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The Honest Money Act, HR2756

Downsize DC has just reported on the introduction of an act to repeal the “Legal Tender” law. This is the law which requires Americans to accept the US dollar for “all debts public and private” regardless of whether they have contracted payment otherwise. According to Downsize DC:

Choice is good because it allows competition. Monopoly is bad because
it leads to price fixing. Monopoly control over what people use for
money provides the greatest price-fixing power of all, because it
impacts ALL of your economic transactions. The Fed can manipulate the
price of absolutely everything, by increasing the number of
circulating dollars (inflation), or by decreasing them (deflation).

This act opens wide the door to competing free market currencies, yet has little immediate or drastic impact. If people are happy with US dollars, they will simply continue to use them. Those that are unhappy with manipulations by the Fed or who simply prefer inflation hedged means of payment will be able to contractually specify their preferences.

Go here to ask your elected representatives to cosponsor HR 2756 and allow freedom of choice in money.

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64 comments to The Honest Money Act, HR2756

  • dearieme

    Spitting on FDR’s grave? Excellent.

  • embutler

    I understand most of the physical greenbacks are loose in the world and only 30 percent are in the US(as of 1997)
    we use electrnic money…pixels
    what will replace them…pixels representing gold??

  • wolfwalker

    “competing free market currencies?” These people are morons. Anyone well-schooled in history knows that there was a time when America had multiple competing currencies. Under the Confederation government (1782-87), states could coin their own money. Fourteen competing currencies and literally dozens of conversions to learn. It was economic chaos. Market experts with years of education and practice can learn that sort of thing. Regular citizens won’t and shouldn’t have to. That’s why the Constitution of 1787 gave the power to coin money to the federal Congress alone.

    In short, we already tried this and learned the hard way that it won’t work. Only a moron (or a Ron Paulite, but I repeat myself) would want to try it again.

  • Fourteen competing currencies and literally dozens of conversions to learn. It was economic chaos.

    And yet we live in a global economy with hundreds of competing currencies traded against each other on the market every day and somehow we all manage. How, I wonder, do you think we pull that off?

    I should add, since it is apparently not obvious wolfwalker, that under the scheme proposed here individual merchants would be as free to refuse payment in certain currencies (or to charge different prices for them) as they are to accept them.

  • we use electrnic money…pixels
    what will replace them…pixels representing gold??

    Why not?

  • It was economic chaos. Market experts with years of education and practice can learn that sort of thing.

    As already pointed out, you need to put the brain in gear before engaging the mouth (or keyboard). There are hundreds of currencies already used in the world, a system which has worked just fine for centuries.

  • Miv Tucker

    But isn’t the point about all those competing global currencies that they’re backed by their various governments, and thus have some guarantee of legitimacy – and are not just the result of free enterprise run riot?

  • Tucker;

    Seriously who do you trust more, Amazon.com or the government of Zimbabwe? Which is more legitimate in your view?

  • wolfwalker

    And yet we live in a global economy with hundreds of competing currencies traded against each other on the market every day and somehow we all manage.

    Most of that trading is done by financial experts on specially-designated international currency markets. Can you think of one non-Third-World country that permits foreign currency to be used directly in domestic financial transactions such as buying things in a regular store?

  • Nick M

    Annoying Old Guy,
    Are you suggesting that the dollar is pegged to the value of the latest Tom Clancy?

    I know sod all about economics but I do find the idea of competing currencies within a country unpleasant. I’m annoyed enough with exchange rates when I go abroad to quite frankly not have to want to worry about it when I go to the corner shop for a pack of ciggies. Now there might be sound economic reasons for all of this but being a Geordie I’ve handled a lot of Jock currency and usually had it rejected in England. A Clydesdale Bank fiver! What’s this Monopoly money? So I start minting my own coin, or Perry does or whatever. It’ll be bloody chaos. And what precisely will my cards be in?

    Like I said, I know nowt about economics but then I share my ignorance with the vast majority of the population.

  • Bombadil

    When I was growing up in West Germany, most merchants would accept US dollars in place of marks (at an advantageous exchange rate, of course).

    The system seemed to work pretty well, even though it was probably illegal and unregulated.

  • Nick M

    wolfwalker,
    A lot of UK shops will take payment in Euros. Some even price in Pounds and Euros.

  • Midwesterner

    (At least) two reasons why big government will fight this tooth and nail to the death. In other words, with a ferocity beyond all understanding.

    One, it will be the death of national taxes and many others as well.

    Two, it will take away the national government’s power to manipulate trade and production. For example, right now the dollar’s slide is not just tolerable, it is calculatingly encouraged as a means to reduce domestic consumption of foreign products and increase domestic manufacturing and exports.

    In short, it would destroy the national government and turn it back into a federal government. That’s a good thing, but don’t expect the national government (Lincoln’s creation) to roll over and die without a fierce fight.

    Also, the national government’s debt is denominated in US dollars. Allowing competing currencies would remove the inflation tax (it’s huge and hidden), render the national government unable to service the debt except by monitizing (printing dollars), which would kill the market for T-bills, and cetera.

    But it should be interesting to hear this all come out in the debates. I hope they are forced to publicly state in the record all of these reasons for mandatory single currency when they debate the legislation.

  • Dale Amon

    I think a point is being missed. Many places do accept payment in different currencies already. The thing is, they are required to take payments offered in dollars in the US, even if they have written a contract in gold. That is gross interference with private contract.

    As to a corner store that decides it will only accept payment in Rands, it sounds like many of you would not frequent it. So what is the problem then? Let the market take it’s course… if people don’t want the hassle, then that store will fail.

    The biggest impact of this would be on contracts where a buyer and a seller make an advance agreement on what currency or commodity the contract will be paid in… without fear that one party or the other can renege and force the other to pay/accept dollars in lieu of the contracted currency or good.

  • Midwesterner

    The most likely currency in the internet age will be variations on the egold theme. People seeking mediums of trade will shop around for what ever value brokers they trust and gives the best transaction rates.

    Expect to see some form of mainstreaming of commodity certificates based on the spot market price. Expect also to see ‘fractional reserve’ commodity certificate ‘bankers’ spring up. Buyer be cautious. When in doubt stick with bankers like egold that specifically avoid fractional reserve and maintain the full quantity of the commodity in their vaults.

  • Midwesterner

    Dale,

    The thing is, they are required to take payments offered in dollars in the US, even if they have written a contract in gold.

    There is one reason this will not go away without the national government collapsing. The real reason for requiring the dollar conversion is so that Big Bro can carve off ‘its’ share of all market activity. Big government will not give that up without a fight to the death because that’s what it would mean. An end to all of the massive redistribution schemes and therefore to politics and government as we know it.

    Incidentally, in support of this, I asked my accountant about using egold and she threatened to drop me if I did. Tax code would apparently require me to calculate and pay national taxes on every single transaction according to fluctuations in the price of gold. If anybody knows otherwise, I’m like to hear it.

  • A Clydesdale Bank fiver! What’s this Monopoly money? So I start minting my own coin, or Perry does or whatever. It’ll be bloody chaos. And what precisely will my cards be in?

    I don’t see why this has to be any more chaotic than stores accepting 3-5 credit cards at checkout. If they can manage to deal with Visa, Mastercard, and American Express, surely they’ve got it together enough to accept USD, Euros and Yen concurrently?

    When I was growing up in West Germany, most merchants would accept US dollars in place of marks (at an advantageous exchange rate, of course).

    That was my experience in United Germany in 1994 as well – especially, for some reason, at the Turkish-run businesses.

