Bob Moriarty: Solving Our National Problems Starts With Sound Money

JKC - yes, 21 Million is the limit that is often quoted as the max. number of Bitcoins that will ever exist, based on the exponential hockey stick of effort needed to create that last incremental Bitcoin.  Anyway… we already have money in place that acts very similar to Bitcoin    and that is of course Gold.  The richness of ore grades are decreasing, and the cost of energy to get each incremental ounce out of the ground and refined is increasing… so we have a nature enforced limit to growth of the system.  Gold is wonderful because it is almost infinitely divisible- every 197 grams contains 6.02 x 10EE23 atoms that are each a unit of Gold… WOW… lots of divisibility!  23 orders of magnitude right there!Never let anyone tell you there is not enough Gold around to become a reserve currency… it's just a question of allowing the value of each Nanogram  (billionth of a gram) to grow to meet needs of the economy.  As I have said in the Bitcoin thread… we have all been programmed to believe that is somehow not possible… but that is a lie.  
My point is that between Gold, and Silver, and Bitcoin, we really don't have to invent anything else… we just have to take what we have and break away from the reins of control and propaganda enforced today by the bankers and TPTB.  
Mark_BC said,

I envision more of a system like they have in India where people use gold and silver as the vehicle of savings and the currency as simply a vehicle fro transactions. This is why the bankers hate India... It's really hard to extract wealth from a populace that simply doesn't place its wealth in the central currency and that currency is continually inflating as a result.
So true!   I just don't know that I consider inflation as an effective limiting mechanism.. because in extreme cases it becomes hyperinflation, which is so destabilizing historically.  Where is the point of loss of confidence?  How often will the Gov't money need to reset?  I think you see the problems in something like a "Greenback" that is simply a Gov't printed money with nothing backing it... there are certainly no easy answers.  We are in a very unique period of time where the current debt-based fiat paradigm continues to be buoyed along by shear inertia.. all of the abused fiat currencies referencing against each other in a context of mutual assured destruction.. and with Gold being suppressed, no external reference available.  I am convinced that this will be looked back upon as abject insanity.  I am also convinced that China's insatiable appetite for physical Gold is their effort to opt out of the (mutually assured) destruction to come.                  

Thanks to all for a very rich discussion.  Thumbs up for all, on the house!
I'll throw in my 0.0001 bitcoins worth.

While I initially had disdain for debt-based money, I came to objectively appreciate some positive attributes.

Good- Debt-based currency is fundamentally a currency based on a future "promise to pay" aka based on a reliance that a promised amount of work and wealth will be delivered in the future.

That's great if you want to expand an economy quickly based on the a future which optimistically can be delivered by a hard-working and innovative citizenry and lots of easy to get at oil and minerals.

I concede that maybe a debt-based monetary system could work if we had a very, very disciplined regulator at the helm.  Who would constantly look at our money supply and debts and weigh it against the likelihood that the economy could deliver said promised output in the future.

Unfortunately, to echo Dave's comments, as a species, we just ain't that good or trustworthy.

Bad- no matter what the ability of a citizenry to deliver in the future, a reckless government and greedy and immoral private sector can always outspend it.  Very much like the concept of no matter how much you make, you can always spend more than you make. 

This is where we find ourselves today.  We have outspent our future.

The best system I have heard of is to get back to the basics of what money is: a marker of wealth.

Not future wealth, or theoretical wealth, but actual wealth.  That's basically the main attraction.  That a hard monetary system would get back to properties that drew humans to money in the first place- fungibility, portability, assayability, rarity. 

Gold standards have some elements of this clearly, but seem too limiting. Gold standards have a major flaw that I don't get how proponents would circumvent- what happens when wealth grows faster than the supply of gold (or silver). 

How can gold keep up with a fast-growing economy?

The system that makes the most sense to me is a central authority that issues currency based on an accurate assessment of "wealth".  This fulfills the reason we invented money in the first place, to represent our wealth with something we could exchange with a fellow human for something they had that we wanted.

That aligns with the theories of capital formation and preserves appropriate value to said hard-earned capital.  Interest rates would never be 0.25% or 0.0% which totally mispriced hard-earned capital  but probably around 6-10% depending on how much capital was hanging around at any given moment.

I don't have an opinion of what format the money should be in, whether electronic or coinage or both.

But the key point is that it should reflect current state wealth, not future promises to produce and pay back.

The administrative details are tricky.  Humans are fallen and ever able to be corrupted.

Money supply managers would have to value food, buildings, vehicles, computers, CNC machines, purified metals, boats, furniture.  In a perfect system, all would go into the summation.  Then money would either be issued or retracted depending on the summation on current quarter versus prior quarter. 

I would not try to account for ethereal things like knowledge or education- hey it's not fair, but nothing's perfect.

