What is "non-fiat" money?

I think that refers to the dieting practices of central banks.

As in ....

The financial world is so bloated, maybe it is time for the central banks to go on a "non fiat" diet.

1) Must it carry full intrinsic value?

A: No, but it should come pretty close. If the intrinsic value of paper were to ever approach its face value as currency, it would be used as notes valued anywhere from a few mills to a couple of cents. While lighter than a penny, it wouldn't be useful for much more than a penny would be. You certainly wouldn't want to buy a meal with it, and absurdity is reached at even an article of clothing not to mention higher priced items like electronics, cars, and houses. It would take warehouses full of the stuff to do business. It FAILS the portability test listed below.

If this is so, then only coins (we could add beaver pelts) would qualify.

A: Sorry, beaver pelts fail the durability test, as well as the divisibility test, AND the intrinsic value test. (at least the last one at present because we have other means of making clothing now) Yes, only coins or small bars/ingots would qualify.

None of our commonly used coins today would qualify, as the metallic content is below legal tender value (pennies, for awhile, were actually worth more than a penny).

A: True. At least with respect to the face value on them. They might be useful with a lower value, but being base metals, they are only good for subsidiary coinage. See my note below on why copper and nickel are only good for small change.

If a coin is measured by full intrinsic value, then the trading value would vary every day with the price of the metal. I guess we'd use scales instead cash registers.

A: Again, see my note below on copper and nickel. Small change has a high velocity, and so it is easier to remove them from circulation and coin newer versions with the same face value to reflect the change in intrinsic value. We don't need scales. But we may need new types of cash registers. (though computers can solve this easily, it is the old time registers that are an issue) If the weight and purity are imprinted on the coins, with or without a face value, the coins can always be traded on that basis even if a new issue is circulated with the same weight and purity and a different face value. The point of giving this power to Congress was so that the same standards of weights and measures would be used throughout the country and so people could trust they were correct. This is no longer necessary as there are reputable private firms that mint according to trusted high standards, but as long as the weights and measures are set by Congress, anyone or any State should be able to coin money according to those standards.

If Congress minted coins with no face value, and only weight and purity, there would be no need to ever re-mint coins until they wear out. Coins could otherwise circulate forever based on that weight and purity. (and do so internationally) The only questions would be what metal and what weight and purity to make the unit of account for government accounting purposes, and how would the market handle various floating currencies? The answer is likely that Congress would either adopt the silver or gold ounce as their unit of account, or no unit at all, and use all of them. The market will do what it does now, and most merchants would likely coalesce around pricing goods or accepting coinage based on the 200 DMA relative between each metal. Computers can handle all of this. If not already, then it would be easy to program into POS systems. Cash registers might be a bit tougher, but new models would surely be introduced.

Vending machines may have an issue, but this can be solved easily since likely only copper or nickel would be accepted due to lower prices. Current machines pick up on metallic signatures so they could easily be programmed to recognize the new coins by their size/weight and metal content. The readout could easily display the amount given/needed as you drop in coinage as they do now. They even display the price of an item if you enter its code without depositing coinage. So this would work now, by showing the price in various metals or an option button could be added to choose the metal and then have the price displayed. Changing to small screens or larger readouts would be trivial.

If you deposited non-fiat coins in a bank, would they become fiat since the money becomes digital? And the intrinsic value would become an asset to the bank.

A: The coins still exist. The digital blips are merely accounting entries proving you own the coins and the bank is holding them for you. The blips themselves are not currency. The bank is a fiduciary holder of the coins in trust for you. Thus they are not an asset to the bank, but a liability for them, as they are owed back to you. You are confused (not your fault) with the nature of our present banking system which treats deposits as assets for the bank. This is unlawful. Were we to return to specie, we would have to majorly reform our banking institutions back to "warehouses" that served clearing functions. (for a fee)

Additionally, fiat is "by decree" so making a deposit does not turn deposits into fiat. There is no associated government decree. As noted, the digital or paper book keeping entries are not used as currency. This is simply an accounting mechanism to transfer ownership of the money from one person to another. Physical exchange is one mechanism and is most widely understood; bank clearing functions are another, but their effect and status are the same. Digital blips, checks, etc. are not currency. They are clearing mechanisms - mechanisms of transferring ownership. You are ascribing a status to them that does not exist even today.

