Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

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Epsilon Delta
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Epsilon Delta »

lee1026 wrote:I think that the velocity of money is relatively bounded. Velocity of money is the GDP/M0 (by definition), looking around the world, we see countries where the velocity of money is around 5-10* (AU), and we see countries where the money velocity is 0.5 or so. (Japan) I am not aware of any countries that is more extreme in either direction then these two. So if you move from one extreme to the other, prices go up by 50x. It isn't what I call stable or desirable, but it isn't what I would call hyperinflation either.

*That is, the monetary base is around 10-20% GDP.
The US was a bit above 20 in 1985 (it's now about 4), that doesn't really affect your argument though, since its still the same order of magnitude.

With electronic transactions there's no obvious limit. Some people dream of a cashless economy with an M0 of zero, and again there is no obvious reason this can't be approached.

But maybe velocity of circulation is bounded because nobodies tried to manipulate it. There are easier ways to mess up the economy, but I suspect a determined effort to manipulate velocity could also do it, although I'd rather not find out exactly how it messes it up.
lee1026
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by lee1026 »

I think the rather fundamental reason why velocity can't go too high is that people don't want to instantly spend money. I get my paycheck, I buy things, but there is generally a period of time in the middle where I am holding on to currency. If it takes me two weeks to spend my paycheck, then the fastest velocity can be is around 26. And that is assuming that my employer is running paycheck to paycheck, which I really hoping that they are not doing.

Banking can speed this up, but the while the banking multiplier (roughly defined as M3/M0) can be high, it still won't get us into hyperinflation range.
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jasc15
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by jasc15 »

Oicuryy wrote:
jasc15 wrote:This, combined with compelling arguments from folks like Warren Buffett that gold has no intrinsic value, made me wonder why the dollar ever was backed by gold, and what use it was.
Do you have a link where Buffet argues that gold has no intrinsic value?
Well, I was about to link to the 2011 Berkshire Hathaway Shareholder letter where he makes that argument, but you posted it yourself in this article.
Oicuryy wrote:Warren Buffett: Why stocks beat gold and bonds

A graphic in that article shows that an investment in gold met Buffett's goal of increasing purchasing power over the holding period after taxes. But an investment in stocks increased it more. An investment in T-bills increased purchasing power before taxes but not after. The purchasing power of paper dollars declined 86%.

Does that help you understand why folks in Benjamin Roth's day were worried about the paper dollar becoming decoupled from gold?

Ron
I think so. Paper money is very vulnerable to inflation and devaluation, as Mr. Buffet noted in his letter, but he also says that the only reason gold has any value is because people believe that it will be more derireable in the future:
Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future
This worked out well for gold over the time period in question, but its still based on an idea that demand will increase forever, preserving its increasing value. Isn't the price of gold just a bubble at these rates?
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jasc15
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by jasc15 »

It seems the last several responses simply say that gold is harder to reproduce than paper money, thus limiting rates of inflation in a gold standard. This is my original point, that gold is convenient to represent value since it it relatively hard to reproduce, not that it is valuable on its own. Is the resistance to inflation the only reason it is seen as superior to paper money? It's value otherwise has been argued to be not much else.
Valuethinker
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Valuethinker »

David Jay wrote:
Epsilon Delta wrote:The answer "Everywhere" seems a bit of overreach. I can think of more than a handful of places it hasn't, at least it hasn't happened yet. And there are more than a handful of places where the gold standard ended badly.
I am not a gold bug. Don't get me wrong. But it would take significant evidence to convince me that a government can massively print paper currency without an inflationary effect.
Japan since 1990.

Eurozone now, arguably. UK and US since 2008. The monetary base in all 4 cases has expanded massively. Inflation has not resulted.

We can split hairs. A large increase in bank reserves and monetary base is normally seen as an increase in the "money supply" but has not (in these cases) led to a large increase in money in circulation.

It will be interesting to see where the Chinese get to-- perhaps it depends on their ability/ willingness to devalue their currency.

The bottom line seems to be that in the face of fundamental deflationary forces, and particularly after an asset bubble price collapse, it's very hard to get inflation going again-- the conventional tools of monetary policy just don't work.
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Valuethinker »

Epsilon Delta wrote:
lee1026 wrote:I think that the velocity of money is relatively bounded. Velocity of money is the GDP/M0 (by definition), looking around the world, we see countries where the velocity of money is around 5-10* (AU), and we see countries where the money velocity is 0.5 or so. (Japan) I am not aware of any countries that is more extreme in either direction then these two. So if you move from one extreme to the other, prices go up by 50x. It isn't what I call stable or desirable, but it isn't what I would call hyperinflation either.