I would invite auditors from other countries, drawn at random, to audit the money calculations and spot check a few neighborhoods and warehouses representing the wealth from the native money supply manager, to try to ensure integrity.  I would entertain ideas for as much transparency as possible.

Subject to corruption?  Yes, all systems are.  This one makes the most sense to me based on the basic function of money in the first place.

Take care,




We try to solve the problem of the spirit with the flesh, but the flesh does not animate the spirit, the spirit animates the flesh.  Gold does not create sound men/women, that is the work of the spirit.  Materialism separates us from life because it is a craving for what has no life.  The life is in the living world which we say exists only in our own minds, even though the mind is only a mirror of the living world.
The debt that is a problem is not that on the balance sheets of banks, households and corporations. That debt can be eliminated tomorrow and everything in this material world that we have built will remain intact as it is now.  The debt that is a problem is the debt we have created by despoiling the living world.  We have despoiled it because we say that it has no life even though it is alive. In our unconscious cruelty we continue to despoil the world, but the world every day gives freely unto us even though we give nothing in return.

The world is visible in its wholeness, but we have broken it into a thousand pieces: science, religion, philosophy, nature, man, god and so we see nothing. All we have to do is become aware of when we have taken something and then give something back.

Hrunner said:Gold standards have a major flaw that I don't get how proponents would circumvent- what happens when wealth grows faster than the supply of gold (or silver). 
Good point. Gold standards require governments to set an official gold price and that price is the limit you describe above. A better system is Freegold: just let the market set the price for gold. If wealth is indeed growing faster than the supply of gold, then the price will rise and currency can be increased proportionately.

[quote=Hrunner]Gold standards have a major flaw that I don't get how proponents would circumvent- what happens when wealth grows faster than the supply of gold (or silver). 
How can gold keep up with a fast-growing economy?
I would humbly suggest that your question comes from a frame of reference that is fixed in the current paradigm.
If you have a stable money system but growing wealth, then each unit of money simply buys more stuff over time, the exact opposite of an inflationary money system where your money grows faster than the economy and buys less stuff over time.
A fixed amount of gold in relation to more real wealth is merely the opposite of what we have now.  No reason it cannot operate, too.
So let's think about that for a minute.  What would a world be like where you had a form of money that you knew would become more valuable over time?  Well, that would be a powerful stimulant for saving.   And, of course, savings = investment.
So in a world where we have money becoming more valuable, we have a set of incentives in place to curtail current consumption in a way that promotes real investment.  Again, the exact opposite of our current system.
Would that be any better or worse?  I honestly don't know, but I'm willing to give it a try because the current system is destroying savings, promotes over-consumption today at the expense of the future, and is destroying the planet. 

Hrunner wrote:

This is where we find ourselves today.  We have outspent our future.


i'll amen that.

What happens in a time when money becomes constantly more valuable?  Certainly, having a fixed money supply in a time when population expands is inherently deflationary.  It likely leads to hoarding behavior, saving, parsimony, and all the evils of what happened during the Depression and also during the last 20 years in Japan.Honestly, I don't see how that's a bad thing.  Not over-consuming, being careful, avoiding debt, and living within your means - perhaps that is just something that is aligned with my own worldview too closely for me to see that as anything but positive.  I dislike waste, and a deflationary environment impels people to not waste.  Deferring gratification brings benefits, unlike the paradigm of the past 50 years, where it just brings higher prices.
There is actually one area where we have experienced deflation in the current paradigm: computing machinery.  We all know, instinctively, that if we wait a year, we can get a better computer - if not cheaper, then at least faster with more memory and disk.  We expect it.  For me, deferring buying a new computer is second nature.
A gold standard would be like that - but across the board, for everything.  "Wait a bit, and it just gets cheaper."  So we use everything longer, we milk each device until it is really ready for the scrap heap.  And then we recycle it.
For bankers, it would suck, since debt would shrink.  Deferred gratification means less spending, less waste, less debt, and lower aggregate interest payments to bankers.  And no more money creation.
However, the one problem with gold is - what happens if we happen to find more of it.  The whole system is vulnerable to one lucky find.  Say (to put this way out there) a gold asteroid, mined in orbit.  Sudden, massive inflation.
But I like the concept of a fixed money supply.

