But there are certainly problems with gold/silver standards as well. That issue was heavily politicized at the turn of the century over a hundred years ago by Williams Jennings Bryan. The farmers that he represented were paying interest on their loans and suffering from deflation since the monetary supply was restricted.

Despite what bankers might fear about deflation, it’s not as a bad a beast as central banks would have you believe. The quality of life in America improved by a remarkable pace in the 50 years between the Civil War and 1913 and the economy was suffering from deflation. The only reason the boom was uninterrupted was because many banks misbehaved, lent out too much money, and caused bank panics.

For the specie (gold/silver) starved colonies, banning the issuance of fiat money was the bane of the economy, and its effect was similar to a instantaneous shrinking of the money supply.

The reluctance to issue fiat money came about because of the Revolutionary War because the government issued excessive numbers of Continentals that in the end became worthless. Lots of farmers were dispossessed because of the loss in value of the Continental.

Fiat currency is not inherently bad. But there is a danger to fiat currency, when extraordinary circumstances or private interests take control over the issuance of money.

TanGeng wrote:

“Well Milton Friedman had one set of theories surrounding the monetary policy and the way to soft land the Great Depression.

But the normal mode of operation for his central bank would be monetary creation at a steady rate that matches long term economic growth. Under Friedman’s system, there would be little or no inflation.

That is not how the Fed operates right now or how it has operated in the past 60 years.”

***

In the research that I’ve done, the only economic system I’ve heard of that’s come close to this is Colonial Script. It sounded basically like an IOU system where future goods and services were being bartered around through contracts. After the British banned Colonial Script, the colonies returned to a fiat-based currency in the run-up to the Constitution. But they ended up inflating their new currency so much that they decided to go with gold and silver coin.

In the DVD “The Money Masters”, the author proposes a similar system (as Friedman) and warns of a possible return to a gold standard citing the fact that the IMF and other world organizations now have large control over gold. If they have such a large control they could definitely wreak havoc with the markets if they wanted to.

If we had a system that was not susceptible to corruption, than I think that a fiat inflation-free currency could be the most ideal solution. The most modern example I can see of that is LETS (Local Exchange Trading System) as well as the number of other local currencies that have sprung up here and there. But is it really possible to create a fiat currency that is free from inflation and deflation? It sounds like a pretty daunting task and would require a very just and moral society.

I think this is where gold/silver/asset based economists end up drawing their conclusion eventually. In the end, the currency is supposed to facilitate trade in a fair manner. With an asset based currency at least you will know that you are trading your goods for something that has value on the market. Whereas with a fiat currency the currency is not a real storage mechanism of value.

This is where our problem with rampant credit and negative savings begins and is also why people project a collapse in the future. The system as it is now perpetuates itself indefinitely. It is debt-based. The government issues bonds, sells them to the Federal Reserve, who prints out the fresh currency. To pay off these debts (on the bonds) more money must be issued and borrowed to pay off yesterday’s liabilities, meanwhile we are simply incurring more liability for the future.

Slowly the actual wealth (hard assets) gets displaced to the top and the purchasing power of the currency wanes away. But at the same time, in order to maintain wealth it’s necessary to participate in the system. (For instance you must lend your money to the bank by way of a savings account to have any chance of competing with inflation.)

Will it eventually collapse? I think it’s pretty certain that at some point, the wealth could become so displaced that it would affect people’s abilities to make their loan payments, buy gas, food, etc. Is that what would constitute a collapse?

It has yet to get to that point yet, I do know that the service industry has been hit pretty hard by all of this. The owner of the store I work at is selling his two franchises to another guy in town. Our sales are down tremendously and the owner can’t even break even at this point. I’m not too optimistic and I see this as a trend that’s going to continue going on in the coming years.

Ah, Milton. The perfect example of Rothbard’s Law.

If you read what I’ve written about Fred Thompson, you’ll see that I’m more interested, as a political junkie, in his impact on the GOP field.

And, admittedly, he is a far more interesting person to watch than RudyMcRomney.

It’s real alright.

This could be another S&L disaster. This time there will not be enough money for the government to bail out.

Freddie Mae and Freddie Mac have been allowed to carry far too much debt and in recent years acquired historical sub-prime paper.

http://financial.seekingalpha.com/article/42216

Fannie Mae and Freddie Mac both assessed fines for improper accounting methods is a sgnificant piece of the puzzle that is being down played. The brother and sister act are two of the largest financial institutions in the world!! A fine example of why government should stay out of the free-markets.

http://www.mises.org/story/2627

Well Milton Friedman had one set of theories surrounding the monetary policy and the way to soft land the Great Depression.

But the normal mode of operation for his central bank would be monetary creation at a steady rate that matches long term economic growth. Under Friedman’s system, there would be little or no inflation.

That is not how the Fed operates right now or how it has operated in the past 60 years.

But the greatest feature leading up to the Great Depression was run away credit that promoted runaway investment. Those runaway investments popped and wiped out millions of dollars of savings. – This was back when a million dollars actually was worth something.

Today that runaway credit exists again. It is not only true in the United States but also true in Japan, China, and Europe. We’re setting the table for prolonged stagflation or another massive shock like the Great Depression.

I am not a Fred Thompson supporter, though I do find him a more interesting candidate than any of the other frontrunners.

Buckwheat,

Last time I checked, I still lived in a country where I was allowed to disagree with people. I think Ron Paul is right on many things, but wrong on monetary theory.

Pick up Milton Friedman someday and you’ll figure out why.

So Mataconis, why are you cozying up to the neocons if you’re supposedly a libertarian? Are you a mole? What’s your game, Doug?