I've talked about the Fed, and I've talked about gold, but now I want to talk about an assumption that I think is maybe a stretch. Specifically, the assumption that the money we use is Fiat, that its value is based only on the word of the bankers or the Fed.

I learned about the real bills doctrine in college; one of my main sources, here, is an article written by one of my UCLA professors, without whom I likely would not have graduated. So I may be biased. But I would like to talk about it anyway, because I think the real bills doctrine is important, even if many economists believe "The dead horses of economic theory have a habit of suddenly springing back to life again, which is why it is necessary to beat them even when they appear lifeless."

The basic tenent of the real bills doctrine is that, with or without gold, the Fiat money we use today actually does have backing; You can have money that is backed but inconvertable. The main result of this concept is that "money issued in exchange for sufficient security (usually short-term commercial bills) will not cause inflation."

Of course, this does not address the problem that inflation sometimes IS caused by central banks, but it is only because they issue it without sufficent security. The federal reserve actually does hold assets, just like other central banks, and it is against this that it issues federal reserve notes. The Feds balance sheets identifies them as "Collateral Held Against Federal Reseve Notes". So if the money is fiat, why the backing?

Money is not Fiat. The fed holds assets against the notes it issues, as backing, including but not restricted to gold. Money's value is not based on scarcity, or the word of the bankers. When banks fail to take a sufficient amount of assets in to back newly printed money, inflation results. This is not due to the fiat nature of modern money but due to the way it is backed; Under the gold standard or anything else, banks can print more money and cause inflation, the backing is irrelevant.


I do not wish to reproduce the whole paper here in my post. But I believe it is important for people to read it, as it is not particularly long.

There are other issues here though. As I've said before, the gold standard and money convertability does us no good, if convertibility can be suspended. If someone can suspend it for a weekend, they can spend it for a million years. The government has suspended convertibility before, and even if the gold standard was reinstated, it would do it again. The real bills doctrine admits that inflation is going to occur if money is issued without sufficent security. So, even if the real bills doctrine is true, and all money is backed but inconvertable, we still have to deal with danger that the fed isn't going to actually do it's job, or, in other countries, that the government is just going to go on a printing spree and stuff its pockets with the excess. Unfortunately, so long as there are governments, this risk exists. The gold standard doesn't protect us from eminent domain. It doesn't protect us from the goverment revaluing the dollar overnight, after they find a few billion dollars in their bedstands.

I'm getting off topic now (remember, money is backed!), but I imagine the only way that a gold-standard could be safe is if money was actually made of gold. Otherwise, there is nothing stopping governments from re-valuing their currency vs gold. Of course, then the alchemists would all become government employees. Or, amazingly, at the first sign of crisis the government would change the rules.

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