How liquid are bitcoins and other crypto-currencies?

[WWGD]

@gleem: Why do you think gold is special in any way? What about all the other metals?I never did any transaction where gold would have been involved in any way.

In the distant past currencies were linked to gold or other metals, but that stopped long ago.

I think in U.S , it was Nixon who broke the connection. At least he was the first one to do so.

Anyway, I think this explanation:
was nice.

 

[Stephen Tashi]

When US currency was linked to gold, how was this done?

I think the only actual way to "back" a currency by gold would be to guarantee that a given amount of currency could be exchanged for gold. However, a few decades before Nixon, I doubt a citizen could take some dollar bills to Ft. Knox and exchange them for gold. So where did the exchanges of dollars for gold actually take place?

Most money in the economy isn't physical currency; it's just information about accounts. My understanding is that when a bank makes a loan, it effectively creates the money to make the loan. So if federal government indeed was trying to link dollars to gold, it had a complicated task. It had to regulate banks enough to keep the money supply from growing so large that there wasn't enough gold to back it.

 

[Bystander]

Nixon [insert]LBJ[/insert] who broke the connection.

 

[BWV]

When US currency was linked to gold, how was this done?

The dollar was redeemable into a set amount of gold - not by anyone at any amount, but by banks. Trade imbalances between countries involved actual transfers of gold.

Most money in the economy isn't physical currency; it's just information about accounts. My understanding is that when a bank makes a loan, it effectively creates the money to make the loan. So if federal government indeed was trying to link dollars to gold, it had a complicated task. It had to regulate banks enough to keep the money supply from growing so large that there wasn't enough gold to back it.

Yes, the money creation in fractional reserve banking is that a depositors money is lent out by the bank and spent in the economy, therefore increasing the amount of money beyond that set by the central bank. This is an issue with fractional reserve banking, not the gold standard. We have fractional reserve banking today without the gold standard and a whole slew of regulations on bank capital. In theory one could have either a gold standard or fiat currency in conjunction with both fractional or full reserve banking.

 

[Stephen Tashi]

This is an issue with fractional reserve banking, not the gold standard.
We have fractional reserve banking today without the gold standard and a whole slew of regulations on bank capital. .

Yes, but my question is how did the government attempt to regulate things in the days when they claimed to back currency with the gold standard. For example, if the governments supply of gold was running low, did they curb the amount that banks could lend? Did they have any legal authority or "big stick" to compel banks to curb lending?

I suspect the claim to back the dollar by gold didn't mean that the government had enough gold to exchange for every dollar (physical or un-physical) in the economy. Apparently the claim to back the dollar by gold was just a willingness to exchange dollars for gold on the assumption that there were only a limited number of traders who would want to do that. So perhaps the government had only a fractional reserve of gold.

 

[BWV]

Yes the money supply through fractional reserve banking exceeded the gold reserve of the central bank. In practicewould leave the central bank through settling international balance of payments, not through individual citizens or domestic corporations redeeming their notes for gold. For example, the US ran large trade surpluses in the 20s and approximately doubled its gold reserves during the decade

 

[mfb]

For example, if the governments supply of gold was running low

Then the amount of money in circulation was lower as well. You only give away gold if you also take dollars out of circulation. At least that is the idea of a gold-backed currency.

 

[Stephen Tashi]

Then the amount of money in circulation was lower as well. You only give away gold if you also take dollars out of circulation. At least that is the idea of a gold-backed currency.

I see. How does that theory prevent banks from adding a significant amount of money to the economy in a situation where the government runs low on gold?

 

[mfb]

They are not allowed to do that.

Well, the money is not tied to gold any more, so this is purely historical.

 

[BWV]

It’s not that they were prohibited-as this system in the US predated the Federal Reserve and any real banking regulation- the issue is banks can only create money through lending out deposits. Without deposit insurance, a bank will fail if it lends too aggressively and then depositors learn of this and demand their money back - this provided an incentive to limit the expansion of credit (and thereby money) by banks. Nonetheless, there was a cycle of booms and financial panics throughout the 19th century was caused by the expansion of the money supply through credit then its contraction.

 

[rootone]

I think I'll bet on tulips, at least they look nice.

 

[Ilythiiri]

When US currency was linked to gold, how was this done?

I think the only actual way to "back" a currency by gold would be to guarantee that a given amount of currency could be exchanged for gold. However, a few decades before Nixon, I doubt a citizen could take some dollar bills to Ft. Knox and exchange them for gold. So where did the exchanges of dollars for gold actually take place?

Most money in the economy isn't physical currency; it's just information about accounts. My understanding is that when a bank makes a loan, it effectively creates the money to make the loan. So if federal government indeed was trying to link dollars to gold, it had a complicated task. It had to regulate banks enough to keep the money supply from growing so large that there wasn't enough gold to back it.

Now you're talking monetary theory, not investment or cryptocurrencies.
Check out this book - Debt: The First 5000 Years by D.Graeber, it's a difficult one - only bibliography list is ~100 pages - but rewarding.
https://libcom.org/files/__Debt__The_First_5_000_Years.pdf
Some random quotes from it:
"...Temple bureaucrats used the system to calculate debts (rents, fees, loans ... ) in silver. Silver was, effectively, money. And it did indeed circulate in the form of unworked chunks, "rude bars" as Smith had put it.33 In this he was right. But it was almost the only part of his account that was right. One reason was that silver did not circulate very much. Most of it just sat around in Temple and Palace treasuries, some of which remained, carefully guarded, in the same place for literally thousands of years..."
"... argument is that any attempt to separate monetary policy from social policy is ultimately wrong. Primordial-debt theorists insist that these have always been the same thing. Governments use taxes to create money, and they are able to do so because they have become the guardians of the debt that all citizens have to one another. This debt is the essence of society itself. It exists long before money and markets, and money and markets themselves are simply ways of chopping pieces of it up ..."