Sunday, 17 January 2010

Let's print some quids

I was first told about the Gold Standard in school, when I was around 8 years old. The teacher told us that, before the Spanish Civil War, we could take our "pesetas" notes to the Central Bank and they would give us a bit of gold (I never put that to the test, though). Now, the teacher said, the value of money was based on the amount of it, and the amount of it depends on the Central Bank. The system, the teacher said, was now based on "trust".

The "trust" he referred to was the hope that the Central Bank and the Government will not mess everything up (I am way too old to believe in "independent" Central Banks). The Bank could print money to pay for Government debts, because the debts were fixed ("hey, you owe me a trillion pounds") but the value of money was not ("yeah, I'll print them out for you!").

It is the equivalent to pay for a £500 new TV by getting cash from a cash machine with your Visa Electron (you've got to have the money in you account), or use your Visa Credit Card instead (you create money out of nothing although you'll have to pay it back in the future).

Credit Cards create an illusion of wealth because one can afford a lot of things "now" and pay "later". The same happens with the Government. The Government can get a lot of things now (hospitals, benefits, wars) and pay later. Or, better still, don't pay at all and simply print the money, which causes its value and the value of the debts to fall. One cannot print gold or create it out of nothing, that's why Governments don't like it. Paper money isn't good for the lender but quite nice for whoever owes the money.

The guy who invented the fiat currency, or paper money, system was quite clever. And he definitely owed money to someone.


sound money man said...

Good post. Have you read "Gold, Peace and Prosperity" by Ron Paul?

banned said...

I tried Quantitative Easing over at Tesco the other day but they damaded cash instead. At least I managed to bring some stuff home without incurring yet more ruinous debt for the younglings.

sound money man said...

I've noticed that too banned. If I want to pass an IOU at Tescos I have to do it through the commercial banking sector and settle my bill at the end of the month or incurr interest. The UK Treasury is in a similar predicament although they have no credit limit and special "introductory" rates of interest. Only the Bank of England gets to pass its IOUs off as "legal tender" and instead of paying interest, they charge it!

A,J, said...

Thanks for the link, Sound, I haven't read that particular book but I've recently finished "End the Fed", a really great book.

Maybe next time we should explain the "wonders" of printing money to the Tesco cashier. He/she might join the Libertarian revolution! (not too sure about the free groceries, though) :-)

sound money man said...

@AJ: although I haven't had that conversation with the Tescos cashier, I did have an intereting conversation with a very young bank teller at Halifax. I presented him with a big cheque and he asked if I wanted to open a savings account. I told him that the money would not be sitting there for long as I intended to put the bulk of it in gold bullion. I explained that the pathetic interest rate being offered was far below the rate at which the central bank were increasing the total money supply. You could almost see a little lightbulb go off above his head. A big grin crept across his face and he nodded.