monetary systems.

You continue to make an artificial comparison when you suggest Gold, or any other physical asset is valued in the same way as a theoretical medium such as fiat currency/money

Sorry, but my statement is totally correct. Gold has essentially no practical value, OTHER than as a "store of value". In a gold standard monetary system it also has value as a "medium of exchange". Its value is derived from EXACTLY THE SAME CHARACTERISTICS as "dollars" in a fiat money system.

You fail to acknowledge the difference between secured and unsecured debt.

I don't find this at all germaine to the discussion, in that it requires me to concede your supposition regarding the nature of money as debt - I do not.

The problem here is that you are moving back to a discussion regarding an asset based currency rather than discussing a fiat based one..not that I'm not willing, but I wrote this article in an attempt to provide a forum to those who wished to provide supporting statements FOR that system.

In order for me to identify the characteristics that speak favorably to a "fiat" monetary system, I need to differentiate it from an asset-backed system.

In reading your comment, what I understand you to say is that the asset based system will provide better price stability over all, but not necessarily in the short term....correct?

Asset backed money will tend to be more volitile over the short run. Fiat money will tend to depreciate more over time. I wouldn't characterize it as "better", for the reasons I noted, and will attempt to clarify hereafter.

Your assumption is that the cycles will occur at the same rate with an asset based currency as with a fiat one.

US History shows us that the swings within the cycles were much wider during the time we had asset backed currency, while subsequent cycles have been much more moderate in scope. Part of my argument is that a modern, capital intensive economy is less able to recover quickly from a significant downturn than the pre-Industrial Revolution economies, and that therefore moderated swings in economic cycles are preferable.

Yes, it does force many to spend them as fast as they can before they lose value...I'm just not sure if I assign that same characteristic with the same value as you do. In addition, as previously mentioned, the end of the road is stratification, bankruptcy for most, and a real hang over at the end.

No, actually price inflation merely influences holders of "money" NOT to simply sit on it - to either spend it in consumption OR invest it in productive endeavors. Deflation encourages holders of money to sit on it - not spending or investing. Deflation results in a worse situation for the aggregate economy than does inflation. The "end of the road" you mention is actually the long term effects of deflation, not inflation. As we have discussed in the past, the vast majority of financial wealth is held by a very few among us. The vast majority of the negative impacts of inflation are felt by holders of money, (and owners of debt) because in the broader economy, when prices of goods and services are rising, the cost of labor also tends to rise, so other than the wealthy, the effects are small, and more positive (for debtors, which you suggest we all are anyway).

Deflation, on the other hand, harms the debtor most, with the pending example of the housing crisis spelling out exactly how bad deflation in just this one (very crucial) segment of the aggregate economy can be.

So my argument is that inflation and deflation are not equally negative, and that a fiat monetary system, with its inherent flexibility in money supply, can more adequately combat the more damaging deflation, making it the superior monetary system. The rigid money supply inherent in an asset-backed monetary system is effectively neutral between inflation and deflation, despite deflation being a greater negative in the aggregate economy. As I noted previously, the "market" has determined it to be preferable also, since as far as I know all modern economies have fiat money.

In essence, you argue that debasing the currency is a good thing.

Which is, or course, precisely what has occured on a number of occasions....over-printing. The "rules" may be in place, but adherence to those rules seems to be a serious problem.

In both comments, you are assuming that the worst case scenario is the inevitable result/ On the real world, our modern experience is quite the contrary - show me the last time a developed nation created a monetary crisis by foolhardy debasement of their currency. We have had an unprecedented period of world wide monetary stability since the US completely abandoned gold as related to the dollar.

Yes, every Federal Reserve Note represents a debt owed to the Federal Reserve, hence the interest paid on each and every note.

A Federal Reserve Note does not represent a "debt" - the only obligation associated with it is to replace it when tendered with a fresh note (or notes) of equal value. It does not bear interest.

On the Banking side, the same is true, basically for the same reason.

They are very different, actually. The increase in the money supply created by banks lending funds from deposits received are generally created by a transaction wherein someone obligates themselves to pay the bank back money borrowed, plus interest. That is the transaction, not the money, though. Its sorta like saying I used an oven to bake a cake, therefore a cake is an oven.

Let's assume that you have just gained independence and are now issuing DenLand Dollars. On what basis are you going to convince me that those DL Dollars have value? You wish to purchase, for example, one bushel of wheat, how many DL's are you going to give me....and why?

I make DenLand dollars legal tender for all goods and services within the Majestic Kingdom of DenLand (its official name!). How many of those dollars it may take to buy a bushel of wheat is not for me to say, rather it is determined by the marketplace.

Me

Yes, it does force many to spend them as fast as they can before they lose value..

You

No, actually price inflation merely influences holders of "money" NOT to simply sit on it

Not sure if I really see any difference in the two statements.

Putting a dollar into an investment OR consumption is not sitting on it. If your money becomes worth more over time (deflation), you can profit by simply sticking it under your mattress. We would both agree this is not very useful for the aggregate economy. If one anticipates price inflation over time, averaging, say 3%, one knows that to keep up they must put their money not dedicated to consumption into some endeavor that will earn them a return at least the level of inflation, or their money will become less useful to them later. Investing is the alternative, and is preferable to "the mattress" - which, buy the way, is pretty much what a couple of trillion dollars in corporate funds are doing right now - how's that working out for us?

I see this statement as in conflict with itself in a number of ways, but I'll address one.

when prices of goods and services are rising, the cost of labor also tends to rise,

Perhaps, but wages always lag behind, thus it is a perpetual game of attempting to reach zero and rarely, if ever, a net positive gain for labor.

I acknowledge that the correlations are imperfect, but again note that modest inflation is typically reflected in wages with a relatively brief lag - I don't expect inflation or deflation to result in a net positive gain for labor, that is determined almost entirely by other factors. But again, even with a lag period where cash purchasing power declines slightly, the effective cost of one's debt (house, car, student loans, credit cards) declines in line with inflation as well, and most of us are debtors to some degree or another, and this is where a net "wash" or net benefit occurs for most of us.

On the real world, our modern experience is quite the contrary - show me the last time a developed nation created a monetary crisis by foolhardy debasement of their currency.

NOW.

There is no monetary crisis anywhere in the world today that I am aware of. There are debt crises is some of the smaller European countries, but these are NOT inflationary bubbles caused by over-printing money.

Every single FR Note represents debt...hence the "note" designation. This is simply a fact which I have already explained, and thus I really don't know what else to say. Perhaps researching the subject would be of more use to you.

Just because it uses the word "note" does not make it a debt. The only obligation corresponding to a Federal Reserve Note is an obligation on the part of the Fed to replace it with an equal quantity of currency when the note is presented. No matter how you slice it, that is NOT a debt, but merely a requirement to replace an ugly used piece of paper with a crisp new one.

Yes, every Federal Reserve Note represents a debt owed to the Federal Reserve, hence the interest paid on each and every note.

A Federal Reserve Note does not represent a "debt" - the only obligation associated with it is to replace it when tendered with a fresh note (or notes) of equal value. It does not bear interest.

What part of my original rebuttal statement do you find issue with?

Let me seek to clarify a different way - I hold in my hand a Federal Reserve Note with a face value of $100. To whom do I go to collect the supposed debt that is due to me, and what do I get when "paid"?

Besides, as to the question the article asks, I would note that even if your suggestions regarding the dollar, under the current US Federal Reserve system, being accurately described as "debt" (even though it isn't), that the US system is not the only way to have a "fiat" currency - a system COULD simply print up piece of paper, call 'em money and be done with it.

How?

You print up one million notes...than what?

How does the marketplace do anything? Individual participants decide what they are willing to trade for what. If my DenLand Dollars are legal tender (and they are), then when one party, holding DenLand Dollars wants to buy a bushel of wheat from someone holding a bushel of wheat, they will decide how many DenLand Dollars it takes to satify the wheat seller. The currency itself is a tool only, not a rigid absolute valuation system for all goods and services.

All else being equal, the more DenLand Dollars there are, the less each one is worth to the wheat seller. Numerous other factors come into play as well - if DenLand is a huge land with millions of citizens and thriving internal trade, the mere fact that DenLand dollars are legal tender (and hence the official tool for purposes of a medium of exchange and store of value - nothing more, nothing less) will cause them to be reasonably highly valued, assuming they are not oversupplied relative to the economy. If DenLand is just me and my family on our little plot of ground, chances are there is no number of DenLand Dollars that would be enough to acquire that bushel of wheat.

As to your arguments in favor of inflation....basically you support the debasement of the currency.

I advocate a monetary system which actively considers that DEFLATION is worse than INFLATION rather than one that is impotent to differentiate between the two. If that bias results in the slow, long run "debasement" of the currency, I'm fine with that, because it's better than the alternative.

Of course the monetary crises are a result of fiat currency.

Again, what monetary crisis? Europe has the makings of a debt crisis, which is a completely different animal.

Dennis, not to get in the middle, but just a thought about your dispute that a bank note doesn't represent debt...

Yes, the Department of the Treasury does still mint our coins (at the US mint) but that represents under 1% of the US money supply, the great bulk of which is simply bankbook entries – electronic keyboard impulses in computer memories – created by banks on-the-spot to fund loans they make in response to loans applications their “customers” submit (hence the competition by banks for your loan applications and credit card borrowing).

If only 1% or so of the currency in circulation is minted, and the FED and the member banks used that money to create the fractional reserve holding 98% of what's on the books --then doesn't that mean that each piece of paper (note) is a debt-paper?

If only 1% or so of the currency in circulation is minted, and the FED and the member banks used that money to create the fractional reserve holding 98% of what's on the books --then doesn't that mean that each piece of paper (note) is a debt-paper?

Nope. First, 1% of the money supply is coinage. In addition another relatively small portion is currency (bills). Neither of these are debt in any form, and that is the basic misstatement that precedes the others.

As to the remainder of the money supply (essentially bookkeeping entries without physical form), the point of distinguishment that I am trying to make is between what the money actually is and what it actually represents, versus the method by which the supply of money is, in our particular monetary system, modulated. They are two very different things.

A US dollar is nothing more (or less) than a medium of exchange (ie. a tool to facilitate commerce) and a store of value. It is neither a debt nor directly representative of one.

How the total supply of dollars (coinage, currency and deposits) is, in our current system, increased, decreased, and distributed is largely though a banking system wherein deposits of presently unused dollars on one end (store of value) are not left to merely languish under one's mattress, but rather are (subject to reserve requirements) lent out to other parties whose current demand for dollars exceeds their current supply.

Yes, more often than not at least a substantial portion of the dollars lent by the bank are expended on some good/service, and then deposited in another bank. Thus the total supply of money (as measured by bank deposits) has increased. But the debt that was created in the process is not itself the money supply increase, merely the mechanism by which the money supply was increased.

At the end of the process, I still have the "money" I deposited originally (though in reality most of it isn't sitting in the bank's vaults, it has been lent to someone else), and the recipient of the borrower's borrowed funds still has that "money" on deposit with their bank, and neither one of us owes anyone anything. Nor does the Federal Reserve owe either of us anything if we choose to hold our "money" in the form of currency.

Conflating the object with the process by which it is manufactured is the flaw in the "money equals debt" argument.

But the debt that was created in the process is not itself the money supply increase, merely the mechanism by which the money supply was increased.

Hmm, it would seem to be both, in my mind. It's the mechanism (the fractional reserve system), and they are also creating dollars that are not in existence, correct? It's the nonexistent dollars that give the dollars that are in existence a relationship to debt.

You still are using the "if this" and "if that". Specifically..how much is a DenLand Dollar worth?

Of course I am, that's the point. What is a US dollar worth? Whatever the market determines it's worth - just like a DenLand Dollar.

what is a Denland Dollar worth? You just declared your independance, now you approach the Saudi's for a barrel of oil.

You approach the Saudi's with a US dollar - how much do you get? Depends on what THEY think a US dollar is worth - again, exactly the same for a DenLand dollar.

Having said that, at least we wouldn't be paying interest on that same fiat money, which would make a huge difference in terms of the country's financial situation.

