Sound Money is better than Fiat Money for the average citizen.
Debate Rounds (3)
Fiat money is typically paper currency that is not redeemable for any sort of commodity. Because it is inconvertible, the preceived value is ever changing in a way that can be very tragic for average citizens. Indeed, history bears the sad tales of many nations becoming ruined due to a difficiency in discretion when considering the state and health of the country's legal tender.
The argument "Sound Money is better than Fiat Money for the average citizen." is disingenuous as the definition of sound as an adjective is "free from defect."  I think most would find it hard to disagree with the claim that a currency without defects is better than a currency with defects.
Seeing as how Pro says "Sound Money" can be achieved by connecting money to a rare commodity I will interpret "Sound Money" to be a "Commodity Money" that is backed by rare metals.  A currency backed by a commodity is not free from defects nor is it even sound in Pro's definition.
Commodity money is commonly thought of as gold or silver coins. It is typically described as having value other than as a medium of exchange.
Commodity money is not a sound currency because a commodity's perceived value is tied to it's rarity, not intrinsic value.
According to Niall Ferguson in the book "The Ascent of Money" the Spanish Empire defaulted on it's debts four times from 1557-1596. During this time period Spain was getting large amounts of gold from colonies in the New World. As the supply of gold in Europe increased it lost value, which led to the inability of Spain to pay its debts.  This demonstrates a commodity currency does not have imperceptible changes in value over long periods of time.
The paper "The Sustainable Debts of Philip II" by Mauricio Drelichman and Hans-Joachim Voth on pages 7-8 state that the defaults resulted in the King of Spain levying new taxes on his citizens in 1576 and again 1591 to appease his creditors. I posit that these taxes were harmful to the average citizen.
I do not claim that sound money is perfect. There is no currency in existence that can fit that description. However, money whose value is connected to a rare commodity such as precious metals is very sound, very dependable, historically ideal, and the closest thing we have to a currency without defects. Although, I will readily admit, that tying the value of one's currency to anything has its drawbacks, it still is the most stable form of currency. I am not talking using gold and silver coins to buy groceries but having the paper dollars we use redeemable for a set amount of gold/silver.
In contrast, fiat currency has no redeemable or intrinsic value, and because of that huge defect it is easily manipulated. The temptation for governments to use the printing press to create more money is historically too great. Inflation is the result and not just a little. The most classic case of fiat money being abused is in Zimbabwe where the inflation rate was 79.6 billion percent. See link below:
In the US and around the world central banks will perform what is called QE (quantitative easing). A core provision of QE is increasing the money base or money supply. In layman's terms that means intentional inflation. As Con pointed out in his very brief and incomplete synopsis of 16th century Spain's fiscal policy problems, the currency in use was being inflated faster than it could be used to pay off the nation's debts. Clearly Spain's fall had more to do with its spending/debt habits than its choice of currency. But that topic is for another debate.
Con even provided evidence on behalf of my case (thank you very much) that supports the cause of having a currency whose supply does not change significantly over time. In essence, Con showed that as the amount of a currency in circulation is increased, terrible things happen to that nation and it's citizens. This is precisely what happens with QE. The money in circulation is increased by hundreds of billions or in some cases trillions of dollars. The consequence is high levels of inflation. Since 1913 the value of the US dollar has dropped 95%. See chapter 6 of Thomas Woods book - Meltdown (linked below).
In the 16th century, gold was the most stable form of currency even with people finding it everywhere in the Americas. Today, since there is such a large pool to draw from, any new introduction to the gold pool from new gold mines has little effect on its value. Unless a huge asteroid made of solid gold falls from the sky, the value of gold will only grow and increase in worth, as will any currency tied to it.
Even if the value of the US dollar has dropped 95% since 1913, the purchasing power and quality of life of the average citizen has increased well beyond that. According to the logic and calculations of your source Mr. Woods, the dollar gained value during the Great Depression. I am sure we can all agree the Great Depression had a net negative impact on the average citizen of the United States.
Modern fiat currency is more stable because governments have more control over it. it cannot be found in the ground and the rate at which money enters and leaves circulation can be regulated. In a commodity backed currency, it is possible to manipulate prices by hoarding. In a fiat currency, hoarding is dangerous because the government could always just print more money. This means you have to continuously spend your money thereby keeping the currency circulating, which is beneficial to growth and the average citizen.
With a commodity backed currency you run the risk of population growth exceeding growth of the money supply. With less money to go around you would experience deflation. To avoid deflation a nation would devalue existing gold certificates by printing more of them.
Inflation of a currency is not inherently bad for average citizens. For example, inflation can be beneficial to workers and debtors. As average pay increases, companies can reward productive workers with raises and punish unproductive workers by not giving them raises. It is unfavorable for the employer to cut a worker's wages and doing so would be harmful to an average citizen who bases the rest of their decisions around a certain fixed income.
