June 21, 2012 at 4:44 pm #16950rajones1956Member
I have been studying monetary systems for awhile and there seems to be three basic systems. Commodity money, Sovereign Fiat money, and Debt Based Fiat money.
It appears that commodity money is the most stable, although this system seems to have been prey to fractional reserve banking, causing periodic booms and busts, via inflation. Sovereign fiat requires the government to be honest and wise in managing this system and is apparently impractical, although it was successfully used in England in the form of Tally sticks. The debt based fiat system, which is virtually used globally today seems to be the worst of the three. Money is created by borrowing from private banks at interest and enters circulation as debt. Although money is created as debt, the interest is not. This money leaves circulation as the debt is repaid, but the interest must be obtained by more borrowing or by wages paid by others who at some point borrowed money. Thus the stability of this system seems to require an increasing amount of growth and borrowing in the private sector and or borrowing in the public sector, i.e. government borrowing and spending to maintain an adequate amount of money in circulation to facilitate exchange. If growth in the private sector falls then then borrowing slows and the money supply becomes restricted, and the government is compelled to borrow and spend money into circulation to ease the restriction. Seems this system ends in spiraling debt and most of the wealth going into the pockets of those who received the interest, the bankers, including the FED.
Is this analysis basically correct? If not, can you give me your views?
ThanksJune 22, 2012 at 11:37 am #16951jmherbenerParticipant
A monetary system can have two types of media of exchange: money and money substitutes. Money is the general medium of exchange. Money substitutes are perfectly secure, on-demand, at-par redemption claims for money. Money plus money substitutes constitute the system’s money stock. In our system, for example, Federal Reserve Notes are money and checkable deposits are money substitutes.
There are three types of money: commodity, fiat, and credit. Commodity money has (roughly) the same value of the commodity from which it is made as its purchasing power as a medium of exchange. Commodity money comes into existence by people’s choice within a market and can be maintained entirely by private enterprise. Fiat money has less value of the commodity from which it is made than purchasing power as a medium of exchange. Fiat money can only come into and maintain existence from the intervention of the state. Credit money occurs when the state declares that it will make something money or a money substitute in the future and people believe the state and therefore, use the item as money today.
There are two types of money substitutes: money certificates and fiduciary media. Money certificates have a 100 percent reserve of money into which they can be redeemed. Money certificates would be produced by private enterprises as warehouse receipts (i.e., owners titles to money being warehoused) of money owned by people and stored by the private enterprises. Fiduciary media have a fractional reserve of money into which they can be redeemed. Fiduciary media come into existence through intervention of the state.
With these categories as background, one can define different monetary systems by combining the different types of money and money substitutes. For example,
Free Market: commodity money and money certificates.
Classical Gold Standard: gold coin money and fiduciary media.
Current Monetary Regime: Fiat money and fiduciary media.
Then one could add contingent conditions to tailor the description of the system to particular cases in the real world. For example,
Gold Exchange Standard: gold bullion money and fiduciary media.
And, of course, there could be more complex contingencies, as say under the National Banking System.
If I were to take a guess at classifying the systems you mention, they would be as follows.
Commodity Money: commodity money and fiduciary media.
Sovereign Fiat: fiat money and money certificates.
Debt Based Fiat: fiat money and fiduciary media.
In our current system, money itself (i.e., currency or Federal Reserve Notes) is printed by the Federal Reserve. Banks bring money substitutes (i.e., checking account balances) into existence by creating credit. The process of monetary inflation and credit expansion is driven by the financial gain to the state for printing more fiat paper money (and having credit expanded by the banks) and the indefinite profitability for banks to issue more fiduciary media by creating more credit.June 22, 2012 at 6:43 pm #16952rajones1956Member
Thank YouJune 23, 2012 at 9:00 pm #16953martin_wittowMember
In G.Edward Griffin’s book, “The Creature from Jekyll Island”, he defines 4 types of money: commodity money, receipt money, fractional reserve money, and fiat money. i.e.gold/silver, redeemable notes with 100% backing, redeemable notes with partial backing, and no gold/silver at all.
I mention this not as a challenge to Professor Herbener, whose definitions seem to include these definitions as subsets. But rather because Griffin’s definitions inspired the following (not sure if this will be a question or a comment inviting a response):
It seems like we appear to have fractional reserve monetary rules but fiat money. Fractional reserves make sense when there is a commodity. But, when the reserve is something that can be created at will with a few keystrokes on a computer, what is the point of having a fractional reserve? My understandingis that the fraction is not a legal requirement (although at one time it was), it is just FED policy. Well, if that fraction is arbitrarily low, say 1% or .01%,or .001%, or whatever the FED wants to set it at, there is (or can be) no fractional reserve at all, practially speaking.
I guess my point is that I am skeptical that we have much of a fractional reserve monetary system. If we do (and I suppose that we do, although I have heard of shockingly low fractions, but I cannot remember where/when), it is only because the FED finds it convenient/expedient for the time being.
If I am wrong that fractional reserve policy (the fraction) is arbitrary (i.e. not fixed by law), please correct me, and then I apologize for wasting resources.June 25, 2012 at 9:51 am #16954jmherbenerParticipant
The current monetary system has fiat money produced by a central bank and fiduciary media (money substitutes with a fractional reserve of money). The point of the system from the view of the state is to permit unlimited monetary inflation and credit expansion controlled by the state. The state desires the system to have fractional reserve banking because that is the source of credit expansion and credit expansion is the method the state uses to fund its own debt. Credit expansion is also lucrative for banks. In fact, it is so lucrative that banks have a tendency to extend it too far setting in motion bank runs. So the state must regulate the fraction to keep the banking system intact.
If the central bank wants monetary inflation and credit expansion it could provide more reserves to the banks by issuing fiat money and buying assets from banks or it could allow banks to lower the fraction of their reserves or some combination. Normally, the Fed has left the reserve fraction the same and regulated monetary inflation and credit expansion by buying assets from banks. Before the crisis, banks held a 6-7 percent reserve against their fiduciary media, i.,e., their checkable deposits.
I cover these points in my lecture on Monetary Policy. Also, take a look at Rothbard’s, The Mystery of Banking.
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