    And just to add to the list of examples, plenty of shops along the Canadian border accept both the green kind of money and the colorful kind with cute furry animals on it.

    I think that is their right. If accepting payment in Canuck Bucks helps a restaurant in Niagara Falls, why shouldn’t they do it? Surely that’s their decision to make – and they do it because it is more convenient for their customers.

    Well-run shops will not do things that make life harder for shoppers. There is no reason to think that a competing market in currencies will end up “chaotic” for the average citizen. All it will do is open the possibility of freeing ourselves a little from shady economic manipulations from London/Washington of the kind Midwesterner was talking about. That’s a good thing.

  • But isn’t the point about all those competing global currencies that they’re backed by their various governments, and thus have some guarantee of legitimacy

    Oh I have to thank you for that, I haven’t laughed so hard for days. Given the long history of inflating fiat currencies and debased metallic coinage stretching back since time immemorial, the notion that governments, states of any sort, can be trusted to be paragons of fiscal rectitude more than anyone else can be trusted, is almost beyond parody.

  • embutler

    dear joshua
    pixels are not backed by any physical currency…and they wouldn’t be backed by gold either..
    as long as no one demands actual physical cash ,there are enough greenbacks around to satisfy the demand..

    the US has a 13 trillion dolar economy ,backed up by damn few actual physical dollars

  • Johnathan Pearce

    Can you think of one non-Third-World country that permits foreign currency to be used directly in domestic financial transactions such as buying things in a regular store?

    I think Marks & Spencer accepts payments in euros in its Oxford Street branch in London, for example. The idea of parallel currencies is no more weird than using different types of software. People who can only imagine life with one currency for one geographical region suffer from limited imagination. Of course, in practice, it is more convenient for people to only use one currency, just as it is convenient for most people to use metric, imperial measurements or MS-Dos rather than some rival computer software. But giving people the potential choice to use a different currency acts as a potential deterrent to issuers of fiat currency to devalue it.

    Using different currencies is messy. Life is messy; if people want it simple, go to North Korea.

  • Tanuki

    I like the idea of competing corporately backed e-currencies; we could have the Dollar bill be replaced by Bill’s Dollar – Microsoft Money (apt to self-destruct without warning and need regular revaluations), the Apple Dollar (creatively designed by teams of fiscal-artists but only accepted by about 5% of merchants), and the Exxon E$$O (use it to buy your gas and get an extra 10%). No doubt the Japanese would get in on the game with the Sony Yen and the Nintendo WiiCash (neither of which would play well with each other).

  • Sigivald

    Joshua: When a store takes three different CCs, that just means that they’re asking the nice CC network to give them dollars from your credit account – the merchant typically has one CC system that handles all of it.

    However, taking five different kinds of cash is a nightmare. They need to be stored properly, and there’s no room in cash drawers. People want change in their “preferred currency”, so you have to stock the till with that, too. The teller or the POS system needs to do exchange rate calculations, current enough to not peeve the customer (with the CC network, of course, your bank does this silently for them) – and that’s a giant headache.

    That’s why, while I don’t care if competing currencies are legally allowed, they are not going to catch on short of economic collapse of the US Government… which would cause so many other, more significant problems that competing currencies become irrelevant.

    (And I don’t give a fig about fiat money, either. I’ve read Mises Theory – and his biggest problem with fiat money was that states would intentionally inflate it believing it was helpful. That idea’s been beaten out of them and all decent states live in mortal fear of serious inflation. [States like Zimbabwe are so failed that their laws about foreign currency are irrelevant.]

    Gold-backed currency has, to say the least, “issues” with an economy with rapid wealth creation, not to mention issues with supply and trade.)

  • Michiganny

    I do not think your local merchant much gives a dam or a dinar what currency your bank account is in, as long as your credit card is accepted.

    That is pretty simple.

  • Sigvald –

    The points you raise about logistical problems handling many different types of cash all strike me as correct. However, I’m sure you’ll agree they are problems for individual stores to solve and not appropriate justification for a policy that requires stores to accept US dollars if they do not wish to do so.

    I do not think they are insurmountable problems, by the way. Computers will take most of the sting out of your objections. There is nothing preventing the store from stocking the ambient currency of choice in registers (say, Sterling in London) and allowing people who want to pay in RonPaul Egold Dollars to take their receipts to a separate register or dispenser machine for change. Most people these days pay with credit or bank cards anyway, and for these transactions there is, as Michiganny points out, absolutely no difference in efficiency associated with the denomination being used.

    One of my reasons for drawing the credit card analogy (admittedly, probably not a very good one) was to remind people that even 20-30 years ago credit cards and bank cards were nowhere near as widely accepted as they are today. They had to make the case to stores and consumers for their use, and they have done so quite successfully. I see no problem with the burden of proof being on the private, alternative currencies, as it were. They are a business and should promote their own acceptance. Point being – no doubt you are right that at first Americans would continue to use greenbacks exclusively. But that is not to say that alternative brands couldn’t worm their way in to the market and eventually become standard.

    I think it is telling that our fascist government has recently felt the need to shut down exactly such a currency with guns and brute force despite the fact that it breaks no laws. Whatever you may think about the acceptability of alternative currencies, the US government is clearly worried about them. I tend to think they’ve reason to be afraid, and that realization makes me all the more certain that a competing market in currencies is a good idea.

  • pixels are not backed by any physical currency…and they wouldn’t be backed by gold either..

    Why not? There is nothing stopping anyone from setting up an electronic version of the Liberty Dollar which is redeemable in gold. “Pixels” are an accounting method, just like the nice-smelling green pieces of paper are an accounting method. Paying with your bank card and paying in cash are not fundamentally different. They both represent an exchange of value (=redeemable utility).

  • Gold-backed currency has, to say the least, “issues” with an economy with rapid wealth creation, not to mention issues with supply and trade.

    Would you care to spell out what they are? I am honestly curious. This is an issue that I am very much interested in but haven’t had the time to properly research.

    I don’t see that the problems with gold are as drastic as you say.

    With regard to the supply issue, this is nothing that can’t be solved by holding houses and accounting. That is, after all, how banks came into existence in the first place.

    With regard to the wealth creation issue – wealth is not really a “point accumulation” game like SpaceInvaders. Sure – we can get wealthier by accumulating more dollars, but we also get wealthier when general prices go down (the main point Democrats habitually miss about globalization). Wealth isn’t “how many you got” but “how much what you got buys.”

    A true gold-standard economy would mean less rapid wealth accumulation in the form of denominated dollars (pounds, yen, whatever) floating around, true. But it would also mean prices hold steadier and/or go down more quickly. So I often wonder whether the perception that a gold-standard economy would inhibit wealth creation is not just a giant mistake(/illusion/deliberate lie) on the part of those who don’t want it.

    Again – I don’t know as much about this subject as I would like and so am asking for explanations, not arguing.

  • “Can you think of one non-Third-World country that permits foreign currency to be used directly in domestic financial transactions such as buying things in a regular store?”

    I did that very thing in Japan as late as a year ago.

    There is no serious argument against competing currencies. All opposition to it comes from ignorance. Some people are better (more innocent) at that than others.

    F. A. Hayek is my central touchstone in this matter, although not all there is to it, by a long shot.

  • “Gold-backed currency has, to say the least, ‘issues’ with an economy with rapid wealth creation, not to mention issues with supply and trade.”

    Really? Name them.

    This is nonsense.