Similarly, as the productive worker's wage rises, they can use that money to pay down debts. With inflation, the principal of the debt loses value. If a worker's wage is increased beyond the rate of inflation, debt can get paid off even faster. If not used to pay down debts, additional money can be used to buy additional goods or services they wouldn't otherwise have. This is more significant in the case of citizens living paycheck to paycheck without any savings or investments to speak of.
A huge asteroid of solid gold falling from the sky would probably be more devastating by its physical impact, than by the devaluation of gold-backed currency. ;)
You simply cannot predict what technologies or discoveries would lead to the devaluation of a commodity. Aluminum went from being one of the most expensive and rare metals to dirt cheap and abundant in less than 20 years. I would not be surprised if Mr. Musk or others are successful in their asteroid mining endeavors which kick-starts the next gold rush in less than 100 years. We might even discover a process to make synthetic gold cost-effectively as has been done with diamonds.
But let us consider what would happen if 16th century Spain and early 21st century Zimbabwe found themselves using the other's currency system. Spain, racked with debt, would have undoubtedly repeated what Zimbabwe did; maybe not at the ridiculous rate of 80 billion %, but they would have undermined their whole system just the same. Governments find themselves in a tough situation periodically and the temptation to dilute everyone's hard earned savings is just too much, and they indulge. And they don't indulge in just a little "healthy" inflation (these quotations denote sarcasm) as you infer. The inflation is monstrous in proportion and destructive in nature.
In Zimbabwe's case, had they been forced to use paper money backed by gold, they simply would have had to default on their debts because the sound nature of money backed by gold would not have permitted them to stretch it at all. Its not the end of the world when a nation defaults, and in fact it can be a very positive thing. Its not like an international repo company is going to drive through the country repossessing all the nation's TVs or tanks or whatever the money was spent on. The worse thing that would happen is, due to a terrible credit-rating, international commerce would think twice before investing there, again.
I find it morally offensive that any government would adopt a financial system that penalized people who save money before making a large purchase. Saving is the not only the personally responsible and disciplined thing to do, but it is actually better for the whole economy! Look at the housing bubble that burst not ten years ago. People were buying houses without placing a down payment because the federal government forced banks to issue the extremely high-risk mortgages in order to "stimulate" the housing industry. The whole thing fell flat on its face. Focusing on spending rather than saving because of fast economic stimulation is comparable to consuming energy drinks rather than a steady diet of whole grains simply because you like the stimulation. Beware the crash that follows the sugar high.
"Real savings come first if you want to invest." - Friedrich Hayek
Saying that our standard of living has gotten better since 1913 so we should accept the current fiat system is a huge cop-out. No one can contribute these gains in life quality to foolish fiat fiscal policy. It is more due to innovation, enterprise and hard work of regular citizens DESPITE the poor monetary policy of the politically elite.
I support Thomas Woods and his research. If you are to challenge his premises, provide evidence of your own. Your emotion and conjecture on the topic of The Great Depression is not fitting nor will it be accepted in these hallowed halls of Debate.org.
I will admit your idea of a population out growing a money supply is an interesting one. I have never heard of that before. In everything I have read, I have never encountered such a thing happening. It probably would take thousands of years for a single country to out grow its rare metal reserves, and since most countries have over time switched their currency systems, this has never been a problem. An interesting point, I admit, but I don't think it would be much of a problem. Look at BitCoin. They started off selling a single digital coin for only 6 cents. When the price per coin reached over $800 they had already created smaller money units that represented fractions of a single coin. So not something to worry about.
A last word on inflation. I like your idea about rewarding productive workers with raises, but underlining that principle is the reality that inflation steals an individual's wealth, makes them work harder to earn the same value they once possessed. That is a vicious cycle.
I don't see how there is a difference between Zimbabwe with paper money backed by gold, and simply having the paper money backed by Zimbabwe. What is to stop an unscrupulous country from simply printing more of the paper money with "backed by gold" written on it? Then there isn't enough gold to be redeemed by all certificate holders.
I'm not sure what caused the housing bubble, and that is a different debate, but I do know about savings and large purchases. The average price of a home in the United States during 2013 was $320,900 and the average yearly salary was $44,888.16. That is seven years of saving assuming the average citizen puts every penny toward a house. Most of that yearly salary is going to go to rent (since they don't have a home), food, gasoline, medicines, taxes, etc. Will they have a separate savings fund like a 401k in order to retire?
