I really appreciate your honest answer. And I have now a very good idea of where your thinking is coming from. I will probably respond more later, but will say now why a gold or any other commodity standard for money appears to be unworkable, and it had to be abandoned. The unsolved fundamental problem is that it has become impossible to maintain the price of any particular commodity, sufficiently constant, thus currency based on the redemption value for some particular commodity would be as volatile as the commodity itself. Solve this problem together with the problem of needing to constantly increase the supply of money because of growing productivities and populations*, and a commodity based currency might be practical again. In it's most recent incarnation, the gold standard could only be maintained by for 27 years! These problems I mention are precisely those that Keynes foresaw at Bretton Woods, and that's why he proposed use of the Bancor as the reserve currency. That's an idea that might be worth looking at once more, but the U.S. will not be in the forefront of any push to abandon the dollar as the reserve currency, and for obvious reasons.
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*The fuel for a modern capitalist economy is credit, and a credit driven economy can not tolerate deflation, which is ruinous.
I have been reflecting on your comments on this thread and would like to make some distinctions to clarify my position on the issue.
Monetary base is the currency in all forms that can be used to make transactions with. Money supply is the currency available to make transactions with that can be used cumulatively to produce the level of demand. Aggregate demand or aggregate expenditure is the cumulative total of transactions the money supply has generated at a specific period of time and GDP is the annual total of cumulative transactions that have been made with the money supply.
This is my issue with this whole FED money value argument you have been raising. The monetary base is something which is controlled to maintain a currency's value. It has a value in itself without having to be backed up with anything (although it can support the currency value if it is backed up by something) purely from the fact that currency in itself is something that has a value and is traded on an exchange. This is the backing currency has people buy it.
The monetary base and its controlled value is something people buy as a commodity of purchase, people buy the currency's ability to purchase goods at a later date. Maintenance of the currency's supply through the control of the monetary base and limitation of its quantity is an aspect of currency control that gives it value. The issue you are more looking at when you see the FED increasing demand in an economy is an increase in money supply unless it is QE.
There has been a movement when people started buying the currency on the international FOREX market that the currency became the commodity and validated it as a thing of value. The FED's responsibility is to maintain its value by controlling its quantity. The next aspect of the FED's responsibility is to enable more transactions or to control aggregate prices through managing the money supply, the money that is available to make transactions with.
The FED has many opportunities to do this without having to alter the monetary base and compromise the currency's value. There is still another risk that you are stumbling on, which is also damaging to a currency's value. The process of expanding the money supply may involve using the monetary base (which is as a currency that is traded and valuable in its own right) as an asset used to back up the money supply and the transactions it is used to make.
It is like the FED is hypothecation or rehypothecation against the currency as an asset when it expands its money supply, when it is done by expanding credit. If what you claim is occurring when the interest rate is reduced and the FED lends more money out or exchanges cash for commercial bank assets it might be impacting the monetary base or currency's value, which can be another form of currency devaluation or impact the currency's trading value.
I am seeing a lack acknowledgement to the value of the currency in this thread, which is the fact that it is a commodity traded on a international exchange. This is what the FED is managing, the currency's own value in trade. The other aspects of the FED's operations are to hit economic targets or maintain financial stability. My concern and what I feel you are missing is the act of hypothecation or rehypothecation the currency when credit is expanded.
This might be the thing you are all arguing about but not appreciating because you are all still trying to find the object of currency value. THE CURRENCY HAS A VALUE IF IT IS TRADED ON AN EXCHANGE. My concerns are that the FED's operations might devalue the currency's value on the exchange and that the expansion of credit, if the currency is used as a collateral asset, could reduce the value of the currency and damage its purchasing power internationally.