I have a $100 bill in my hand - who do I talk to about collecting my interest? Again, you are incorrectly connecting dots that are not connected. The US gov't has debt because it spends more than it takes in and it borrows (from home and abroad) to fund the excess spending. This is not the same as, nor particularly germane to, the US money supply. That you fail to distinguish the object (money) from ONE of the tools used to modulate its supply (debt) is where I continue to suggest you refine your thinking on the subject.

The European sovereign debt crisis is not a monetary crisis, but rather a fiscal one, created not because these nations debased their currencies (they have not), but because they've simply spent more money than their creditors were willing to lend without ever increasing interest rates, which these nations can't afford to pay. Actually, they wouldn't have a debt crisis if they created a monetary crisis, as that would by its very nature "inflate their debt away".

I understand that you support the debasement of the currency, and thus the rich getting richer and the poor getting poorer.

That's the opposite of what actually happens with debasement of the currency (or more correctly the money generally). The holders of money (ie. the wealthy) lose, because their holdings of money become worth less over time. Those without holdings of money (ie. the rest of us) typically have wages that (roughly) increase along with prices, keeping our standard of living relatively constant - and we don't have any dollars that we hold onto that lose value. Debtors are the ones who come out ahead, because they repay yesterday's borrowed dollars with "cheaper" tomorrow's dollars.

and they are also creating dollars that are not in existence, correct? It's the nonexistent dollars that give the dollars that are in existence a relationship to debt.

Well, the total money supply (of dollars) has increased, so by that measure they are now in existence when they weren't before the loan transaction.

There is a relationship between debt and the money supply, but again it is a relationship of tool to final product, not one whereby one thing equals the other.

Dennis I think these are good concepts but need fine tuning to hold up under practical application. We're honing it down to the brass tacks.

What is a US dollar worth? Whatever the market determines it's worth

A US dollar is worth a US dollar, that is all. It has no intrinsic value. I can trade it to the US government for -- another dollar. Or I can use it to cancel a debt, income tax, for instance. If I trade it for a Euro, I have a similar piece of paper the value of which is diminished by the overhead cost of money exchange. If I trade it for gold, I have the gold (less similar overhead cost). If I trade it for clothing, I have clothing (again less overhead cost). If I trade it for another dollar, I have another dollar. It is worth nothing. It is a representation of debt. Whoever paid you the dollar transferred ownership of that debt to you, and you in turn may transfer it to someone else.

approach the Saudi's with a US dollar - how much do you get? Depends on what THEY think a US dollar is worth

That's one scenario. It also depends on how much you believe your dollar is worth. If they don't offer enough oil in trade, you keep the dollar. It is still a dollar.

The US gov't has debt because it spends more than it takes in and it borrows (from home and abroad) to fund the excess spending. This is not the same as, nor particularly germane to, the US money supply. That you fail to distinguish the object (money) from ONE of the tools used to modulate its supply (debt)

Close, but philosophically unsound. One cannot spend money one does not have. For instance, one cannot simply spend more than one takes in if the money is not physically in existence. One must issue debt. The government has debt because it issues debt in the form of paper. Currency is one form of that paper. It could simply sit on the excess funds generated by debt issuance, but it chooses to spend more than it takes in. In other words its revenue is deficient to spending, hence the annual deficit and the government debt.

European sovereign debt crisis is not a monetary crisis, but rather a fiscal one, created not because these nations debased their currencies (they have not), but because they've simply spent more money than their creditors were willing to lend without ever increasing interest rates, which these nations can't afford to pay. Actually, they wouldn't have a debt crisis if they created a monetary crisis, as that would by its very nature "inflate their debt away".

More clarification is needed on this statement. We think the Euro crisis is related to a lack of confidence from lenders. They can't create more debt because they must first reduce some of the principle. It's like the 20% equity needed to take a second mortgage on your home. The bank doesn't want to lend more money because you haven't enough equity to justify the risk.

Debtors are the ones who come out ahead, because they repay yesterday's borrowed dollars with "cheaper" tomorrow's dollars.

This statement is true when the debtor has access to those dollars in the formerly higher value. I may pay debt with cheaper dollars, but I do the same amount (or more) of work to earn the cheaper dollars, so there is no gain. What I do have is the use of the purchase, whatever it may be, in real time. What actually happens is that those who are closer to the top of the financial pyramid, for instance the central banks, gain access to new money and can use it with the implied advantage before the overall value of the money is reduced by the inflation that creates those cheaper dollars.

Actually that statement needs more work too. The inflationary pressure that invokes the cheaper dollars phenomenon has a rubber band effect. Those at the top get to use the new money before the overall effects of inflation are noticeable. The guy at the bottom doesn't receive that benefit. Does that make better sense?

hmmm DenLand dollars, JonLand dollars (so this is where it came from).

Dennis,

I have tried to say the exact same things you have been saying (in the other article referenced), but I must admit, your explanations have been much more eloquent than mine were.

bd,

you buy a house by taking a mortgage, you spend more money than you take in. It is the same concept. Your business borrows money as an investment, you spend more money than you take in. It is again the same concept.

It is the same thing with the government deficit, revenues are below spending, the government borrows money. So of course the government can spend more than it has.

There is a relationship between debt and the money supply, but again it is a relationship of tool to final product, not one whereby one thing equals the other.

Dennis.....Yes, it is, and that "final product" is always debt --no matter how many hands and trades that dollar passed through. I thought the easiest explanation is that the paper is "monetized" by debt via the FED and fractional reserve system. Without debt --it wouldn't have monetized value.

I interpret the point you are making is the "use and exchange" value of our dollars. Yes, there is bartering value, and there is exchange value with the markets. But, the point I think that is being made about debt - being its inherent value.

Reserves are the assets (vault cash and Federal Reserve deposits) used by banks to conduct day-to-day transactions, especially processing checks or providing the "cash" needed for cash withdrawals. While prudently managed banks are inclined to keep reserves in the due course of business, bank regulators stipulate specific reserve requirements needed to back up deposits, usually in the neighborhood of 10 percent of outstanding deposits. Any reserves that banks have over and above those required by regulators are excess reserves.

Excess reserves are the key to money creation. Banks use excess reserves to make loans, a process that involves the creation of checkable deposits (and money). If banks obtain excess reserves, if they have more reserves than needed to keep deposits safe, then they make interest-paying, profit-generating loans. These loans find their way into the hands of the borrowers as checkable deposits.

So, it's reserves and deposits that the bank agency uses to charge fees and have lending power -- for the money they are "lending us" to use... the money that the Federal Reserve system monetized by purchasing debt... they are "debt papers" that we are 'renting' from the bank agencies that charge fees as our monthly rent.

I hold in my hand a Federal Reserve Note with a face value of $100. To whom do I go to collect the supposed debt that is due to me, and what do I get when "paid"?

our taxes are used to pay this debt you will never get paid.

I feel a certain urge to bang my head against something quite solid...

The US Dollar is worth, 1588.95 divided by one ounce of gold....at the moment. You just declared independence...how much is your's worth? Based on WHAT?

Did the US government decide that a dollar is worth 1/1588.95 of an ounce of gold. NO. Why do I have to decide what a DenLand dollar is worth, but the US government does not? Inconsistent...

One cannot spend money one does not have. For instance, one cannot simply spend more than one takes in if the money is not physically in existence.

One gets more money by borrowing it from someone else who has more than they presently require. It doesn't have to be physically in existence, in that the vast majority of money is not. The US government, under the present Federal Reserve system, does not simply manufacture more dollars when it wants to spend more than its revenues, it actually borrows money from people/nations who have it to lend. Notwithstanding this generalization, it is true that, in an unregulated fiat monetary system the government could simply print more money, that would result in rapid inflation and currency devaluation, which is why that is NOT what we do.

Dennis...lol...you don't get the interest...the FED does...you pay the interest...whether it be through inflation, or taxes, or bonds.

You keep speaking about "tools" when you seem to fail to realize I know exactly what i am saying. Each NOTE is a debt that the American Citizen collectively owes to the FED.

No, there is no interest associated with the Federal Reserve Note - no one pays anyone any interest in direct connection to same. Inflation is not interest, it is the result of the "real" economy modifying it's collective decisions as to what a particular form of money is worth. Taxes most certainly are not interest. "Bonds" have nothing to do with either US dollars generally, or Federal Reserve Notes specifically. No, a Federal Reserve Note does not correlate with any debt that anyone owes to anyone else - the sole "obligation" under same is for the Fed to issue a like dollar quantity of notes if you present those in your hand to them - nothing more or less. You are simply mistaken in trying to connect things together into a nice little package that don't connect in the simply way you're trying to frame them.

The WEALTHY don't HOLD money, or haven't you noticed? They hold assets.

They hold the vast majority of all financial assets. Things like US treasury securities, corporate bonds, and other forms of debt. Inflation MUST erode the value of these financial assets, and the wealthy, as the holders, must bear the loss in value of their holdings.

I thought the easiest explanation is that the paper is "monetized" by debt via the FED and fractional reserve system. Without debt --it wouldn't have monetized value.

Sorry, simply untrue. I realize that the distinction is complex, but the money and the debt are two separate things, and all the oversimplification of trying to equate them does not make them one and the same. As I noted in my simple example of the banking system, when done, I have "money" in the bank, and the person who sold to the borrower has "money" in the bank, and neither of us owe anyone anything, period. The borrower's situation is different, in that until they repay the loan, they owe "money" to the bank, but their debt is completely separate from the people who have the "money".

I may pay debt with cheaper dollars, but I do the same amount (or more) of work to earn the cheaper dollars, so there is no gain.

ONLY if you assume that prices rise over time while wages remain frozen (in nominal dollars), but that isn't what happens generally, and most certainly over the long term. If I borrow $100,000 to buy a house now at $1000/mo, and after 10 years general inflation has totalled 30%, even if my wages have only increased 15% in response, I'm still earning $1150 for every $1000 that I did when the loan was taken out. I'm still better off in that respect.

Dennis in WA

I feel a certain urge to bang my head against something quite solid...

I have multiple concussion syndrome at this time so I know the feeling.

Dennis.....Yes, it is, and that "final product" is always debt --no matter how many hands and trades that dollar passed through. I thought the easiest explanation is that the paper is "monetized" by debt via the FED and fractional reserve system. Without debt --it wouldn't have monetized value.

CL1, you are mischaracterizing both how the federal government's debt is distinctly and completely separate from how the federal debt instruments are utilized by the Federal Reserve in connection with the issuance of currency first, and the relationship (or lack thereof) of federal debt to the overall money supply.

First, let us be clear on how federal debt is created. The Federal Reserve has absolutely nothing to do with it - the debt obligations are created and auctioned to the public thru the Treasury (hence Treasury bills, Treasury notes, and Treasury bonds). Treasury securities are the form which US government debt takes - Federal Reserve Notes are not debt instruments.

Ah, you say, but the Federal Reserve "monetizes" this debt by printing up currency to buy Treasury securities. The only problem with this reasoning is that the Federal Reserve cannot by law print up (technically, have the Bureau of Engraving and Printing print up) a bunch of currency to use to buy up all this Treasury debt - in order to issue additional currency, a Federal Reserve Bank must ALREADY have in its possession a corresponding quantity of Treasury securities.

So how do the Federal Reserve Banks acquire Treasuries if they can't just print up currency? The same way normal banks make loans to people - by using deposits. In the Fed's case, these are the reserve deposits of "normal" banks (hence "Federal Reserve Banks").

I'm oversimplifying, so if anyone has a good link they'd like to share that explains better, please share.

I imagine most folks nonetheless think that the Fed has been just opening up the printing presses to fund the US government's "exploding" debt. I would invite you to look at the share of US debt "held by the public" (since Fed not actually a part of US gov't) that is held by the Federal Reserve system - it has remained nearly constant as a share of GDP (5.4% end of 1999, 5.6% end of 2010), despite the total US debt growing from 39% to 62% of GDP in that timespan. So much for "monetizing the debt".

The US dollar is ONLY a means of exchange and store of value, and it has value only because of its status as legal tender. What value it has is determined by the market (whether or not it has some arbitrary commodity connected to it). Although the primary means (other than printing currency) that the supply of money is expanded under our Federal Reserve system is through the process of banks lending depositors funds, the money itself is NOT A DEBT. If I hold a dollar in my hand, I neither owe anyone anything because it's found its way to me, nor does anyone owe me anything.

