What is the best system to replace the Fed?

[Cutlass]

Also, is there even enough gold around to sustain sufficient reserves for every US dollar in circulation? Not even talking about all the other currencies who'd have to switch as well for the system to make any sense.

You just keep devaluing until there is enough to go around. Until the next devaluation. Instead of $35/ounce, do $1000/ounce. And then $5000/ounce.

 

[ParkCungHee]

You just keep devaluing until there is enough to go around. Until the next devaluation. Instead of $35/ounce, do $1000/ounce. And then $5000/ounce.

Wouldn't that cause tremendous- ooooh I see what you did there.

 

[Leoreth]

I should have added "at the current gold price", which would make the answer "no", I suppose.

 

[civ_king]

Within the foreseeable future? Some sort of democratically controlled central banking system.

Eh wot? Because everyone knows people who want more things while the debt goes down and taxes go down can balance the budget.

Americans not only want to eat their cake and have it to, but they also want someone else to pay for it and not pay for anyone else's cake

 

[Tahuti]

Deflation doesn't increase purchasing power in effect. And that is because it causes massive economic dislocation and usually leads to economic depressions.

What economic dislocation? You mean unemployment? The very definition of deflation is an increase in purchasing power of a nominal monetary unit in real terms.

Point is that deflation would be an extremely big problem in a modern economy like ours, but historically (before the 20th century that is), there was nothing but deflation and it wasn't necessarily bad.
Nowadays, a Gold standard - and it's associated deflation - would be a very bad thing, but before the 20th century, it was pretty much the best monetary systems countries could have at the time.
After all, no institutions were conceived to keep a fiat-system viable. Ancient China and 18th century France all suffered hyperinflation when they attempted to switch to a fiat currency because both didn't had a Central bank and monetary authorities to keep track on the money's value.

 

[amadeus]

You just keep devaluing until there is enough to go around. Until the next devaluation. Instead of $35/ounce, do $1000/ounce. And then $5000/ounce.

Yeah, the gold standard requires a lot more faith in the government than having the Federal Reserve system does.

 

[Cutlass]

What economic dislocation? You mean unemployment? The very definition of deflation is an increase in purchasing power of a nominal monetary unit in real terms.

Point is that deflation would be an extremely big problem in a modern economy like ours, but historically (before the 20th century that is), there was nothing but deflation and it wasn't necessarily bad.
Nowadays, a Gold standard - and it's associated deflation - would be a very bad thing, but before the 20th century, it was pretty much the best monetary systems countries could have at the time.
After all, no institutions were conceived to keep a fiat-system viable. Ancient China and 18th century France all suffered hyperinflation when they attempted to switch to a fiat currency because both didn't had a Central bank and monetary authorities to keep track on the money's value.

NoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNoNo

What happens with deflation is not an increase in purchasing power. It is a falling of wages. Debts are in nominal (constant) dollars. If you have $100 in income, and $25 in debt payments, what happens when your wage falls to $90? $80? $70? The debt to income ratio goes way up. And that means a lot more people default on debt. And that means that a lot of banks stop lending money. And that means that a lot of companies go out of business and a lot of people lose their jobs.

Before the 20th century, gold was only a "good" monetary system because they didn't know any better. Truth is, it sucked beyond reason. But people had a faith in it that was utterly irrational. Yet it kept coming back, not because it was any good, but because there wasn't any alternative.

But nations fell off the gold standard all the time. Any time there was a war or a crisis or the king racked up debts he didn't feel like paying, they went off the gold standard for the duration. The US, during the Revolutionary and Civil Wars was off gold. And much of the time between them, any bank could issue script. And while that script was supposed to be backed by gold, in practice you couldn't count on that. towards the end of the 19th century, gold was so much of a problem for the economy, that silver was demanded instead.

Gold as money is an exercise in ignorance and absence of alternatives. Once you know better, once you have other choices, gold can't be justified.

 

[Ajidica]

towards the end of the 19th century, gold was so much of a problem for the economy, that silver was demanded instead.

And we know where that got us.
Nearly bankrupted the country, too.

 

[DaveShack]

True. According to the US Code, Title 12, Chapter 3, subchapter XII, subsection 411, Federal Reserve Notes are to be issued exclusively for the purpose of making advances to Federal Reserve banks and for no other purpose (translation: they are not to be issued for general circulation as money)... they can, however, be "redeemed for lawful money" (translation: they are not lawful money) at the Treasury Department or at any Federal Reserve bank. So why do the words "legal tender" appear on them?

