Why not return to gold as the national currency? Since that question has come up often on this blog, a chapter from “Web of Debt” addressing it is posted below.
Chapter 37
THE MONEY QUESTION: GOLDBUGS AND GREENBACKERS DEBATE
“You shall not crucify mankind upon a cross of gold.”
– William Jennings Bryan, 1896 Democratic Convention
At opposite ends of the debate over the money question in the
1890s were the “Goldbugs,” led by the bankers, and the “Greenbackers,” who were chiefly farmers and laborers.1 The use of the term “Goldbug” has been traced to the 1896 Presidential election, when supporters of gold money took to wearing lapel pins of small insects to show their position. The Greenbackers at the other extreme were suspicious of a money system dependent on the bankers’ gold, having felt its crushing effects in their own lives. As Vernon Parrington summarized their position in the 1920s:
To allow the bankers to erect a monetary system on gold is to subject the producer to the money-broker and measure deferred payments by a yardstick that lengthens or shortens from year to year. The only safe and rational currency is a national currency based on the national credit, sponsored by the state, flexible, and controlled in the interests of the people as a whole.2
The Goldbugs countered that currency backed only by the national credit was too easily inflated by unscrupulous politicians. Gold, they insisted, was the only stable medium of exchange. They called it “sound money” or “honest money.” Gold had the weight of history to recommend it, having been used as money for 5,000 years. It had to be extracted from the earth under difficult and often dangerous circumstances, and the earth had only so much of it to relinquish. The supply of it was therefore relatively fixed. The virtue of gold was that it was a rare commodity that could not be inflated by irresponsible governments out of all proportion to the supply of goods and services.
The Greenbackers responded that gold’s scarcity, far from being a virtue, was actually its major drawback as a medium of exchange. Gold coins might be “honest money,” but their scarcity had led governments to condone dishonest money, the sleight of hand known as “fractional reserve” banking. Governments that were barred from creating their own paper money would just borrow it from banks that created it and then demanded it back with interest. As Stephen Zarlenga noted in The Lost Science of Money:
[A]ll of the plausible sounding gold standard theory could not change or hide the fact that, in order to function, the system had to mix paper credits with gold in domestic economies. Even after this addition, the mixed gold and credit standard could not properly service the growing economies. They periodically broke down with dire domestic and international results. [In] the worst such breakdown, the Great Crash and Depression of 1929-33, . . . it was widely noted that those countries did best that left the gold standard soonest.3
The reason gold has to be mixed with paper credits is evident from the math. As noted earlier, a dollar lent at 6 percent interest, compounded annually, becomes 10 dollars in 40 years.4 That means that if the money supply were 100 percent gold, and if bankers lent out 10 percent of it at 6 percent interest compounded annually (continually rolling over principal and interest into new loans), in 40 years the bankers would own all the gold. To avoid that result, either the money supply needs to be able to expand, which means allowing fiat money, or interest needs to be banned as it was in the Middle Ages.
The debate between the Goldbugs and the Greenbackers still rages, but today the Goldbugs are not the bankers. Rather, they are in the money reform camp along with the Greenbackers. Both factions are opposed to the current banking system, but they disagree on how to fix it. That is one reason the modern money re-form movement hasn’t made much headway politically. As Machiavelli said in the sixteenth century, “He who introduces a new order of things has all those who profit from the old order as his enemies, and he has only lukewarm allies in all those who might profit from the new.” Maverick reformers continue to argue among themselves while the bankers and their hired economists march in lockstep, fortified by media they have purchased and laws they have gotten passed with the powerful leverage of their bank-created money.
Is Gold a Stable Measure of Value?
There is little debate that gold is an excellent investment, particularly in times of economic turmoil. When the Argentine peso collapsed, families with a stash of gold coins reported that one coin was sufficient to make it through a month on the barter system. Gold is a good thing to own, but the issue debated by money reformers is something else: should it be the basis of the national currency, either alone or as “backing” for paper and electronic money?
