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What would happen to an economy if physical precious metals were legal tender currency?

Imagine money that had intrinsic value. How would this affect banking, government spending, saving, and consumer spending?

Better or worse than fiat money?

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  • Mar 16 2013: If only physical currency was accepted for business, then you start getting into logistical problems, transporting the currency would be costly & inefficient (so much for the ability to pay with credit or debit). Also, inflation & the price level would be determined by the mining of raw materials relative to the creation of new goods. Also, the fractional reserve system would likely run into some problems, slowing growth.
    • Mar 17 2013: Under physical currency, would it be possible to have the current recession that was caused by the housing boom among other factors?
      • Mar 18 2013: I don't think it would be possible to have such a large boom in the first place. But Boom/Bust cycles would still happen on a ripple scale because they are generated by human optimism / pessimism moods.

        Precious metal has many disadvantages, the main one being that it ignores the real needs of man in favour of an idea. I propose a physical currency based on the concept of Land-Time, which relates directly to the human material condition. Because of the lack of a speculative upside, and omitting the (considerable!) value of "footfall" the cost of a house should tend toward;

        Cost of land (in term of the lost potatoes its not growing)
        Cost of Materials (in terms of land required to sequester carbon emissions + mining materials + labour).
        Cost of labour (in terms of land required to support the workmen for that much time)

        These "Real" costs do not change much year on year - but changes to higher technology have actually INCREASED Land-Time costs considerably. This can be reversed by designing more intelligently, using materials neared their natural state (Masonry, Timber in the round, Thatch or Slate) or very carefully chosen higher tech materials in very carefully audited contexts ( Glass is extremely expensive but lasts for very long times). In real terms the cost of a thatched cottage is the same today as it was in 1600.

        This analysis is based on the Ecological Footprint equivalent of the "Perfect Marketplace" in Classical Economics. In real life a house closer to the shop or with or footfall is always going be preferable, so worth more (even in the stable Land-Time currency proposed) , just as in the real Cash Market, the inflated price of a ridiculously over-large house miles from the shops is set by the willingness of Banks to dish out mortgages and not by the theoretical "perfect marketplace" economy it exists within. .
    • Mar 17 2013: "... the fractional reserve system would likely run into some problems, slowing growth..."

      That's a bit of an under-statement isn't it? It sees to based on the idea that we are still growing, but slowly. In the UK and other overdeveloped economies we are contracting in real terms.

      Wouldn't Fractional reserve banking completely implode at the first whiff of any alternative? Its all the world's financial authorities can do at the moment to manage a sustained and relatively gentle deflation....what do you really think would happen if people saw a realistic alternative?

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