There have been cases in Utah where getting the homeless into public housing saved money because they didn't end up in either jail or emergency room. They were able to get off drugs and become productive members of society. There are clear benefits to home ownership versus homelessness and having to save up a lot of money is something that isn't always feasible. I know it is a bit of a stretch, but there are also benefits to owning over renting, though not as clear as not owning a home at all. The average citizen benefits from home ownership, if nothing else they own the property and could rent out their house to someone else for a profit or sell it to someone else. If saving for a home, a lot of money is out of circulation and sitting in a bank account (while the bank loans this money out to others). Sure the mortgage costs more money in the long run, but you get to enjoy perks of the home sooner and save money that otherwise would have gone to rent and the landlord. As stated last round, minor inflation the mortgage debt gets reduced as well and it works out for the average working family. Owning your home is a big part of the "American Dream."
I did not mean to imply that the living standard increased because of the current fiat system. I simply wanted to point out that the living standard had increased significantly since 1913, for technological or other reasons. This is in spite of the value of the dollar falling 95%.
I am not attempting to challenge Mr. Wood's premises, only interpret them. I read the entirety of Chapter 6 and could only find this: "Whether a system that has caused the dollar to lose 95 percent of its value is really the best of all possible systems" on page 109 of his book "Meltdown: A Free-Market Look at Why the Stock Market Collapsed ...". From page 151 of the same book he writes "But when Americans had a legitimate commodity standard, they had a money that held its value. In fact, it actually gained in value. An item that cost $100 in 1820 would have cost only $63.02 in 1913." From this interpretation I made the comments in my second paragraph during round 2.
I freely admit that due to the nature of these debates, I did not have much time to fully digest the text and my interpretation may be flawed. I must have missed where he says exactly how he reaches his "-95% value" conclusion. From my previous quote regarding page 151 he is says that the dollar increases in value when an item costing $100, costs $63.02 after a period of time. This implies that the dollar loses value when an item costing $63.02, costs $100 after a period of time. So if the value of the dollar has fallen 95% something that used to cost $100 now costs $195. So when prices fall, the value of the dollar goes up, when prices go up, the value of the dollar falls.
During the Great Depression "consumer prices fell 24.4 percent."  So by Mr. Wood's own logic, the value of the dollar rose during the Great Depression. I am merely trying to say that the "value" of the dollar has a negative correlation to the quality of life of the average citizen. I am not implying that fiat currency caused quality of life to go up. Neither am I saying that quality of life would have gone up as much or more under a commodity currency.
I only brought up the Great Depression because Woods does, a lot. I don't think it is emotion or conjecture to say that the average citizen suffered during the Great Depression. I am sorry I did not provide a source for my previous statements regarding the Great Depression. I incorrectly assumed it was common knowledge. I also am not implying that the Gold Standard was the cause of the Great Depression nor that fiat currency helped the United States out of it. I was merely trying to relate Mr. Wood's "value" of the dollar to the average citizen's standard of living. If the standard of living has increased and the value of the dollar has decreased, then would it not be in the interest of the average citizen for the value of the dollar to decrease another 95% over the course of 100 years?
I fundamentally do not see the difference between inflating a fiat currency so you have billions of dollars, or increasing the value a commodity so much that you have to exchange fractions of ounces or grains of rare metal as currency. Do you just keep switching currency systems when it is no longer divisible? That doesn't seem very dependable.
In the case of crypto currency like BitCoins you end up with those who invest early to get easy access to coins which kind of sounds like a weird ponzi scheme to me, but I am not well read on BitCoins. I don't think dividing or switching the currency makes it dependable. Who decides which new metal becomes currency? What happens to all the people with paper saying it is backed by the old metal? Maybe you end up with a scenario where gold, silver, copper, etc. are all different fractions of currency, but that isn't consistent due to supply and demand of each metal. In comparison, fiat would have far less transaction costs because you wouldn't have to convert.
If money increases in value over time due to prices lowering, then it makes sense to hold onto your money and wait for it to go up in value. If money decreases in value over time due to prices raising, then it makes sense to spend your money on material resources or goods. This spending of money translates into the exchange of goods and services among people.
I don't think a case can be made that commodity backed currency is superior to currency backed by a government. Citizens care about the purchasing power of the currency and how it lets them exchange their labor into goods and services. It makes no difference if I make $100,000 a year or $10,000 a year if the price of a house has the same ratio, $500,000 or $50,000 for example.
The fundamental choice is between whether private enterprise(commodity) or the federal government(fiat) should control the money supply. Both have a risk of corruption, but a democratic government is supposed to look out in the best interests of the people, and voting is done to keep it that way. Private enterprise is under no such obligations, so the government-backed currency is the better choice for average citizens.
This was my first debate, so thanks for reading! I tried reading as many tips as I could to improve beforehand but nothing beats experience.
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