Only because the farmer knows that the state backs and taxes that gold. He cares little for the gold of foreigners except as a commodity, which is beyond his ability to do commerce, so it's no good.

The state liked gold because it could monopolize it fairly easily, (easy to spot, easy to meld, not too little but definitely not too much) and looked so good that it conveyed the kingly authority. Gold crowns. One term to mean both coins and headgear, and served the same purpose: to further suggest divine right and leviathanism. As the kids would say: fat stacks, yo. It was the best bling labor could provide. From spinner rims, to a gulfstream, or a black amex etc. It all lead to royal or lordly credibility. This was later true for Senators or emperors, and again for feudal lordlings, who had by this point also adhered to tradition, but that tradition was merely to augment their swagism.

That you would attribute his point to Krugman displays a great degree of ignorance, or minsunderstanding at best. Krugman believes what you do--that the Fed is creating new money. Bernanke believes it too. This is why they do it. But unfortunately it does not create any new money at all. This is because existing treasury securities are also money. reve_etrange is correct: the Fed is actually cashing out institutional savings accounts, and because that removes interest bearing assets from the private sector, it is effectively reducing the money supply--though is marginally adding liquidity in the process.

I read that book long before I was educated in economics, and even then, twenty pages in, I had stumbled across two errors so large it undermined the entire thesis. I can only remember one of them, which was that he stated "supply is demand", which is a dangerous economic premise to operate from. It's so tastily close to the truth in so many instances, that it is like changing lanes using only the side mirrors. A fatal accident, a fatal mistake.

The problem isn't that banks *can* leverage too far, the problem is that banks *do* leverage too far *because*. Goodness, what is old TrueStory saying here...

Greedy folk are going to figure out how to make money somehow. When the political economy was well structured, their greed was to provide high wages and benefits so that they could produce valuable goods for people. High treasury rates kept inflation low while simultaneously provided backdoor spending stimulus. Very clever government work. High taxes meant that income had to be channeled in different ways, and it meant that Veblen's conspicuous consumption was achieved by being formal and austere. A Cadillac is no G-6 with a Gallardo waiting at the next airport. No one was a consumer, people were citizens.

But those days don't exist, so since capital investments are difficult when people's demand is strapped, financialization is key. Unfortunately financialization is inherently economic cannibalization past the point of capital investment, so we get financiers playing zero sum games that involve huge private market credit expansions that have to self destruct because the money is traded for more money when there isn't more money to be had once an asset goes bad.

Why do you think banks pay huge bonuses in the short run? It's to get the money out of the game as fast as possible. To get it out of their own company and into their private accounts because their goals are to get rich, not build a corporate legacy. (N.B.: Did you know treasuries and stocks used to correlate positively? They did when our economy was functioning correctly.)

We are also, by the by, about $2 trillion to $2.5 trillion below full employment. Full employment right now is 6% unemployment because we have a terrible tax code, no industrial policy, and a chimera of a welfare state--just too mangled and not done right. Full employment could be 1% unemployment, but only if, as Krugman often jestly laments, if we were fighting aliens and structured our economy for that.

*** Here's my real point, though, about devaluation, deficits, and inflation: Price (P) does not meaningfully go up until Quantity (Q) reaches its asymptote. More money in the system means more employment, and more stuff. Until there's no more employment to be had and everyones making the most stuff they can. That's when prices go up with more money. We are, again, at least $2 trillion annually away from that point. It has to be bottom up though, or we have another financial crisis.

If you read the S&P's reason for the downgrade, it in diplomatic terms said the Republican Party was obstructing recovery, not because of a debt issue. If that was the case, they would have downgraded the US a long time ago.

Oh dear, someone is following the political propaganda tank that pretends to be the Austrian school of economics. University of Chicago *is* the Austrian school, the real one. The one where all the Austrians fled Nazi Germany and lots of them found their way to Illinois. After all, Hayek was an integral professor at U of C.

The math of neoclassical economics, Chicago, Keynes, etc, really all came out of the Austrian school anyway--at least Menger's theory of value and price. That's the sad part of today's Austrians, they don't actually understand their own history. The whole point of the Austrian school was that it was supposed to be "scientific" and "mathematical", the physics of social science, with immortal theories that stretch space and time because they are part of the fabric of reality. So when I see today's Mises followers, I cannot help but cringe. They take the political conclusions of the 19th and early 20th century folks, who were never really arguing this stuff anyway, and disregard the actual economic theories.

It is funny though, when the original Austrians and the Chicagoans met for a summit and Mises called Friedman a socialist. But by that point Mises was obsolete. Menger, the father of neoclassical economics, had been fixed up by Keynes who in turn has been fix by many others. (Really, the break was Marshall. Marshall fixed Menger, by writing almost the exact same material only better. Keynes was two academic generations later, directly from Marshall). Rothbard's work was theoretical porn based on the idea that all humans are self preserving profit seekers. It is interesting to see the logical conclusions of the first neoclassical Austrian premises so that we know they are totally bunk. The first person with that theory said for that to work it required a big, giant whale to be the untouchable, unquestionable sovereign. Hobbes.

Why do I bring this up?

Because appeals to the Austrian school ala Mises.org is not economics. It is an identity, and identities are not truth.

So back to currency:

I find it curious, paulpach, that you keep almost making the point. Money is fictitious, a social accounting measure, but you don't take it to its conclusion, which is that since it is so, it should be done unconstrained by arbitrary agents like metal. You said it yourself "people chose gold and silver because it had the right level of scarcity". Absolutely. And per capita income before the commercial revolution in europe, particularly before the industrial revolution, always Mathusianally crashed back to $500 of 1990 USD, or so. Population growth was minimal. And then wealth and population exploded, and the distance and speed of trade exploded. Can you actually say something with the "right level of scarcity" is still true to today? Dear, that is a faith based view.

You repeated that governments with fiat always defaulted. Aside from the correct statement that all currencies are degrees of fiat, and that state power always dictated the worth of coinage, there's a popular book out called "This Time is Different". The authors ultimately failed in their assessment, but had a key point:

All governments with high debt defaulted. Wait, no, it was all governments with high debt that wasn't true fiat. Nearly all governments will eventually need to take on high levels of debt. The only ones that default are the ones that run out of money. The only ones that run out of money are using bullion or pegged currencies or owe money in currencies not their own. As long as a government has the sovereignty to tax, and has fiat, it can never default.

Now, you are correct that the highest growth in the US was during the gold standard, 1890-1913. This is partially because of gold, but partially in spite of it. We also had the longest economic recession thanks to gold, from 1873-1879. And we had a general economic malaise in many ways in the interceding years.

The second highest growth was during 1948-1965. Also the days of gold. But it was really fiat designed for America to control terms of trade until it was no longer feasible. And it was backed by a state-guided, Keynesian hands-on economic policy.

The real issue today is that there aren't good investments precisely because money is bottlenecked and going into non capital investments (like stocks), so we have continuous bubbles. Nobody wants to buy machines anymore. It's a shame, really.