Money

Stossel: Money, Money, Money

A new documentary reveals how stable currency leads to prosperity.

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What makes money trustworthy?

"It has to be fixed in value," says Steve Forbes in his new documentary, In Money We Trust?

Forbes notes that money has to be reliable, like a clock. We have "sixty minutes in an hour; sixty seconds in a minute. Imagine if that floated each day; that would make life chaotic."

Stossel presents an abbreviated version of the documentary, which notes that throughout history, people needed a way to assign a fixed value to money. They tried all sorts of things, including backing money with crops, silver, and salt. "Salt" is where our word "SALary" comes from.

Eventually, most people settled on gold, which was used up through the mid-1900s to back currency. The stability it brought to markets helped enable massive economic growth.

But a gold standard didn't always ensure stability. The Roman Emperor Nero was one of the early creators of inflation.

"They would call in all the coins, melt them down, reissue them—of course, with his picture on them," according to Jack Weatherford, author of The History of Money. The re-issued coins, critically, also contained less gold than the old ones.

Governments throughout history have often resorted to inflation when they couldn't raise enough taxes.

World War I was the first big event that shook up the consensus around gold.

"To print money to pay for the conflict, Europe and the U.S. went off gold," the documentary's narrator notes. "And after losing the war, Germany suffered the infamous Weimar hyperinflation."

In the U.S. during the Great Depression, President Franklin Roosevelt even confiscated private holdings of gold in order to devalue the dollar.

"All kinds of constitutional freedoms, and this moral commitment to maintain the value of the money, were swept out," says Judy Shelton, director of the Sound Money Project at the Atlas Network. Shelton is under consideration to be President Trump's next Federal Reserve pick.

Today, the Federal Reserve controls the supply of dollars. People use them because they trust that others will value them, and because the government says it stands behind them. But dollars are not backed by gold, or anything else.

That worries people like Steve Forbes. A dollar buys 80 percent less than it did when Nixon took the country off gold in 1971. That's largely because the Federal Reserve intentionally creates 2 percent inflation every year—they set it at 2 percent rather zero because it provides a buffer against deflation, which they fear will cause recessions.

Forbes' documentary backs a return to the gold standard.

"The only way to restore trust is for the United States to return to the system that worked for most of its history," the narrator says.

"Gold has proven to be the preferred monetary standard," says Brian Domitrovic, a history professor at Sam Houston State University.

Milton Friedman opposed the gold standard. Today, most economists oppose it.

But Stossel says Forbes' documentary sums up the history nicely and "will give you background to help you decide what you think."

You can see the full documentary on some PBS stations, or stream it at: InMoneyWeTrust.org.

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The views expressed in this video are solely those of John Stossel; his independent production company, Stossel Productions; and the people he interviews. The claims and opinions set forth in the video and accompanying text are not necessarily those of Reason.

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  1. But dollars are not backed by gold, or anything else.

    But so what? What is the value of gold backed by?

    1. Today, the Federal Reserve controls the supply of dollars. People use them because they trust that others will value them …
      You could use leaves if people trusted them.

    2. “But so what? What is the value of gold backed by?”

      Said in complete ignorance. Gold has value in of it self as a commodity. Gold has been valued in decorations even back in the stone ages. Jewelry made with gold will look like brand new even if its 10,000 years old. Just go online and see the pictures of ancient Egyptian jewelry. I use less than a dollars worth of gold to fume glass pipe and other item to make a kind of pink glass. That little trick would allowed me to sell items that normally would go for 2$ to 5$, To be sold for 10$ to 40$. It even has value in electronics and as a heat reflector as well. Just do a search on gold uses and history if you want to know why it’s valued.

      1. In other words, gold is backed by the perceptions of other people about what it can buy or be used for. Which makes it philosophically different from fiat money how, precisely?

        In gold-based currencies, gold’s “intrinsic” value is actually just a residual value which sets a floor. That floor rarely accounted for the full value of the currency.