The "debtophiles" among you are going to have to explain "what debt, to whom, from whom?" you are referring before I can give your argument credence.

So, it's reserves and deposits that the bank agency uses to charge fees and have lending power -- for the money they are "lending us" to use... the money that the Federal Reserve system monetized by purchasing debt... they are "debt papers" that we are 'renting' from the bank agencies that charge fees as our monthly rent.

Wow! No one is making you or me or anyone else deal with banks, as depositors or debtors or both. They are almost universally used because they provide value to both depositors and lenders - depositors can store money in such a way that they can access some or all of it anytime they want, and for the privilege of using it to make loans, banks typically subsidize the costs of the services that they use to attract depositors, and/or pay the depositor interest. Borrowers find it far more convenient to seek loans when they wish to obtain additional funds from a bank rather than by finding and negotiating with an individual or individuals - it's just far more efficient and therefore more economical.

Modern economies require banks (or some similar form) - without them we would all be far, far worse off. Imagine the difficulty and the cost of finding enough people in my small, semi-rural, below average income town to get financing to buy my house, versus a trip to the credit union, where I could borrow, say $200,000 from 100 or 200 different folks with total deposits of $1000 to $2000 - no comparison.

Just because banks can have negatives as well is no reason to demonize them.

Dennis,

I don't believe there is anything really simple that describes the money creation process, and that seems to be part of the problem. People can grasp the simplicity of gold assets backing the currency in circulation. It is much more difficult to grasp the current system, so people assume that it must be bad because they don't understand it. This turns into multiple bouts of circular arguments that end up pissing everyone off.

I have been out of the industry for a few years and even after a few years, things are starting to fade in my mind, and I have to commend you with how eloquent you have stated this, but unfortunately it seems to no avail. :(

I do have a textbook on it, so that should indicate how complex it really is to understand all the intricacies of our global monetary system.

I don't believe there is anything really simple that describes the money creation process,

Boy ain't that the truth! I don't pretend to have all the answers myself (though I may come off that way sometimes!), I just hope I can help the open-minded look at things from a different perspective.

I think I still have an old college banking textbook laying around somewhere myself...Maybe I should dig it up and refresh myself too.

Well your descriptions have been far more eloquent than I have been making in the other threads (there are now three other threads related to this, I saw you post on the other half of this I believe, and then two others). My background is from an IT systems perspective, not from the financial business side of things so that may explain the difference.

Your descriptions have been pretty much bang on and fairly complete. I guess the only concept that people need to get over is the concept of money as a hard asset, as opposed to an asset to facilitate commerce. Once someone gets past that, everything should fall into place.

Dennis, 5.30, thank you for going over the processes, and yes, I was aware of how the Federal Debt(with T-Bills, Bonds, etc,) is different from the actions taken by the FED, but you are right, I thought they were just printing up the money to buy the Securities. Those reserves that the banks are holding, came from the FED, I thought, as banks are just agencies to collect fees from the money that is given them by the FED. I call those dollars that came from the FED "debt papers" because they were generated as a result of purchasing 'our debt instruments' - correct-- by earning interest from those debt instruments. So, that dollar sitting in reserve at a reserve bank, if traced back to its origin, is tied to the purchase of debt, thus giving it no value.

Thank you for your informative and detailed reply.

Those reserves that the banks are holding, came from the FED

You now get that it is actually the exact opposite, correct? Private individuals and businesses deposit money with banks, and banks deposit that portion of the individual/business deposits which they are required as reserves with the Fed.

The currency that the Fed generates are not generated "as a result of purchasing" Treasury securities, the holding of Treasury securities is a required precondition to issuance of currency, but issuance of currency up to the Treasury holdings of the Federal Reserve Banks is not required of the reserve banks.

The idea that a tool must have some established, rigid, "intrinsic" value is where you go wrong. Like any tool, be it a hammer or a dollar, its value is a) in the eye of the beholder, and b) tied to what it might be useful for to the holder.

The value of dollars, whether in the form of currency or bank deposits or other forms of "money" is in what you can do with them. If I can take a dollar that I have in my pocket, and exchange it for a McDonald's cheeseburger, then it has value. A dollar has "no value" as you suggest, only if it cannot be used for any purpose - obviously it can, so it has value.

If you still think dollars have no value, feel free to send all of 'em you have my way - I could find use for a few more!

Dennis, yes, I have already agreed to what you keep focusing on that I already pointed out in my 14.24:

I interpret the point you are making is the "use and exchange" value of our dollars. Yes, there is bartering value, and there is exchange value with the markets. But, the point I think that is being made about debt - being its inherent value.

What you and others aren't acknowledging is the very plain and simple fact (this issue isn't complicated at all -- they want us to think so, though), is how much can you barter and trade with your dollars, if banks suddenly couldn't make anymore loans? Without loans, banks would go out of business, and without loans, your debt-papers will do you no good.

Anything 'real' - a commodity - will still have value; your debt-papers will have the same value as your toilet paper. :)

The question is why there is a monopoly on their production which is not beneficial to the general public.

I don't think I correctly understand where you are going with this. It reads to me like you are suggesting that anyone and everyone should be able to print up their own currency? That obviously doesn't make any sense, so you're trying to say something that didn't come thru I'm assuming.

What you and others aren't acknowledging is the very plain and simple fact (this issue isn't complicated at all -- they want us to think so, though), is how much can you barter and trade with your dollars, if banks suddenly couldn't make anymore loans? Without loans, banks would go out of business, and without loans, your debt-papers will do you no good.

Well, you are mistaken on several levels. First, if banks "couldn't" make any more loans (why that would be I have no idea, it would be a really dumb idea for the reasons I mentioned previously), then banks only source of revenue would be service charges on deposit accounts - which would presumably skyrocket (might now be $1.00 for every check you write for example - similar to cost of money orders now). If everyone decided those fees were too high, such that most everyone stopped using banks for deposits, then we'd pretty much have to become a cash economy - which would be ridiculously inefficient.

But if we had a cash only economy, then in fact cash would become rather MORE valuable, in that the total supply of money would be much smaller, which would increase the value of the remaining supply, not decrease it.

As to your characterization of our currency as "your debt-papers", we've already debunked that falacy - there is absolutely no debt of any kind associated with Federal Reserve Notes. Period.

Which brings me back to a point for Socrates to consider:

If Federal Reserve Notes actually did represent some form of debt, then they wouldn't actually be a fiat currency. As such, your criticism of the supposed debt aspect of Federal Reserve Notes is actually a criticism of a hard-money currency, NOT of a fiat currency. So you are actually making an argument against hard-money, not fiat.

Dennis, first of all, I would like to compliment you on your style of discourse. I can see why Soc likes exchanging with you, as you continue to maintain civility in the face of dissension; and even your 'direct' prefacing remarks, " you are mistaken on several levels, " are well-received.

I maintain that banks would go out of business without loans, as the lending process is what makes the fractional reserve system work -- without that, the system would seem to fail, as credit is what our nation and globalization are based on.

Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction (called the reserve ratio) of the quantity of deposits as reserves. Some of the funds lent out are subsequently deposited with another bank, increasing deposits at that second bank and allowing further lending.

Deposits, imo, wouldn't be enough for the banks to collect 'fees' that they thrive on, and the lending process, as pointed out above, help banks - help each other.

Additionally, my point about, what if the banks couldn't make loans anymore, was only to point out that the value of fiat currency comes from the lending process.

Thanks CL1 for the kind words!

I wasn't disagreeing with your contention that the banks would quite likely largely go out of business - they would I would insist maintain a niche business (compared to lending anyway) of other financial services - storing money and getting it from one place to another. A completely "cash only" economy would be a complete disaster in terms of economic efficiency at a minimum.

Additionally, my point about, what if the banks couldn't make loans anymore, was only to point out that the value of fiat currency comes from the lending process.

That's actually incorrect. The form of currency, whether "fiat" or hard-money, is completely separate from the creation of (the larger, broader) form of "money" via a fractional reserve banking system. We had a fractional reserve banking system long before we went off the gold standard. Even prior to the creation of the Federal Reserve, we still had a fundamentally similar system in terms of the "non-cash" money supply (banking and deposits and lending were all features of our economic system from the get go).

Even prior to the creation of the Federal Reserve, we still had a fundamentally similar system in terms of the "non-cash" money supply (banking and deposits and lending were all features of our economic system from the get go).

I agree with that statement; lending was happening prior to 1913, but that doesn't negate the point I was making. Futures and speculative markets, as well as global derivatives markets, are only possible with the lending process (on computers, now), and it's that process of lending/selling "debt instruments" that give our money 'value.' Yes?

Futures and speculative markets, as well as global derivatives markets, are only possible with the lending process (on computers, now), and it's that process of lending/selling "debt instruments" that give our money 'value.' Yes?

Nope - I think you are trying to connect the unconnected. Our money has value because the dollar has been endowed with "legal tender" status, making it an incredibly useful tool as a means of exchange and store of value. What exactly its value is at any given point in time is determined by the marketplace (ie. all of the economy, both the "real" economy and the financial sector).

Loaning money for profit in the form of interest is simply one of the myriad uses of money. No one is forcing anyone to borrow money, so those who choose to do so must therefore find it to their benefit to do so. That others also find it to their benefit to lend money on terms favorable to them should be no surprise. It isn't a bad thing, per se, it is simply free market capitalism at work.

If for some reason no one either wanted to borrow or to lend anymore, money would still have value for its many other useful purposes. As I noted before, it might well have MORE value, in that its aggregate supply would necessarily be decreased under a fractional reserve banking system if borrowing/lending ceased, such that the dwindling supply of dollars would each be more useful/valuable unless demand for money decreased as much or more than its supply.

The speculation/derivitives, etc which you decry are merely one perhaps unsavory use for this tool we call money. It would exist in some form regardless of our form of money or lending/borrowing.

the dollar has been endowed with "legal tender" status

I agree; I even made that same remark myself in one of these threads or articles. The fact that it is legal has nothing to do with my point.

What exactly its value is at any given point in time is determined by the marketplace (ie. all of the economy, both the "real" economy and the financial sector).

Yes. I've also stated that many times, i.e. "our money has 'both' use value and 'exchange' value."

So far, all you've done is agree with me, and danced all around the 'point.' ..That point being a focus on money lended to "commercial" banks, thus those banks 'create' money using the 'frs', that gets dumped into the speculative futures markets, among other things, thus, forcing a set value to be determined on that sell date --- and that is part of the basis of my point --- the use of the fractional reserve system 'allows' the banks to not only create money, but to determine its value on the markets. :) That becomes the lending value at that time --but the lending process is what maintains that value at any given point. It's still a 'borrowed' dollar on a computer.

Guess we'll have to agree that most of our conversation has been you coming back and verifying what I've already said in some areas and adding a few side-issues in other areas, with you continuing to want to look at money as a separate issue from the debt-factor (that it must be sold and bought, only to be sold again, on credit) to give it face-value. ..Or, we can just agree to disagree. Happy New Year, to you, again.

Happy New Year to you as well (before I forget again!)

That point being a focus on money lended to "commercial" banks, thus those banks 'create' money using the 'frs'

Here is where I think you begin to diverge from the issue under discussion generally - money and what goes into its value. I believe this is a divergence because, to the extent the Fed lends money back to commercial banks, especially in its efforts over the financial crisis to prop up the capital position of commercial banks, hasn't really had the sort of effect on the money supply or the markets that you attibute to it. In point of fact, the vast majority of Fed lending to banks in the last several years has been to merely stave off a huge contraction in the money supply due to the inability of banks with wrecked capital positions due to greater than anticipated default/investment losses to make new loans.

While you might disapprove of bank lending broadly, tell all the small and medium sized businesses that have been unable to get financing for capital improvements or for even for working capital purposes that it's a bad thing. The economic collapse would have been far worse if access to credit had been curtailed even further.

thus those banks 'create' money using the 'frs', that gets dumped into the speculative futures markets, among other things, thus, forcing a set value to be determined on that sell date

the use of the fractional reserve system 'allows' the banks to not only create money, but to determine its value on the markets

it's that process of lending/selling "debt instruments" that give our money 'value.' Yes?