Goldbugs maintain that a gold currency is necessary to keep the value of money stable. Greenbackers agree on the need for stability but question whether the price of gold is stable enough to act as such a peg. In the nineteenth century, farmers knew the problem firsthand, having seen their profits shrink as the gold price went up. A real-world model is hard to come by today, but one is furnished by the real estate market in Vietnam, where sales have recently been undertaken in gold. In the fall of 2005, the price of gold soared to over $500 an ounce. When buyers suddenly had to pay tens of millions more Vietnamese dong for a house valued at 1,000 taels of gold, the real estate market ground to a halt.5
The purpose of “money” is to tally the value of goods and services traded, facilitating commerce between buyers and sellers. If the yardstick by which value is tallied keeps stretching and shrinking itself, commerce is impaired. When gold was the medium of exchange historically, prices inflated along with the supply of gold. When gold from the New World flooded Spain in the sixteenth century, the country suffered massive inflation. During the California Gold Rush of the 1850s, consumer prices also shot up with the rising supply of gold. From 1917 to 1920, the U.S. gold supply surged again, as gold came pouring into the country in exchange for war materials. The money supply became seriously inflated and consumer prices doubled, although the money supply was supposedly being strictly regulated by the Federal Reserve.6 During the 1970s, the value of gold soared from $40 an ounce to $800 an ounce, dropping back to a low of $255 in February 2001. (See Chart, page 346.) If rents had been paid in gold coins, they would have swung wildly as well. Again, people on fixed incomes generally prefer a currency that has a fixed and predictable value, even if it exists only as numbers in their checkbooks.
The tether of gold can serve to curb inflation, but an expandable currency is necessary to avert the depressions that pose even graver dangers to the economy. When the money supply contracts, so do productivity and employment. When gold flooded the market after a major gold discovery in the nineteenth century, there was plenty of money to hire workers, so production and employment went up. When gold became scarce, as when the bankers raised interest rates and called in loans, there was insufficient money to hire workers, so production and employment went down. But what did the availability of gold have to do with the ability of farmers to farm, of miners to mine, of builders to build? Not much. The Greenbackers argued that the work should come first. Like in the medieval tally system, the “money” would follow, as a receipt acknowledging payment.
Goldbugs argue that there will always be enough gold in a gold-based money system to go around, because prices will naturally adjust downward so that supply matches demand.7 But this fundamental principle of the quantity theory of money has not worked well in practice. The drawbacks of limiting the medium of exchange to precious metals were obvious as soon as the Founding Fathers decided on a precious metal standard at the Constitutional Convention, when the money supply contracted so sharply that farmers rioted in the streets in Shay’s Rebellion. When the money supply contracted during the Great Depression, a vicious deflatio-nary spiral was initiated. Insufficient money to pay workers led to demand falling off, which led to more goods remaining unsold, which caused even more workers to get laid off. Fruit was left to rot in the fields, because it wasn’t economical to pick it and sell it.
To further clarify these points, here is a hypothetical. You are shipwrecked on a desert island . . . .
Shipwrecked with a Chest of Gold Coins
You and nine of your mates wash ashore with a treasure chest containing 100 gold coins. You decide to divide the coins and the essential tasks equally among you. Your task is making the baskets used for collecting fruit. You are new to the task and manage to turn out only ten baskets the first month. You keep one and sell the others to your friends for one coin each, using your own coins to purchase the wares of the others.
So far so good. By the second month, your baskets have worn out but you have gotten much more proficient at making them. You manage to make twenty. Your mates admire your baskets and say they would like to have two each; but alas, they have only one coin to allot to basket purchase. You must either cut your sales price in half or cut back on production. The other islanders face the same problem with their production potential. The net result is price deflation and depression. You have no incentive to increase your production, and you have no way to earn extra coins so that you can better your standard of living.
The situation gets worse over the years, as the islanders multiply but the gold coins don’t. You can’t afford to feed your young children on the meager income you get from your baskets. If you make more baskets, their price just gets depressed and you are left with the number of coins you had to start with. You try borrowing from a friend, but he too needs his coins and will agree only if you will agree to pay him interest. Where is this interest to come from? There are not enough coins in the community to cover this new cost.
Then, miraculously, another ship washes ashore, containing a chest with 50 more gold coins. The lone survivor from this ship agrees to lend 40 of his coins at 20 percent interest. The islanders consider this a great blessing, until the time comes to pay the debt back, when they realize there are no extra coins on the island to cover the interest. The creditor demands lifetime servitude instead. The system degenerates into debt and bankruptcy, just as the gold-based system did historically in the outside world.
Now consider another scenario . . . .
Shipwrecked with an Accountant
You and nine companions are shipwrecked on a desert island, but your ship is not blessed (or cursed) with a chest of gold coins. “No problem,” says one of your mates, who happens to be an accountant. He will keep “count” of your productivity with notched wooden tallies. He assumes the general function of tally-maker and collector and distributor of wares. For this service he pays himself a fair starting wage of ten tallies a month.
Your task is again basket-weaving. The first month, you make ten baskets, keep one, and trade the rest with the accountant for nine tallies, which you use to purchase the work/product of your mates. The second month, you make twenty baskets, keep two, and request eighteen tallies from the accountant for the other baskets. This time you get your price, since the accountant has an unlimited supply of trees and can make as many tallies as needed. They have no real value in themselves and cannot become “scarce.” They are just receipts, a measure of the goods and services on the market. By collecting eighteen tallies for eighteen baskets, you have kept your basket’s price stable, and you now have some extra money to tuck under your straw mattress for a rainy day. You take a month off to explore the island, funding the vacation with your savings.