with a stable money supply, there needs to be a sustainable resilient local economy.  Regardless of the monetary system, if you are a reseller of goods that come from half way around the world produced by a group of people making sub par wages, your income stream is extremely insecure.  The debt based money system has a lot of what we would call negative incentives, but the intent is to allow a small portion of the population skim wealth out of every transaction. Increasing transaction frequencies and debt benefits somebody.  The question you have to ask is negative incentives for who?  Cui bono?
Intent matters. I know this takes the comfortable theoretical discussion of monetary policy into the uncomfortable territory of politics, but I don't think that we can have a sensible holistic discussion that can reach actionable conclusions and can be a healthy predictor of future outcomes without taking all the variables into account.  We hear a number of complaints by those who are upset by missing out on the recent and continuing rise in the stock market and misses in predictions in the price of gold because of the constant hammering it gets (now down below 1,290 despite continuing claims that it will bust out soon, stock market is setting new highs every week).  Is the intent to profit at any cost?  Layoffs, externalizing costs, and stock buy backs drive corporate profits up.  Fewer people are working harder and harder.  This is polarizing the population, increasing government spending, and creating general misery in the population, do we want to profit from that? Then on the backside, the laid off workers are getting benefits cut because they just not looking hard enough for a job. Then to add to the craziness their hard working terrified of loosing their jobs colleagues cheer because they are told government spending is the problem.  This is really insanity!

The problem is that crime pays and very well.  We keep thinking that at some point the numbers will not add up and then like magic the financial system will right itself, maybe some pain in the process, but everything will be good.  Money printing that is distributed among the general population can cause hyperinflation, sure.  But printed money that sits on the balance sheets of the big banks can be used like a club to suppress the prices of gold and sack the economy.  It can go on for generations.  Think 18th century France or the British Colonies not Weimar Germany.  (I think that Weimar was a special case because of fears that the German revolution would go the way of Russia). Right now hedge funds are swooping into the market picking up distressed housing driving people into the rental market and the media pitches this as a housing recovery. "Investors" can make money on the way up and the way down. Without the rule of law in the financial markets those trying to do the right thing are forced out.  Buying gold at this point is more a bet on political changes then market changes IMHO.

I feel a little like the crazy cousin who is reluctantly invited to and spoils the Thanksgiving Dinner.  But monetary policy to me is to far removed from the hard work that needs to be done at a foundational level.  Natural systems are truly abundant when approached from a cooperative rather domineering perspective.  You can't do anything about these foundational issues by trading futures on the CME, you need to role up your sleeves and get your hands dirty. To me, buying gold is like fixing the plumbing in your 10th floor apartment when the foundations are crumbling. There is a revolution going on, thousands of people all over the world are working independently and in hundreds of organizations rejiggering  our relationship with our world. We are all working our arses off so that those who decide to buy gold have something worth purchasing.


That very thing happened in Europe when the Spanish Conquistadores returned with the "New World" gold. There was an uptick in inflation (gold was less valuable because there was more of it) that eventually worked its way through the system. As with anything with a high perceived value that diminishes over time, the first users receive the most benefit. Too much money in the system will force prices higher.

It depends on how much gold was able to be returned to earth and how widely the information was distributed to set the massiveness and suddenness of inflation. Look at the diamond producers. (I don't know what level of reserves they currently possess. I've heard they have many years worth of sales in their vaults.) Are they flooding the market with their diamonds? They want to keep the quantities limited so the price remains very high. If they flood the market, diamonds won't be considered a safe haven. They lose their markets. Diamonds aren't nearly as scarce as the producers want you to think.

On the other hand, the markets (based on prices) are saying that gold is much more plentiful now than it was a few years ago. Perhaps it is just saying that more people are dishoarding. Isn't that what miners do? They dig and refine and sell into the open market. When the price drops too much, they go out of business. Eventually, balance returns to the system.


Dave,Great comments, just an editorial note.
Deflation can happen without recession.  Peter Schiff recently reminded us of this point in a recent appearance on CNBC
"The idea that the problem in Europe that there is an absence of deflation is ridiculous.   If you're going to define inflation as rising consumer prices, the slower they rise, the better…
Moderator (European know-nothing but attractive host): Depending on how much inflation you have, no?  You can't have pure inflation,  or you wouldn't have growth.
Peter Schiff:  Sure you can.  The natural consequence of a growing, vibrant economy is that prices come down.  Because economies find more efficient ways to produce things.    And the price of goods comes down.  That's what happened in America from 1870 to 1913.  Prices were falling rather sharply every year and we had tremendous economic growth.  You can even look at industries.  The fastest growing industries are where prices are coming down.  Not where prices are going up.  Look what's happening with cell phones, computers.  Prices come down every year.  And consumers buy more, because they have more purchasing power.
"(self important European analyst):  But I think the issue is this perception of if we are going to see disinflationary repression, the ECB are very mindful of that position, that will just further comprise consumer psychology …"
Peter Schiff:  But those aren't pressures.  You don't feel pressure when the things that you need to buy become less expensive.  That's relief.  Falling prices are a relief to consumers.  What pressures consumers are when costs go up… So the ECB is going to complicate things by making things more expensive.  You don't grow your economy by destroying the value of your money."
This is a classic clip, which should go into your time vault, to be taken out after the collapse, of watching common sense and sound money versus establishment nonsense.  It encapsulates the status quo telling the masses why it is good for the producers of high quality goods and services to hand over wealth to central planners and financializers. 
It needs to be filed under the "what the hell were we thinking" folder.
I see different kinds of deflationary periods.   Good deflation that Peter Schiff references where productivity and efficiency lowers prices.
And bad deflation, which is a loss of confidence of the economy.
That's what happened in the 1930's.  Everyone got fearful, held on tightly to their money, which triggered of job losses, business destruction, bank destruction and bank runs, further job losses, families stopped purchasing for fear of a smaller future or an actual loss of income and an actually smaller future.
Even those bad deflationary periods will end quickly, if the government gets out of the way- see the Austrian theory of creative destruction.  Prices fall for a while, then bargain hunters plow in and things reverse quickly.
Great discussion, everyone.