It is connections such as these that I disagree with. Yes, Fed action can and does influence (not set) the money supply, but the money supply generally is a function of both supply and demand. The Fed can set liberal policies for banks in terms of reserve requirements or "lend" them money - really act as depositors - both of which will tend to increase the quantity of available loans from banks and to lower their cost - interest rates. But to actually increase the money supply there must be demand for the loans made available. That demand is from separate actors and for separate purposes, and what those who choose to borrow choose to do with the borrowed funds is beyond the scope of what the Fed or the banks influence.

So to suggest that a "cheap" money policy by the Fed directly creates speculation in commodities is a couple of leaps too far. In point of fact, I would argue that a perception of inflationary policies by the Fed influences those who already have money and believe such things as Austrian economics to speculate in commodities as hedges against their fears of inflation. It isn't the folks borrowing doing the speculating.

In the same way, the Fed, which actually sets policy certainly does not "determine its value on the markets", much less the banks, which are really only trying to profit by attracting as many deposits as they can as cheaply as they can and lending them out to get the highest possible return (interest earned minus default losses). What the supply side does alone doesn't determine anything about the value of the money - really only effecting the price of money in terms of the risk free rate of return (interest rates).

The value of the actual dollars in terms of what they can be used for (ie. what they can buy) is determined by actors totally independent of the Fed and the banks. And it has value and is valued independently of the processes that are utilized in managing its supply.

But again, if you look logically at the currency alone, and remove/forbid all banks and all lending, this vastly reduced money supply would most certainly continue to have (the same) core functions that it has now, and would continue to have value - more value (per dollar) than now, because you would now have far fewer dollars chasing the same goods and services and investments and speculation. The value of dollars would not disappear if the mechanism of its supply were altered away from a fractional reserve banking system.

Dennis, no, I don't disapprove of bank lending. I 'do' believe we most likely have not always been told the truth. In addition to the bailout funds they were given, and yes, some of the banks gave the money back (after they collected large amounts of interest from it) as they "recovered," but the FED, also gave them an additional 600 billiion last year, that was supposedly invested in foreign markets because the interest rates are too low here to make investing in 'us' profitable.

No, the only divergence is your use of red-herring style discussion, diverting the premise by adding a lot of tangential information; it's true information, but it strays from the point. I could make bank-detailed, elaborated comments, too, but they aren't necessary, if we stay with the point.

The point of the article is "Do we need a fiat currency?" ... My discussion has been to point out the danger of the system, perhaps not so much that it will fail because lending is at risk, or even the fact that the dollar only has the 'assigned' market value set by banks --- my point is that the boom, bust, boom, bust cycles don't help the people -- they helps the banks! With every recession/depression, they get wealthier, and we get poorer.

So, no, we don't need a fiat currency. We need a currency that is controlled by our government such that profits go to us, aiding paying off our ND, not a private banking cartel collecting billions in interest; and we need a currency that is better able to withhold it's value in fluctuating markets.

I believe that is being on-point to this article's premise. :)

My confusion regarding your position is characterized by statements such as:

at money as a separate issue from the debt-factor (that it must be sold and bought, only to be sold again, on credit) to give it face-value

even the fact that the dollar only has the 'assigned' market value set by banks

which I find to be both untrue, and more importantly for our discussion, utterly at odds with the premise which we both supposedly agree on regarding the currency specifically, and the dollars otherwise constituting the money supply overall, has value because of its legal tender status. My position has been that the value of money is based solely on the market's (not the banks) determination of how useful the dollars are as a medium of exchange/store of value because of their legal tender status, which is totally INDEPENDENT from the system by which it happens to be created under our present Federal Reserve system.

It seems to me that what you have been raising an issue with is, in fact, outside the premise of the article, in that it is really a criticism of the "manufacture" process in the Federal Reserve system, which, if I understand correctly, you believe creates unreasonable profits for the banking system.

But I would counter that that is a criticism of the process of creation (actually, expansion beyond the currency base) of the money supply under a fractional reserve banking system, NOT a criticism of a fiat currency (as noted before, we had fractional reserve banking under the gold standard currency as well).

A fiat currency is simply one which does not have an arbitrarily assigned replacement value (ie. $1 = x grams of gold). The distinction with a hard-money currency is unrelated to the "debt/banking" issues you raise - one can have either a fiat currency or a hard-money currency both with or without a fractional reserve banking system. Actually, technically the whole banking/debt/federal reserve system is outside the premise of the article, in that while they impact the overall money supply, they have nothing to do with the portion of it that consists of the currency.

my point is that the boom, bust, boom, bust cycles don't help the people -- they helps the banks! With every recession/depression, they get wealthier, and we get poorer.

As I've discussed previously on this seed, the magnitude of the boom/bust cycles faced by the US economy were actually much larger under a gold standard currency. So this concern would actually be more favorably addressed with a fiat currency rather than hard-money.

So, no, we don't need a fiat currency. We need a currency that is controlled by our government such that profits go to us, aiding paying off our ND, not a private banking cartel collecting billions in interest; and we need a currency that is better able to withhold it's value in fluctuating markets.

A system such as you describe is again, not a question of fiat or hard-money, but rather a question of fractional reserve banking versus some alternative supply chain. I would be interested to understand further how you would envision an alternative system actually being constructed and working.

Socrates - Sorry for the lack of clarity - the "we agree" was to CL1, who was suggesting that he and I agreed on some principles, not as to what you and I may or may not have agreed upon to date.

You continue to refer to "debt based currency" but haven't to my mind responded to my basic question which must be answerable for that statement to be accurate - with respect to the CURRENCY, who "owes" what "debt" to whom?

The problem in discussing "lending practices", etc, lies, in my opinion, in the fact that I take a much longer view that you

I'm not suggesting that issues related to the mechanics of the creation of money aren't worthy of further discussion, only that that discussion is a discussion separate and distinct from the question posed by the article, to be debating the merits of a "fiat" currency versus a hard-money/asset backed currency.

OOPS, sorry CL! Anonymity has its disadvantages!

We", collectively, owe money to the FED....for no other reason then we allow it to print our money as debt, rather then..(lol) as true fiat currency.

We owe money to everyone who holds Treasury securities - the Fed only holds them on deposit for commercial banks, who only hold those deposits with the Fed as reserves for their customers deposits, so really, its bank depositors who are the ultimate owners of the Treasury securities held by the Fed.

The currency (not money more broadly) printed at the behest of the Fed is not debt! It doesn't change one bit what we the people owe for the borrowing of the federal government through the Treasury.

Dennis, that's Ok. On the internet -- you can call me anything (within reason:), and I'll still respond. :)

T-Bill is sold for less than its face value at maturity. ... This tax treatment makes T-Bills more attractive to investors in states with higher income ...

Same thing that is done on the markets with our dollar to 'give' it value --- but the "point" is that it is a tax -- a debt instrument. So, those deposits that the banks are holding are representative of debt to the FED, as a "tax treatment."

1. Treasury Prints money (fiat currency) and uses said currency for government business.

2. FED prints money (fiat currency) which has interest attached to it,payable to whoever owns the bond, etc. (Here, I just keep it simple.)

Sorry, but neither of these statements is accurate. The Treasury doesn't print money. What it does do is collect money via tax receipts and supplements this as needed with borrowing, then it spends the money. When it borrows, the Treasury (not the fed) issues bonds, which obligate the federal government to pay interest. None of this has anything to do with the currency.

The Fed orders the printing of currency from the Bureau of Engraving and Printing (more or less the same as the Fed printing it), but the currency they print is neither a bond, nor does it carry interest. This has nothing to do with the federal government's spending or borrowing.

I've read your links, they are largely unsubstantiated by any sourcing, most even failing to identify who they are, and they have numerous factual errors.

How so? One dollar is "printed up"...how does it become a financial instrument?

A one dollar (or other denomination) federal reserve note is, by law, designated as legal tender for all debts public and private. It is not a debt itself, but rather the bearer is entitled to use it in satisfaction of the bearer's obligations. (FYI, I literally smacked my forehead when I read your last - with both hands!)

T-Bill is sold for less than its face value at maturity. ... This tax treatment makes T-Bills more attractive to investors in states with higher income ...

Same thing that is done on the markets with our dollar to 'give' it value --- but the "point" is that it is a tax -- a debt instrument. So, those deposits that the banks are holding are representative of debt to the FED, as a "tax treatment."

Treasury securities are often bought and sold by the markets at prices below their face value AND above their face value. Their value at any given time is a simple matter of a time value calculation taking into account the stream of payments to which the bearer is entitled versus the purchaser's require rate of return (interest rate). Treasury bonds include periodic interest payments as part of their stream of payments, which is why, for example, a $100 - 10 year Treasury bond with a 5% interest rate might be sold for $117 if the market only requires a 3% rate of interest for this particular sort of liability.

A Treasury note, on the other hand, does not include any periodic interest payments in it's stream, only the obligation to pay, for example, $100 in 1 year. This Treasury obligation (which has nothing to do with either currency or the money supply), would be worth $97.08 in today's dollars if the required rate of return was again 3%. Nothing sinister, just math.

I've digressed a lot again, because this has absolutely nothing to do with our currency, which has zero characteristics of either a debt or a tax.

I would like to return to the "dollar bill" question. How does it make its way into the market place? (not counting simple replacement, of course)

I wasn't sidestepping - I didn't understand your original question to be asking for this information. I had actually run into a decent simplified explanation on a link I read previously during our discussion on this issue, but unfortunately couldn't find it again quickly.

The short answer is that the currency is distributed from the various Federal Reserve Banks to the banks with deposits with them at those bank's request in order to satisfy their anticipated customer demand for currency (which fluctuates daily). The Federal Reserve doesn't GIVE the banks this currency, of course, they debit and credit the bank's deposit account with the Fed bank when currency transactions take place.

The supply of currency in circulation then is a function of end user demand.

Dennis, I don't mean to intrude on your point with Socrates (his question to you), so please don't stop with your point to him.

I wanted to comment, again, regarding your position that our currency has "zero characteristics of either debt or a tax."

The United States Treasury pays the Fed interest on the US bills, bonds, and notes the Fed buys with the money it creates out of nothing.

(my personal emphasis on "notes")

Would you agree that any instrument that requires "interest" to be paid constitutes the existence of a 'loan' ?

CL1 - the more the merrier!

The US Treasury pays EVERYONE who holds Treasury bills, Treasury bonds, and TREASURY notes, interest. No one pays anyone interest on FEDERAL RESERVE notes. Two very different things. Yes, there is a loan, and yes, there is interest, but neither of these things were created by the Fed - rather, by the Treasury as a result of spending/taxation policies passed by Congress and implemented by the Executive branch.

The other part "the Fed buys with money it creates out of nothing" is closer to on point, though not quite accurate either. Before the Fed ever existed, we had both US currency and a fractional reserve banking system. Although prior to 1933, US issued paper currency was backed by an obligation to redeem it for a certain quantity of gold - but even then, the quantity of gold that was required to back up the paper currency was only a fraction of the amount of currency actually issued (35% I believe). Upon this foundation the Federal Reserve system was built - the whole monetary system is, and always has been long before the Fed, at a fundamental level, a process of manufacturing something out of nothing.

The Federal Reserve has limitations on the quantity of currency it can issue, based on the amount of Treasury securities it holds. It acquires Treasury securities not by printing money (chicken and egg), but by essentially investing the reserve deposits that private banks place with the Federal Reserve, as required by the enabling statutes. This limits the issuance of currency by the Fed to the required reserves from the private banks, which itself is a function of total deposits, which results from economic activity in the aggregate economy. Under the Federal Reserve system, the supply of currency (the only part of the money supply that the Fed DIRECTLY controls), and money more broadly, which may be influenced by the reserve requirements and other banking policies implemented by the Fed, is a function of demand for money, ie. loans, in the private sector economy.

Right, Dennis, the FED doesn't GIVE the dollar to the banks, it LOANS those dollars to them. IE..debt.