2) Would paper money that is redeemable with gold qualify as non-fiat? It has no intrinsic value as it is backed by a promise to redeem. Is a promise good enough?

A: It might not be fiat if it wasn't decreed to be legal tender, but that doesn't mean it is money. It is merely currency that people accept in the place of money. The question of "is the promise good enough" can only be determined on a case by case basis with each person who accepts it. (and that may change from time to time)

According to Paul Horvitz, Director of Research, Federal Deposit Insurance Corporation, in 1933, the money supply was around $20 billion while our gold supply was only around $4 billion. Does that mean that the gold backed money was actually fiat since the promise to redeem was only fractionally supported?

A: The "money" supply could not have been larger than the actual money in existence. What was meant by that is there was more "currency" circulating than money that it represented. There is no such thing as "gold backed money." Gold IS money. This would be "gold backed currency." And it would only be fiat if it were currency by decree rather than market acceptance. But that doesn't mean it is a good substitute for actually using money.

In order to prevent the value of money from varying, gold was arbitrarily valued at $20.67 oz. The problem was that if the market price of gold went much higher, people could profit by redeeming their money. And, if they suspected that only some money could be redeemed, that could start a bank run. And, this is exactly what happened when we defaulted on our promise to redeem in 1933 (domestic window closed) and 1971 (foreign window closed).

A: Setting the price of gold relative to silver wasn't done to prevent the value of money from varying, the act itself is a variation in the value. That's kind of silly to even suggest. And anyone who attempts the task of fixing the value of money is barking up a tree that cannot be climbed. Money IS commodities in the market place. Their value can be relatively stable for various reasons, but that value cannot be forever fixed. Nor is such a desirable end. The question ultimately arises, fixed with respect to what? If some other commodity, that too fluctuates over time. So you are chasing a moving target. If you always want say a pound of flour to equal 10¢ you could adjust the face value of silver accordingly, but you'd be doing it on a constant basis. And this would negate any incentive to reduce costs in order to compete in the market place. A pound of flour will ALWAYS cost 10¢ no matter what you do. Sure, you could make more profit, but you could never gain market share except in proportion to the population increases. Standard of living can never rise. Everything would stagnate, and there would be little or no incentive for innovation.

But to the point, while there have been some arguments concerning the use of face values on coins, as opposed to weights and fineness alone, the first coinage act of 1792 established ratios between gold and silver that were near historic (hundreds of years trend) means. It was initially set at 15:1. It has been known to fluctuate and has been as low as 10:1. (ounces to ounces, not Dollars to ounces) This is why Congress was given the power to "regulate its value" so that if the ratio were to change, Congress could recall present coins and issue new ones at the new ratios. Of course, it would have been easier to just mint whole and fractional ounce coins with the weight and purity stamped on them, and then there would have been no need to re-mint anything. The only question would have been for government accounting purposes, how should they handle the ratio, or should they use a mono-metallic standard.

The problems associated with bank runs were directly tied to currency not coinage. The value of the coins did not change much. What did change, and what was not trusted after a time, was the relative value of the bank notes that circulated as currency. This was a problem since the early days of the Republic. Every time a bank issued more currency than money it had on hand, trust went down, value went down, prices went up, and bank runs ensued. This was especially prevalent after the Civil War when Congress messed up the coinage when a whole dollar coin was not the same as two halves, four quarters, or ten dimes. (it was no longer fungible) Thus it failed to circulate and so a money shortage occurred. (they also issued $1 sized coins with a $5 value to the Orient for trade) Coincident with this, Congress placed us on a Gold standard, even though the silver dollar was still our unit of account. These imbalances wrecked havoc on currencies and produced bank runs. In addition, bankers got greedy and inflated their currencies which also produced bank runs. Instead of implementing the Federal Reserve, or stealing everyone's gold, what they should have done was use Article 1 § 10 to prevent the States from allowing their banks to issue notes at all. They also could have prohibited the use of bank notes as currency under this section.