  • Midwesterner

    Sigivald,

    Such small ambition! Of course the merchant will be payed in whatever currency he wishes, and I will pay the merchant in whatever currency I choose. And somewhere off in the deeper reaches of the free market there will be the cash card service provider, making the currency conversion in real time updated to the second. It is already happening in internet sales.

    What it really means is I will keep my savings in whatever currency I choose as also will the merchant. If we keep our money in different currencies, the exchange rate will be matched to the closing of the sale.

    If it is a cash sale, I will come prepared to deal in whatever the merchant expects. I already do. I have bought cars where the seller took me to a currency exchange and had cash in his hand before he released the title. Curiously, once at the currency exchange I could have converted my dollars and paid him in any of a number of different currencies.

    Perry’s 4:23 cannot be stated strongly enough. The government’s perpetual pilfering of the cash in my pocket and bank account makes the most usurious title payday loan shark look like a screaming bargain.

  • J

    Well, many retailers issue and accept their own currency, called gift vouchers. Some of these cross retailers, but almost all are pegged to the nearest national currency, so perhaps they don’t count. They do however work very well for the retailer, because they know much of the currency will never be redeemed.

    Some amusement arcades, in their heyday, not only issued their own currency, but refused to accept the national one – their machines would only work on tokens. They could change the exchange rate (i.e. the cost of tokens) and they could change prices (number of tokens required for a game).

    Loyalty card points can also be thought of as a currency, and these are not pegged to any national currency, but then you can’t exchange them readily either (unlike gift vouchers and arcade tokens, which private individuals could exchange freely if they so wished).

    I see enormous potential for abuse by dominant suppliers, and little hope of co-operative groups getting their act together in time (such as with Liberty Dollars, perhaps). I’m reminded of the factory shops and mine tokens – it’s not encouraging.

    I think currency freedom is basically good, but society isn’t really free enough in other areas for it to stand much change of working out well.

    I’m always surprised at how quickly standardised currency took hold even in very primitive societies. England in the ‘dark ages’ had a national currency with a well organised network of secure mints, issuing and distributing millions of new coins every 2-3 years, and recalling old coinage to prevent forgery and clipping. The percentage of pure silver in coins of this era is amazingly consistent, suggesting the whole system worked rather well.

  • Midwesterner

    I see enormous potential for abuse by dominant suppliers

    Examples?

  • Alsadius

    I don’t think any of you actually understand legal tender laws. Legal tender laws do not force businesses to accept US dollars* for anything other than debts denominated in US dollars. If you say “I’ll sell you my car for the price of yours”, you are under no obligation to take dollars, in any amount, instead of the other guy’s car. All legal tender laws say is that a dollar is a dollar, and if you have a dollar-denominated debt, you must accept dollars for it. It does not force you into using dollars, nor does it ban competing currencies, whether private or international. The only reason they’re on the books at all is because there during the Civil War there were metal-backed dollars were circulating simultaneously with fiat dollars, and the government wanted to ensure that its fiat dollars would be accepted on par with the backed dollars. The biggest reason they’re in place today is to place an upper limit on how many pennies you have to accept at a time, and generally to make sure that nothing stupid happens to interfere with the functioning of the economy. But it’s far from a libertarian nightmare – in fact, it’s probably the most benign legislation I can think of any government having passed in a long time.

    * = For sake of simplicity, I’m restricting this discussion to the US case. The laws are essentially the same everywhere, however.

  • But it’s far from a libertarian nightmare – in fact, it’s probably the most benign legislation I can think of any government having passed in a long time.

    I hope you’re right. But if you are, why the recent raids on Liberty Dollars? The US MInt actually did seize their assets; that’s real.

    The laws are essentially the same everywhere, however.

    I don’t think so. The laws in Germany – at least back when marks were legal tender – expressly required businesses to operate in marks.

  • Sunfish

    Can you think of one non-Third-World country that permits foreign currency to be used directly in domestic financial transactions such as buying things in a regular store?

    A number of stores in the southern and western United States accept Mexican Pesos. I’ve bought pizza in Lempiras de Honduras before as well, in the US. Okay, I probably got hosed on the exchange rate, but that was the price of doing business.

    It did not cause the world pizza market to go tits-up and die, because I bought a slice in Central American money while physically located in the US. Now, the fact that the agua dulce was limited to uncaffeinated fruit-flavored stuff, on the other hand…that was a problem but I don’t blame the foreign money for it.

  • Midwesterner

    If you say “I’ll sell you my car for the price of yours”, you are under no obligation to take dollars, in any amount, instead of the other guy’s car.

    But you are required to convert the transaction into a dollar value to report and pay any taxes. If I trade a late sixties muscle car (they are going for obscene prices) for a new Aston Martin, I am required to record the exchange in cash value. Because the increase in the value of the muscle car is subject to capital gains tax. So for practical purposes, yes we can make the exchange between ourselves, but we must exchange dollars as far as the taxing authorities are concerned. Furthermore, at least some states charge sales tax on the swap. There is no way you can pay tax on a non dollar denominated exchange. So you are wrong. It must be done in dollars.

    If you want to say “that is tax law, not legal tender law”, fine. But the tax law cannot work without the legal tender law. One way or another, they will force you to conduct the transaction in dollars.

  • wolfwalker

    Interesting responses. I could suggest that UK merchants taking euros doesn’t really qualify — it seems obvious that Britain will become part of the eurozone eventually. The example of German merchants taking dollars along with deutschemarks is more convincing, although the chap who posted that also suggested (and I suspect is right) that it was technically illegal.

    I still don’t like the idea. The few examples offered are all of just two competing currencies, with a well-defined exchange rate. Multiple competing currencies with independently-fluctuating values and exchange rates seems guaranteed to lead to trouble. Even if it’s constitutional, which it may well not be. The US Constitution gives Congress the exclusive power to coin money and establish its value. The “Liberty Dollar” people were raided because they were a private organization encouraging people to use their privately-minted coins as currency.

  • Dale Amon

    I’m glad you brought that up. It really does show how ready the monopolists are to put down competitors via the use of violence and to steal their assets for the DC ‘mob’.

    I am not just using hyperbole. I do indeed consider what happened as theft and the people involved in the seizure as criminals.

  • Paul Marks

    Money “backed by the government” – what does this mean? In economics (as opposed to politics) it does not mean anything.

    To turn to other matters:

    Various commodities have been used as money (the process by which a commodity gets used as money over time was well described by Carl Menger back in the 19th century).

    As for the United States only “gold or silver” can be declared “legal tender”.

    “But that only restricts the State governments not the Federal government”.

    “Coin money” (Article One, Section Eight) was supposed to protect the United States from the “not worth a Continental” money of the Continental Congress.

    Of course there never were truly “competing currencies” during the that period – because each State (and the C.C.) tried to FORCE people to accept their notes.

    “Bad money drives out good” only if the exchange rate is fixed – if it is not then “good money drives out bad” as people will refuse to use a rapidly inflating currency if they are allowed to use an alternative that is not inflating.

    Of course the various protections of private contract and secure possession, in the Constitution of the United States, were supposed to protect the gold of ordinary people even in time of war – but sadly the early 1930’s proved that a document only matters if enough people are prepared to stand up for it.

    F.D.R. robbed people of their gold and voided private contracts – and the Supreme Court said it was O.K.

    Of course, he got away with this because of the Great Depression – which shows the great weakness of a gold STANDARD.

    A “standard” is no good. If a great credit-money bubble can be created (as Ben Strong of the New York Federal Reserve Bank created one in the late 1920’s) then one still has boom and bust.