        1. That’s all true… But Zimbabwe and Weimar Germany show just how important it is to have a floor!

          The fact is that technically EVERYTHING is subjective value… But certain things have been so consistently agreed upon as having certain values to them that it might as well be considered practically objective value, at least within a range.

          Gold is highly valued for countless industrial reasons, other commercial reasons (like jewelry), and then additionally for its historic value as a currency.

          Fiat currencies are BS. I’d rather have a currency backed by salt than one backed by nothing! But gold/silver are far better. Having that floor in there is incredibly valuable from a stability standpoint.

      2. BlueStarDragon, you making bongs or what?

    3. A Promise On A Promise

      The following is an excerpt from the semi-fictional novel, Retribution Fever:

      At one time, the world had employed an international currency accepted everywhere — gold. Karl Marx (1818-1883) referred to it as “universal money”. The metal had functioned as a currency throughout history, the earliest known use being in 643 BC in present-day Turkey. Europe formally adopted it as the international standard in the 15th-century after the Hundred Years War. In 1900, Congress passed the Gold Standard Act, officially ending the use of silver as a standard of currency and establishing gold as the sole standard.
      Then in 1933, President Franklin Delano Roosevelt (FDR; 1882-1945) had criminalized Americans’ owning gold; thereby, robbing those who did. By law, the victim became the criminal. In 1938, Chancellor Adolf Hitler of Germany imitated FDR.
      Both FDR and Hitler had understood the challenge for governments to rob the creative and productive while using currencies based upon gold. At one time, the U.S. government had been issuing “Gold Certificates” in denominations as high as “ten-thousand dollars payable in gold to the bearer on demand as authorized by law”.
      FDR had withdrawn those “yellow backs”, substituting “green backs” based upon silver; i.e., paper-currency promising silver on demand rather than gold in exchange for the intrinsically worthless paper. Subsequently, Big Government reneged on that promise; “Silver Certificates”, too, became historical relics ultimately replaced by “Federal Reserve Notes”.

    4. All value is relative, meaning determined by individuals.

      All transactions are dependent on values being different. If values for things weren’t different, no one would trade their stuff.

      Gold doesn’t have inherent value per se, but it has been valued for it’s beauty and usefulness very consistently, by nearly every human, since its discovery.

      Pieces of cotton with pictures of dead Presidents on the other hand, not so much.

      -An Economist

    5. Its rarity is backed by physics (the large amount of energy needed to fuse nuclei larger than iron). Ditto for its corrosion resistance (no lonely valence electrons), which is rare in an element that’s solid on Earth’s surface.

      Gold prices do fluctuate, but they’re not controlled by a central bank, nor easily controlled by a single private entity or government. (Mines don’t control enough of the supply, for example.)

      1. A few interesting bits.

        Actually, gold prices fluctuate very little, especially over time… Mostly what is fluctuating is the value of the dollar! If you look at the price of gold relative to other hard assets (real estate, commodities, etc), you will see that the value barely fluctuates at all.

        Also, the gold and silver markets are both heavily manipulated nowadays due to the paper futures markets… Granted there is limited power in this, but central banks and other big entities do try to manipulate the price of physical by trading in non existent paper gold.

  2. most people settled on gold, which was used up through the mid-1900s to back currency.

    BULLSHIT. Most BANKERS settled on gold because gold serves their purpose when they lend to governments or when they settle huge cross-market (now international) trade transactions and it is a currency that requires banks at the center. Most PEOPLE have far preferred SILVER as a real currency because it actually serves that monetary utility function and it is a currency that doesn’t need banks. The US dollar was defined in 1792 as a quantity of silver. The US eagle was defined in 1792 as a quantity of gold. Which currency do YOU think is ‘money’?

    The stability it brought to markets helped enable massive economic growth.

    Gold doesn’t do shit to bring stability because it intrinsically sucks as currency. We tried that experiment. Minted a gold dollar coin after the CA gold rush created a supply. The $1 coin then was very useful for the economy – from payroll/rent on down to everything smaller – and a coin carries its value intrinsically so it isn’t a debt and doesn’t require third-party trust. That coin quickly failed cuz it was a third the size of a dime and pocket lint gets lost easily.

