Gold standard, inflation or why modern banking system is a kijiji scam

[Heathen Hammer]

Today, my friends, we are going on a wild journey to understand the way modern banking system works... and why it doesn't.

First let's start with a little history recap, forgive me for crumping a 1000 years of economic history in a few paragraphs:

Originally, metal was money. But holding large quantities, not to mention transporting it, was very dangerous. So banks became a thing - they would hold your metal for you, and give you a piece of paper, a receipt, which you can later use to get your metal back. Templar banks were a good example of that.

At some point those receipts became popularly credible and people begun exchanging goods and services for those receipts, while metal was taken out of banks less and less, but was still exchanged for receipts at 1:1 ratio.
More time has passed, and banks realized that as people exchange receipts more and more, and most metal they have is not being withdrawn. So they started loaning some of other people's metal that they had for profit, knowing that they still have enough metal to meet requests for withdrawals. And so fractional reserve banking was born. Receipt supply increased, while the value of metal remained the same. As a result, they begun issuing loans for amounts at 3:1 or even 5:1 ratio compared to the amount of metal they actually had. One could say they were making money out of thin air, while in reality what drew them profits was... confidence, because everyone believed that if they have a bank receipt for metal, bank would honor it.

Fast-forward to less prosperous times, and the chickens begun to roost. As more people begun withdrawing their metal, banks begun to run out. Some went out of business and people that weren't fast enough to withdraw their metal on time were left with nothing. Confidence was gone and people were too scared to put their metal in the bank again.
Then came in the governments. They liked banks and their impact on the economy as it stimulated other businesses, so they decided to bring back confidence by issuing rules on banks and lowering rates of exchange to 2:1 or 3:1. And slowly, confidence became growing back and people started bringing their metal to banks again.
Over time, as confidence continued growing, rates started going back up again to 5:1 or eve 10:1 ratios. Amount of loans grew, so did the businesses and people's confidence grew as they were exchanging those receipts so much that metal was barely even withdrawn anymore. Biggest problem for the government at that point was dealing with fake/fraudulent receipts, so government decided to make its own which everyone in their countries could recognize. Metal was still in banks, but almost never withdrawn, while most money people had was in form of receipts for that metal.

As the time passed, governments realized that its dangerous that banks issue loans for such high amounts and could potentially go out of business, as the the magic money they made were based on confidence. So the government took all the metal from the banks, promising citizens that its merely keeping it safe for them, along as they continue trading and exchanging government-issued receipts.

And so they did, for generations: confidence in paper receipts grew and over decades and decades people begun to forget that real money is metal, while paper receipts are just, well, that. As confidence in paper grew, governments became greedy and begun dictating that those receipts represent less metal (first half, then third, then fourth, etc.), but as this process happened gradually and over time and people continued using the receipts to the point where most governments simply announced that those receipts are, in fact, money and due to their high confidence in paper people just went with it.

As this progressed, governments themselves fell into this trap and begun issuing more paper "money". As a result hyperinflation happened, and public confidence in paper money plummeted, people would stop exchanging goods and services for paper and held confidence in things they could actually hold and control: like metal and or food.

Governments didn't like that, not one bit. First of all it is far easier to tax and regulate paper then metal and food, not to mention that the gravy train of free money left the station along with consumer confidence. First they tried to bring consumer confidence by force and of course it didn't work. So governments promised that from now on paper would be backed by metal or by paper that can't be hyperinflated - and as it now relied on confidence in other things then paper itself, it worked, at least for the time. Then as governments got greedy (this happens quite often) they introduced fiat currency, which is backed by government itself.
Because of that, governments no longer could go on printing spree like they used to, so they begun printing currency in small increments, and doing it in the way that majority of public wouldn't notice, but would gradually devalue the currency their citizens hold over years and decades. But nothing lasts forever, and now we see public lose its confidence in currency yet again. This is the stage in which we are now.

