Yes, together with the rest of the currencies that are backed by nothing but “the full faith and credit” of govts and their corresponding central banks. The chances for your more “hopeful” scenario went out the window with the Gold Standard.
There’s no regression theorem for money backed by “faith”. It only applies to commodity money. When the “faith” goes away in a “faith”-based currency, there’s nothing left to support it.
As to what exactly would happen… Start with a run on all banks, as every market agent tries to transform his digits on a computer screen (or on his bank statement) into paper currency. Since the $500billion in paper currency is nowhere near the aggregate amount of all such transform attempts, most of those agents would end up holding the bag. The winners would be the ones who had transformed their “faith” based digits into gold before this occurs, which is why I said that markets are forward looking.
I don’t know the details about Somalia but I assume that most currency claims there had been of the paper (and not digital) kind, making the first part of the above scenario a bit less painful.
Finally, I didn’t mean to be condescending. The above things are so clear in my mind that I thought a detailed elaboration was unnecessary.
If the fed fails Thursday, what are goods priced in on Friday?
How is the gold standard any less of a faith-based currency system? And don’t get me wrong I’m all for the gold standard, or any commodity standard. Isn’t any currency based on peoples faith that they hold the highest vendible good available?
If the dollar has failed, why are people anxious to get paper dollars out of the bank?
Thanks Z, you and I likely have very few things to squibble about.
I’ll assume you mean the US goes to a free market monetary system and the rest of the world does not. Here goes.
1 The federal reserve would have to distribute their gold to the banks. Gold distribution would occur in direct proportion to bank deposits. In other words, the amount each depositor would get would be calculated by (total ounces of federal reserve gold / total bank deposits) * personal account balance. (this could be a very small amount)
The dollar would be worthless immediately. All personal, bank, and govt debt would be immediately wiped out. All purchases would require some form of monetary commodity or barter material.
The initial price discovery of gold/silver etc would not take long at all, but afterwards, those who get left holding the dollars would sell assets to buy essentials. Asset prices such as houses would be relatively cheap compared to food, etc. The economy would basically start over. The people with all cash or cash equivalents, no debt, and no assets will be hurt the most. They’ll have to start from scratch and go to work, luckily labor will be in high demand unless the gov’t tries some sort of wage control.
Free monetary system would expand throughout the world rapidly. Why? Each government faces a decision, either jump in with the US and give up their control of their monetary unit, or keep their system and risk complete trade isolation with the US, any other country that joins the US, and mass exodus of precious metal from their country and into the free monetary system countries. I think many (especially the more democratic ones), would chose the former, and this would cause a cascade effect, because the more countries that went free monetary system the more isolated the fiat countries would be. At first they would be flush with foreign assets, but when they run out of gold or silver,
All governments would rapidly lose power, and this would probably be the beginning of the end of all government power, entitlements and military would phase out but this, of course, would be a good thing.
For those of you who think the dollar would fail immediately, what would goods be priced in the day following the elimination of the fed? What about the day after that? and after that? And apply the same question to gold, how would gold be priced?
At what point does gold stop being valued in the dollar, and the dollar start being valued in the gold. Get the difference?
There will be two simultaneous rushes: (1) to transform the digital $ numbers into slightly more valuable paper numbers (cash) in your hand, and then (2) to transform this worthless cash into whatever someone else is prepared to give you in exchange for it. You can extrapolate what that’s going to do to the value of the cash in your pocket.
You keep asking boundary questions about when and what exactly is going to happen. My suggestion that markets are forward looking answers this question. The price of 1oz of gold will never move from $1300 one second to $1.3million the next, or the price of a loaf of bread from $3 to $3000 the next second, but both can adjust pretty quickly to those levels as the probability of your assumptions increases.
The question posed was “what if we had a FREE MARKET in the produciton of money tomorrow”. In that case, I don’t see how anyone would accept paper dollars for exchange. It just doesn’t make sense that prices would gradually increase in terms of dollars. It would be a totally different process than hyperinflation(gradually losing faith in the currency) or inflation(money printing). The dollar would instatly be worth zero.
The Dollar was our currency before the FED, I don’t see why we wouldn’t still use it after. It just wouldn’t be a fiat dollar, but backed by gold/silver.