    So it has to be immediately deposited IN A BANK (now you know why banks love gold standard) and you are no longer on a gold standard but a this-banknote-is-as-good-as-gold standard. And since that money standard now depends on banks, it now creates a very unstable economy with bank runs and financial crises whenever people stop trusting banks.

    What’s amazing is that economics stopped even being an academic discipline that would attempt to understand ‘stable money’. Because who hires economists? BANKS and big companies that have to manage their bank debt and bonds. You don’t bite the hand that you’re gonna depend on for your future paycheck.

    1. Thank you for letting me know that I have to keep my gold in a bank but can scatter my silver ingots all over my driveway willy nilly.

      1. You don’t HAVE to do anything. The fact remains that the gold dollar (smallest coin the US ever minted) failed because people couldn’t use it and so they didn’t want it. It FAILED as a coin which is the only way a money standard based on a metal can actually be based on that metal itself. There is such a thing as a coin that is physically too small to be useful and that is exactly where ‘gold standard’ leads. gold itself is intrinsically useless – so banks ‘make it useful’ by creating the smaller divisions of that via accounting.

        It is why there has NEVER been such a thing as an actual gold standard. It has ALWAYS EVERYWHERE quickly become an IOU-exchangeable-for-gold standard. Which creates a financial crisis whenever IOU-exchangeable-for-gold is found not equal to actual gold. And the further proof that gold coins are deposited is that those crises result in bank runs. There can be no such thing as a bank run if any significant numbers of people are storing gold coins in pockets or coffee cans.

    2. I don’t fully disagree with your critique… There is a lot of truth to silver being better in many respects, and that debate raged for a long time in the USA.

      That said, I’m of the mind that using both is the sweet spot. Gold is plenty useful for reasonable dollar transactions. A respectably sized gold coin nowadays could be the equivalent of $100-200 dollars. But there ain’t nothing wrong with a $1xxx dollar coin either.

      Silver can be used for smaller denominations.

      Either way, I’m not so rabidly anti banker that I mind depositing money in banks… Especially in the modern world, it is simply the way things work, and will continue to work. The real trick is having a government you can trust to stick to their convertibility promise. The USA had it for a long time… UK and many other nations for even longer.

      Bankers can be skeezy, but if the system overall is sound, the fact that the currency is backed vs physically carried around isn’t the end of the world IMO.

    3. Personally speaking, I believe gold is no better than fiat currency because it too has no intrinsic value, you can’t do much with it other than jewellery or electronic components Air Conditioning Replacement Service. In an apocalyptic world, both paper money and gold will be equally useless because they really don’t have intrinsic value, but food, water, clothing, they all have intrinsic value.

  3. But if we go back to the gold standard, we can’t print all the money that Modern Monetary Theory says we can print to pay for the Green New Deal and the other ideas the Progressives have.

    1. Banks create money when they make loans. Money is destroyed when those loans are paid off.

      Govts do not ‘print money’. That notion is a relic from the days when COINS mattered. They BORROW money from banks. BANKS create the money out of thin air and then lend that created money to whoever (private or govt) is borrowing money. The risk of ‘inflation’ is because that money is created BEFORE anything is produced – again doesn’t matter whether the borrower is private or govt.

      A ‘gold standard’ doesn’t cause banks to be responsible about lending. No more so than eating three bowls of spinach and exercising. And the only way anything will become ‘stable’ is because responsible lending has occurred and banks have no liquidity and no solvency issues on their balance sheet.

      1. Fractional reserve banking FTW!

        The government DOES control the base amount of currency though… Which is a limiting factor on how much “money” banks can create, since the have reserve requirements. Having something backing the base amount of currency in circulation is not a bad thing, even if fractional reserve banking does in fact allow for more money than is backed by gold to exist in the system.