In 1969, the market price of gold reached $41.28 per ounce while it was arbitrarily valued at $35 oz. Should we be surprised that foreigners sought an easy profit by redeeming their dollars? And, had we simply increased the arbitrary price of gold, we would have instantly devalued the currency.

The problem here was that Congress was not exercising its power to regulate the value of the money they coined. In fact, no money was ever coined at the $35 standard. Neither silver no gold were ever coined at that standard. The silver in circulation was still at the $20.67 standard. Instead of closing the gold window, Nixon should have asked Congress to mint new coins to reflect the new price.

In reality though, the situation was such that the currency was ALREADY devalued. It wasn't the purchasing power of gold that changed, but the loss of value in the Federal Reserve Note. (mistakenly called a "dollar") Nixon's only real solution should have been to abandon the FRN and return to gold and silver. That would have stabilized things and gold would not have been exiting the country.

Not to get sidetracked, but in 1933, FDR declared bankruptcy and confiscated the people's gold at $20.67 oz, then in 1934, after citizen gold was taken, he raised the value to $35 oz. What if he would have raised the value in 1933 instead? Could it be that the U.S. may have prevented bankruptcy?

A: Maybe, but the problem here is that you are using $ to talk about things that are not $. (not your fault, most everyone does it) As such, you are comparing apples to oranges. A FRN is NOT, repeat, is NOT a Dollar.($) A Dollar is a coin containing 371.25 grains of .999 fine silver. Has been for about 500 years give or take a few grains. The US did not invent the Dollar. It adopted the Dollar because it was already circulating at the time of the Revolution. Thus when you say that gold was valued at $20.67, what you are saying is that it took 20.67 Dollar coins to equal the purchasing power of one ounce of gold. When you say FDR revalued gold at $35, you are saying it now took 35 Dollar coins to make that same purchasing power. In essence what he did was not raise the value of gold, but lower the value of silver. And in reality, he wasn't lowering the value of silver either, because it retained its purchasing power. What he was doing was devaluing the FRN which was denominated in Dollars. (but was not itself Dollars)

This doesn't get us out of bankruptcy unless you can trick your creditors into accepting a piece of paper worth less than it was the day before for the same amount of debt. And it didn't work. We still had to exchange that paper for gold. The amount of gold in ounces that we had to pay did not change. What changed was how many pieces of paper represented that amount of gold. It didn't reduce what we owed one bit. It effectively raised prices and further depressed an already depressed economy by making the paper that circulated Stateside, worth less than it was the day before. In truth, if we owed say $20.67 million to France, they could have received prior to the revaluation - one million ounces of gold. But after, they could only receive about 590k ounces. They agreed to this because it was the only way they could get paid. We still owed the full million, but since we were in bankruptcy, they accepted the 590k ounces and called it a day. However, any NEW debt issued, would have been at the $35 (or 35FRN) level. So because we continued to borrow, in 1971, we were again, no longer able to pay. Instead of simply revaluing gold to the FRN and thus devaluing the FRN Nixon decided to refuse to pay at all anything of substance and the deal was made to "back" the FRN with oil instead. You couldn't get oil for it, but because it was now required to buy oil, it gained by fiat the intrinsic value of being necessary for industry on a wide scale. (test #4 no what defines money in my post below)

3) Do legal tender laws establish fiat money? If so, then digital money, checks and credit/debit cards are not fiat money since they are not legal tender. Or, are digital money, checks and credit cards fiat since they have no intrinsic value? This is an important point since the vast majority of our transactions are made without coins or paper dollars.

A: Yes. Fiat currency is established by decree. Legal tender laws are such a decree.