Ah, but a search for legal tender finds something else entirely:

31 USC Sec. 5103
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.
​

So FR Notes (which are lawful money) can be exchanged for lawful money (FR notes, coins, US currency, national bank currency, etc).

Edit: forgot to put my opinion on the subject...

I think the current Fed is fine. Current monetary policy is keeping inflation at low levels, so at constant incomes the cost of living is remaining constant, or at least nearly so (YMMV, as it's expressed as an economy-wide average where your situation could be much better or worse). If we could be certain income would increase faster than inflation, then allowing a little more inflation might be OK. But the main problem is that income will stagnate until the wealth losses of the subprime crash have been absorbed. That's where the growth we would have is going, into financing those losses. If inflation had been allowed to run up, the result would have been a rise in cost of living without concomitant rise in income, resulting in a lower standard of living.

 

[innonimatu]

There's an old concept in international macro known as the "impossible trinity": it's impossible to simultaneously have (1) independent national central banks, (2) stable exchange rates and (3) free international capital flows. Any two of those imply the negation of the third. If society decided that (2) and (3) were important at the expense of (1), as they did from 1945-1973, then a gold standard would be a good way to achieve those goals.

More recently, most developed countries have decided that (1) and (3) are important to the exclusion of (2), hence volatile exchange rates and independent banks in the form of the Fed, ECB, BoE, RBNZ, BoC, and BoJ.

It's not "independent central banks", it's "national monetary policy". Right now those are polar opposites, with central banks across the world actively working against public interest and national governments. The only think policy makers care about is (3), "free" (unregulated by the states) capital flows.

 

[G-Max]

The gold standard isn't a help with inflation. It just means that there will be a lot less economic growth and a lot more deflation.

The idea that inflation promotes economic growth is utter nonsense, but not as much as the idea that you can have rapid deflation in a slow-growing economy with a slow-growing supply of currency.

In what sense? It was established by an Act of Congress

Congress has no authority to establish a central bank. The powers granted to Congress are as follows:

"To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

To establish Post Offices and Post Roads;

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

To constitute Tribunals inferior to the supreme Court;

To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

To provide and maintain a Navy;

To make Rules for the Government and Regulation of the land and naval Forces;

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;

To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings; And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof."

Furthermore, if you read the Federalist Papers, they make it quite clear that a central bank is not a valid exercise of the Commerce Clause or the General Welfare Clause.

What's the main argument for the abolishment of the Fed, now?

Is it the typical "state rights" opposition to a central bank on federal level?
Or its current organization based on the "fiat money" principle?

Both of the above and about a dozen other reasons.

That would require a pretty powerful worldwide government first ... or else you get the mess that's currently going on in the Eurozone, only magnitudes worse.

Also, I don't think we could satisfy the Fed's critics by moving the entire organization up another intergovernmental level.

You make too many assumptions. If most of the countries in the world agreed to use grams of 10% gold, 90% iridium as a reserve currency, how would that necessitate world government? How would that require expanding the Fed to a global scale?

Also, is there even enough gold around to sustain sufficient reserves for every US dollar in circulation?

The USA certainly has nowhere near enough gold to back all of its currency at spot prices. As for global gold reserves versus global supplies of all currencies, I have no idea.

Curious. From what I've learned from discussions with internet libertarians, private is better than those incompetent and overblown government institutions ...

Those same libertarians will also tell you that all of the virtues of private systems disappear when they get in bed with government.

You apparently don't understand what "can be redeemed for lawful money" means, neither what the purpose of Federal Reserve Notes is. On a more general note against the "counterfeiting money" argument, you people seem to forget which role money plays in our economy

Would you care to back up these assertions with facts?

Except when there's no rational reason to expect inflation.

Inflation should always be expected for fiat currencies.

And, as already mentioned, a wisely managed central bank doesn't cause unnecessary inflation.

1) the Fed has never been wisely managed
2) all inflation is unnecessary

But a gold standard currency is guaranteed to lead to stagnation and deflation.

Really? So the extremely rapid economic growth that we experienced under a bimetallic standard during the Free Banking Era and Gilded Age was just a fairy tale made up by the authors of history books?

Wow. It's like you've never heard of hyperdeflation!

Oh, you mean that hypothetical phenomenon that has never happened once in all of recorded history, and would stop almost immediately after it started once people realized that there was no more money left to hoard but they still had to pay rent and buy food?

Debts are in nominal (constant) dollars.

