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Pastimes : Book Nook -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (123)	3/30/2001 1:24:34 AM
From: JF Quinnelly	Read Replies (1) \| Respond to of 443

At $20.67 an ounce, there wasn't enough gold in 1929-1930 for every dollar to be 100% backed. No kidding. That's why they call it fractional reserve banking It seems like you are saying "credit money" as if it's not money. It is different, which is why every book on the subject talks about the theory of money and credit. In a banking system credit acts like "money", but it's not the same. It's not credit like on your credit card bill, it's what you see on your bank balance. It's your checking and savings balance. Credit money is also called "bank money". Credit money can be rapidly expanded and contracted, and helps create the business cycle. "Real money" is like a stable core that the pyramid of credit money is built on. That's how banking systems operate, unless they are the 100% specie systems that exist only in fantasy. It seems like you are saying "credit money" as if it's not money. Adam Smith thought it was, if the collateral for the loans were good. I don't know where you spotted this in Smith. But it sounds like the "real bills doctrine", which proved to be pro-cyclically inflationary and was discarded by the Fed in the 'teens. Collateral always looks "good" in a boom, and if you monetize it there's no end to the expansion- until it collapses because there are no endless expansions. What looked like "good collateral" quickly turns bad, and you end up with a ton of bad assets in your banking system. It's why the Fed will only monetize Treasury debt instead of "real bills". . If it's not 100% backed then what sustains it during a bank panic is faith. That's right. That's why people ran on banks before deposit insurance. But all banking is fractional reserve- even the idol of the hard-money set, von Mises, states this in his Theory of Money and Credit. Having witnessed the German hyperinflation, he wanted a gold based currency because it prevents the sort of hyper-expansion of money that occurred in Germany . But fixing the price of gold to $20.67 seems really dumb. Hamilton settled on this to save the finances of the United States from the fiasco of the unbacked Continental currency. Accepting either gold or Continental dollars for payment of taxes made the Continentals "good as gold". This is how all gold standard currencies work. They work unless there's a panic and everybody seeks to convert their currency and credit money into specie at the same time. The $20.67 value of a dollar is chosen because the Treasury makes a small amount on each coin that way. A $20 coin has less than one ounce of gold in it, gold being valued at $20 and ounce.