        Also, the reserve requirement is regulated by the government… If they wanted to keep the amount of money floating around close to the amount of actual gold backed currency, they could easily change the reserve to 99% or something.

  4. Steve Forbes has been banging this drum since the ’80s, and he gets wronger with every passing year.

    In the late ’70s, when trust in the U.S. dollar was wavering, an argument to peg it to some value or other might have made more sense. But not for the past 3 decades.

    Fortunately the Fed settled on pegging dollar value to the general price level, the singular best possible choice. With an allowance for very moderate inflation primarily because wage prices are sticky down, a stable price level is what inspires trust in the unit of exchange.

    Now, if we can just agree to take any Congresscritters who try to radically change lending policies at Fannie and Freddie (and Sallie) and line them up against the wall for execution, we can have faith that the dollar will be relatively well protected.

    1. Yeah, no. Human nature didn’t change in the last 30 years. If they had a choice between an easily inflatable (monetarily speaking) currency and one that wasn’t so easy, they’d cease using the inflatable one every time (ceteris paribus).

      The Fed is why the dollar went from slow (price) deflation to fairly quick (price) inflation. It’s now worth less than 5 cents from 100 years ago.

    2. Dude, our currency ISN’T stable by any real meaning of the word. It is all over the map. For the most part commodity prices don’t fluctuate that much, it is in fact the value of the dollar bouncing around that causes half of the perceived price changes.

      Also, quoted government inflation figures are BS. They play tons of games with them. During some periods of the last 20 years real inflation has approached 10%. It’s been relatively low lately, but still higher than claimed. Why do you think things like SS that are pegged by CPI aren’t buying the same standard of living they used to?

  5. “Money, money, money.”
    Can I have some?
    In cash?
    In large amounts?
    I won’t tell.

    1. Money, get back
      I’m all right Jack
      Keep your hands off of my stack

      1. Money takes the form of various types of financial assets that are used for transaction purposes and as a store of value. Money created by the Fed (notes, coins, and banks’ deposits at the Fed) represent the monetary base (M0). Windows Replacement Service or This state money, or high-powered money, is imbued with the most moneyness of the various types of financial assets that are called money.

  6. I went and watched the entire documentary. Stossel’s six minute summary and recap isn’t really worth the time of day but the original is worth a watch even if it’s very blatantly gold buggy. Overall I wasn’t really sold by their arguments that gold is that great of a thing to base your currency on. It mainly amounts to saying “but look at all the good things that happened while the gold standard was being used.” The message of “stability brings wealth” is a good one though and is well supported.

    Ultimately though, I think it’s because gold is just an arbitrary thing to base your currency on as anything else and that arbitrariness is ultimately a weakness that governments can and will exploit to take short term fixes over long term stability. You can say “Well, governments can’t create unlimited gold” but new gold is mined every year, and what’s to say gold is better than anything else like silver or iron or hydrogen or #2 pencils or sports cars or stamps or performance rights to Michael Jackson songs.

    1. It is true that gold isn’t the ONLY reasonable thing to base a currency on… Personally I like silver a lot more in many respects… But you get pretty hard pressed to find anything else that has all the qualities that make for a good currency backer.

      Probably the next best in the world right this minute might be oil… But oil has good chances of being phased out because of technology… But it is also not directly holdable or tradeable by individuals in any easy way, one would purely have to trust the government to hold it. Maybe something like massive, insane amounts of grain? Most things just have too many issues to be practical.

      Gold and silver have consistent values that are high enough to be useful for transactions, they have supply constraints that don’t limit them too much, but they aren’t likely to be flooded into being valueless either, they have industrial uses, a long history behind them, etc.

      I’m a big fan of commodity backing, because government simply cannot be trusted, and 100% of fiat currencies have failed eventually… But if you had a 2000 year old Roman coin, it would STILL be very valuable today. Other commodities might theoretically be okay, but it just so happens gold and silver are the best commodities around. I would be okay with a fixed commodity basket, like 40% gold, 40% silver, 10% platinum, 10% copper, or something to that effect.