This is the fundamental reason why both inflation and deflation suck, and why an asset-backed currency is best: it experiences neither. Ten Carbombistani Dollars may be the price of a brick of ramen, or it may be enough to buy a Lamborghini. However, ten grams of iridium will always be roughly equal in value to a Roomba, or an hour and a half with a high-class escort.

Ah, but a search for legal tender finds something else entirely:

31 USC Sec. 5103
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.
​

Now THAT is interesting, although saying "Title 31, Subtitle IV, Chapter 51, Subchapter I, § 5103" would have made it easier to find.

I think the current Fed is fine. Current monetary policy is keeping inflation at low levels, so at constant incomes the cost of living is remaining constant, or at least nearly so (YMMV, as it's expressed as an economy-wide average where your situation could be much better or worse). If we could be certain income would increase faster than inflation, then allowing a little more inflation might be OK. But the main problem is that income will stagnate until the wealth losses of the subprime crash have been absorbed. That's where the growth we would have is going, into financing those losses. If inflation had been allowed to run up, the result would have been a rise in cost of living without concomitant rise in income, resulting in a lower standard of living.

You seem to be unaware of the fact that real median wages have been decreasing since 1970 or so, and allegedly "low" inflation bears some (if not most) of the blame for this.

 

[Arwon]

Yeah, I don't really care what the intricate details of your constitution says. It's 3 centuries old, it means less than nothing to me. Economic policy (like most things) has come a long way since the days when friggin mercantilism was still a major current of thought.

The point is that a government-established but independent central bank is pretty much normal practice in the developed world. I'm still not seeing how the Federal Reserve is importantly different to the Bank of Japan, the Reserve Bank of Australia, the European Central Bank, and so forth.

 

[Ajidica]

(quote)Congress has no authority to establish a central bank. The powers granted to Congress are as follows/quote)
Massive US history fail. The ability of congress to create a national bank was clearly established in McCullogh v. Maryland under the Marshall court.

 

[Ajidica]

Edit: sorry for the double post and the non-working quotes. Blame the keypad on my iPhone.
Edit2: I might as well use this post for something. Gmax, you claimed that iridium will always be at a constant price. If iridium behaves anything like say, copper, we can expect a quick economic crash if the price heads south, much like Chile under Allende.

 

[Abegweit]

Would you rather have Ben Bernanke or Ron Paul make monetary policy?

Neither. What's more, that's exactly what RP has been saying.

I rest my case.

Sorry. I don't get it. What exactly is your case? That you worship Ben Bernanke's magical skillz?

 

[G-Max]

Yeah, I don't really care what the intricate details of your constitution says. It's 3 centuries old, it means less than nothing to me.

You live in a former penal colony that pretends to be an independent country even though Her Royal Worship is your head of state. Your opinion means nothing to anyone.

The point is that a government-established but independent central bank is pretty much normal practice in the developed world.

Argument from popularity = fail.

I'm still not seeing how the Federal Reserve is importantly different to the Bank of Japan, the Reserve Bank of Australia, the European Central Bank, and so forth.

Why are you even mentioning those? This discussion is about the Federal Reserve and ONLY the Federal Reserve. If those other banks really aren't any different from the Fed, then this only means that they suck too.

(quote)Congress has no authority to establish a central bank. The powers granted to Congress are as follows/quote)
Massive US history fail. The ability of congress to create a national bank was clearly established in McCullogh v. Maryland under the Marshall court.

Appeal to authority = fail.

The Supreme Court has been wrong many times before, and will continue to be wrong many times in the future.

If iridium behaves anything like say, copper

It doesn't.

 

[Bordz]

You live in a former penal colony that pretends to be an independent country even though Her Royal Worship is your head of state. Your opinion means nothing to anyone.

well considering we were like the only western country not to go into recession during the gfc i would say our opinion means quite a lot actually.

Bascially in my opinion, not enough regulation and poor existing regulation is whats wrong with the fed

 

[Abegweit]

(quote)Congress has no authority to establish a central bank. The powers granted to Congress are as follows/quote)
Massive US history fail. The ability of congress to create a national bank was clearly established in McCullogh v. Maryland under the Marshall court.

Massive invention of federal powers by the scum in the Supreme Court. Do you have no shame?

 

[sophie]

Massive invention of federal powers by the scum in the Supreme Court. Do you have no shame?

Hey man, if you hate the US Constitution then you can GIIIIIIIIIIIIIIIIT OUT!

 

[JollyRoger]

Massive invention of federal powers by the scum in the Supreme Court. Do you have no shame?

He was talking about the early 19th century Court, not the current 5 in the conservative majority.