    And a great bust, and all the distress it creates (people starving in the streets and so on), will be used as a excuse for all sorts of statism.

    The only real way to prevent the bust is to prevent the boom – i.e. prevent the credit-money bubble.

    Not a “gold standard” or a “silver standard” or any other form of “standard” – but straight money.

    “But how will loans be financed?”

    By SAVINGS.

    If people do not save then other people will not be able to borrow (period).

    Any effort to “finance” loans other than 100% by real savings always ends in tears.

  • spidly

    I’m partial to the gold ‘ol tried and true ‘rock with a hole’ currency

  • dick

    When I was in Rio a couple of years ago I used US dollars for everything except for the one time I went to an outdoor market on a Sunday (the Hippie market in Ipanema). Never had a problem with paying in dollars, in fact they preferred them.

  • Sunfish

    If you want to say “that is tax law, not legal tender law”, fine. But the tax law cannot work without the legal tender law. One way or another, they will force you to conduct the transaction in dollars.

    Does Wisconsin have an ad valorem tax on vehicles? Here, we do, a percentage that declines each year taken on 85% of the original purchase price. However, 1% of 85% of a million yen is 8,500 yen, with no need for a dollar conversion. Now you just have to convince the county clerk to accept yen. (What if the county clerk will taken 8,500 yen for the ad valorem tax, but the state DMV wants the $20 plate paid for in dollars?)

    Personally, I’d set the vehicle charge according to GVW or something else that actually predicts the wear-and-tear that the vehicle causes to the road, but then I’d also only charge it on vehicles operated on public roads and would use the money for (you guessed it) maintaining and repairing public roads.

    My only problem with eliminating the “legal tender” part of the law is, when I write some guy a payable penalty assessment, what would I write down for the fine? Eighty bucks or 39.33 Euros or 100,000 Turkish Lira? Since the fines are set by the city council or the Hundred Dumbasses of Denver, do they have to write the conversion into law?

    That’s been the advantage of the current practice of pretending that none of the other 150 or so currencies don’t even exist: at least we can be on the same page, domestically. Not that I’m claiming that makes this bill bad policy, since I already wrote my Congressmoron in support.

    I still don’t like the idea. The few examples offered are all of just two competing currencies, with a well-defined exchange rate

    Like the use of Mexican pesos in much of the SW US? Or my example of an obscure currency, also used in the US?

    Think back to the Depression. When FDR couldn’t make himself stay out of the way, various cities or localities started using different kinds of scrip. Maybe that was illegal, but so what? It provided liquidity and a means of exchange when the Federal Reserve wouldn’t or couldn’t, or at least not effectively.

  • Alsadius

    Joshua: I really don’t know what that was about. Maybe they were violating some other laws, maybe the raiders don’t have a damn clure about the laws they operate under – I honsetly don’t know.

    Sunfish: Stores on the Canada-US border operate the same way. I recall a couple restaurants in Niagara Falls with explisitly dual-denominated menus.

    Midwesterner: This is true. However, it has little to do with legal tender laws. All legal tender laws say, essentially, is “A dollar is a dollar, and if you’re going to accept one kind of dollar then you have to accept another”. It governs usage of government currency, no more. Finding market prices for purposes of taxing bartered items is separate – yes, it relies on legal tender laws, but only in the same way as your computer relies on Maxwell’s Laws. It’s a fundamental part of the structure of economics in a modern society, and as such many other things would change if it were withdrawn, but it is not relevant in any kind of immediate sense.

    Wolfwalker: Not quite – the US Constitution says that “No state shall…make anything but gold and silver coin a tender in payment of debts”, but it doesn’t state that private entities can’t do the same. Mind you, that’s probably just because nobody even considered the possibility, but it’s still a perfectly valid loophole.

    Paul Marks: You make a similar mistake. No individual state may use anything but gold or silver, but “Congress shall have the power to…coin money, regulate the value thereof, and of foreign coin”. Congress can do whatever the hell it wants, the restrictions are only placed on individual states. Your rationale is probably accurate(and your condemnation of FDR’s seizure of gold certainly is), but that doesn’t change the law.

    As for your prescription of savings-based loans, you’d basically make the economy fold overnight. You’d have to call in every fractional-reserve loan instantly, which there’s not enough money in existance to cover, and even failing that the instant collapse of the money supply would result in massive deflation – exactly the thing that caused the Great Depression, incedentally.

    Also, I assume that the “straight money” you desire implies commodity money. Tell you what – find me any commodity in existance with value that has fluctuated less over the last 20 years than the US dollar has. If there’s any such commodity, I’ll consider the possibility that there’s merit in the idea of commodity money. But since there isn’t, I see no danger of that.

    Sunfish(again): This is the whole reason why the USD has standing at all, in the practical sense – the government demands it. Every currency needs some kind of bedrock, somewhere where it has value as a last resort, if it’s going to be stable in the long run. Government taxes and user fees seems as good a place as any.

  • ian

    The best example is surely airport shopping. I recall buying things at Schipol and not having the full amount in Dutch money so paying the rest in Pounds. The till was set up (c1978!) with every European currency. $, yen and probably others.

    On the down side, the UK revenue have been looking at things like LETS schemes and Timebanks, to see if they can get something out of it.

  • Tell you what – find me any commodity in existance with value that has fluctuated less over the last 20 years than the US dollar has. If there’s any such commodity, I’ll consider the possibility that there’s merit in the idea of commodity money. But since there isn’t, I see no danger of that.

    This is an interesting challenge. How is the value of the dollar determined? I suspect that’s too complicated to answer in a comments thread, so if you have a link to some helpful summary I would appreciate it.

  • Midwesterner

    Sunfish,

    Does Wisconsin have an ad valorem tax on vehicles?

    Oh my yes. I actually went to my cabinet and dug out a “Wisconsin Title & License Plate Application”, form id “MV1”, version date, “11/2004”. It may have changed since then, but not probably on what we’re discussing. Everything including both fees and taxes is to be written into a place for which the $ sign is already provided. Amount subject to tax is purchase $ minus tradein $. The state sales tax is 5% of that. Added to that are a number of local and municipal (county and city) taxes and fees. These fees apply to all vehicles regardless of age or condition. The only cases in which any fees are waived is if the vehicle is not being licensed, but the sales taxes still apply in these cases.

    Everything is to be filled into places premarked with a US dollar sign. Having been involved in some vehicle swaps, I can assure you that at least some of the counter people will challenge a suspicious looking vehicle value. But even if they don’t, the state DoR does. I was even audited by the state Dept of Rev for bringing a Volvo from Arizona to Wisconsin and reporting a price that was somewhat less than bluebook. Fortunately I had paid with a cashiers check and was able to fully document the sale. (The car had badly sun damaged paint and the owner was eager to get rid of the third car in a two driver family.) I paid for that car in US$ but if I had paid pesos, I would have had to document the currency conversion as well, I presume.

  • Alsadius

    Joshua: The most obvious approach is to use CPI data for the value of the dollar and measure everything else in inflation-adjusted dollars. It’s imperfect, of course, but it has the advantage of being really easy to get data on, since I doubt anyone’s looking to write a thesis to win a blog debate.