Digital blips, debit cards, checks, credit cards etc. are not fiat because they have not been decreed to be tender. Fiat requires a decree. It has nothing to do with intrinsic value, though usually the whole point of a legal tender law is to declare something that has no such value as if it does. (which is why you see the two together, but it is not necessary)

These items share the same status as bank notes before the Federal Reserve or before the Greenbacks. (United States Notes) They are private instruments that are accepted as money, but they are not money themselves. They are not accepted because of a government decree, but rather because of trust in the institutions that issue them and accept them.

As noted above, they aren't actually currency, but a means to transfer ownership of money held by a fiduciary. (the bank) They could still exist under a specie system and not result in monetary inflation or price inflation since they only serve to facilitate transfer, and do not come into existence on their own. (loans notwithstanding, that is another issue entirely)

Credit cards are on par with loans, and so would result in monetary inflation and thus price inflation. Technically, they are short term loans. They could remain in a specie system, but to prevent inflation, would only be able to extend credit proportionate to some fixed reserve of specie coin that depositors allowed to be used for the purpose of loans. (most likely no one would agree to do so, as they would want to ensure the return of their money that was loaned out, it would only likely be approved for money making or business ventures, and not for mere extensions of credit for common everyday purchases because someone else can't manage to live within their means)

4) If a "non-fiat" PM money system were used; either paper money backed by a promise or coins with full intrinsic value, we would artificially limit the economy by the scarcity of PMs.

A: You are first presuming that such limiting is artificial. By what standard would you consider the limiting to be natural? I contend that limiting the money supply to what is physically available is rather natural and not artificial at all. Artificial would be what we have now, where Congress or the Fed decides what is in circulation. Scarcity of PMs is a fact of nature and so by definition is not artificial.

Additionally, you are presuming that a relatively fixed money supply (which isn't true, since mining is still possible and the supply can grow) is a limitation on the economy. The economy is merely individuals trying to fulfill their unlimited needs, wants, and desires with their limited resources. By having a relatively fixed supply of money, the value of the monetary resource relative to goods and services will increase as new goods and services are offered. Thus the monetary resource becomes less scarce or limited, and people can fulfill more needs, wants, and desires. This is the definition of a rising standard of living.

If you were to use a paper currency that had little or no restrictions on its supply, then not only will you negate the positive benefits of mass production and innovation to some or total degree, but you will eventually increase the cost of living, thus lowering the standard, and thus making the monetary resources held by individuals even more limited in value and thus requiring more of it, rather than less, to meet the same needs, wants, and desires. (this is our present situation)

Conclusion

The inevitable question becomes, should money be a medium of exchange or a direct store of value?

A: BOTH. something is only adopted by the market as money if it satisfies BOTH conditions. If something does not satisfy both conditions, then it is not a good use for money.

If it is defined as a medium of exchange, you are always free to store your wealth in the PM or asset of your choice. Isn't that a better option than carrying coins or depending on a promise?

A: No. Because of all the reasons cited above. Because a mere medium of exchange is not sufficient. In order to be a good medium of exchange, it ALSO has to be a good store of value, otherwise it isn't as trusted.

Look at the criteria below for what defines a good money. Fiat currency fails those test and so cannot be an effective medium of exchange. So it can't be money.

If it is not durable, it will have to be spent quickly. But as this pressure increases, it is self re-inforcing to the point no one will accept it. This is what happens in a hyper-inflationary scenario. The pressure to dump off the currency as fast as possible, because it is not durable, or not a store of value (the value is decreasing regardless of what is printed on the face - and that IS arbitrary) will increase as the value decreases. This higher velocity of the currency reinforces the notion that it is losing value and thus should not be trusted. Prices necessarily rise to compensate. This sets the loop and the pressure to spend increases again. Unless something is done to either restore value, confidence in value, or reduce pressure to spend, this will continue. Unfortunately, NOTHING can be done. The market will always price the commodity in question to its intrinsic value eventually, in this case, effectively ZERO. (it may even go below and be more useful as a fuel source than as currency)

You HAVE to have BOTH a medium of exchange AND a STORE of value in a commodity in order for it to be money and for commerce to be facilitated rather than follow a boom-bust cycle. In the present case, we are on a longer term cycle, that is better termed - expansion-depression. We will continue to repeat this cycle, more and more frequently until the end result is chaos and the breakdown of the social order.

