Ed, I'll try to keep this brief.
The main point is that, since about the turn of the 20th century, most people are under the impression that money is somehow different from any other item of value -- that's it's somehow 'sanctified' because it's controlled by governments. But it isn't, and never has been. Essentially, money has simply been a convenient item of value to carry around in order to barter for other goods. But, because it's also a convenient way for governments to exact taxation, then money has gradually acquired a mythical character which seems to make it different from other goods. But it isn't, and never has been. When you write . . . <<<< (EW) My general point is that, under conditions of instability, governments will do what they believe they have to do whether a currency is pegged to a commodity or not. >>>> . . . surely the point is that these "conditions of instability" are invariably caused by governments themselves. And, in doing "what they believe they have to", governments invariably make the situation a great deal worse. Or, as the Japanese government is discovering at the present time, there is almost nothing it can do about its deflation without risking a revolution -- either from the bottom or the top. At the present time people aren't spending because the goods they *could* buy, but don't, are declining in price by about 2-3% a year (and increasing). Thus, it's sensible not to spend money on those goods but to simply put the money under the mattress. If the government inflates the currency in this situation -- and goodness knows, that's easy enough to do -- then it risks alienating most of its adult population, many of whom will see their life savings wiped out. (The Russian government got away with a three-fold devaluation in '96 without a revolution, but a Japanese government couldn't, with its sophisticated population well-used to high standards of living.) On the other hand, if the Bank of Japan were to carry out its legal mandate of stabilising prices, then it would have to take bankruptcy proceedings against almost all of its major banks (because of their largely fictitious assets), risk alienating its present financial sector (and its Ministry of Finance officials!), bankrupt many of its large firms -- altogether throwing millions out of work until some years have passed and new, properly resourced banks with proper asset-backed currencies can be established in order to support new investment and employment. On yet another hand (!), Prof Fukao at the University of Keio, a former senior official of the Bank of Japan, considers that complete meltdown will follow in about 3-5 years if nothing is done because, by then, the ratio of public debt to national production will be rapidly approaching 200% and it will not only be the banks that are bankrupt but everybody else, too. When you write (quoting your same words again). . . <<<< (EW) My general point is that, under conditions of instability, governments will do what they believe they have to do whether a currency is pegged to a commodity or not. >>>> If a currency is tied to a sufficiently sound commodity then governments can do nothing about its value, and thus doesn't have the capacity to make things any worse. In fact, governments won't have any capacity at all except to increase or reduce taxation -- which is the only honest way of proceeding in times of difficulty. I'm not suggesting that the commodity-base should be gold. I don't think there's sufficient confidence in it in the western world. I think the value of currencies should be based on basic foodstuffs from around the globe, like maize, wheat, rice and millet on which we all depend. In this way, unless there's the most exceptional world-wide weather catastrophe (such as caused by a super-volcano or an asteroid -- when we'd have a great deal else to worry about!), the value of money will remain pretty steady all the time. ---- Japan has been knowingly drifting into deflation for several years. But the same has already begun to happen to the rest of the developed world. And long before 11 September, too. Commodity prices have been falling for almost two years and consumer prices for about a year, despite the fastest drops ever in interest rates in the US (now being followed by the EEC and other countries). Most economists think that this will save the day, but there are other reputable economists who are beginning to be spooked by a spectre of deflation which could cause an economic depression quite as long as Japan's is already, and could last much longer, because governments (in the same way as Japan) face political disaster whichever way they turn, given the present economic wisdom. So, like Buridan's Ass, they'll be transfixed and do nothing. Quite simply, I think we need freely competing, sound currencies, not those which can be manipulated by governments. If western governments allowed independent banks to operate now, then a start could already be made in achieving currencies which people would invest and spend instead of putting them under the mattress. This could then rapidly restore a situation similar to that of the rock steady value of money (gold-based) which lasted for 200 years until governments started detaching the value of money from everything else and treating it as a political football. This will be the only way for Japan to avert disaster -- and for the rest of us in the years to come if deflation takes hold. So I'm both a pessimist (in expecting deflation) and an optimist (in expecting a necessary paradigm change). Keith Hudson ___________________________________________________________________ Keith Hudson, General Editor, Calus <http://www.calus.org> 6 Upper Camden Place, Bath BA1 5HX, England Tel: +44 1225 312622; Fax: +44 1225 447727; mailto:[EMAIL PROTECTED] ________________________________________________________________________