*That is, the monetary base is around 10-20% GDP.
The US was a bit above 20 in 1985 (it's now about 4), that doesn't really affect your argument though, since its still the same order of magnitude.

With electronic transactions there's no obvious limit. Some people dream of a cashless economy with an M0 of zero, and again there is no obvious reason this can't be approached.
Yes and there's probably no limit to the number of near monies that can be created. The reason monetary aggregates are not a policy tool now is that it was discovered that if a Central Bank targets a monetary aggregate (MO, M1, M1b, M2, M4 etc.) then that aggregate ceases to have a power on the inflation rate-- Goodhart's Law. This was discovered in the era of explicit monetary targetting in the 1980s by the Fed and the Bank of England.

But maybe velocity of circulation is bounded because nobodies tried to manipulate it. There are easier ways to mess up the economy, but I suspect a determined effort to manipulate velocity could also do it, although I'd rather not find out exactly how it messes it up.
The European move to negative interest rates on central banking deposits is just such a measure. We shall see if it will work.

So far the market has found Mario Draghi's latest move (from -0.2% to -0.3%) quite unconvincing-- a resounding thumbs down yesterday. The Swiss Central Bank is trying even harder.

I cannot remember who thought of it in the USA (and it is lampooned in H Beam Piper's "Space Viking") but the Social Credit Party in the Prairies in Canada in the 1930s proposed a system of a free allowance to each citizen, that would lose value at the end of the month-- just forcing it to be spent. I think the courts ruled that only the Bank of Canada could issue money, so the idea of "Citizens Credit" died a death.
Valuethinker
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Valuethinker »

jasc15 wrote:Or was there something else valuable about gold?

I was thinking about this while reading The Great Depression: A Diary, when the author constantly worried about the US going off the gold standard, and reducing the dollar's gold content. This, combined with compelling arguments from folks like Warren Buffett that gold has no intrinsic value, made me wonder why the dollar ever was backed by gold, and what use it was.

It seems to me that it is a hold-over from the transition from a barter-based economy to a currency-based economy. The currency had to be something not easily replicated, which in the past meant something relatively scarce like gold. The "value" in using gold for currency wasn't that some quantity of gold was of equivalent value as so many goods, but that it could be universally recognized that it represented a certain value of goods since its supply was controlled.

With the invention of paper money which is relatively hard to reproduce, all of the features that made gold useful as currency can now be applied to this paper. However, since people are resistant to change, these notes needed to continue to represent some quantity of gold, which in turn represented the value of goods. It seems redundant to have one currency to represent another currency which in turn represents some value of goods. Cut out the middle man that is gold, and just substitute one fiat currency for another.
Trust, especially in governments, was low.

Most countries when they got under financial and military stress, would devalue the amount of silver in the coinage (gold coins were always fairly rare). Thus leading to inflation. Many Roman Emperors did this, as well as many medieval kings and some early modern rulers.

Gold had the advantages of:

- being relatively rare
- being highly dense
- being an important and attractive decorative metal

Now in the New World, where they didn't have a concept of money, AFAIK it was just decorative for the Aztecs, Incas, etc.

The hunger for gold is in other words an Old World thing, spread presumably by the various migrations too and fro across the Central Asian Steppes between Europe, India, the Middle East and China.

But there was an alternative to gold which grew up in Early Modern Europe with the Rothschild banker family etc.

Bills. Bills of Exchange, theoretically exchangeable for gold or silver (or English currency) in London were used by merchants all over Europe and even into the Middle East and beyond.

The Bills would be settled by the Rothschild bank in London. You knew you could trust the Rothschilds in Frankfurt or Paris or Lisbon because the Rothschilds in London would always make good on the debt when the Bill came due.

After a while people stopped encashing the bills into precious metals or currency, and treated them as being "as good as".

Periodically there were banking panics, as there was in the summer of 1914 due to the onset of WW1. At that moment the Bank of England had to step in to stabilize markets, usually by quietly organizing a bailout of the affected bank (the Barings Crisis).
Valuethinker
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Valuethinker »

jasc15 wrote:It seems the last several responses simply say that gold is harder to reproduce than paper money, thus limiting rates of inflation in a gold standard. This is my original point, that gold is convenient to represent value since it it relatively hard to reproduce, not that it is valuable on its own. Is the resistance to inflation the only reason it is seen as superior to paper money? It's value otherwise has been argued to be not much else.
Think about history. Gold and silver were in use for thousands of years as money (but not in the New World, AFAIK). On some Polynesian islands they used huge rocks cut into donuts (hard to steal that way ;-)).