Partly true, and partly not. Some of the currency issued to banks by the Fed the banks are entitled to by simply drawing upon their reserve deposits with the Fed, just as you or I can get cash from our checking account with our bank. Some the Fed loans to banks (federal funds, discount window), which is fine as it creates not debt for the PUBLIC, nor for the US government, but rather for the private banks.

The business of banks is borrowing and lending money. When you or I deposit money with a bank, it creates a liability for the bank (ie. they owe us that money back). It profits by borrowing money from the general public or other sources, including the Fed, and lending it at higher rates than it takes them to get it.

In the context of the seed, the total supply of money under the current fractional reserve system is, again, determined largely by the demand for money, as expressed by "end user" borrowing - the more people and businesses borrow, for whatever reason, the higher the money supply, the less they borrow the lower the money supply. This is in part why price stability is much greater than under a hard-money system where the supply is pegged to the available quantity of an arbitrarily determined commodity - which does not respond directly to the demand for money.

I should note also, with respect to inflation, that over time price inflation is to be expected without any so-called "debasement" of the currency. Any number of the inputs that go into the supply of goods and services is limited - land, oil, copper, farmland, etc - while, with a growing population, demand is always rising. Therefore, prices for each of those imputs for which supply is limited SHOULD rise over time.

Dennis, I knew there was a difference between T-notes and 'frs' notes; I thought the statement I highlighted was referencing the latter. Sorry. The point I was wanting to make was the same as Soc's point in 5.58.... that dollars (frs notes) represent debt. You like to keep pointing to the basis being the reserve deposits held by the banks. Those deposits are on 'loan' from the FED (right?), and therefore, the money created by the commercial banks put out to businesses for loan or investments, are another loan from a loaned source. For us, it always traces back to having taken a loan from the FED.

your entire explanation agrees that each dollar represents debt. It is true that part of the problem is the fractional banking system.

No, the dollars do not "represent" debt, just because the process by which the non-currency portion of the money was manufactured (in the case of any fractional reserve banking system) INVOLVES debt. The portion of the money supply consisting of Federal Reserve Notes specifically does NOT involve debt with respect to its creation - rather it requires the fed to hold an ASSET. These notes do not create, nor "represent" any obligation to pay principal OR interest from anyone to anyone.

Those deposits are on 'loan' from the FED (right?), and therefore, the money created by the commercial banks put out to businesses for loan or investments, are another loan from a loaned source. For us, it always traces back to having taken a loan from the FED.

Wrong. The deposits of the banks with the Fed are a fraction of the deposits they receive from their customers. Just as with your checking account with your bank (which is an ASSET of yours, not a debt), the bank's deposits with the fed are not borrowed from the Fed.

If you want to broaden the scope to the basic principles of finance, rather than talking about what the money itself actually is and does, then you can tangentially link everything a bank does to debt of some sort or another. So what? That certainly doesn't mean that the dollar in my pocket "represents" either a debt to me or from me or anyone else for anything, because it does not.

I imagine most folks nonetheless think that the Fed has been just opening up the printing presses to fund the US government's "exploding" debt

Sorry, can't keep up with you but what I would like to know is where the FED got the money to bail out foreign bank in the tune of trillions?

To heck with Denland dollars, I want tally sticks, or maybe some colonal scrip, heck I'd even take a greenback at this point but I'll have NO dung for dollars.

The Federal Reserve is as crooked as the old time Blacksmiths that held gold for those that had it and issued notes on that gold.

Dennis..

Wrong. The deposits of the banks with the Fed are a fraction of the deposits they receive from their customers

I was talking about the commercial banks... are you?

CL1, let me clarify - the Fed receives deposits from the commercial banks, which are a fraction of the deposits received by the commercial banks from their customers, individuals and businesses. So I disagreed when you said:

Those deposits are on 'loan' from the FED (right?)

because it's actually quite the contrary - the Fed, in some sense, is "borrowing" reserve deposits from the commercial banks, which are themselves, in some sense, "borrowing" it from their customers, not the other way around.

It becomes more complicated when either the Fed or the banks make loans, because in neither case are they loaning their own money, they are ultimately loaning their depositors' money instead, acting primarily as an intermediary. When the Fed loans money, what it is ultimately doing is loaning funds accumulated from numerous "end users" (individuals and businesses), that would otherwise be held as unproductive stagnant capital.

Dennis...

Hmmm, I thought funds were deposited by the FED into the banks to 'borrow' while they use them to create money using the 'frs.' ..and that the banks earned at atleast 6% interest on it before returning it to the FED. You are saying that is not correct?

Getting back to the notion of money representing debt, could we look at this example from an article I seeded for a minute:

Here is the trick. Take, for example, a year like this year in which the government runs a $400 billion dollar deficit. The Treasury Department has to sell $400 billion in US Treasury bills, bonds and notes (government IOUs) to buyers at a rate of interest sufficient to attract their money (and beat the interest competition of other banks’ CDs and other governments’ bills, bonds and notes). To avoid a credit squeeze, the Federal Reserve System Open Market Committee in Washington directs the NY Federal Reserve Bank to purchase roughly 10% of that total (or $40 billion in our example) in existing US bills, bonds, and notes from the current holders. To pay for them it creates the $40 billion out of nothing, merely with keystrokes on a computer. Through more keystrokes, this new $40 billion is deposited into the banks of the various bill, bond, and note sellers, thereby increasing the reserves of those banks by $40 billion

It all stems from a government "IOU"... everything is based on future speculation of that original debt. Just because it meets or exceeds its speculation, doesn't negate the fact that it is a non-existent entity, represented by a piece of paper and by a number on a computer, based on a speculative IOU.

What am I missing in your mind?

The First use....Newly created...Where did it come from?

Not sure I get where you are trying to go with this line of inquiry, both in the post above, and below. It sounds to me like the fundamental question about the "Big Bang" in some respects - who/what was the unmoved mover?

"Dollars" were first created when the US became the US under the Constutition. There were, through various historical iterations, dollars created in various forms by various means, so that when the current Federal Reserve system was created, and thereafter the current incarnation of the currency, Federal Reserve Notes, all sorts of "dollars" represented by currency already existed.

Because fractional reserve banking, in one form or another, also predated both the Federal Reserve and the current currency, all sorts of "dollars" represented by banking deposits also existed prior to both. Ditto with US Treasury securities, the acquisition of which by the Fed banks is a precondition to the issuance of new, additional Federal Reserve Notes (though those notes do not have any claim on the Treasury securities held by the Fed banks).

So additions to the current stock of Federal Reserve Notes are issued based upon a foundation of deposits and Treasury securities that existed before their creation - not the other way around, if that gets where you're trying to go.

Perhaps, in part, this addresses CL1's question - but to elaborate:

Hmmm, I thought funds were deposited by the FED into the banks to 'borrow' while they use them to create money using the 'frs.' ..and that the banks earned at atleast 6% interest on it before returning it to the FED. You are saying that is not correct?

Yes, I am saying that is incorrect, and in fact very nearly the exact reverse of the process. Remember, the banks and numerous "dollars", in both the form of currency and bank deposits, existed well before the Fed did. When the Fed was established, the Fed was funded by the banks, which were required by the statute creating the Fed, to place a portion of the deposits that each bank held with the Fed as required statutory reserves. It is upon this foundation that the Fed builds when it conducts all of its various functions.

It is true that part of the operations of the Fed is to loan money to banks at various times, mostly just overnight, but the funds they loan to these banks are, in fact, the funds of the Fed bank's collection of bank depositors. In this respect, the Fed operates just like any other bank - taking in deposits, and loaning out portions of those deposits.

This is also what it does when the Fed purchases Treasury securities. It does not manufacture the money "out of nothing", rather, it utilizes deposits placed with it by member banks.

That some portion of the deposits placed with the Fed by member banks are funds loaned to that bank by the Fed (from its deposits generally), DOES give the Fed greater latitude than banks generally to expand the money supply to, for example, purchase Treasury securities, than the underlying member banks can. So the quote you provide does have some elements of truth to it, but it does oversimplify and overgeneralize quite a bit.

Heck, out of necessity, my comments do as well, but I am trying to present as complete a picture as succinctly possible.

Ditto with US Treasury securities, the acquisition of which by the Fed banks is a precondition to the issuance of new, additional Federal Reserve Notes

Your discussion with Socrates points to 'my' point in your highlight above -- yes, they (banks) must acquire those securities as a precondition to the issuance of new... and that collateral is a 'debt instrument' -- they are backing up the issuance of new dollars on the value of an "IOU." That makes the new dollars 'debt papers'.

Yes, I am saying that is incorrect,

Are you saying the highlight in my 5.68... is lying? Money is deposited into those banks that was 'created out of nothing' more than a computer.

Your discussion with Socrates points to 'my' point in your highlight above -- yes, they (banks) must acquire those securities as a precondition to the issuance of new... and that collateral is a 'debt instrument' -- they are backing up the issuance of new dollars on the value of an "IOU." That makes the new dollars 'debt papers'.

Nope. Here's why: The Treasury securities acquired by the Fed are NOT "collateral" for the Federal Reserve Notes - the Federal Reserve Notes have no direct tie to the Treasury securities that the Fed holds, nor are they "backing up" the issuance of the new dollars. The Fed merely has to, as a precondition, to issuance of FRN have these assets. This indirect, tangential relationship is certainly far from that appropriate to labelling FRN as "debt papers".

Hmmm, I thought funds were deposited by the FED into the banks to 'borrow' while they use them to create money using the 'frs.' ..and that the banks earned at atleast 6% interest on it before returning it to the FED

It is this part of your statement that I was saying was incorrect, before I proceeded to say why. I did actually read the entire source document for the longer third party quote you provided before commenting on it - my comment on the quote specifically was:

So the quote you provide does have some elements of truth to it, but it does oversimplify and overgeneralize quite a bit.

The third party source article did have a few glaring omissions in other areas - on seigniorage, for example, the implication was that the Fed kept all the profits, but in reality, all the profits, over the statutory return to the member banks (which remember are the actual source of the Fed's funding - not magic money manufacture), go back to the federal government - to the tune of $80 billion/year. Think of the member banks as "preferred shareholders", and the federal government as, effectively, the owner of all the "common shares", if comparison to a normal corporate structure is helpful (the Fed ain't "normal"!)

Likewise, the section you quoted isn't entirely wrong, but it does falsely suggest that the Fed has far greater control over the various processes than it does, and that it becomes the sole funding source for the sale of Treasury securities (both directly and indirectly), which simply isn't true. As I've noted earlier on this seed, if the implication WERE true, then the amount of Treasury securities held by the Fed, as measured relative to GDP, would have risen substantially over the years since the last balanced budget in fiscal 2001. In fact, however, the percentage is almost exactly the same (just over 5% of GDP, when federal debt held by the public was 36%, AND when it was 62%-ish - not rechecking figures right now).

I've seen far worse articles, the one this came from is pretty accurate factually, but does leave out some important details, and does selectively utilize facts to draw unwarranted conclusions/implications.

Dennis..

but in reality, all the profits, over the statutory return to the member banks (which remember are the actual source of the Fed's funding - not magic money manufacture), go back to the federal government - to the tune of $80 billion/year.

the section you quoted isn't entirely wrong, but it does falsely suggest that the Fed has far greater control over the various processes than it does, and that it becomes the sole funding source for the sale of Treasury securities (both directly and indirectly), which simply isn't true.

I was wondering how you know these things to be 'fact'. Do you have any source info that states the same? I'm not saying I don't believe you; it's just that it's the opposite from what I've been reading. Do you or have you worked for the govenment and/or FED in these areas to know that what you are saying is a fact?

Sure...

http://www.whitehouse.gov/omb/budget/Historicals

Table 2.5, "Composition of other receipts" column entitled "Federal Reserve deposits" which the footnote describes as "Deposits of earnings by the Federal Reserve System" - over $75b in 2010, almost $80b in 2011.

(Took me a bit to find you a link - I'm such a budget geek that I actually downloaded all the historical tables so I'd have 'em handy at all times!).