I would point out that we are in the midst of another and more powerful Greater Depression. And that if we do not fix the problem by drastically reducing government and returning to a true laissez faire economy and monetary system, we will experience a devastating war, followed by enormous expansion and an even greater depression just a mere 30 or 40 years later. This will then repeat again with an even stronger impact in 15 to 20 years, which if we haven't devolved to complete chaos by then, the next round following should do the job. If we manage to avoid a nuclear exchange this time or next, we are more likely to wipe ourselves out in about 60 to 90 years. The only other alternative (other than laissez faire) would be an EMP which would set us back centuries and kill off most of the population.

If for no other reason than convenience, fiat money is needed.

A: You never explained how gold and silver are inconvenient. Thus you have nothing to compare paper fiat currency to on that standard. Does the above not sound like some reasons that fiat isn't so convenient? I'd rather whatever inconvenience gold and silver coins might possibly pose over the present mess, thank you very much. And from my perspective, gold and silver are VERY convenient.

They are:

• Durable
• Portable
• Store of Value
• Medium of Exchange
• Anonymous
• Easy to Store & Protect
• Reduces cost of living over time

Compare that to FRNs:

• Last 18 months to a few years in circulation
• Bear no relation to value with their size
• Lose value over even short periods of time
• Are not accepted by all merchants in all denominations worldwide
• Can be somewhat anonymous, but increasingly attached to records just for using them
• Are only "safe" if stored in a water-fire proof safe at home or in a bank
• Increases the cost of living over even short timeframes depending on inflation level

Which one is more convenient again?

I did answer your question about the "Fei" below did you catch it?

The gold standard failed in 33 years. The current system has worked for over twice as long but I think it is soon to fail.

But the point is they both are failures regardless of money species. The real key is not the type of money but rather WHO issues it. We allow a private bank cartel to create and control all of our money and then we wonder why they are screwing us.

Until the U.S. takes back its sovereign power to issue and control its own currency there will be no recovery as things will only get worse.

Prior to the advent of the single-tier and then later after 1913, the dual-tier fiat monetary systems, there was what could be considered a certificate system, which in the simplest definition were nothing more than warehouse receipts, each represented a redeemable weight of either gold or silver. Since the Constitution is very clear about what money in the United States is, there was also a necessity, under the Constitution, to create a standard of weights and measures when it comes to money. Thus, there is no need to use scales instead of cash registers, is there DrKrbyLuv?

Fiat money, whether based on a single-tier system, such as the Greenbacks, or a dual-tier system as we are now subjected to is considered “Fiat” because it requires a government “decree” enforced by legal tender laws for paper to be considered money without a foundation of value related to that paper. Under the single-tier system, rapid economic destruction was far too prevalent, thus the dual-tier system was created to organize debt into currency. The government “decrees” that its Official U.S. Treasuries are the security of the government “decreed” money. So, the “fiat or decreed” U.S. Treasuries become the security behind the “fiat or decreed” paper money and the “fiat or decreed” paper money becomes the security behind the “fiat or decreed” U.S. Treasuries.

Again, the deposit of commodity coinage into a bank does not mean that the digital accounting of that coinage becomes “fiat”, on the contrary, there would be little difference between a paper warehouse receipt, such as a gold or silver certificate, for coinage verses a digital receipt for such coinage. The bank must, at least under a 100% reserve system, provide for the fiduciary responsibility of its deposits and ensure the trust of its depositors; otherwise it would face potential insolvency. Under a free-market banking system good business practices would preclude the excesses of risk since a bank must carefully maintain its reserves, unless that is the owners of the deposits provide the bank with permission to use his deposited and titled property [gold and silver money] in the form of loans. In that case the banker must again take extreme care in the extension of credit, since the money deposited in the bank is not the property of the bank, but of the depositors. Those depositors who give such permission share with the bank in the profitability of the loans.