    For reference:

    Year CPI Inflation
    1987 111.2
    1988 115.7 4.0%
    1989 121.1 4.7%
    1990 127.4 5.2%
    1991 134.6 5.7%
    1992 138.1 2.6%
    1993 142.6 3.3%
    1994 146.2 2.5%
    1995 150.3 2.8%
    1996 154.4 2.7%
    1997 159.1 3.0%
    1998 161.6 1.6%
    1999 164.3 1.7%
    2000 168.8 2.7%
    2001 175.1 3.7%
    2002 177.1 1.1%
    2003 181.7 2.6%
    2004 185.2 1.9%
    2005 190.7 3.0%
    2006 198.3 4.0%
    2007 202.416 2.1%

    CPI is January data, taken from ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
    (100 = 1982-1984 average)

  • Midwesterner

    Alsadius,

    Compare the cost of gasoline in 1970 (~ $0.33?/gallon) and the price of gold in 1970 (~$37.60/oz), one ounce of gold buys ~144 gallons of gas –

    and the cost of gasoline today (~ $3.05/gallon) and the price of gold today (~$800/oz), one ounce of gold buys ~262 gallons of gas.

    So gold has increased to 182% of its value relative to a major consumable while at the same time the dollar has diminished to little better than 10% of its value relative to that same major consumable. This approximate, ballpark ratio works for most market values including food, real estate and manufactured goods as well as energy.

    The reason the silly claim about the stability of the dollar can be made is because, a priori, an assumption is made that it can only be compared to other fiat mediums of exchange. Clearly when compared to commodity backed mediums of exchange, the dollar is an unstable and highly inflationary mess.

    1987 ~$340/oz ~1.50/gal equals ~227 gallons. So in the requested 20 year time frame, gold has increased to ~116% of its value relative to a major consumable while at the same time the dollar has dropped to about 50% of its value relative to that same major consumable.

    BTW, the CPI is specifically engineered to use products that have had extreme benefits of mass production and to take those economies of the market place and use them to disguise the true rate of inflation. You can get a more accurate picture by looking at raw materials, food, energy and real estate individually. But even the first three of these have production efficiency gains that are lost to view. I personally think the Consumer Price Index is a load of bullshit propaganda. It was created and is used to take the place of the gold standard. With predictable results.

    Needless to say (I expect) I agree with everything Paul is likely to say about the ‘gold standard’ (as opposed to gold backed, in the vault). A gold standard’s most useful feature is demonstrating how badly flawed fractional reserve banking really is.

    I say, eliminate legal tender laws and let people decide for themselves whether to have their money in a fractional reserve (to say nothing of ‘fiat’) currency.

  • Midwesterner

    I accidentally used an ‘inflation adjusted’ price for the cost of 1987 gasoline. It should have been ~$1.00 not ~$1.50. In fact, gold now buys 77% of what it bought in 1987 and US$ buys 50%. Repeating, gold has not increased to 116% but has dropped to 77%. Gold has lost 23% of its value while US$ lost 50% of its value re gasoline.

    In the 37 year time frame (1970) my math is wrong. Gold purchased 114 gal/oz, not 144. This means a 1970 gold ounce now buys 230% of the amount of fuel it bought in 1970, and a 1970 US$ now buys 11% of the amount of fuel it bought in 1970.

    My apologies for these errors.

  • Midwesterner

    Sunfish,

    I forgot to answer one of your concerns –

    My only problem with eliminating the “legal tender” part of the law is, when I write some guy a payable penalty assessment, what would I write down for the fine? Eighty bucks or 39.33 Euros or 100,000 Turkish Lira? Since the fines are set by the city council or the Hundred Dumbasses of Denver, do they have to write the conversion into law?

    My thinking is that the highway system and its traffic enforcement officers are the seller, and can determine what currency and amounts they will charge. It is up to the ‘customer’ (driver committing the infraction) to convert to that currency. Just as they would traveling in a foreign country.

    Also, it occurs to me that by ‘ad valorem’ you are referring to those every year pay a percentage of what the state decides your car is worth taxes that states like AZ have so that old cars pay a much lower fee than new cars. Thankfully no. Wisconsin doesn’t have that particular flavor of redistributionism. Just straight sales taxes and usage based fees.

  • Paul Marks

    Alsadius.

    I did not make a mistake.

    I actually quoted the standard response “but this [Article One Section Ten] only limits State governments”.

    As for Congress being able to do anything it wants.

    It can coin money from base metal if it wants.

    But it has no power to issue paper money (stand by for the “Federal Reserve notes are private”, “Second Greenback case says it can anyway”, and “there is a metal strip in the notes” defences) and it certainly can not confiscate privately owned gold or void the gold clauses in private contracts.

    “Regulate interstate commerce” has nothing to do with that.

    Of course the government has done all the above, but it had no Constitutional right to do so.

    A priest can not make 1+1=68 and nine people (or five people) in robes can not make a text say something different from what it does say.

  • Kim du Toit

    As a former retailer, I can only look on this argument with despair.

    Schipol Airport does indeed accept most major currencies (I bought some coffee with US$ the last time I was there — but I should point out that the change was given in euro coinage, not US). The cost of those cash registers, however, is several times that of regular, single-currency ones. This may be okay for small operations like Schipol or a corner store, but for, say, Kroger? Oy. 1,300 stores x 15 registers per store x multi-currency premium per register = way too much fucking money.

    And we haven’t even begun to address the need to train many thousands of cashiers (some part-time, some of minumum-wage IQ) to handle all this.

    Pass.

    Like so many of the pie-in-the-sky thoughts offered by free-market dreamers, this one would work perfectly well — right up until it’s actually implemented.

    Single currencies work better than multiple currencies, within the sphere of that currency’s influence.

    The plain fact of the matter is that the states within the pre-United States tried multiple currencies, and that failed, miserably. It’s also why the European Union (likewise a confederation of states) unified the various currencies of Europe. It has worked, I think, better than in the past, where every time you crossed a border you ended up with a pocketload of (worthless) currency.

    Where the single currency idea falls over is when you have major currencies rubbing up against each other: euros, yen, dollars, yuan and so on, where the controlling authorities have major economic policy differences, or see their currency as an economic tool to be used against other nations.

    The “one-world” currency would have to be maintained by the United Nations or the World Bank.

    Like that’s ever going to happen.

  • Dale Amon

    The problem with your argument is that it is a strawman. You make it sound as if the legal change would require stores to handle multiple currency. It would do no such thing. If I want to pay with, say Liberty Dollars, then it is up to me to find a store (or an internet outlet) which accepts them.

    Krogers has absolutely no need to make any changes whatever unless the use of some alternative currency reaches a scale at which they think it will be profitable for them to find a way to accept that currency. If that never happens, well, that is just the market at work.

    Likewise, the most likely way such things would work is that I would get a debit card from my free market bank; that bank would hold my currency, say gold or liberty dollars or pounds of pot, and would then work with Cirrus or some other such provider to do the automatic transfer into the store’s preferred currency. This is absolutely nothing new. I just did it today, paying from my dollars account to buy a book denominated in sterling to be sent to a Eurozone country. Had my bank account been in Liberty dollars it would have made difference whatever.

    As to the primary intent of the change, if I and another libertarian sign a contract in which I purchase say 100,000 doodad-geehaws from his factory in Taiwan and agree upon a price in gold that will be paid in gold on delivery, then that is his problem and my problem.

    This is just a matter of choice. No one is forcing you to do anything.