FYI, different source (and different year), but for comparative purposes I'll note that in 2009, the 6% dividend paid to member banks was less than $1.5b. I've been reading a fair bit of late, and don't have the specific link handy for that one - I'll add if I run across again.

I'll wait, and hope for a reply...When the FED prints, issues, causes to appear....whatever terminology you wish to use....from where does that dollar come?

With respect to additional (as opposed to replacement) currency, the Fed, in effect, does just hire it out to be printed, based soley on their authority to do so ("out of nothing" if you wish). That latitude, though is constrained by their holdings of Treasury securities, so they can't simply print up as much money as the federal government wants to spend at any time, the flexibility is limited, and anyway, the currency itself is a relatively small proportion of the total money supply.

With respect to the remainder of the money supply initiated at the Fed, it is really pretty much the same process as private bank lending which we've previously discussed - they have deposits, they make loans to willing borrowers, some of the funds loaned to those borrowers wind up back at the Fed as deposits, increasing their ability to make loans.

Dennis..

Thank you for providing that link. I didn't mean to have you research; with so much knowledge, I thought you already had it readily available. That appears to be a useful page for budget info. Unfortuntely, my browser won't let me in when I click on Table 2.5 (or any of the Tables). I get a bar asking if I want to open it, and when I click "yes" - nothing happens. I will take your word for the info to be correct.

That is good to read in your second paragraph that the central bank does indeed print up funds (hires it), and as you say, they are "constrained" by their T-security holdings. There must be some ratio involved they must follow before printing dollars?

Also, earlier, in your statement that holding those securities is a precondition to printing notes, and that it is not a 'collateral' condition --- it sounds as if the reason for the precondition is essential to what we're discussing. Is it simply our government saying, We'll let you print up money for us -- as long as you buy something from us. .. Or, is the thinking that they can only purchase 'so many' securities, leaving the rest for public purchase, therefore, they are limited to only printing up funds that meet that a precondition ratio of holdings vs. printing?

The tables are in excel format, so if you don't have that installed, that could be the problem...

My understanding is that there is a 1:1 relationship between the Fed's holdings of Treasury securities and their ability to issue currency (I assume that means face value, rather than market value, but that's just an assumption).

The constraint is really so that the Fed isn't able to simply print as many dollars (in currency) as it may like, but that it's maximum issuance capacity is limited in some way that relates (though imperfectly) to real economic activity.

So they have to have the funds from deposits to purchase Treasury securities before they can expand the supply of currency. Largely this means that there must be an increase in real ecomony borrowing from member banks by real world customers so that the bank's reserve requirements increase.

Fed policies do, however, also (in addition to "real" economic activity) influence their ability to add to Treasury security holdings by increasing their "fed funds" and other lending (where they essentially lend the reserves they hold acquired from one bank to another bank, which keeps all or part of the borrowed funds in their Fed account). It is this area where your article quote is theoretically possible, but the Fed doesn't have the sort of control implied in terms of both getting banks to borrow, or in terms of what they do with any funds that they do borrow.

Yeah I assume it's related to debt/gdp ratio, but unable to establish concrete statements. It's slippery slope determining the actual formula used and its relationship to law or policy or economic think tanks.

So they have to have the funds from deposits to purchase Treasury securities before they can expand the supply of currency. Largely this means that there must be an increase in real ecomony borrowing from member banks by real world customers so that the bank's reserve requirements increase.

I see that, now as a result of your discussion. Thank you.

Fed policies do, however, also (in addition to "real" economic activity) influence their ability to add to Treasury security holdings by increasing their "fed funds" and other lending (where they essentially lend the reserves they hold acquired from one bank to another bank, which keeps all or part of the borrowed funds in their Fed account). It is this area where your article quote is theoretically possible, but the Fed doesn't have the sort of control implied in terms of both getting banks to borrow, or in terms of what they do with any funds that they do borrow.

Yes. And it is in that area of creating money on a computer, and then depositing a 'number' in a bank account... that is the basis of my discussion. Because those 'numbers' get loaned and then deposited into the same bank or another bank, as you and my article also confirmed, that keeps the process going. No one ever keeps the billions of notes under the mattress; the notes/numbers always represent a deposit somewhere. Are you still going to say that those 'papers' don't represent debt? That "increased" supply of money is a result of that loan/deposit mill.

Are you still going to say that those 'papers' don't represent debt? That "increased" supply of money is a result of that loan/deposit mill.

Yep :)

Whether paper (or other currency) or in the form of electronic deposits, I continue to distinguish between the end result "money", and the debt which is related to the creation (tangentially with respect to currency, more directly with respect to banking deposits, etc.). While related to the creation, the debt is not integral to the dollars that result, again any more than a cake equals or "represents" an oven, simply because an oven was used in its creation.

The total supply of money may increase through processes that includes debt, but that does not make the money INTO debt, nor representative of debt - the result is distinguishable from the process.

While related to the creation, the debt is not integral to the dollars that result, again any more than a cake equals or "represents" an oven, simply because an oven was used in its creation.

Try cake relates to flour instead. The oven analogy doesn't work.

If I trade cake for gold, you have cake, I have gold. They are what they are regardless of what they might become in the event of exchange. The dollar is only useful as itself, and it has been stated that it is created based on other resources like GDP or debt. The point remains that the dollar is only a ghost or facsimile of a known resource, and that is the fiat system.

A gold standard requires that I own the cake or the gold and that instead of actually trading the cake, I can give you a receipt that you can keep on the shelf or trade again for something else as needed. You might choose to store it as such because you can't eat the cake before it grows mold, but next week, you want to exchange the receipt for my fresh cake without giving me any more gold (because you bought two cakes last week). The difference is I can't just print out fake receipts, I actually have to keep producing cakes to ensure that when you redeem the receipt I can honor it with fresh cake. Our government is not producing enough fresh cake to keep up with all the receipts, so the receipt, the dollar, has become debt instead of resource. If we all try to cash in at once, someone is going to be holding an empty bag of goods and will find no dollars and no cake in the bag.

I agree.

Dennis, baking the cake in the oven would relate to the 'frs'... it expanded the cake batter. :)

Try cake relates to flour instead. The oven analogy doesn't work.

We fundamentally disagree - in your alternative analogy, you assume that debt is part and parcel of the result, but that simply isn't so. In the fractional reserve banking, debt is NOT WITHIN the money that results, but merely part of the mechanism of its creation. The money itself does not include within it any element of debt. Perhaps a closer analogy would be the relationship of cake to the heat of the oven rather than the oven itself, but your analogy extends the relationship further than warranted by the end result.

If I trade cake for gold, you have cake, I have gold. They are what they are regardless of what they might become in the event of exchange. The dollar is only useful as itself

Gold, like dollars, are only useful as money, and all money is conceptually an intangible, whether in a tangible or intangible format. So the value in gold has nothing to do with its tangible properties - it is entirely in its perceived value as a store of value and medium of exchange - no more, no less.

Our government is not producing enough fresh cake to keep up with all the receipts, so the receipt, the dollar, has become debt instead of resource. If we all try to cash in at once, someone is going to be holding an empty bag of goods and will find no dollars and no cake in the bag.

You are conflating two disparate elements of our current monetary system - the "fiat" currency, and the fractional reserve banking system. The "government" only produces the currency (and that indirectly) - the currency does not carry with it any form of debt whatsoever. The remainder of the money supply is created via the fractional reserve banking system, which does utilize debt in the creation process, but again, the resulting dollars do not "represent", much less equate to, debt. These dollars, in whatever form, are, in fact a "resource", because if I hold dollars, in whatever form, I can use them either as a medium of exchange (consumption) or as a store of value (keeping them under my mattress, or investing them for profit)

The currency and the fractional reserve banking system are independent variables in the monetary system, either can exist without the other, and have throughout America's history.

But to carry your criticisms, and the presumed alternatives which eliminate the qualities you dislike, to their logical conclusions, requiring both a hard-money currency, and the elimination of fractional reserve banking, you wind up with a monetary system that more closely resembles a barter system (I must have something tangible under my exclusive control in order to exchange it for something else tangible).

This is incompatible with a modern economy, which under both hard-money currency and fiat has relied upon some form of fractional reserve banking system since the Renaissance. Your prescription is really a proposal to return to the Middle Ages.

So the value in gold has nothing to do with its tangible properties - it is entirely in its perceived value as a store of value and medium of exchange - no more, no less.

That is the point. Fiat has no value. Gold is an actual ingredient like the flour. The appearance that the elements are disparate is illusory because they are both means for control and whoever has those means will maintain an advantage over those who do not.

The first tier, the FRS, creates money that has no value other than that second tier banks need it as that starter. FRB rules limit second tier banks from reproducing what the first tier controls. FRB sets a limit which is controlled by first tier. And the snowball grows as it rolls downhill. It remains debt until it returns to first tier and is destroyed or renewed.

'Modern economy' is not an economy but rather a system of monetary control. An economy resembles the barter system you compare to Middle Ages. That system places the control of the economy in the market and in the hands of those who produce goods rather than in appointed policy managers and private bankers.

The risks are abundant in the one system that policy makers will abuse their authority through force to further whatever goals might be in their best interest, and in the other system that market forces will do the same.

Under the current 'modern' system of centralized banking, those at the bottom tier have no protection from policy makers in that the fiat currency is subject to devaluation, i.e. it has a shelf life and like the cake will go stale. The shelf-life is directly controlled through policy set by the top tier. In other words, even though you may believe you own your money, the top tier is exercising control and is really only allowing you to use it. It's like having a store coupon with an expiration date.

In the latter system of barter, those at the bottom tier have some unchanging physical asset in which to store wealth that has no shelf-life -- gold. In any market, change indicates possible profit or loss, however loss is avoided by refusing to transact. The problem with fiat currency remains in the shelf-life of the currency, that simply by not transacting, the currency loses value by default. The top tier banks gain value by default, therefore the system is rigged against the ownership of personal wealth by those participating below the top tier of the banking system. I would call it racketeering.

Fiat has no value. Gold is an actual ingredient like the flour

Fiat money and gold have exactly the same utility in any economy - medium of exchange/store of value. Whether in tangible form or not, their function is identical, that you may have a bias for the tangible form (of an intangible - which ALL money is) means you may value it more highly, but that is not a function of anything other than your bias - it is no more useful.

The first tier, the FRS, creates money that has no value other than that second tier banks need it as that starter. FRB rules limit second tier banks from reproducing what the first tier controls. FRB sets a limit which is controlled by first tier. And the snowball grows as it rolls downhill. It remains debt until it returns to first tier and is destroyed or renewed.

As previously discussed, that is almost exactly the opposite of how the Federal Reserve system works - the dollar as the official form of money for the US, and the fractional reserve banking system came before the Federal Reserve, and the Federal Reserve was built upon those foundations, not the other way around as you mistakenly claim.

As to the rest, I find conspiracy theories terribly tiresome. If you have a constructive, VIABLE alternative to our present monetary system, feel free to elaborate.

You find it distasteful? We are discussing the alternative in the form of gold standard. Your discussion appears focused on historical emergence rather than function. The central bank is the dream of bankers who use usury to make themselves wealthy at the expense of producers. As you have stated, historically the US resisted the enactment of a central bank and today as we see the failure of the central banking system, we see more resistance. The struggle is still in its early stages in the United States although in our lifetime central banking has been the sole system of banking in the US. The so-called 'modern system' isn't really so modern. There are modern attributes, but the central banking system is not that modern and is actually counter productive as we are seeing today. It promotes corruption and removes incentive to invest in solid risk while providing incentive towards bad risk.

You find it distasteful?We are discussing the alternative in the form of gold standard

Not distasteful, tiresome - I've been trying to seemingly little avail to separate out the currency from the overall money supply, but have been consistently felt compelled to correct the rampant misunderstanding of our current monetary system, and allowed myself to be dragged into discussions of the larger money supply under the Federal Reserve system, which has nothing to do with whether the currency is asset-backed or not, and which is simply one flavor of a central bank within a fractional reserve banking system, which is again totally independent of the currency question. So debunking further massively overwrought conclusions with some small kernal of underlying truth, but stretched beyond all connection with how that broader system works is, indeed, tiresome.