Chris, and Freegold,
Ok I get it, thanks for your explanations.  You make great points re rewarding savers.  And for the record, I would prefer a gold standard to the manipulated fiat system we currently have.

But there remains some problems for a simple gold standard that you didn't mention.

Yes, we should like the feature that if you are a saver, and the AGEs you worked hard for and put in your vault are worth more as the wealth of the nation grows.

But I'm going to say something heretical in these pages, I think a gold standard in a growing economy would result in over-rewarding savers!

And punishes manufacturers in some ways.  Since labor costs can be 50-95% of some products (software, doctoring and nursing, consulting), that's a serious problem!

To be clear, if you are a saver, your money, gold or otherwise, represents hard earned capital, and as I mentioned, interest rates should be high enough to reflect the value of this saved capital.  You should be rewarded for over-producing, prudent spending and saving.  And one should be rewarded for risk-taking, if you take appropriate risks in companies that have a decent chance of "making it".

Consider a simple thought experiment.  I am a saver.  I worked hard and put 10 AGEs in my home vault after a year of employment at the tire factory.

For the sake of argument, we need to convert our gold coins into some commodity as an arbiter of wealth.  Let's say at the beginning of the year, 1 AGE = 1 bushel of corn.  Further, let's say the wealth of the nation doubled in one year, thanks to the hard work of all its citizens.  I'm just picking a round number to illustrate the point.  Let's consider a rapidly growing economy that doubles its wealth each year.

So at the end of the year, my 10 AGEs will be worth 10 bushels of corn.  At the end of the 2nd year, the same 10 AGEs would be worth 20 bushels of corn.  I have done no extra work.  I have taken no risks.  I have made no investments.  My AGEs are more valuable because they sat in the vault for one year.  And the economy around me grew at 100%.  I could have been unemployed for a year and I still would be 10 bushels of corn richer.

Now consider my employer.  She /He hires me a 10 AGEs per year.  That's my contract.  10 AGEs per one year of working at the tire factory.  Now at end of year one, those 10 AGEs are worth twice as much.

So my employer is in the unfortunate position of either over-paying me by 5 AGEs in value in year two, or cutting my salary by 5 AGE, which in some sense would be fair, since I am providing the same work, so I should get the same value in AGEs.

This illustrates why I think the mandate to the keepers of the money (the Federal Reserve Act) was STABLE prices and full employment.

The system you describe is unstable in terms of prices in oz of gold, in the setting of a growing (or shrinking for that matter) economy.

In contrast, in a wealth-backed currency  (call it 'new dollars' for convenience) that was pegged to actual wealth, would mean that the $100 new dollars in my vault at the end of year 1 could buy 10 bushels of corn, and at the end of year 2 could buy 10 bushels of corn.  Because the currency has been "normalized" to the wealth of the nation.

My salary would be $40,000 per year at the end of year 1, and assuming no change in my output, $40,000 at the end of year 2.  Which is fair, if my purchasing power is also stable in terms of dollars.

Both savers and workers are neither rewarded nor punished for saving or working. 

Actually, I should say both savers and workers are appropriately rewarded for saving and working.

 If savers want to increase their wealth, then they must take their dollars out of the vault and invest it and /or lend it at interest.  Then they can increase their wealth (over the original savings) by taking appropriate risks and "putting their money to work".

That system makes the most sense to me, as it allows money to function as it was originally conceived, as a "marker" for wealth.  No more, no less.

Thanks again for the discussion.


I understand the idea that savers should not be rewarded for doing nothing, which is the premise behind rising home prices, incidentally (hey, I just sit here and I grow wealthy because my house is worth more!), and yet they should not be punished for wanting to safely store their 'markers for wealth.'

The one assumption you have baked into your example is that the economy will consistently be producing more and more real wealth over time.