There is clearly a problem - many people don't realize that their currency has no real value, since only metal does. The real value of USD, EU, pound and others is nothing more then... confidence that you can exchange it for something. This is it. If significant part of the public decided to ditch USD for one reason or the other, then its over. And here we go to the caviat of the problem.
Governments cannot afford to admit that we are in hyperinflation, because they know public would dump their fiat currency. Which explains why we hear legacy media come up with more and more extraordinary explanations from rising prices, from supply-chain breaking up to other things, while in reality it because government can't stop the money printers.
Why do governments do that? Well, because inflation is how the government is slowly stealing wealth from its citizens. But there's more to that then just that.
Before 1913 US government would create its own money. However, after Federal reserve was established, which would let US government borrow money with interest, that it would pay via taxpayer-funded bonds. In addition, contrary to popular belief its not just FR that can create money out of thin air - most banks can do that as well, provided that they don't issue loans that exceed their own money by a certain threshold. Majority of money in all circulation is created in that manner. And here's where fractional reserve banking comes into play again. Now banks can have X amount, issue loans for Xx10 and whoever receives this loan will pay it back to the bank with interests or forced to do so by the government, while if a bank fails... then again taxpayer's money is used to bail it out. Banks always win.
Without a doubt, this is a monstrous and inhumane system, that is generating misery, corruption and economic, social and political instability in society. Without a doubt, the growing discontent will create popular demand for changes in the monetary system, as the veil is falling, primarily due to us living in hyper-information age.
So how should current banking system be changed? I think that we are long overdue to rethink this problem and best bet is to rely on metal again. We need to abolish federal reserve and either ban or severely limited fractional reserve banking, while simultaneously bringing back gold standard to maintain public confidence in currency.
In conclusion, I'll leave some of the very interesting articles that I found while researching this subject:
https://mises.org/library/inflation
https://www.lewrockwell.com/2021/09/...onetary-curse/

[Lord Thesaurian]

If the OP isn’t overtly anti-capitalist then it should be necessary to understand that value is inherently relative. Like fiat money, gold/precious metals or gems or whatever as a currency is only as valuable as the minimum value of goods or services that can be exchanged for it. Gold is a proxy like any paper. If you understand that, then you understand why re-instituting the gold standard is impractical at best. Tying money to the price of gold, as opposed to that of the goods and services we consume, leaves things as important as the rate of inflation at the mercy of the gold supply and rate of mining, which in and of itself is a waste of resources. Rather than a source of stability, the gold standard was a relatively volatile time:

Annual consumer price inflation:

Spoiler Alert, click show to read: 

GNP growth:

Spoiler Alert, click show to read: 

The gold standard means more volatility, not less, and as the global economy became more interconnected, that volatility was virtually inescapable. Gold’s inherent inflexibility hobbled capital markets and contributed to both the depth and length of the Great Depression, convincing the US to suspend gold convertibility, and other countries to abandon the gold standard altogether, which kickstarted a global economic recovery. More on that here. Long story short, In 2021 there are other, more relevant ways to go about decentralizing currency besides making things way worse by going back to the gold standard.

[Heathen Hammer]

I think the Gordian knot is the fact that fiat currency is not viable in long-term, as its value solely rests on public confidence in it. As it stands and other non-fiat forms of currency become available, there is a pretty strong chance that at some point confidence reduction will grow exponentially and everyone and their grandma starts dumping fiat for crypto, metals and other assets as paper loses most of its value.
1929 Stock Market crash was primarily caused by increasing rates of speculation and easy credit, it seems that FDR's decision to ditch golden standard had first and foremost to do with other factors - primarily with his intent being to print more currency, which he couldn't do without having to reduce its value in the first place.
Metal isn't a proxy like paper. Metal is, well, money. Currency that isn't backed by physical value, its backed by belief in that you can exchange it for other things, and as that belief diminishes it is just that, paper. I'm not saying that brining back gold standard is our ticket out of Inflation city, but it would be a good first step, at least as temporary measure. I'd further limit banking, and ban or severely restrict fractional reserve banking, to prevent financial institutions from handing out loans which they themselves don't have.
As it stands, federal reserve and central banking system overall, are relics of eras long past. The increasingly antiquated and robust monetary system that we have today is clearly failing, as the purchasing power continues to drop and more and more major powers are beginning to trade things like fuel without use of USD. Essentially Western world is being set up for an economic calamity, the magnitude of which could eclipse both 1929 and 2008.

[antaeus]

Essentially Western world is being set up for an economic calamity, the magnitude of which could eclipse both 1929 and 2008.

Predicting downturns in the economy is like predicting rain. Sooner or later something will happen, and confirmation bias yay: "I said this would happen"

[Heathen Hammer]

Predicting downturns in the economy is like predicting rain. Sooner or later something will happen, and confirmation bias yay: "I said this would happen"

Because major economic downturns have predominantly been caused by the ineffective and inherently flawed federal reserve/central banking system, and while it remains in place this will continue to happen.