  • Alsadius

    Midwesterner – Gasoline is notoriously volatile, to the point where it is regularly excluded from inflation numbers to get a sense of what’s actually going on, instead of merely a measure of the volatility of Middle Eastern politics, so using it as a baseline is problematic, at best. Even ignoring that, looking at a broad 30-year sweep in gold vs gas ignores the fact that gold regularly fluctuates by 20% or more in a year. It was $35/oz in 1968($204/oz real), $850/oz in 1980($2276/oz real), $253/oz in 1999($304/oz real), and it’s $794.40/oz right now. Assuming smooth increases and decreases(which, in reality, means that it exceeded these numbers as often as it fell beneath them), that’s an increase of 22% from 1968 to 1980, a decrease of 10% per year from 1980 to 1999, and a 13% per year increase since 1999.

    Gold moves by between -10%(or more) and +22%(or more) per year, the US dollar moves by between +1% and +6% per year. Even if we exclude the 1968-1980 period as being an adjustment period for the deregulation of gold(and a period where the economy was screwed anyways), it’s still got 5x as large a range of volatility as the US dollar.

    As for your criticism of the CPI, the preference for goods that benefit from mass production has more to do with the fact that nearly everything benefits from mass production – buildings are taller, increasing the real estate pool, food is produced from genetically modified plants and animals in a factory farm, raw materials are harvested 99% by machines, and we’d barely even have the concept of “energy” as a commodity if it weren’t for the mass production that both enables us to have it, and that uses most of it. Aside from direct, personal service of the kind that can’t be computerized, and certain luxuries, I can’t think of anything that hasn’t benefited from mass production. It has some flaws, but those flaws are the same as the ones that exist in any other attempt to measure a modern, industrial economy.

    Paul Marks: The US government does coin money – everything up to the 50-cent piece is a coin(ignoring the collector pieces, at least). Even if you consider the Fed a government agency(which you should, of course) and use your interpretation of the clause in question, the fact that it issues paper certificates redeemable for the coins it mints in accordance with Art I, Sec 8, seems perfectly acceptable. A minor piece of functional legislation saying that anyone who accepts the coin as money has to accept the coin certificate as money doesn’t seem out of line. That said, I’d like to challenge your interpretation of the word “coin” – it’s a verb that means to make something into money as much as it means to make something into a metal coin. Using the dictionary closest to the Constitution(Webster’s 1828), the verb “coin” is defined as:

    COIN, v.t.
    1. To stamp a metal, and convert it into money; to mint.
    2. To make; as, to coin words.
    3. To make; to forge; to fabricate; in an ill sense; as, to coin a lie; to coin a fable.

    Use definition 2 in the Art I, Sec 8 clause, and see what I mean.

    Also, just to make this totally unambiguous, I do not support FDR’s confiscation of private gold – it was one of the biggest offenses against both liberty and sanity ever committed by the US government. I support fiat currency in the modern era(because governments finally got kicked hard enough by reality often enough that they seem to have been following the good-sense laws of economics as regards the money supply since about 1980), but I certainly don’t support government confiscation of private property for whatever asinine reasons FDR thought it wise to do so.

    Dale Amon: That’s exactly how the current system works – you can use whatever currency the person you’re trading with will accept. Legal tender laws don’t change this at all.

  • Dale Amon: That’s exactly how the current system works – you can use whatever currency the person you’re trading with will accept. Legal tender laws don’t change this at all.

    Except that the government is actively shutting down such alternative currencies as surface. It doesn’t seem to tolerate non-government currency. That’s a big difference from the situation Dale is advocating.

  • Alsadius

    The Liberty Dollar has been operating for over a decade. I heard of it five years ago. If it’s taken this long for the cops to bust the place, the government must be orders of magnitude more slow and inefficient than even I’d give them credit for.

    Also, even if the problem is baseless raids on innocent organizations, legal tender laws are not at the root of that. The root of that is stupid government employees not obeying the laws they’re supposed to operate under, not laws specifying methods of use for the government-issued currency. Repealing legal tender laws will not make the Liberty Dollar one iota more legal – it’s legal already, meaning that the bust was either for reasons of other illegal acts(not having to do with legal tender laws) or was wrongful(in which case, changing the law won’t help).

  • Midwesterner

    nearly everything benefits from mass production

    Er, no. That is my point. We are NOT benefiting from mass production. The manipulators of the US government currency are pocketing the benefit by printing dollars and we are paying the same old price with highly inflated dollars..

    Gasoline is notoriously volatile, to the point where it is regularly excluded from inflation numbers to get a sense of what’s actually going on,

    Yeeeaah. Riiiight. It couldn’t possibly be excluded from inflation numbers because it’s gone from around 30 cents a gallon to 3 dollars a gallon in 40 years. That knowledge would clearly cause confusion and prevent us simple citizens from “getting a sense of what’s actually going on.” You are clearly full of post consumption bovine feedstuffs. Which have coincidentally experienced similar (confusing, don’t mind them) price changes.

    I got a really big kick out of your gold numbers. What I especially liked was your use of the world “real”. More obfuscatory bullshit. “Real” is what I earned and put in my piggy bank from when I was ten years old. That “real” money is now worth less than ten percent of what it took me to earn it. You actually have put yourself on record stating that the dollar’s value is not real.

    I also get a big kick out of your assumption that the changes in the value of gold, energy, real estate, foodstuffs, etc relative to the dollar, mean that the dollar is stable and the commodities are doing the fluctuating.

    The CPI is a load of crap and a complete fraud. You are a lousy spin doctor trying to spin the indefensible.

  • Paul Marks

    Alsadius.

    I did not deny that the U.S. government mints coins (although whether base metal coins can be “legal tender” in any State is a more complicated argument).

    But it has no right to print Dollar notes – or to give power to a government or private agency to do so.

    Nor does have the right to steal privately owned gold.

    And nor does have the right to void gold clauses in private contracts.

    Supreme Court judgements to the contrary not withstanding.

  • Alsadius

    Midwesterner: If you don’t think we’ve benefited from mass production, try knitting your own clothes and farming your own grain. Mass production makes everything cheaper, better, and more available. Thus, your initial complaint that using goods that benefited from it skewed CPI data is wrong, because it benefits almost everything, and your seeming claim above that it’s just being used by elites as an excuse to inflate the currency and pocket the difference is just ludicrous.

    As for gas prices, there’s a few points you seem to be missing here. One, 40 years ago OPEC didn’t exist, and it was being sold primarily by American companies engaged in serious competition. Nowadays, there’s political tension all over the place among major producers, and something like 70% of the oil production in the world is controlled by a single cartel. Of course the price has gone up. Two, it hasn’t gone up all that much – 30 cents 40 years ago is $1.85 today, and most of the difference between $1.85 and $3 is taxes and price hikes based on hurricanes and Iraq in the last few years. I don’t have numbers handy, but I think the pre-tax inflation-adjusted gas price was actually marginally lower in 2005 than in 1965. Three, the concept I was referring to is a standard practice when reporting CPI data – they give out the total CPI number and the core CPI number, which excludes foodstuffs and energy, because they’re both highly vulnerable to short-term fluctuation(based mostly on weather and politics, respectively) and thus not indicative of long-term trends. I used imprecise language before, but that’s just because I assumed you’d heard of core CPI data. That said, if you need any proof of the volatility of gas prices, just ask yourself if you know of any other business where they need big, easily-changed numbers out front to tell you what the price of their main product is.