In a world of depleting resources, that won't always be true.  We are living in a time of extraordinary abundance, fueled, literally, by a one-time raid on many millions of years of stored sunlight.  This allows us to do some really (energetically) silly things like split atmospheric nitrogen to turn into ammonia that we blithely wash into the sea in vast quantities.  

So we might also need to consider that the future system(s) of money should operate well in a world where there is reliably less every year, instead of more (kind of like Greece today).

Additionally, today's 'growing' economy is not growing at all if one subtracts the borrowing required to create that growth, so wee might view it as a temporary boost that will revert in a most negative way when the artificial stimulants are removed.  Thus, one's gold will be a marker for more stuff than is appropriate (as in your example with 200% more corn) during the up part of the cycle, and then be a marker for less stuff than is appropriate during the normalizing part of the cycle.

Over time that all washes out better than the current debt-based money system where the money supply simply grows no matter what (or else!).

I am completely unclear on how we could fashion a true monetary system where real wealth and money were somehow managed to remain in proportion to each other.  In the absence of perfect data gathering by some well-intentioned central body that then advances or shrinks the money supply based on the available information, my preference is to default to the collective intelligence of free-minded individuals who make use of a circulating medium of exchange that is NOT manipulated by any central body at all no matter how well intentioned.

Under this model, there will be imperfect flows and accumulations of money within and across borders ,but, over time, the money will seek out the opportunities and find its way towards the best uses.

Bluntly, I am quite assured that the central bank manipulations will ultimately prove to be destructive, as I think every attempt to centrally manage money always succumb to human tendencies, and I am equally convinced that debt-based money is a concept whose time has passed. 

Good response and important point.  I agree with you that the wealth-backed money system poses a problem for savers in the event that the economy shrinks.

(Programming note- I responded to your post 48 hours ago, but after hitting the SAVE button, my post vanished.  I did not have time to re-write until now.  2nd time's the charm).

1.  My basic answer to your point is that money is fundamentally a social contract.  For money to function it is a shared resource that a group agrees to use amongst itself for the 'greater good', benefiting from all the reasons money was invented in the first place- portability, assay-ability, rarity, fungibility etc. 

It is a social contract.  Like a government, police force, marketplace, educational system, transportation system.

The corollary to money- as- social- contract theme is that in a wealth-backed system as I described, money is tied collectively to the collective productivity and wealth building activities. 

I once read somewhere that "No man is an island, entire of itself, every man is a piece of the continent, a part of the main"  (John Donne).  So it is with our social contracts, including our money

2.  John Mauldin once said "there are only two ways to increase GDP (aka wealth), increase your population and increase your productivity".  While I think I might be able to come up with a couple of additional ways, his point is well taken. 

If your GDP/ wealth is shrinking, according Mauldin then either your population is shrinking (ala Japan) or your productivity is shrinking.  If you live in a wealth-backed dollar country and the population is shrinking, that may have some benefits to you that will offset some of the loss of wealth.  There will less people therefore more land and resource per capita (the "capita" is shrinking, the land and renewable resources are staying the same).

If your productivity is shrinking, then you've got some bigger fish to fry, and it sucks to be you, living in your country.  You as a citizen had better figure out why productivity is shrinking and address it, or suffer the consequences of living in a productivity-shrinking country.  Is is education?  Lack of capital investment?  Government has grown to an out of control size and is wasting your dollars?  Are you voting the rascals out of office and replacing them with more fiscally-responsible politicians?  Are you and your fellow citizens being too stingy in investing your savings in new ventures? 

If any of the above, and several other possible reasons in your control to change are happening, then you deserve to have your money lose value.  Or at least I should say that value-loss is the natural consequence of all of the above.

Social contracts have down sides and up sides.  But a contract, including social contracts, ties you as Party A to the fate of Party B.  That's the nature of contracts.  That's actually the point of contracts.

3.  Interestingly, one of the results of the computer revolution, the internet revolution, and nano-tech revolution, we are increasingly able to have sensors in everything and have real-time analytics of everything.

I have pointed out previously a key feature of Keynesian theories.  If you run a country according to Keynes (or pseudo-Keynes in our case), then the government must be ready to swoop in and flood the market with money in the event there is a loss of aggregate demand.  You know, "temporarily".   To "smooth out the business cycle".  However, the key corollary is that the money flooders must collect huge amounts of economic data continuously in order to know two things: what is the right time to flood the money and how much money to flood.  And when to stop the flow.  And by how much.  We don't think about it much, but that IMHO is why we have the proliferation of government statistical offices- the BLS, the Fed money supply data, the TCDMO, the CPI and inflation rate, the crop reports, the import-export data, the GDP.   And I would include all the public company disclosure forms which include their balance sheets. 