[antaeus]

Because major economic downturns have predominantly been caused by the ineffective and inherently flawed federal reserve/central banking system, and while it remains in place this will continue to happen.

OF all people, I thought you would be OK with this... seeing as hard times are a driver of innovation and outside-the-box thinking.

[conon394]

Because major economic downturns have predominantly been caused by the ineffective and inherently flawed federal reserve/central banking system, and while it remains in place this will continue to happen.

Err nope.

https://www.moneyandbanking.com/comm...-very-bad-idea

re also Depression of 1873–1879. You can have a perfectly fine depression and volatility cause by reckless conversion to the gold standard.

[EmperorBatman999]

You could say that the number of economic downturns has increased since the Federal Reserve, and/or that they have failed repeatedly in their job to stabilize the economy.

I would say that the Federal Government and Federal Reserve's tendency to print tons of money to supply Keynesian programs like COVID checks and the Infrastructure Bill are hugely irresponsible by destroying the value of the dollar and raising the deficit even higher, but I'm afraid they're doing it because if they don't, they know something worse than inflation is going to happen. I can't put my finger on what, but it feels like they're having us swallow this bitter medicine to avoid something far worse, like a devaluation of the dollar through another phenomenon, or some shortage of public cash which would plunge huge parts of the populace into poverty. We know already that the Reserve can't increase interest rates because it would hurt the government's ability to pay its debts, but at the same time, these interest rates cause parasitic investment companies like Blackrock to thrive while simultaneously preventing ordinary Americans from meaningfully growing their savings through banking and their own investments.

[Heathen Hammer]

https://www.moneyandbanking.com/comm...-very-bad-idea

re also Depression of 1873–1879. You can have a perfectly fine depression and volatility cause by reckless conversion to the gold standard.

Yet the number of economic downturns has increased ever since Federal Reserve became a thing. So abolition of federal reserve could certainly help with reducing volatility, while also curbing the hyperinflation. Not the ultimate solution, but it would certainly be a first step. I think we can all agree that both federal reserve and notion of fiat currency are economic relics from past century and the desperate attempts by financial institutions to cling to past can result with major economic calamities unless necessary reforms are made.

[Basileos Leandros I]

As pointed above, value is relative - in the case of a complete economic collapse, gold would not have the value that it has today. You need to look at Maslow's pyramid to see exactly what holds real value, regardless of situations.

[Heathen Hammer]

I never said that metal has consistent value, my point is that fiat currency system makes it more likely that economy takes a downturn, while purchasing power of citizens erodes as a result. Backing currency with gold won't make it stable, but it could work as temporary solution while work is done on more comprehensive overhaul of the monetary system.
I guess to put it simple is imagine modern gaming PC running copy of 80s windows. This is what is happening with modern economies, that are running on incredibly outdated economic system that was suited for early XX century then today.

[antaeus]

I never said that metal has consistent value, my point is that fiat currency system makes it more likely that economy takes a downturn, while purchasing power of citizens erodes as a result. Backing currency with gold won't make it stable, but it could work as temporary solution while work is done on more comprehensive overhaul of the monetary system.
I guess to put it simple is imagine modern gaming PC running copy of 80s windows. This is what is happening with modern economies, that are running on incredibly outdated economic system that was suited for early XX century then today.

I'm not entirely sure you've thought this through. There are a great many variables at play.

Economic cycles of boom and bust occurred before digital money, before paper money, and probably when we used shells and beads as currency. They're happening faster now, but our communications systems are faster, as are our logistics, our resource extraction, our production capabilities. It took 6 months for information to traverse the world 200 years ago. Now it takes less than a second. I think the speed and frequency of economic cycles can be explained by many things other than the lack of a gold standard. What I gather from your post is you want to completely break the world's economies by tying global currency to an arbitrarily assigned metal that you acknowledge will be unstable as a stop gap until you can figure something better out.

How does backing a currency with an arbitrarily assigned metal value improve citizens purchasing power anyway?

How are our modern economic systems outdated relative to something that was never universal and fell out of use half a century ago?

How would you enact the return to a gold standard against what would likely be widespread opposition at local, state, federal, and international level?

[PointOfViewGun]

Is there a particular reason why the words "kijiji" and "scam" only appeared in the title? Have I just been scammed by this thread?

[Heathen Hammer]

I'm not entirely sure you've thought this through. There are a great many variables at play.

