4 ms·

Even if we think gold is finite (doubtful in any meaningful sense), it does not follow that the amount of money (in the modern sense) would be finite in gold st

Even if we think gold is finite (doubtful in any meaningful sense), it does not follow that the amount of money (in the modern sense) would be finite in gold standard. Gold standard means that the value of an unit of currency is tied to a specific amount of gold. In addition it may mean that the amount of bank notes in circulation in such system matches the amount of gold in the vaults of central bank. Neither of those means that the amount of money people have lent to the banks (i.e. money at their bank account) has any meaningful relationship to the amount of gold - at least without extremely strict regulation of financial companies, lending and saving. (Of course, same applies to cryptocurrencies, the claim that current cryptocurrencies would somehow set a limit for money creation is just a massive misunderstanding of money and credit.)

symlinkk 6y ago
I don’t understand what you’re trying to say. How does “lending and saving” change the fact that money can’t be created out of thin air?
- SpicyLemonZest 6y ago
  Under standard definitions, every bank loan creates money out of thin air. When you get a $10k car loan, for example, that means the amount of money floating around the economy has increased by $10k; there's nobody else in the market who has to spend $10k less because you got that loan.
- smallnamespace 6y ago
  His point is that most money is indeed created out of thin air through the mechanism of fractional reserve banking and the creation of debt. This happens even if the monetary 'base' remains a fixed quantity, like bullion gold.
  - dnautics 6y ago
    Yes, but minimally you can create disclosure regulations requiring entities that are lending to disclose the level of leverage they are operating at. Customers can then discriminate when they deposit based on withdrawal risk.
    - beefield 6y ago
      Sorry, your comment made me laugh a bit. You know, before the smartest guys were incentivized to figure out how to make you and me click ads, they were incentivized to figure out how to circumvent financial regulation. Turned out that it is really, really f*cking hard to write a regulation that can't be somehow gamed. And even if it was not, you need to remember that vast majority of people do not know how to handle percentages, it is quite naive to expect that those people could make any rational judgements based on any financial disclosures whatsoever. Just look around, Madoff managed to con quite a few sophisticated investors, and to anyone with any common sense Tether has been behaving exactly as if they would be doing their best to scam the whole crypto scene - and nobody cares or requires disclosures.
  - spiralx 6y ago
    Fractional reserve banking doesn't actually model how banks work in the modern economy though - they don't lend out deposits, they just add a figure to the customer's account and add a matching loan to their assets, literally creating money. They could do this without any deposits at all.
- beefield 6y ago
  That's not a fact. Money can and will be created out of thin air regardless if your monetary system is built on central bank money, gold or even bitcoin. A naive example: Alice has a gold coin. she walks to a bank and makes a deposit. Now she has one gold coin in her bank account and bank is holding her coin. Now Bob walks into the bank and says that he needs a loan of one gold coin to buy things. Bank happily lends the coin received from Alice to Bob. Bob walks to Alice and buys things from Alice and gives the coin to Alice. Now Alice has one gold coin and another gold coin at her bank account. Total amount of money she has is now two gold coins, even if only one gold coin exists in the whole universe! And yes, that money at her bank account is as real money as money nowadays gets. And yes, the truth is even more weird, you do not even need to circulate the money as in the naive example, banks can and will just create money out of thin air to people's accounts. After all, the money at the account is literally, literally nothing more or less than a way for bank to say that it will pay you money some later date if you so wish. To make that promise, you do not need any money to exist anywhere. Even I can do that promise on any imaginable currency (what that promise is worth is another discussion). And as said, this has absolutely nothing to do with what "base money" the monetary system is built on. And of course, this is the reason why financial system is so heavily regulated.
  - throwaway13337 6y ago
    That promise is based in trust that when someone wants their gold back out, they can get it. If there is little confidence in that, people wouldn't store their gold there. There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. With fiat currency backed by nothing, the reserve no longer needs to exist at all as long as you have control over the creation of new money. I'm not saying the gold standard is the answer but it is different. That difference does not go away when we talk about lending.
    - pessimizer 6y ago
      > There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. The point is that both fiat and gold sit in a system of debt powered by trust. If you're theorizing a natural limit to the smallness of reserves, you might as well be theorizing a natural limit to the amount of money that can be printed. edit: it's certainly physically easier to have no reserves than to print infinite paper.

symlinkk 6y ago

I don’t understand what you’re trying to say. How does “lending and saving” change the fact that money can’t be created out of thin air?