Seems like we every piece of data know to man- except of course an accurate accounting of physical gold in the Fed's vaults and the vaults of the bullion banks- but that's another story.

Anyway, the advance of data-gathering which has been "used for evil" thus far, could be used for good, i.e. to have an accurate accounting of the nation's wealth to set the money supply appropriately.  This is a partial answer as to your question of how a wealth-backed currency might work.

4.  If you are a saver and find yourself in a wealth-shrinking economy, then you have options and one of them is the ability to get out of money, which is a marker of wealth, and exchange your money for actual wealth.  Exchange money for land, tools, PV panels, buildings, equity shares in growing companies, a tractor, insulation, purified metals especially ones that have an industrial use, firearms, food, oil wells, income producing rental property.

Kind of like what we talk about here at Peak Prosperity.

Good discussion.


So looking for immutable currency really, aren´t we??Eradication of interest (it´s the interest, stupid), and a obligatory schedule of repayment of principal only at the rate of depreciation/consumption of the underlying property. It´s not rocket science is it.
That is what Mathematically Perfected Economy is all about. To restore our promissory obligations to its rightful state.
Gold will never save us as it cannot solve deflation, and when existing with interest it will not solve irreversable multiplication of debt by interest into insoluble debt (thereby also outstripping the gold supply)
Debt itself is not the issue, it´s our mechanism to retire money from circulation and keep the balance between money and whatever is represents. No inflation, no deflation!

And what is it your afraid for anyway. Thanks
[This user's posting privileges were suspended back in 2010 - Jason]

Hi All,
This is fascinating reading. I feel like receiving a free education in record time!

Anyone with a little common sense will have to admit that the current debt-based money system is way past its sell-by-date. The more I learn, the more I am convinced that the core problem is the fact that we have given away the right to create money to those that benefit most from that right.

Maybe I've missed it, but I see no mention on your site of an organization much like yours, trying to educate people in the same areas. They are British (yes, I know they sound funny…) and their site is I have a feeling that you are complementary and an exchange of ideas could benefit all those in search of a solution to the currency problems we are facing.

(also, it is delightful to hear a 10 year old girl explain to her teddy bear why there is so much debt, and what is wrong with the money system).

Greetings from the euro-zone!


The Netherlands

I've read many of your other posts and generally agree with them. This post gave me heartburn. I'm sure you have some sound reasoning to support your conclusions. I'd like to hear some of those reasons. First, let's start with your first point:

When I imagine how something actually became viewed as money, your description isn't the process that comes to mind. I imagine that someone (miner) found a shiny nugget of gold in a stream bed and thought it was unique enough to pick up and save. Later, during a bartering transaction, this person didn't have anything that the other person wanted … and pulled out the nugget. Who knows what the circumstances were, but the key is that a trade was made. The gold nugget had as much perceived value as whatever was being traded. At this point, the gold nugget wasn't money. It was just a tradable item. If the person who accepted the nugget (merchant) later used it as an object for trade, then it would start to become money. When the merchant would gladly accept the miner's gold as a full value trade for a particular good, that is when it became money.

There was no social contract expressed or implied. There weren't any contracts of any kind at this stage. It was an intermediary for a bartering transaction. The idea of money wasn't invented so much as it was stumbled upon. Once the concept was accepted, the search was on for the best money. As you noted, the best money had to have certain characteristics - General acceptability, portability, durability, divisibility, homogeneity, cognisability, stability, malleability.

Fast forward to medieval times and you find people depositing their gold with goldsmiths for save keeping. These goldsmiths would then give the gold owner a receipt for the gold deposited. The goldsmiths would relinquish gold to whoever possessed the receipts. These paper receipts were used as money. At this point, the paper represented the gold that was being kept for the receipt keeper. There was now a contract between the depositor and the goldsmith that could be transferred. There still wasn't any kind of social contract.

The goldsmiths soon determined that only a small percentage of the gold in their vaults was ever called. They reasoned that they could write more receipts than they possessed gold to cover … and no one would be the wiser. This practice likely started slowly and progressed as the smiths became emboldened. It worked until a rumor spread that there wasn't enough gold to cover all the receipts. Runs on the bank commenced and when the gold ran out, lynchings began.

Fast forward to modern times and the bankers have successfully changed the basis of money from gold to debt. There can be no more runs on the bank (unless you want to convert your electronic deposits into paper receipts.) Bankers who prefer their necks to stay the same length have benefited greatly. There are contracts everywhere between the borrowers and the lenders … but I still don't see the social contract that you speak of. What am I missing?