With respect to the issue raised by the column, I did begin #5 with a post discussing why a fiat money system, with a system of money supply modulation that takes into consideration supply and demand within the aggregate economy (not the strawman "run the printing presses till they bust" cannard), was preferable to an asset-backed currency where the arbitrarily modulated supply of an arbitrarily selected tangible item has an outsized influence in the overall economy despite having itself no particular correlation with that overall economy.

I would, as I suggested below to our esteemed Author, Socrates1, that perhaps it would be helpful for you to describe what you would see as a more effective monetary system, and why you think that would be so. I would again note, that converting the currency back to some asset-backed model would result in very little change in the FRS or fractional reserve banking systems which seem to be significant areas of concern to you in your posts.

I understand your attempt to separate the currency from money supply and the issuance of the currency from the central bank issue. I am tired too for different reasons and thus not at my best.

The separation of currency from money supply is related to more defined money supplies. I was taught M1, M2, etc. The modern definitions are similar but not the same. In our discussion though, the difference seems irrelevant.

The underlying issue is that what you deem to be a strawman argument is the truth. The nature of it cannot be changed by simple denial. The selection is not arbitrary. Gold has no shelf life and is one of the rare commodities that exist as such. It is therefore an effective storage of wealth that remains essentially what it is worth regardless of the value of fluctuating currencies. This remains the central point of my assertion that a gold standard is essential to an economy.

With a gold standard, I would feel comfortable with using a bank to store wealth and would also feel as comfortable not using such a bank as I can store my wealth in a real good, that is gold. If banks risk their money using fractional reserve banking, I may choose not to participate in that risk taking, however under the current system, I have little or realistically no choice.

As a risk taker, I assume responsibility for my choices, however under the current system, the risk takers minimize their responsibility by spreading their risks (but not the wealth) to those of us who have little or no choice. One fine example is the American taxpayer.

The replacement system would not be so much of a system as we know it. It would draw us back to holding real wealth and risking it in markets that provide opportunities for growth as well as risk. The profit as well as the risk would remain on the shoulders of those taking those risks. For example if I want to purchase a real good like land, I might choose to hold my savings in pure gold in my personal safe rather than to risk losing it by investing it in a stock or in a bank.

My example is similar to the way my grandparents conducted financial affairs less than 100 years ago. They were able in this manner to accumulate some considerable amount of wealth. They did not borrow money to make purchases and because of the market crashes in their lifetime, they were very adamant that a 'pay as you go' system was essential to financial success. Bank loans were as rare then as they are a matter of necessity today. The climate has changed and moved in this direction of central control of money, and the favor leans towards those who already own wealth rather than those who wish to accumulate it.

No conclusion here, just food for thought to develop this discussion.

Gold has no shelf life and is one of the rare commodities that exist as such. It is therefore an effective storage of wealth that remains essentially what it is worth regardless of the value of fluctuating currencies.

I disagree with the conclusions you draw from the beginning, correct, statement that gold has no shelf life. First, numerous other tangible items have a more or less unlimited shelf life (including, by the way, paper currency). Just because gold does not physically decay/deteriorate over time does NOT mean that it "remains essentially what it is worth regardless of the value of fluctuating currencies".

The value of gold can and does fluctuate based on the supply (which has nothing whatsoever to do with the economy generally, but rather is a function of the ability of people to find and extract it from the ground through mining), and on demand. Over time, whether the relative value of gold rises, declines, or remains stable would depend on whether the supply derived through mining activities grew at a rate slower, faster, or similar to the growth of the overall economy (being itself a function of both growth in base economic activity and in population).

Stability of the value of gold never has been the case, never will be. Pegging our monetary system and the value of all goods and services to the supply of a randomly selected commodity, the supply of which varies by factors totally unrelated to the aggregate economy, will tend to result in far greater short run volatility in prices than does a form of money the supply of which is tied to aggregate economic activity.

I have already discussed the greater dangers of deflation, versus inflation, so need not repeat that here.

however under the current system, I have little or realistically no choice

I disagree here also, I know many people who, for whatever reason, live pretty much free from banks (cash basis). Though I have previously noted that in a hard money currency one generally does have greater incentive to do absolutely nothing with their money (neither spending nor investing it), which has the aggregate effect of depressing economic activity overall.

My example is similar to the way my grandparents conducted financial affairs less than 100 years ago. They were able in this manner to accumulate some considerable amount of wealth. They did not borrow money to make purchases and because of the market crashes in their lifetime, they were very adamant that a 'pay as you go' system was essential to financial success

But we don't live 100 years ago - and the standard of living achievable by the population generally was dramatically lower than it is today.

Also, no one is obliged under the current monetary system to borrow money by pledging their future earnings in order to consume or invest today, they do so as a free market principle whereby they believe they benefit.

I personally am in the enviable position of being able, should I choose, to live debt free and to still have a substantial nest-egg. I carry debt, because in my particular circumstance I can borrow at interest rates which are lower than the long run rates of return that I can earn by investing my financial assets elsewhere (that, and the corresponding tax subsidies). I understand that there are risks in this approach, based both on the predictibility of my future earnings, and in the future earnings of my investments, but the net expected positive return is sufficient for me.

On the other hand, on average, the vast majority of us would find a system whereby credit was not available in the fashion it is today resulting in a standard of living far, far lower than we enjoy today - many fewer people would be able to afford to own their own homes - car sales would plummet, etc.

That the ability to use borrowing to enhance one's standard of living has risk (as all action OR inaction does), is a valuable lesson taught to many by the housing collapse. The unfortunate side effects of that lesson, however, is a significant contraction in aggregate demand that is the root cause of our continuing economic doldrums. Hard money/limited fractional reserve banking are recipes for exaccerbating our current problems, not solving them.

Just because gold does not physically decay/deteriorate over time does NOT mean that it "remains essentially what it is worth regardless of the value of fluctuating currencies".

I don't know why you can't see the contradiction in your statement. Gold does not change. You can put a block of gold on the table, and unless it is disturbed by force, it will be the same exact block of gold in a millennium as it is today. It's value does not change, the value we place on it, e.g. dollars/ounce, changes. Currency, by default, has a diminishing value because of inflation, hence a limited shelf life. Even putting it in the bank will not earn enough interest for it to stay ahead of inflation.

Deflation is not damaging to anyone unless that person has made a mistaken investment. I encourage the price of everything to drop. Those who believe inflation is beneficial have been duped into the system that supports those with wealth and injures those who are attempting to accumulate wealth. There's the saying, 'one step forward, two steps back'. A wage earner doesn't get to spend what he earns before he pays off the government and the banks for taxes and inflation.

But we don't live 100 years ago - and the standard of living achievable by the population generally was dramatically lower than it is today.

This statement is relative to what you believe to be a higher or lower standard. If computers or cell phones or tv are the measure, then one may agree. If health concerns like vaccinations and cures for common diseases that were once fatal, then one may agree. Those standards are higher. Is there perhaps an alternate perspective to this statement? Are we really better off than we were 100 years ago? Those are rhetorical questions of course since you must be the one to decide for yourself and yours. I think we are not better off than we were 100 years ago.

in a hard money currency one generally does have greater incentive to do absolutely nothing with their money (neither spending nor investing it), which has the aggregate effect of depressing economic activity overall.

In a hard money currency, one will have greater incentive to save for a goal. It does not depress the economy, it is the basis for capitalism, it is the economy and it is the representation of real wealth. The current system is depressed because it represents debt instead of wealth. Some refer to it as 'OPM', you know, Other Peoples' Money. Borrow to invest instead of risking your own money. You must be aware of what happened in the derivatives market and what caused those crashes of the stock market back in the 30s, moreover take a look at the Euro zone crisis and the recent bankruptcy of MF Global. This system causes a fake scenario of economic boom which ultimately results in mal-investment and leads to a bust. It is only a facsimile of a true economy where supply and demand affect prices.

On the other hand, on average, the vast majority of us would find a system whereby credit was not available in the fashion it is today resulting in a standard of living far, far lower than we enjoy today - many fewer people would be able to afford to own their own homes - car sales would plummet, etc.

Contrary to popular belief, credit does not help us, rather it hurts us by creating an inflationary environment. Each dollar spent costs more to earn than in a pay as you go system. Also in order for producers to sell goods, they must produce at optimal price, whereas in the current market with too many dollars chasing too few goods, they may charge increasing amounts for same products through the use of bank loans. In another case, look at the cost of health care. The fear is that if government does not get involved, it will become unaffordable, but it is already unaffordable because government has gotten involved. Additionally if the new health care system is implemented people will be forced to pay for services (pledge of future earnings) they don't receive.

no one is obliged under the current monetary system to borrow money by pledging their future earnings in order to consume or invest today, they do so as a free market principle whereby they believe they benefit.

This statement requires dependency on conditions. The price of food perhaps is within everyone's reach without a debt requirement, perhaps clothing and maybe even a dwelling. The rest requires a commitment to future earnings. Even rental agreements require the same commitment. To be realistic, those who cannot maintain a bank account and a credit rating will live below the poverty line in this country. Many property owners check credit ratings before they agree to a lease.

I personally am in the enviable position of being able, should I choose, to live debt free and to still have a substantial nest-egg. I carry debt, because in my particular circumstance I can borrow at interest rates which are lower than the long run rates of return that I can earn by investing my financial assets elsewhere (that, and the corresponding tax subsidies). I understand that there are risks in this approach, based both on the predictibility of my future earnings, and in the future earnings of my investments, but the net expected positive return is sufficient for me.

And this passage explains why you are a fan of such a system. We have different perspective. As long as you can make the margin call, you're in business. I don't worry about margins, but I do worry that the government can't pay its debt and expects to be able to hand the bill to me and others like me.

Gold does not change. You can put a block of gold on the table, and unless it is disturbed by force, it will be the same exact block of gold in a millennium as it is today. It's value does not change, the value we place on it, e.g. dollars/ounce, changes.

At the last, you concede the key point (that the value of gold DOES change) - the value that "we place" on gold has nothing to do with its intrinsic characteristics, and everything to do with its socially established usage as a store of value/medium of exchange. The intrinsic and the monetary values are two separate and distinct things, and failing to differentiate, you fail to comprehend fully my point.

Currency, by default, has a diminishing value because of inflation, hence a limited shelf life. Even putting it in the bank will not earn enough interest for it to stay ahead of inflation.

There is not any means or mechanism of "default" by which the value of currency declines. Nor, despite recent trends, is it necessarily the case that putting it in the bank won't earn enough interest to keep ahead of any inflation that may exist.

Deflation is not damaging to anyone unless that person has made a mistaken investment. I encourage the price of everything to drop. Those who believe inflation is beneficial have been duped into the system that supports those with wealth and injures those who are attempting to accumulate wealth. There's the saying, 'one step forward, two steps back'.

Deflation is damaging to anyone who carries debt, and benefits anyone who owns debt, the inverse being the case with inflation. That the wealthy are of necessity the owners of debt, and the less so the carriers of debt (each in the aggregate), deflation of necessity benefits the wealthy at the expense of those without wealth. It is far easier for someone without wealth to accumulate it when inflation reduces over time the effective cost of their debt - and it is that much more difficult for those who carry debt to get out of it with deflation.

In a hard money currency, one will have greater incentive to save for a goal. It does not depress the economy

When one saves money, rather than spends or invests it, it most certainly does depress the economy. Corporations presently sitting on roughly $2trillion in cash is certainly a depressive influence on the economy. Idle resources, whether land, labor or capital, must result in a lesser aggregate economy.

Each dollar spent costs more to earn than in a pay as you go system.

Only in a period of DEFLATION.

Also in order for producers to sell goods, they must produce at optimal price, whereas in the current market with too many dollars chasing too few goods, they may charge increasing amounts for same products through the use of bank loans

No, no, no. Producers must merely be able to generate a profit from the production and sale of goods. In the current market, we have precisely the OPPOSITE of what you describe - we have too FEW dollars (decreased demand related to wealth destruction primarily due to DEFLATION in housing market) chasing TOO many goods, hence the reason corporations are sitting on that $2trillion cash, and not investing it in enhanced production.