    As for the word “real”, it’s standard economic terminology for “inflation-adjusted”. Since CPI data is the best way of estimating inflation at our disposal, I use it as a guideline for all the other numbers. That said, I never claimed that fluctuations of commodities against the dollar implied that the dollar is stable and the commodities are fluctuating – if I were trying to assert that, I’d have ignored the existence of CPI data and used nominal dollars as my baseline. But since government statistical agencies are nice enough people to give me a monthly measure of what a standard basket of goods, consisting of most major items people purchase regularly, costs, I’m going to use that as my baseline for everything. And compared to that baseline, gold is 5x as volatile as the dollar. I’m not using the dollar as my baseline, I’m using a broad swath of commodities. What more do you want? If the CPI isn’t good enough, what would be?

    Also, if you want the money you earned as a child to be worth something, spend it at the time. Even in a world without inflation, you’d have to be a fool to keep it locked up doing nothing for 40 years. Spend it, invest it – do something other than hoarding cash, since hoarding cash in any quantity is almost invariably the worst possible thing you can do with it in an economy that’s even remotely stable.

    Paul Marks: Why do you insist upon associating me with gold confiscation? I’ve never supported it – I specifically condemned it in my last post, just to make my opposition explicit and to get us off this rather unproductive venue of conversation. But in case that wasn’t good enough, I’ll say it again – I do not support gold confiscation. I do not support governments breaking private contracts involving gold. I do not support FDR’s monetary policy, his auric policy, or really just about any of his domestic policies whatsoever. My position on legal tender laws is based in 2007, not 1933, and I’d prefer to discuss it with that in mind.

  • Midwesterner

    From wikipedia:

    Meanwhile, the shock produced chaos in the West. In the United States, the retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974. Meanwhile, New York Stock Exchange shares lost $97 billion in value in six weeks.

    There are two kinds of commenters that I don’t bother ‘debating’. One are blowhards who don’t know what they are talking about and recite a lot of false ‘facts’. The other kind engages in strawman arguments and attempts throughout their comments to mislead and deceive. I don’t really care which kind you are.

    You said “One, 40 years ago OPEC didn’t exist, and it was being sold primarily by American companies engaged in serious competition.” when in fact, Opec takes advantage of the situation after the June 1967 Arab-Israeli war, and of a supply shortage, to force the western companies to agree to end oil price discounting. By the end of the decade, a barrel of oil costs $1.80.”

    That’s right. 1970. OPEC. No discounting. $1.80 per barrel. 2008. ~$90.00 per barrel. *

    30 cents 40 years ago is $1.85 today,

    Um. Yeah. That’s kind of my whole point. Except it is actually far worse than that. You must be using that there Consumer Price Index thingy. You ever heard of hedonic regression? It’s one of those nifty tricks they use to manipulate the CPI.

    The rest of your comment suggests that you are truly clueless and not really intending to mislead. You have no understanding of what inflation is, where it comes from, and most importantly, where it goes to. Hint, at the ~$12,000,000,000,000 size of M3, every 1% of inflation takes away $120,000,000,000 of value from all of the people than own dollars or $IOUs and gives it to whoever prints the money. In any case, I’m not going to bother continuing this conversation.

    I will however, try to make something clear for anybody else still reading this thread. Since 1960, money supply M2 has gone from 300 billion dollars to 7,400 billion. That’s right. Approximately 25 times as many dollars as there were in 1960. And considering the the Federal Reserve won’t even tell us the size of M3, it’s a safe guess that the truth is well over 11,000 billion dollars by now. M3 is that nifty little category that includes the IOUs the treasury gives to other countries like China in order to temporarily borrow that money back off of the market and loan it to the US government and its choices. But make no mistake. China, Japan, etc own that many dollars and can also use them to buy stuff on the market. They don’t have to hold those IOUs if they decide they would rather spend the money.

    If we include an estimated M3 (those IOUs) into the inflation from 1960 through today, it’s pretty certain that the money supply has grown from around 300 billion in 1960 to somewhere between 11,000 and 13,000 billion dollars. Using 12,000 for our math, that means the money supply has grown to 40 times as much as there was in 1960. Our population has grown by about 2/3s since then. Does anybody even remotely think there we are all 24 times richer? Not a chance. It’s that hedonic regression slight of hand.

    * Curious example, that. Back then, a gallon of gasoline cost about 13% the price of a barrel of crude. Today, a gallon of gasoline costs about 3.3% of the price of a barrel of crude. The price of crude represents demand times ~true inflation, the price of gasoline represents demand times ~true inflation minus economies of mass production plus taxes. Considering the cost of a gallon crude is ~2.4% of a barrel, and the cost of a gallon of gasoline is ~3.3% that doesn’t leave much for production, taxes and the lower value of products like asphalt. (All of which are worth substantially less except the higher volatility grade which competes and is priced similarly (PDF) to fuel.)

    One more thing, I can’t let this go. “hoarding cash in any quantity is almost invariably the worst possible thing you can do with it in an economy that’s even remotely stable” Worst for who? The cash’s owner? In which case what business is it of yours? Oh… I understand. You don’t want to let the owners of the cash decide if or who to lend it to. You want to force them to lend it. Otherwise all those special projects you can’t get people with savings to loan money to will not find backers. Here’s a news bulletin for you. That is precisely the reason the system was set up and enforced the way it is, to pick the pockets of people who try to save money. Why do you think personal savings in the US is actually negative?

    What a maroon.

  • Alsadius

    I’d like to think I’m not either of your categories of people not worth debating. I’ve got a degree in economics, and I’m not trying to misrepresent what you’re saying. I just happen to legitimately believe that most of what you’ve said is wrong.

    On OPEC, I was referring to its existence as a major force. I admit I was a bit less versed in its history than I should have been, and it had more of an impact before 1973 than I thought, but that doesn’t change the fact that its impact was primarily felt in 1973, when the price of oil quadrupled due to OPEC production cuts in a very short period of time. But the exact date of the founding of OPEC doesn’t change the fact that the price of oil fluctuates based more on politics than on economics, and that it is thus a terrible baseline to use for comparing long-term trends. My error on the detail doesn’t change that.

    Yes, I’ve heard of hedonic regression. Not only is it standard practice, it’s also simple common sense,even if the actual implementation of it is a bit inexact. Let’s go to first principles here – any attempt to measure inflation has to be done by taking a series of commodities, and comparing the money prices over time. There’s no better way to measure inflation than to take as broad a basket of goods as is fesable and watch it, so that is the standard method for doing so. However, goods change over time, and as such the basket has to adjust for that fact. You can basically only do this either by frequently shifting the basket used(say, annually), or by attempting to account for the differences while keeping baskets intact for longer. Both methods are prone to error, but the first is generally more prone to error, since you rapidly lose your basis for comparison over time due to excessive shifting of the components of the basket. Thus, hedonic regression is used to try to minimize error and get a better data set out of the CPI method. And the reason for it is obvious – compare the first computer my father bought in 1992, with the one I’m using now from 2002. They cost roughly the same amount, but mine is over than 1000x faster, has 2000x the hard drive space, 200x the memory, and similar levels of improvement in everything else. If, for sake of argument, the economy consisted solely of money and computers, then hedonic regression would acknowledge this practice for what it is – a deflation by a factor of several hundred – whereas ignoring it would imply that money was worth no more than it was before. Which do you think is more accurate? Again, I’m not sure what you expect statistics agencies to do, but the methods being used are generally the ones agreed by most people who know these issues to be best, and the results they produce line up well with most other sensible methods people use to check the data.

    And I’m fully aware of what inflation is and where it comes from. The price level is determined by the amount of money changing hands in a given period of time divided by the amount of goods changing hands in the same period of time. Inflation is merely a change in this level, which is generally caused by the growth of the money supply outstripping the growth of the goods economy(though other causes can occasionally have short-term effects). It’s not a difficult concept.