SpicyLemonZest 6y ago
Under standard definitions, every bank loan creates money out of thin air. When you get a $10k car loan, for example, that means the amount of money floating around the economy has increased by $10k; there's nobody else in the market who has to spend $10k less because you got that loan.
smallnamespace 6y ago
His point is that most money is indeed created out of thin air through the mechanism of fractional reserve banking and the creation of debt. This happens even if the monetary 'base' remains a fixed quantity, like bullion gold.
- dnautics 6y ago
  Yes, but minimally you can create disclosure regulations requiring entities that are lending to disclose the level of leverage they are operating at. Customers can then discriminate when they deposit based on withdrawal risk.
  - beefield 6y ago
    Sorry, your comment made me laugh a bit. You know, before the smartest guys were incentivized to figure out how to make you and me click ads, they were incentivized to figure out how to circumvent financial regulation. Turned out that it is really, really f*cking hard to write a regulation that can't be somehow gamed. And even if it was not, you need to remember that vast majority of people do not know how to handle percentages, it is quite naive to expect that those people could make any rational judgements based on any financial disclosures whatsoever. Just look around, Madoff managed to con quite a few sophisticated investors, and to anyone with any common sense Tether has been behaving exactly as if they would be doing their best to scam the whole crypto scene - and nobody cares or requires disclosures.
- spiralx 6y ago
  Fractional reserve banking doesn't actually model how banks work in the modern economy though - they don't lend out deposits, they just add a figure to the customer's account and add a matching loan to their assets, literally creating money. They could do this without any deposits at all.
beefield 6y ago
That's not a fact. Money can and will be created out of thin air regardless if your monetary system is built on central bank money, gold or even bitcoin. A naive example: Alice has a gold coin. she walks to a bank and makes a deposit. Now she has one gold coin in her bank account and bank is holding her coin. Now Bob walks into the bank and says that he needs a loan of one gold coin to buy things. Bank happily lends the coin received from Alice to Bob. Bob walks to Alice and buys things from Alice and gives the coin to Alice. Now Alice has one gold coin and another gold coin at her bank account. Total amount of money she has is now two gold coins, even if only one gold coin exists in the whole universe! And yes, that money at her bank account is as real money as money nowadays gets. And yes, the truth is even more weird, you do not even need to circulate the money as in the naive example, banks can and will just create money out of thin air to people's accounts. After all, the money at the account is literally, literally nothing more or less than a way for bank to say that it will pay you money some later date if you so wish. To make that promise, you do not need any money to exist anywhere. Even I can do that promise on any imaginable currency (what that promise is worth is another discussion). And as said, this has absolutely nothing to do with what "base money" the monetary system is built on. And of course, this is the reason why financial system is so heavily regulated.
- throwaway13337 6y ago
  That promise is based in trust that when someone wants their gold back out, they can get it. If there is little confidence in that, people wouldn't store their gold there. There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. With fiat currency backed by nothing, the reserve no longer needs to exist at all as long as you have control over the creation of new money. I'm not saying the gold standard is the answer but it is different. That difference does not go away when we talk about lending.
  - pessimizer 6y ago
    > There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. The point is that both fiat and gold sit in a system of debt powered by trust. If you're theorizing a natural limit to the smallness of reserves, you might as well be theorizing a natural limit to the amount of money that can be printed. edit: it's certainly physically easier to have no reserves than to print infinite paper.