What I’m Looking At: March 25, 2009

* Maxine Waters can barely put a sentence together. The constant stream of WTF expressions on the face of the guy in the dock are priceless. Don’t feel bad, guy, I have no idea what she’s talking about either. Hat tip: Dan Riehl.

* Fix it yourself, then, Senator Jackass. An AIG exec vents in his resignation letter, published in the NYT. If I’m reading it correctly, this individual previously worked in a part of AIG that was solvent and not involved in toxic assets, and then volunteered to work on closing down the bad asset-holding division in an orderly fashion while being paid $1. So his bonus, which Congress just voted to tax at 90%, was his entire compensation for the year. Yes, there are people a lot worse off than him. No, that doesn’t make this little exercise in Chavez-ism okay. Hat tip: NRO

* Book banning makes a comeback. No, it’s not a conspiracy, unless there’s a conspiracy to fill the federal government with incompetent idiots. An innocent-sounding reduction in the legal lead content for children’s …items seems to mean that books printed before 1985 can’t be sold or given away. That’s because they might contain ink that has lead in it. Because of the same law, motorcycle dealers can’t sell dirtbikes and ATVs that are meant to be used by children under 12, because the batteries have lead in them.

If you think back to what was in the news a year or so ago, the new limit is clearly meant to address toys with lead-based paint – and that makes perfect sense. Kids put toys in their mouths. They don’t, however, put small engine batteries or transmission fluid in their mouths. Oh, and there isn’t a single case on record of anyone getting lead poisoning from a pre-1985 book. Other than that, great law!

More On The Gold Standard v Fiat Money

So besides my last post, I also had a status msg on Facebook with my reaction to Ron Paul’s rant about gold. Among others, a friend commented the following:

It’s not magic… money is only money because someone says it is. Fiat or gold/silver standard alike. The problem with a backed currency is that it is difficult to get liquidity as overall value increases. The problem with fiat currency is that the government just prints more money instead of raising taxes. If overall national wealth has not increased, this causes inflation, hurting the poor and working class the most. When a national debt is called in and the government prints it all, hyperinflation happens, wiping out nearly everyone. In the campaign, Ron Paul actually advocated competing currencies (NOT a pure gold standard), where you could buy your bread with a Federal Reserve Note, a euro, or a silver certificate. Keep in mind that FDR actually made it a crime for a private citizen to own gold from 1933 to 1971 (when we went to pure fiat currency), demanding it be turned over to the government. Of course, it’s not like the media or schools will highlight any of this…

“Fiat money” means paper money (or coins, or marbles, or any item used to represent value) that is declared by the government (by “fiat”) to be money.

My friend’s argument is that fiat money exists only as long as everyone agrees that it exists, and thus we’re each always at risk that the system will break down and our bank balance will disappear, wiping out our life savings without a trace. Only by physically possessing something like coins made out of an amount of gold worth their face value can you be sure that your money will survive an economic calamity.

It’s worth thinking about that a little bit. First, even if the only cash in circulation were gold coins, insuring yourself against a banking collapse would still involve keeping money under your mattress. As soon as you bank your gold, you’re right back where you were with paper money because your gold only exists as an IOU from the bank.

Second, and related, the idea of the money supply being controlled by the gold supply is an illusion anyway. If the bank kept every depositor’s full balance in the vault, there wouldn’t be anything available to lend. Of course they don’t keep everyone’s money under a giant mattress, they keep the amount they expect people to actually take out, and lend the rest. So for example, if the bank keeps 50% of all deposits in the vault and lends out the other half, the economy now contains 150% of the original deposits. When the lendees pay back the loans with interest, the money supply goes up even more.

So unless you’re also going to ban moneylending, I don’t see how a gold standard constrains the money supply. As I mentioned last post, though, it would constrain the government from printing money to pay down public debt, which would be a good thing.

More philosophically, fiat money isn’t really money ‘just because someone says it is’. Money – paper or gold – exists for good natural reasons, and people are going to use something as money no matter what else is going on. And whatever money is in circulation is always “backed” by the total value of goods and marketable skills present in the economy. Which goes to what I presume is Clint’s argument in his last comment (“no cash = fascism”) If the government actually denied individuals the right to trade in anything other than government-defined currency (call it “points”) then for good or ill you’ll be forced to use official channels for all your buying and selling.

Of course things like that have been tried from time to time (see “Soviet Union”) and the inevitable result is that, due to the aforementioned natural reasons, a black market always springs up (see “Prohibition”) And that’s why the whole notion of centrally planned economies doesn’t make sense. Economies are a natural phenomenon, exactly like an ecosystem, or a weather pattern. Trying to control it invariably leads to demonstrating that you don’t truly understand it.