Economic cycles of boom and bust occurred before digital money, before paper money, and probably when we used shells and beads as currency. They're happening faster now, but our communications systems are faster, as are our logistics, our resource extraction, our production capabilities. It took 6 months for information to traverse the world 200 years ago. Now it takes less than a second. I think the speed and frequency of economic cycles can be explained by many things other than the lack of a gold standard. What I gather from your post is you want to completely break the world's economies by tying global currency to an arbitrarily assigned metal that you acknowledge will be unstable as a stop gap until you can figure something better out.

Um, what? Source on metal having arbitrarily assigned value?

How does backing a currency with an arbitrarily assigned metal value improve citizens purchasing power anyway?

See above.

How are our modern economic systems outdated relative to something that was never universal and fell out of use half a century ago?

Lack of backing makes fiat currency unstable, causes inflation and other economic downturns.

How would you enact the return to a gold standard against what would likely be widespread opposition at local, state, federal, and international level?

Same way it was brought originally, and nobody would really oppose it except for seething bankers and financial elites that were the ones to benefit from the gravy train of the past century. The rest of the population could probably use more purchasing power and lower prices.

[antaeus]

I think we should back our currency with something more common that all of us can obtain and relate to. We don't need communism for global peace and equality. Let's just back our currency with dirt. 1lb of dirt = a dollar.

To enact this policy I will start shooting people until they submit. Disclosure. Yes, I have shares in a mining company.

[AqD]

I think we should back our currency with something more common that all of us can obtain and relate to.

In many places, tax was once paid in the form of grains. Everyone need food.

Except of course that was a horrible idea since grains need very careful handling during storage and transport, and the longer the distance the higher the loss.

[Heathen Hammer]

Temporary backing it with metal again can and should work, at least as temporary measure, while more comprehensive monetary reform is rolled out. One can argue on what should it be, but I think we can all agree that current fiat currency system is dangerous, unstable and also kinda morally gross and thus has to go.

[swabian]

Temporary backing it with metal again can and should work, at least as temporary measure, while more comprehensive monetary reform is rolled out. One can argue on what should it be, but I think we can all agree that current fiat currency system is dangerous, unstable and also kinda morally gross and thus has to go.

Solution:bitcoin standard/Ethereum standard.

[swabian]

Crypto currency really is a way out. Yes, i know how volatile and freaky it is. The principle is not easy to understand, but it's worthwhile to inform oneself about it. To their utter fault, economists tend to ignore it and to discard it without having had an actual look, and without having tried to understand it. I know very well about the volatility because i have half of money in it. At the start i was regularly scared and bewildered by the volatility, but one can get used to it and it works in principle. It is nothing less than a POTENTIAL technological revolution that can change the world for the better, if enough people support it. I would like to encourage everyone to invest, but it's possible that this brilliant new method of value storage is going to be suffocated by various governments and central banks, who needlessly feel threatened by it.

If there are enough people who believe in this type of currency and learn to value what it can do, it will grow and stabilize. The more people understand it, the more people invest in it, the less volatile and the more reliable it is going to be.

The extreme volatility is actually a good sign. It is so cruel and shaky, because it is the actually only fair market in existence, so there are highly leveraged speculations going on and constant pump and dump schemes run by the rich. Of course there have to be regulations that are actually meant to protect all (especially small) investors. But the current outlook is a display of utter hypocrisy, bank guided lobbyism and corruption, centering around the US Securities and Exchange Commission, which is actually trying to suppress this healthy transformation of the financial market. They are actively suppressing innovation and progress for the benefit of large investment banks and to the detriment of everyone else. Nothing less disturbing is going on, i'm sorry to say.

It is a potential way out and it is about to be taken away from us all. Kudos to anyone who has the courage to appreciate this by investing, even if only on a small scale. Yes i am convinced that this is the way to go in the long run. You may laugh and ridicule now, i truly don't care (pm me for questions, if you want).

It's a HUGE opportunity and my suggestion is to not miss it. But be careful, especially with speculating. It's a wild ride for sure.

[Cyclops]

I think we should back our currency with something more common that all of us can obtain and relate to. We don't need communism for global peace and equality. Let's just back our currency with dirt. 1lb of dirt = a dollar.

To enact this policy I will start shooting people until they submit. Disclosure. Yes, I have shares in a mining company.

By golly you're on to something. Maybe we could use human blood? We already have the blood banks...