And this passage explains why you are a fan of such a system

I got into this position, from a start of a low to very low income single parent household, graduating college with substantial student loans, BECAUSE of prudent use of debt. First, for the purpose of acquiring an education that I would otherwise not have been able to acquire. Next, to purchase a new, and much more reliable car, reducing my expenses overall (better mileage, no repair expense, no wasted time with breakdowns/repair shop). Several years later, I borrowed almost the entire purchase price of a modest home - this purchase allowed me to lock in my housing expenses for the next 12 years, and permitted me to devote a greater and greater share of my (increasing) income to saving and investing for my future.

I shudder to think how much more difficult it would have been for me to advance if I had to save up in full, in advance, for these, and other prudent purchases. Debt has its downsides, of course, but a debt free world is a recipe for stagnation and massive poverty.

At the last, you concede the key point (that the value of gold DOES change)

You are misplacing the words. Our placement of value does not affect the gold. You mistakenly assume that I do not understand. To create value, you assert that some standard be applied as in the case of your version of currency. It is an illusion, but when enough people agree to pretend, a social structure based on the pretense is formalized. These social structures manifest in various forms including religion, nationalism and racism among others, and of course our monetary control system included. None of these illusions affect the form of the element. Gold does not change regardless of any assigned value. In light of that statement, we can see that a commodity such as gold, regardless of what value we may pretend to ascribe, does not change. Gold is the most resilient of these commodities as it is grossly unaffected by externalities. Thus with gold, no matter what arbitrary or contrived value may be placed on it by central banks or governments, I retain the value I personally place on it. If I don't like it, I can trade it, or simply not purchase it initially.

Deflation is damaging to anyone who carries debt, and benefits anyone who owns debt, the inverse being the case with inflation.

It does neither. Deflation lowers the supply of money thereby increasing the value of every currency unit in circulation. The rest is relative to the nature of the investment and the opinions of those who place value in the investment created by the loan.

When one saves money, rather than spends or invests it, it most certainly does depress the economy.

Perhaps the economy will be depressed, but not as a result of the savings. My use of the economy doesn't require that I should stimulate it. I seek to benefit from the economy, whereas you suggest it should be in my interest to stimulate it. I am not the caretaker of the economy, I use the economy to 'economize' my labor so that working hard is also working smart. The economy may be depressed or stimulated externally to my own position which may be fat or slim. I would analyze these factors to make decisions to further my goals.

Corporations may 'sit on trillions', but it is not the obligation of a corporation to spend its money to benefit the economy. Idle resources are a storage of wealth. As wealth is stored it has no effect on the economy. The points you use are supportive of a system of monetary control rather than a true economy. In your scenario, you suggest that mal-investment is preferable to no investment at all. It is an illusion.

Only in a period of DEFLATION.

I say again, each dollar costs more to earn when one borrows money rather than saving money and then purchasing the item. Deflation has no impact on this scenario other than its effect on the value of the currency when the transaction occurs. The cost is the interest one must pay when borrowing money.

Producers must merely be able to generate a profit from the production and sale of goods

Particularly of note is the ability to sell the good. In an abundant supply, the sale price becomes an important factor, but don't forget that the buyer must have the ability to produce the money. If a house is available for 1000, and the buyer only has 500, the seller may have to reduce the sale price in order to sell the good. It is optimal pricing when both conditions are met, that is to repeat your phrase above: generate a profit and sell the good. Of course the profit is totally dependent on the sale, but the price is not optimal unless the profit motive is satisfied.

From the perspective that more money is available through lending, that pricing attribute becomes less important than the buyer's ability to borrow more money, which is the basis for the real estate bubble which occurred and has now burst. People borrowed money they could not afford to repay and without consideration to the fact that the price was simply too high. We have created a condition for mal-invesment through the abundance of lending. The money to borrow for those expensive homes is no longer available, therefore the price of those homes must drop, and the profit incentive may never be satisfied. One might call it deflation, however since in your scenario the money is available in corporate coffers, no deflation has occurred, rather an optimization of price is bringing the value of the housing down to realistic levels. Unfortunately those corporations who invested in the venture may miss the the first condition -- that being making a profit. It is for this reason I say storage of wealth is preferred over mal-investment intended to stimulate an economy.

My perspectives support free-market economy. The housing industry produced too many houses. The price of houses drops. The producers take their labor to more productive activities. That is how the free-market economy works. The descriptive word economy is used to describe a condition of costing less to make, buy, or operate. I intend to use the economy as a means to an end. It is not an end in itself, and I do not have a plan to make the economy more useful to anyone other than myself. This is why corporations are sitting on cash. It is not in their best interest to operate in a mode which would ultimately destroy wealth.

I will limit my comment on your personal experience. I commend you for working the system in a way which benefits you. I find no fault in opportunism.

I shudder to think how much more difficult it would have been for me to advance if I had to save up in full, in advance, for these, and other prudent purchases. Debt has its downsides, of course, but a debt free world is a recipe for stagnation and massive poverty.

Imagine being responsible for your future rather than relying on a system contrived by those who presume ownership of an economy. Ultimately you accept the system as a means of achieving your goals. In contrast I have rejected that system as counter to my goals. At some point you will be forced to make sacrifices for that system. Perhaps then we may have further reason for discourse.

I would suggest that the physical characteristics of gold are themselves meaningless in a discussion of money - two separate things.

It does neither. Deflation lowers the supply of money thereby increasing the value of every currency unit in circulation.

Deflation has nothing to do with, and certainly does not directly effect the supply of money. Deflation is simply a matter of the aggregate effects of supply and demand in the economy - we can have deflation with a stable, growing, or shrinking money supply.

My use of the economy doesn't require that I should stimulate it. I seek to benefit from the economy, whereas you suggest it should be in my interest to stimulate it. I am not the caretaker of the economy

I wasn't suggesting any obligation one way or another. In a free market capitalist economy, you are expected to do that which believe most beneficial to you. It is in the overall governmental monetary policy which was where I would suggest the obligation lie - and, in the aggregate, if policy incentivizes "idle" savings - ie. put your money of whatever form under the mattress kind of "idle", then the aggregate economy will suffer due to the individual, rational, appropriate decisions which will result.

One might call it deflation, however since in your scenario the money is available in corporate coffers, no deflation has occurred, rather an optimization of price is bringing the value of the housing down to realistic levels.

Again, deflation (and inflation) are not one and the same as decreases (or increases) in the money supply - perhaps you are using the Austrian concept versus the usual, price based references, in which case you are misinterpreting the substance of what I am saying. Price deflation in residential real estate has most certainly occurred, and price deflation has negative consequences. For the purposes of this seed, getting further into the weeds of the whats and whys would run too far astray.

Imagine being responsible for your future rather than relying on a system contrived by those who presume ownership of an economy. Ultimately you accept the system as a means of achieving your goals. In contrast I have rejected that system as counter to my goals. At some point you will be forced to make sacrifices for that system.

I am entirely responsible for my future. And my future is much brighter than my past due to opportunities (available to all who ARE responsible). That you personally find those opportunities distasteful is no reason they should be eliminated - you are free to choose not to take advantage of the modern, economically efficient (while still flawed) banking/lending/monetary systems.

But an alternative which removes these opportunities from the equation is to condemn most of our citizens to a far lower standard of living than available today, even in the current "credit crunch" economy - which represents the tip of the iceberg in terms of the consequence of dismantling the status quo monetary system.

I appreciate your points of view even as I disagree.

I appreciate being able to have a respectful dialogue despite disagreements as well!

I'll drink to that.

Er, Socrates... POSTAGE STAMPS are also "legal tender/money". Surely you're not saying that the government could simply cancel all of it's debt with a good mass-mailing, are you?

Well surely the Govt could come in and take everyone gold or for that matter anything of value, they have done so before. Yes I'd say that bottle of Jack Daniels has value.

Sorry, forgot my link:

http://www.federalreserve.gov/faqs/money_15197.htm

Yours may well be to a "Wikipedia" clone by the name, and without sourcing suggests a personal bias or misunderstanding on the part of the author.

Well the federal reserve link also includes cites to Supreme Court decisions on the point, so I'd say rather more authorative than the alternatives without attribution or cites.

But the Supreme Court is the final arbitor of what is and is not the law, so until overturned or until there's a statute or Constitutional amendment, it is what they say it is.

I'm not commenting on whether the Supreme Court is technically correct in this instance, only that, based on a series of their decisions, that the law of the land today says that Federal Reserve Notes are "lawful money". Anyone wishing to argue otherwise must first acknowledge that their opinion is at odds with what presently established law says.

It represented a change in STATUTE, when the US went off the gold standard. From 1933 forward, the "obligation" to redeem Federal Reserve Notes in "lawful money" became for all practical purposes an obligation to replace one piece of paper with another.

Certainly, if either statute or Supreme Court interpretation of the "lawful money" clause were to change, then the situation would be different than it is today. But given the present reality, your argument is regarding some theoretical currency only, not a presently existing one.

So if we argue even that theoretical currency, then my question remains - what exactly is it that the Federal Reserve would "owe" someone wishing to redeem notes for "lawful money", if it weren't other federal reserve notes?

No. If you actually get your financing from a bank (which is not the case nearly as often as most folks think), the bank would not simply "manufacture" the money to make the loan. Rather, they would have had to accumulate money from its depositors, who would have obtained that money by providing goods and services to one another.

The money lent to you, through the bank or whomever, is the result of prior real economic activity. And this money has value not because of the process by which it was created (whether that process involved debt or not), but because a) it is legal tender, and b) the private marketplace has determined that it has value for the purchase of goods and services.

So when you say "putting up nothing of value", you are totally incorrect. Again, anyone who feels that the dollars they have are "nothing of value", I would gladly take them off your hands!

The money lent to you is also not the bank's money - it belongs to someone else and they are merely an intermediary. In making that loan to you, the owners of the bank are placing their personal economic resources at risk, because if they have to take that house back, and resell it for less than the foreclosed loan (plus costs), they must bear the loss, as they are still required to fully comply with their agreements with the depositors (whose money went into the endeavor).

Well, yes, that's the beauty of it for the Federal Reserve.

Just occurred to me - it seems you have finally acknowledged that Federal Reserve Notes (and the remainder of the money supply) is NOT in and of itself a debt of any kind.

That has been my key point - distinguishing between what the process of creation may be, and what the end product itself may be. A dollar isn't a "debt" any more than a cake is an oven.

And yet this is not the case. Depending on the "reserve" requirements the bank may have very little actual money on hand to lend....that's the "fractional" side of things.

Well, no, before a bank can make a loan, it must have on deposit the sum of the proposed loan plus the reserve requirement on the original deposit. So if I want to borrow $90,000 from the bank, and the bank reserve requirement is 10%, the bank must have $100,000 in deposits FIRST - in that respect, it cannot manufacture money out of nothing.

What happens with the $90,000 I used to buy the house? Well that's where the potential expansion of the money supply comes in, because it depends on what the person I acquired it from does with it (the depositors' money that the bank lent to me). If they merely deposit in a bank account at the same or another institution, then yes, the money supply has expanded by $90k, and the bank into which the $90k was deposited MAY loan out $81k of it, and so on.

But the $90k could also go to paying off the seller's bank loan for the house, in which case the money supply hasn't expanded a bit (until and unless that paid off loan $$ is re-lent in a new transaction). Or it could be merely retained by the seller in cash, in which case the $90k expansion of the money supply would be the end of the chain.

No Dennis, your statement was that the FED's didn't owe anybody anything, which is true, they are the Lender, not the borrower.

With respect to Federal Reserve Notes, there is neither a lender nor a borrower - they are not debt instruments. If I hold a $1 Federal Reserve Note, the Fed, as you acknowledge, owes me nothing. On the other hand, I don't owe anybody anything either. And no one else owes me anything. No debt tied to the Note.

But perhaps we get into the weeds too deeply - maybe it would be more constructive to understand what alternative(s) you would prefer and why...

only it is more conspiracy theory tripe from someone who doesn't understand what he is talking about.

Anyways, out of this, can't stand the constant bs.

Hi there - hope all is well.

I would just note that I have seen no facts which would SUPPORT the contention I disagree with!

Maybe off topic, but something new.