Again, you make a very distinct qualification concerning “paper money”, for under a warehouse receipt system the paper or digital receipts are not money, but money substitutions. Paper money substitutes are legally binding contracts; any broken promise of redemption would be remedied by penalty of law. We are not talking about a “gold standard” here, but a gold monetary system that provides for the legal protection of the title to money of the depositor.

DrKrbyLuv, I can see that you have not reached beyond the limitations of the face value of our currency verses the face value of our gold reserves. It unfortunately still traps your mind with the misconception that there must be a par valuation between the vastly depreciated fiat monetary system and the gold supply. As I have stated several times, once gold money is restored to the people gold will flow to meet the demand, not only from private owners, but from other countries. It’s called the market. For a reference of this type of influx you should research the period immediately following the reinstitution of gold as money following the disastrous Greenback regime. The Greenback regime essentially chased coinage of all type out of circulation, in fact out of the country for a while. Once that system was rightly repudiated, the market restored gold into circulation.

The problem is government, when it mixes its power to control with money we face problems. Every example of government intervention exposes the problems created by government mixing with the power to create and control the money it creates.

What happened in 1933 was that Gresham’s Axiom exposed the fraudulent nature of this government’s monetary policy. The reason that FDR attempted to illegally and Un-Constitutionally confiscate the private money property of the People of this country was exactly to thwart the principle of Gresham’s Axiom. For it would be impossible to implement the dual-tier fiat monetary system as long as gold remained a monetary force domestically. The same is true of the events of 1971, but the reasons for cutting the tie between the Federal Reserve Note was far more extensive and concerned the placement of the United States as the superior power in the world, both economically and militarily.

The reason that FDR “raised” the dollar value of gold was simply a case of fiat monetary depreciation; it was inflation, pure and simple. This act alone effectively eliminated government debt by over a half, add that to the fact that FDR repudiated much of the bond debt, such as Liberty Bonds, breaking faith with the People of the United States and fraudulently confiscating untold billions of dollars from the American People in the process by his actions.

Additionally, in 1971, the U.S. Government repudiated every bit of its debt to foreign nations in this radical action that could not be resisted by many. Instead of paying its legitimate debt to its creditors, it forced the acceptance of money that had no asset value; it was money by decree, by U.S. Government decree or fiat.

In comment 3, you are asking questions that do not actually relate to what could be considered money by government fiat, but upon ancillary money substitutes under a fiat monetary system, which, by the way, includes a fiat credit system used to support the fiat monetary system proper. Thus, it is not as important as you make it out to be DrKrbyLuv.

In comment 4, you once again show a misunderstanding of money and the mechanics of exchange. The quantity of money in circulation is not as important as the quality of money in circulation, especially since money is never actually neutral or static within an economy. The only thing that the expansion of the money supply can do is substitute actual economic growth with inflated and temporary stimulation. Look around DrKrbyLuv, see what the expansion of fiat money supplies have done and are doing. Again, I will advise you to research some of the works of the early “economists” to gain a better understanding of the differences between a market-determined supply of money and a government issued supply. David Hume is a good place to start such research, but I have been suggesting your read his works for the last two years or so.

No, the question of whether money should be a medium of exchange or a direct store of value is not the inevitable question because with a real asset monetary system you have both. With a government fiat or decreed money, you can only have the medium of exchange since, in every case, government fiat money always suffers from the government abuses of monetary inflation, losing its purchase value in the process.

So, as far as warehouse receipts, I have no problem with them at all, they are indeed convenient however, the idea that such receipts are actually money instead of what they really represent is Constitutionally odious.

To be honest, it appears that your argument is not one at all, or if anything it doesn’t appear that you have clarified a particular position that is logically meaningful.