Paper money was invented by the Chinese (not sure when-- 4th century?). But it didn't become big in Europe until the 1700s (after John Law introduced it into France, they had a nice bubble and blowup - 1720?).

So the arrival of paper money is relatively new in a historical context, and tied to the rise of the modern and highly centralized nation state which has a strong bureaucracy and military to back up its paper currency.

You can trust in the US dollar because you know, "don't tread on me". "From the Halls of Montezuma... " etc. ;-).
Johno
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Johno »

Epsilon Delta wrote:
Johno wrote:If you stick to a gold standard, which means *not* arbitrarily revaluing the currency v gold, you can't have hyperinflation without a hyper new supply of gold.
You could always ramp up the velocity of circulation. The Austrians might say that's not inflation, but everybody else would see prices going through the roof.
As covered by lee1026, this is a reason you could have rising prices under a gold standard. But nobody disputes that. You can also have rising prices because more gold is found, or if productivity is dropping, in which case sooner or later average purchasing power declines. But it's not plausible that any of these could cause the kind of unbounded drop in monetary value you *can* (don't always all the time, obviously) get with fiat money, very high or hyperinflation. Velocity can go up, but there's no plausible way it can keep going up and up and up forever and never come back down. The supply of fiat money can.

The analogy would be shorting a shock: there's unlimited loss potential. Buying a put on a stock there's limited loss potential. This doesn't mean one method or the other is comprehensively superior, it's just a basic statement of fact. The statement about unlimited loss potential for the short isn't contradicted by pointing out you can also lose money buying the put.
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Epsilon Delta
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Epsilon Delta »

Johno wrote:
Epsilon Delta wrote:
Johno wrote:If you stick to a gold standard, which means *not* arbitrarily revaluing the currency v gold, you can't have hyperinflation without a hyper new supply of gold.
You could always ramp up the velocity of circulation. The Austrians might say that's not inflation, but everybody else would see prices going through the roof.
As covered by lee1026, this is a reason you could have rising prices under a gold standard.
...
Velocity can go up, but there's no plausible way it can keep going up and up and up forever and never come back down. The supply of fiat money can.
It doesn't have to go up forever, it just has to go high enough. The supply of Wiermar marks stopped growing, but only after the damage was done.
lee1026 wrote:I think the rather fundamental reason why velocity can't go too high is that people don't want to instantly spend money. I get my paycheck, I buy things, but there is generally a period of time in the middle where I am holding on to currency. If it takes me two weeks to spend my paycheck, then the fastest velocity can be is around 26. And that is assuming that my employer is running paycheck to paycheck, which I really hoping that they are not doing.
The money in your back account is not part of M0. And if you want to use M1 or M2 or M3 or M4 or M5 or M6 all you have to do is put your paycheck in Vanguard Federal MM and it's still not part of the money supply (Tip of hat to Valuethinker). And if you use M7 some bright spark will invent yet another type of near money. Controlling this would require an unusually creative, active and powerful government, probably the exact opposite of the inclination of most hard money advocates.

The plausible mechanism that can drive velocity of circulation arbitrarily high is the official and shadow banking systems, including things like having your employer direct deposit part of your paycheck directly to your creditors.

Velocity of circulation is just the ratio of GDP/money supply, (for some choice of money supply) It has no logical bounds. It looks plausible but it's completely arbitrary, might as well divide wheat production by the water level in the Bay of Fundy.
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Clive »

jasc15 wrote:Paper money is very vulnerable to inflation and devaluation, as Mr. Buffet noted in his letter, but he also says that the only reason gold has any value is because people believe that it will be more derireable in the future:
Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future
Buffet hold a mountain of T-Bills as the stock purchase power of those T-bills varies and at times will provide buying opportunities, but condones gold whose stock purchase power has been even more volatile over time.

As for stocks beating the alternatives over time ... if you include imputed rent stocks have lagged owning a home ( ( stock capital + dividends ) < ( home prices + imputed rent ) ).

Ancient Talmud text advocated a third each in business, land and reserves, which in present day terminology might be interpretted as, for the average investor, owning a home, some stocks, some gold and periodically rebalancing whenever sizeable deviations have become apparent. Buffet isn't a average investor however and accordingly holds more in stocks and prefers T-Bills instead of gold for reserves.