I have to say up front that I'm not a fan of Mr. Keynes' monetary philosophy. It is interesting that you say we run our country according to pseudo-Keynes philosophy. Actually, I agree with your assessment, but you give the money flooders too much credit. Keynes said that money should be borrowed to be injected into the system to stimulate the economy during down cycles. When the economy was sufficiently revived, the stimulus was to be removed (austerity via higher taxes.) It seems that our politicians are always eager to find reasons to borrow and spend. They aren't quite as quick to remove stimulus. They direct those borrowed funds toward projects that are specifically designed to give them more political power. Meanwhile, all of us are stuck with the debt they accumulate. The politicians make promises that are to be upheld by others - not necessarily the constituents who put them in office. What kind of promise is that? Is this the social contract you speak about?


Grover I liked your description of the timeless “coin of the realm” narrative outlining how debt based currency began its ascendancy. There is certainly truth in that narrative, and it is quite popular with the Austrian view of the world, but there are some other perspectives that may have greater accuracy.  

I have an alternative interpretation of the concept of a “social contract” in the context of money. I would define this instead as social relations, as opposed to a contract, although the differences may well be semantics.

Any discussion of money has to start with a good understanding of the concepts of value and commodities. Money was primarily created to facilitate the exchange of commodities, which right off the bat contradicts the Austrian notion of barter as being a dominant form of social relations in early societies. As the sociologists tell us, the concept of barter was never really widespread, it did of course occur, but mostly on the fringes. The stringent requirement of a double coincidence of wants necessary to allow barter is too cumbersome to be useful in any permanent setting.

So money was needed even in very early civilizations.

It has become fashionable to conflate the ascendancy of debt based currency and the decline of gold based standards to the decline of civilization as we know it. Money, either debt based or gold based, is a primarily a lubricant, and (much) later in time a store of wealth. Money is and was a utility, and is subservient to the dominant social relations of the era. The tail does not wag the dog, money, and all its attributes are created and designed expressly to advance the exchange of commodities.

What began to happen was not so much a change of monetary attributes during medieval times for example, as a change in the social relations. For example, in feudal society it was not possible to sell ones’ labor, so the prospect of (capital) accumulation was rendered moot, and money as a store of value was not really that relevant. It was however, a very efficient means of managing the exchange of commodities.


So the real story is the fundamental change from tribal civilizations, to hunter/gatherer societies, to feudal, and ultimately, to capitalistic societies. During these profound shifts, money changed, and it is still changing. The notion that monetary forms precipitated the change in social environments is not correct- not by a long shot- and this erroneous conclusion is the source of many ideological errors. It is exactly the opposite.


If the focus is steered away from how currency is backed, away from debt issuance, and instead recast to how commodities are exchanged- and what commodities are exchanged, we see a very different picture. In addition, if we are going to discuss commodities we have to discuss value, and have a deep understanding of what value is, and how money represents value. This is actually much easier said than done as value is a difficult concept to grasp. One technique is to use the principle of dialectics to review the subject of commodities, and then to examine the value of said commodities within this framework. Dialectics has to be the most confusing, misunderstood concept I have encountered, if you (try) and read the Wiki definition your eyes are sure to glaze over and you’ll come away with no understanding whatsoever- it is a word salad and a bad one at that. The video by Steve Keen below does a very good job of explaining the concept of dialectics in layman’s terms, and is quite simply the best explanation I’ve ever seen of the subject. If you’ve ever wondered what this mysterious subject is about, you’ll find a good explanation between minutes 4:00 and 19:38 of the video.

Along with this description of dialectics, the video covers topics of commodities exchange and value, at least in summary. To this we can add the subject of money as a facilitator of commodities exchange and a very different picture begins to emerge.

These principles eat away fundamentally at ideological precepts like “sound money” and other tropes of the gold bug crowd, as when labor becomes a commodity, and to survive one must exchange labor for sustinence, the machinations of the Federal Reserve, the requirement for unfettered (fiat) monetary supply and the preoccupation with the government towards full employment become much easier to understand- although still profoundly distasteful. A metaphor may well be captured by a passenger plane hurtling through the sky, Air Capitalia, if you will, on route to destination unknown. In the smoke filled and chaotic cockpit, klaxon horns blaring, the chief of the Fed and other cronies are desperately trying to wedge the control stick upwards to keep the plane from crashing, 3 of the 4 engines are on fire, fuel is down to fumes, and the next landing strip is 2000 nautical miles away. In the passenger cabin, the complaints are that the peanuts are stale and the drink service is slow, the passengers oblivious to the realities of the situation.


But ahead is a KC10 refueling tanker, out comes the umbilical for inflight refueling, alas, it’s not fuel, its champagne for first class.

I get your concern, but you are describing a strange world of miners exchanging gold
nuggets that is not reality.
The point about money as a social contract is at the reason money works at all is that
items that have good sound features of money (gold coins, silver coins) or
government-printed tokens (paper money and base metal coins) is that everyone
involved with money agree to play by a set of "money rules". 