  7. “Fortunately the Fed settled on pegging dollar value to the general price level, the singular best possible choice.”

    The problem with that is that price indices (CPI/PPI) are easy to fudge and tough to design correctly.

    BLS uses correction factors for product categories that change rapidly, but it’s important to be sober about what those changes mean. (Doubling a computer’s clock speed won’t cause it to execute twice as many instructions per second, nor will genuinely doubling hardware performance cause end-user software to run twice as fast.)

    TCO or depreciation would be more accurate measures of what consumers are able to buy with a dollar, but they require longevity testing or surveys.

    1. Yup, the CPI is scammy in about 1000 ways, and waaay undercounts real inflation.

  8. I probably already know most of that will be in that documentary, as I’ve studied this type of stuff for a long time… But I’ll check it out just in case!

    1. Also, FUCK fiat currencies. 100% of them have failed eventually. Think about that. I mean, one can operate on a day to day basis with them or whatever, but in the long haul I just don’t trust the US dollar, or any other currency. I’m forced to deal in them all day every day, but that doesn’t mean I have to like it!

      Consider that half of the nonsense that goes on in the financial world is really jockeying around the fact that the dollar, interest rates, inflation, etc are all floating around based on nothing but government force, vs being stable and market set. All it takes is a loss of confidence and the dollar is worth ZERO.

      That’s why I have a modest SHTF stash of gold and silver. It’s enough to hopefully get me through the worst moments of any crises situation we may have, and will be added to as I get older and richer. Gold and silver don’t really make you a return in inflation adjusted terms, but they are a rather nice insurance policy.

      1. I meant that as a reply to your post about the CPI being scammy, but it ended up here at the bottom :-/

        I’m a little wary of cryptocurrencies also. The supply of an *individual* currency is limited mathematically, but the total supply of crypto-coins isn’t limited at all. If the Kool Kids(TM) who run Western governments decide that they don’t like the bulk of Bitcoin wealth being held by nerds and Russians, they can make a new crypto-currency and use taxes and state spending to transfer uncool people’s wealth into it.

        1. My personal opinion of crypto is that it’s probably even worse than government fiat… At least the US dollar theoretically has all the real estate holdings, and other things of value of the US government backing it… And the assets of US citizens… AND NUKES. LOL

          I think crypto is actually a great idea for a low cost TRANSACTION SYSTEM, but not as an actual currency or store of wealth. By being a widely used transaction system it could take on pseudo currency attributes, but I wouldn’t consider it real money. Also, none of the people that designed any crypto system I am aware of seem to know shit about monetary theory… A well designed crypto would be designed so it created new coins in a near perfect ratio to MAINTAIN the approximate value of a coin, perhaps allowing it to rise in value at a very slow rate, like 1-2% a year… You could scale it based on the number of transactions to achieve this. None I know of do anything close though. They limited the total number to numbers that are far too low, and don’t scale correctly with increased use. Just bad “design” from the get go because the geeks don’t understand money.

          As for CPI stuff… IIRC Shadow Stats is one of the guys who keeps track of this stuff, but it’s talked about by a lot of people. I’d say CPI scam or CPI inaccurate or something would pull things up. One of the biggest ways they scam is by excluding things that are clearly important to cost of living, and by “substituting” things. A force instance of that is that if the price of steak gets too expensive, they imagine people will substitute hamburger for it, then use hamburger as the basis to arrive at the new CPI figure… Even though steak would have showed a higher increase in inflation.

          Just start googling reasonable searches, you’ll find plenty of stuff. There are good videos on YouTube too if you prefer video format.

          1. “I think crypto is actually a great idea for a low cost TRANSACTION SYSTEM, but not as an actual currency or store of wealth.”

            There were a couple of systems like that:

            wiki.p2pfoundation.net/PorcLoom
            wiki.p2pfoundation.net/Loom

            I heard about them in 2010, and I think they’re both defunct :-/ The code might be out there somewhere, though.

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