Britain was on a silver standard from Anglo Saxon times. A Pound was a pound weight of silver. Issac Newton more or less transitioned over to a gold standard in 1717. The pound/gold peg he set remainded relatively stable for 200 year+ until the primary reserve currency transitioned away from the Pound to the Dollar.
lee1026
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by lee1026 »

The money in your back account is not part of M0. And if you want to use M1 or M2 or M3 or M4 or M5 or M6 all you have to do is put your paycheck in Vanguard Federal MM and it's still not part of the money supply (Tip of hat to Valuethinker). And if you use M7 some bright spark will invent yet another type of near money. Controlling this would require an unusually creative, active and powerful government, probably the exact opposite of the inclination of most hard money advocates.
To be somewhat silly about it, the premise of near money is that you can easily exchange it for base money, right? If the supply of near money is extremely large, and the supply of base money is extremely small, wouldn't any person be able to bring down the system by getting simply getting more near money then the entire supply of base money and then demand delivery?

This person will instantly own the entire banking and monetary system, and more importantly, any real assets that the system holds. Foreclose on every mortgage holder, for example. Owning all of the real estate in the country that have a mortgage attached to it is nice.

So I suspect that the ratio of near money and base money have to bounded to some extent, at least in monetary schemes where there is no central bank that can come in and add more base money.

To be less silly about it, near money is always at some risk. The entity that promised to pay you may not actually pay up. As the ratio of near money to base money climbs, financial institutions would have ever more precarious balance sheets. As the balance sheets become more dangerous, people will stop treating the obligations of the financial institution as near money.* So that is probably a more practical reason why the ratio of near to base money is bounded,

*Not to say that people wouldn't lend to them, mind you. People buy junk bond funds. But very few people treat junk bond funds like money, and that is important part here.
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by sawhorse »

jasc15 wrote:With the invention of paper money which is relatively hard to reproduce, all of the features that made gold useful as currency can now be applied to this paper.
Almost anything can be counterfeited. It's a matter of whether it can be counterfeited successfully. In other words, can someone without high tech equipment and inner knowledge tell that it's fake?

Your statement about "paper money that is relatively hard to reproduce" is correct in that it's very hard to reproduce exactly. But paper money doesn't need to be reproduced exactly to fool people. Paper currency is embedded with top secret features that only a few people in the federal government even know about, so only the government can distinguish between government issued paper currency and a very realistic looking fake.

If paper currencies were actually difficult to counterfeit successfully, the government wouldn't have to keep adding security features to the cash.

On the other hand, it's much easier to detect fake gold, and people have known how to do it for millenia.
jasc15 wrote:It seems redundant to have one currency to represent another currency which in turn represents some value of goods. Cut out the middle man that is gold, and just substitute one fiat currency for another.
It's easy to overlook the enormous amount of trust required for fiat currency systems to function. You have to trust your government, your fellow citizens, and to some extent your enemies. That trust isn't given nor deserved in many places especially in times of chaos - situations that lifelong Americans can't relate to.
sawhorse
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by sawhorse »

Very cool discovery. Certainly supports some common arguments for gold. Durable, store of value over a very long time period, allows a large amount of financial value to be transported in a compact manner, useful medium for exchange during chaotic low-trust times (it was intended to be used to finance a war).

http://www.usnews.com/news/business/art ... -gold-ship

The biggest takeaway, however, is this: Never put 11 million gold coins on a single ship :oops:
Last edited by sawhorse on Sun Dec 06, 2015 3:17 am, edited 1 time in total.
denismurf
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by denismurf »

Recently I've been getting emails touting something called the Casey Report warning us about the coming War On Cash. They'll rush it to you for free, plus $4.95 shipping. Among other things, it describes the 3 actions we must take NOW to avoid total destruction of our wealth. Sorry; no further details provided.

Anybody heard of this?
sawhorse
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by sawhorse »

denismurf wrote:Recently I've been getting emails touting something called the Casey Report warning us about the coming War On Cash. They'll rush it to you for free, plus $4.95 shipping. Among other things, it describes the 3 actions we must take NOW to avoid total destruction of our wealth. Sorry; no further details provided.

Anybody heard of this?
LOL at the offer to "rush" it to you for $4.95. Why would they ask for $4.95 when it'll be worthless by the time it arrives? :mrgreen:
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nedsaid
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by nedsaid »

Day9 wrote:
David Jay wrote:I am not a gold bug. Don't get me wrong. But it would take significant evidence to convince me that a government can massively print paper currency without an inflationary effect.
I think one idea is to print a lot of money during deflationary crises and actually take money out of the money supply during boom times. This is good for society and you can't do this with a gold standard (or bitcoin for that matter, yes I'll be the first to invoke the B-word). However I am not sure if this is actually what is happening. Maybe instead of taking out of the supply they are still printing but just not as much.
What you are describing is one aspect of Keynesian economics and it makes a lot of sense.