The rules are something like- the government (or goldsmiths, or tribal money authorities) will create money according to some rule of thumb.  

They will not create more or less than society finds useful as a marker of actual wealth.  They will not create money to support their own little pet projects e.g. (well, the U.S. with debt-back wars and insolvent social programs has already blown that one!).  
 The users of the money will exchange it back and forth between each other according to a system of pricing that makes sense to the members, factoring in things like scarcity, need, desire, input costs, competitive, opportunity costs, etc.
These fundamental social contractual agreements have been in place as long as money has been around.  Government (hat tip to Hobbes), Laws, protection, ethics, are other examples of social contracts. 

These don't  work unless the majority of the community agrees to a set of rules. 
What you are describing is a private contract, which, while valid, is not the concept of a community social contract.
The paper gold receipts from the goldsmiths that you reference functioned like money because the participants continued to play by the same rules as before with physical gold money. 

The social contract broke down when goldsmiths broke their promise to only create paper receipts that were exactly in the amount of the gold on deposit.
We are witnessing the breaking of the social contract around the world wrt money by the malfeasance of the central banks, who are now excessive money printers, governments, who have failed their responsibility as watchdogs, and money authorizers, and the financial sector, who has failed even greater an central banks due to their excessive money printing, and even worse, fake money instrument creation way out of proportion to what is justifiable by human activity.  
When the social contract breaks, humans fall back on inconvenient but simpler and more trustworthy social contracts such as  barter of and precious metals as a safety net.
Thank you for the thought-provoking post.

You introduce some new points, and I want to understand more about Keen's dielectic- is this different from the Greek dielectic versus sophistry debate?
Good point about the utility of money and how it changes to suit the social construct of the current times.
But I confess I didn't see where you were going with the whole commodities thing.  It seems to me you are talking about a time past.  Your point seems to be, if I may simplify, that money only has value as it relates to/ represents commodities.
You do know that we are living in the information era, no? 

So I would posit, if you added up the dollar value of commodities and the dollar value of information (IP, trade secrets, consulting companies, analytics firms, etc, etc) you would see the "value" of information-based assets far outweigh the sum total value of all the piles of wheat, oil (above ground), corn, paper, timber etc.
Also, the significant majority of us get paid to produce, manipulate, deal with information.  
The significant minority produce food, ore, or even manufactured goods.  Manufacturing is
9% of the U.S. economy, and nominally largest economy in the world.
I'm not saying this is good thing or a stable system, it just what it is.  So money as a universal and
fungible marker of wealth must represent commodity or 'stuff' wealth and 'knowledge'

I said in my earlier post valuing knowledge wealth versus commodity is difficult to grapple with in a sound 'wealth- backed' currency system.
Chris' Crash Course I think points out that this present system where commodities are minor wealth components, is a by-product of cheap and easy energy, which, due to invention and use of machines such as tractors, combines and fertilizers relatively
devalues commodities.  

And has provided us humans time and luxury to create knowledge wealth. 

The debt-backed monetary system accelerated the process by expanding money supply rapidly to allow all that cheap energy to be put to use, and create more real wealth,and in turn leveraged for more debt-money.
If the cheap energy theme turns, then the whole system must turn, sweat it out,  and re-value commodities at a higher price, because it will simply cost much, much more to produce them.
I honestly did not get the Air Capitalia metaphor, but I do agree that most of the time it looks to me like the Fed is steering a careening jet through smoke-filled cockpit, so
I'm good with leaving it at that.



Wow. That was a most polite way of saying I was wrong. Thanks (sincerely.) I've noticed in your writings that you can point out problems with other's logic, but I don't recall you ever proposing a solution. I think it is time for you to step up to the plate. You obviously have the knowledge and you are very articulate. You see the shortcomings of all the systems. Given that all fiat systems fail (or are in the process of failing,) is it wise to have a monetary system based on fiat? Can Bitcoin fill the void? Is there any system that is incorruptible? Which direction would you like to see money go after the dollar (debt based fiat) fails?


Tribal societies didn't need money because everyone knew everyone. They kept the "naughty and nice" accounting in their heads. And yet, the social needs were met. Obviously, money didn't factor into the social needs equation. Why does the money system need to be burdened with current social woes?

Also, in an earlier post, you were saying (paraphrased) that savers shouldn't be disproportionately rewarded for just keeping it in a safe. Should bankers be rewarded for what they do? Look at the "too big to fail" banks that were bailed out a mere 5 years ago. It should be obvious that they had this nation by the balls. Things have gotten much worse, not better. Look at what percentage of GDP their profits command. (I'm sure someone can post an interesting graphic to show their obscene profits.) Do you find this fair? Could they accumulate this level of power in a gold based money system?