    As for the effects of inflation, you’re neglecting a fundamental fact. The purchasing power of all the money in the economy is equal to all the goods in the economy at any given time – supply and demand sees to that. Thus, inflation cannot do anything to diminish the purchasing power on the money supply. All it can do is change the distribution. If everybody’s money holdings were to double, then prices would double and there would be no difference whatsoever in the economy to show for it. I acknowledge that the expansion of the money supply that leads to inflation is not spread out exactly proportionally, but the mechanisms whereby money is kept generally account for that and eliminate most of the blow. A decent savings account or bond more than paces inflation, no matter what the level of inflation is, meaning that the portion of M3 stored there is basically unaffected by inflation. The only people who are really harmed negatively are those who hold large amounts of cash, and the small detriment to them is more than made up for by the benefits of a small, predictable, positive inflation rate.

    And M2(I won’t use M3, because there’s no current data on it) has grown by a factor of about 25 since 1960. This yields an increase of about 15x per capita, as compared to a CPI difference of 6.68x, and I’m definitely willing to say we’re all 2.25x as rich as we were in 1960. Actually, that might even be a low estimation, so the fact that M3 has increased by more might be a better representation of the situation.

    As for cash hoarding, yes, it’s worst for the cash’s owner. Now I’m a libertarian, so I think that they’re free to do whatever the hell they like with their money, be it smart or stupid – but that doesn’t change the fact that holding onto it in cash form *is* stupid. Again, even neglecting inflationary losses, you’re forgoing any interest revenue you could make, or you’re forgoing the value of consuming now instead of consuming later. The only times cash holdings of size make sense are in situations where the economy is experiencing severe deflation(meaning that you won’t do any better investing it), or in situations where you have no reason to trust the integrity of the economic system that would be holding your money if you don’t hold it yourself. Drug dealers holding cash makes sense, because it’s less prone to seizure and tracking. People in disaster situations holding cash makes sense, because they can’t access their less liquid assets(and for this reason, I have no condemnation towards people who keep a cash supply on hand). People whose economy is collapsing holding cash makes sense, because it’s the only thing that they trust to have value when the dust settles. But for someone in a stable economy, like the one we have today in the western world, putting a hundred grand in a mattress is stupid. They can do it if they like, and I won’t stop them, but I’ll gladly mock them. And it doesn’t have a thing to do with how people are trying to manipulate the economy – it’s just human nature.

  • Midwesterner

    I’ve got a degree in economics

    Well, that explains a lot. Forests, trees and what not. In all seriousness, I think you were probably a diligent student and learned what you were taught. But being a good student is not what its cracked up to be anymore.

    Thus, inflation cannot do anything to diminish the purchasing power on the money supply. All it can do is change the distribution.

    Exactly the point. It is plain old fashioned redistribution at $120,000,000,000 per each 1% of inflation. And no, you must not ignore M3 even if they told you to in school and are keeping it a secret. Seriously, how much harder can it be to estimate than M1 and M2? They are in fact suppressing that data.

    Seriously, that degree in economics thing. I can tell by your meta-context, all of your unthought as opposed to thoughtful assumptions, that you have much knowledge and little understanding. You should forget everything you were taught, sit down with a pencil and a lot of scratch paper, and design a system that has complete protection of each individuals rights of life, liberty and property. Don’t try to adjust the present system, design one from scratch. It is a far more difficult but productive exercise. The right of property part is what you need to work on especially hard.

    If you want to engineer a currency, its parameters, and whether it is fractional or even fiat, good. Do it. And then offer it to free people for their voluntary use. Several companies like eGold have done this. Forgo all force. If your ideas are right, your currency and your clients will do well. If you are wrong, the market will figure that out and let you know. Currency is not justly the business of the state. But the state is doing everything in its power to destroy all competitive currencies like eGold and Liberty dollars and everything else. There is almost becoming a panicking desperation to its attacks. With good reason. With out a total and absolute monopoly on currency and exchange mediums, the redistribution state will fail. It cannot survive without control of all trade.

    You really need to sit down and work out how the system really works. I recommend drawing lots of boxes and arrows showing how everything relates. Assuming you know double entry accounting, you will find that general concept useful. But most useful will be to draw a hard clear line between the issuing governments of the currencies and the ‘consumers’ of them. For example, when you are deciding what to do with T-bills, remember that as each one expires, another one needs to be bought at market price or that money comes back from the issuing government and into competition with existing circulation pool. There is no quicker way to send inflation into the stratosphere and governments into default. Assume that sooner or later they will monetize. At some point everybody has resorted to turning on the presses. Your most difficult challenge will be rejecting all of the assumptions that have been coded into you so deeply that you don’t even know you are making them. Try adopting the attitude of a forensic auditor and abandoning the perspective of an economist. That will no doubt be difficult as nobody likes to abandon that much expended effort.

    Good luck.

  • Alsadius

    I’ve actually done more of the above than the degree might imply. I learned most of my economics while my major was still physics – I spent far more time debating then than I do now, I read blogs by at least three economists of various stripes, and I was big into all the idealist libertarianism, which means a whole lot more discussion of the underpinnings of economics. By the time I actually started studying it formally, I barely had to go to class – just learn the handful of mathematical models they used, nod my head at all the various types of common sense they used(and sit in wonder at how many of my classmates didn’t get it), and write the occasional essay or exam. I went to a pretty good school, but I still feel vaguely embarrassed using it as a credential, and just sad knowing that it puts me above 98% of people when it comes to knowledge of the field.
    That said, it puts me way ahead of the curve on doing what you asked, since I already did most of it before I had any formal training in economics.

    That said, I’ll give it some thought. I doubt I’ll get anything out of it I haven’t already thought of/seen, but you never know.

  • Alsadius

    I’ve actually done more of the above than the degree might imply. I learned most of my economics while my major was still physics – I spent far more time debating then than I do now, I read blogs by at least three economists of various stripes, and I was big into all the idealist libertarianism, which means a whole lot more discussion of the underpinnings of economics. By the time I actually started studying it formally, I barely had to go to class – just learn the handful of mathematical models they used, nod my head at all the various types of common sense they used(and sit in wonder at how many of my classmates didn’t get it), and write the occasional essay or exam. I went to a pretty good school, but I still feel vaguely embarrassed using it as a credential, and just sad knowing that it puts me above 98% of people when it comes to knowledge of the field.
    That said, it puts me way ahead of the curve on doing what you asked, since I already did most of it before I had any formal training in economics.

    That said, I’ll give it some thought. I doubt I’ll get anything out of it I haven’t already thought of/seen, but you never know.

  • Alsadius

    I’ve actually done more of the above than the degree might imply. I learned most of my economics while my major was still physics – I spent far more time debating then than I do now, I read blogs by at least three economists of various stripes, and I was big into all the idealist libertarianism, which means a whole lot more discussion of the underpinnings of economics. By the time I actually started studying it formally, I barely had to go to class – just learn the handful of mathematical models they used, nod my head at all the various types of common sense they used(and sit in wonder at how many of my classmates didn’t get it), and write the occasional essay or exam. I went to a pretty good school, but I still feel vaguely embarrassed using it as a credential, and just sad knowing that it puts me above 98% of people when it comes to knowledge of the field.
    That said, it puts me way ahead of the curve on doing what you asked, since I already did most of it before I had any formal training in economics.

    That said, I’ll give it some thought. I doubt I’ll get anything out of it I haven’t already thought of/seen, but you never know.