One problem is that there is disagreement about how money is created. Budget deficits play a role in this. The Federal Reserve Bank has a big role in this. But it seems that most money is created in the banking system where in essence your deposit can be leveraged 10 to 1 into loans. Debt is money in today's economy.

Ray Dalio has a good video out there about how the economy works. He talks about productivity growth, the short term credit cycle, and the long term credit cycle as three big factors driving the economy. His discussion of the credit cycles gives good insight into money creation.

Warren Mosler talks a lot about budget deficits and money creation. He has a website and is one of the proponents of Modern Monetary Theory. He has a mini-book on his website and it gives a useful model to help you understand how it works. There are three problems with it. First, it is probably too simplistic of a model. Second, he believes that government sets prices in the economy which I do not believe myself. Third, upon further study it seems that much of our money is created through the money multiplier effect through our private banking system. Despite the limitations of Mosler's model, it did open my eyes to certain things.

I would also recommend Cullen Roche and his blog Pragmatic Capitalism. He sees the limitations of Modern Monetary Theory and expands it to Monetary Realism. But even Monetary Realism probably doesn't explain everything.

This was an interesting journey for me as I am conservative in my outlook and reading all this blew my mind so to speak. But it shows the value of taking off ideological blinders and taking a look at what the other guy is saying.

One final takeaway from all of this is that the gold standard had its problems too. A huge problem is that it was too inflexible, money creation was difficult and this was a problem. As the economy grows, the money supply needs to grow with it. Also, when you have a financial crisis, the ability to create new money is very limited with the Gold Standard. In effect, you have to devalue the ratio of dollars to gold as President Roosevelt did.

This was a problem in the later 1800's as the money supply wasn't growing fast enough. It constricted the economy. The bankers loved it, the farmers hated it. This was the topic of William Jennings Bryan's famous "Cross of Gold" speech. Perhaps someone more knowledgeable about financial history can expand on this. In fact "The Wizard of Oz" was a commentary on this very issue.
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Oicuryy
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by Oicuryy »

Here is a graph of an index of US consumer prices that goes back to 1774. It is not hard to see where the US switched from using metal to paper as money.

Image
Source: http://www.measuringworth.com

Ron
Money is fungible | Abbreviations and Acronyms
lee1026
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by lee1026 »

One problem is that there is disagreement about how money is created. Budget deficits play a role in this. The Federal Reserve Bank has a big role in this. But it seems that most money is created in the banking system where in essence your deposit can be leveraged 10 to 1 into loans. Debt is money in today's economy.
The banking system's leverage is calculated based on a bank's equity, not deposits. A bank's equity comes from selling shares, not people depositing money into checking accounts.
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nedsaid
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by nedsaid »

lee1026 wrote:
One problem is that there is disagreement about how money is created. Budget deficits play a role in this. The Federal Reserve Bank has a big role in this. But it seems that most money is created in the banking system where in essence your deposit can be leveraged 10 to 1 into loans. Debt is money in today's economy.
The banking system's leverage is calculated based on a bank's equity, not deposits. A bank's equity comes from selling shares, not people depositing money into checking accounts.
A bank's equity also comes from retained earnings. A customer deposit is actually a liability to the bank and does not figure into equity. Loans are an asset to the bank and a liability to the customer.

My reading of the money multiplier effect has described a multiple to the amount of reserves held. The Wikipedia article talks about reserves as a ratio of deposits held.

If you work in the industry, perhaps you can add further clarification. My understanding of this is not 100%. Thank you.
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lee1026
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Re: Historically, was gold's "value" simply that it was a convenient, yet hard to counterfeit symbol?

Post by lee1026 »

So there is two separate things being discussed here. There is the leverage ratio of any given bank, which is calculated based on the ratio between its assets and its equity. There is also the money multiplier, which is is based on the ratio between base money and near money.

So when the Fed adds more base money, it allows the creation of more near money based on the money multiplier. When you deposit money into the bank, it doesn't do much for them in terms of letting them expand their balance sheet. The confusion comes from when people confuse the Fed adding more base money and you making a deposit.


Of course, if you found a giant stack of cash in a cave somewhere (base money) and deposit it into the bank, it also allows the bank to create more near money. But most bank deposits are not from cash that was not previously in the system.
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