Ritholtz posted a clever but instructive skewering of gold mania. He got some of the predictable blowback. In response to the blowback, Ritholtz said "Paper money is backed... a collective belief system — so is gold — but the fiat currency also is backed by the ability to tax and have a standing army." Responding to Barry, comes now a certain "Carchamp1," otherwise unknown to me:
Consider that, despite conventional wisdom, fiat currency, or paper money, is backed by far more than general collective belief. When you think about how a fractional reserve system works, a currency is backed by productive enterprise and work. In a fractional reserve system, money is, yes, created “out of thin air”, but it is loaned out with some confidence that it will be paid back.Okay, I grant this may not be Nobel quality, but how often do you here anybody mount any defense at all of "fractional reserve banking?" [Still as a general rule--I'd venture that any comment thread including both "fiat money" and "fractional reserve banking" is probably not worth the eyeballs.]
Now, as we saw with the housing bubble, capital is sometimes employed very poorly. When that happens we ultimately get a contraction, sometimes a very powerful one. This is inherent in fractional reserve systems. That is, it is supposed to happen. It is part of the plan.
While I think the idea of having a few bankers at the Federal Reserve pull the switches on monetary policy should be looked at (could this be done in a market-based approach?), I tend to think the fractional reserve system is pure genius. Probably never heard that before.