When you need extra tallies to build a larger house, you borrow them from the accountant, who tallies the debt with an accounting entry. You pay principal and interest on this loan by increasing your basket production and trading the additional baskets for additional tallies. Who pockets the interest? The community decides that it is not something the tally-maker is rightfully entitled to, since the credit he extended was not his own but was an asset of the community, and he is already getting paid for his labor. The interest, you decide as a group, will be used to pay for services needed by the community — clearing roads, standing guard against wild animals, caring for those who can’t work, and so forth. Rather than being siphoned off by a private lender, the interest goes back into the community, where it can be used to pay the interest on other loans.
When you and your chosen mate are fruitful and multiply, your children make additional baskets, and your family’s wealth also multiplies. There is no shortage of tallies, since they are pegged to the available goods and services. They multiply along with this “real” wealth; but they don’t inflate beyond real wealth, because tallies and “wealth” (goods and services) always come into existence at the same time. When you are comfortable with your level of production — say, twenty baskets a month — no new tallies are necessary to fund your business. The system already contains the twenty tallies needed to cover basket output. You receive them in payment for your baskets and spend them on the wares of the other islanders, keeping the tallies in circulation. The money supply is permanent but expandable, growing as needed to cover real growth in productivity and the interest due on loans. Excess growth is avoided by returning money to the community, either as interest due on loans or as a fee or tax for other services furnished to the community.
Where Would the Government Get the Gold?
In the real world, with no treasure chest floating ashore, a government that tried to switch to an all-gold currency would face another challenge, and this one would appear to be insurmountable: where would it get the gold? The metal would have to be purchased, and what would the government use for this purchase if Federal Reserve Notes were no longer legal tender? In the worst-case scenario, the government might simply confiscate the gold of its citizens, as Roosevelt did in 1933; but when Roosevelt did it, he at least had some money with which to pay for it. If gold were the only legal tender, Federal Reserve Notes would be worthless.
Assume for purposes of argument, however, that the Treasury did manage to acquire a suitable stash of gold. All of the above-ground gold in the world is estimated at less than 6 billion ounces (or about 160,000 UK tonnes), and much of it is worn around the necks of women in Asia, so acquiring all 6 billion ounces would obviously be impossible; but assume the U.S. government managed to get half of it. At $800 per ounce (the December 2007 price), that would be around $2.4 trillion worth of gold. If all 12 trillion dollars in the money supply (M3) were replaced with gold, one troy ounce would have a value of about $4,000, or 5 times its actual market value in 2007. That means the value of a gold coin would no longer bear any real relationship to “market” conditions, so how would this laborious exercise contribute to price stability? If the goal is to maintain a fixed money supply, why not just order the Treasury to issue a fixed number of tokens, declare them to be the sole official national legal tender, and refuse to issue any more? The government could do that; but again, do we want a fixed, non-inflatable money supply? As long as money is lent at compound interest, keeping the money supply “fixed and stable” means the lenders will eventually wind up with all the gold.
Some gold proponents have proposed a dual-currency system. (See Chapter 35.) The fiat system would continue, but prudent people could convert their funds to gold coins or E-gold for private trade. The idea would be to preserve the value of their money as the value of the fiat dollar plunged, but what would be the advantage of trading in a gold currency if the fiat system were still in place? Why not just buy gold as an investment and watch its value go up as the dollar’s value shrinks? The gold could be sold in the market for fiat dollars as needed. Again, you can capitalize on gold’s investment value without having to use it as a currency.
The “Real Bills” Doctrine
If using gold as a currency is plagued with so many problems, why did it work reasonably well up until World War I? Nelson Hultberg and Antal Fekete argue that gold was able to function as a currency because it was supplemented with a private money system called “real bills” – short-term bills of exchange that traded among merchants as if they were money. Real bills were invoices for goods and services that were passed from hand to hand until they came due, serving as a secondary form of money that was independent of the banks and allowed the money supply to expand without losing its value.8
The “real bills” doctrine was postulated by Adam Smith in The Wealth of Nations in 1776. It held that so long as money is issued only for assets of equal value, the money will maintain its value no matter how much money is issued. If the issuer takes in $100 worth of silver and issues $100 worth of paper money in exchange, the money will obviously hold its value, since it can be cashed in for the silver.
Likewise, if the issuer takes I.O.U.s for $100 worth of corn in the future and issues $100 worth of paper money in exchange, the money will hold its value, since the issuer can sell the corn in the market and get the money back. Similarly, if the issuer takes a mortgage on a gambler’s house in exchange for issuing $100 and lending it to the gambler, the money will hold its value even if the gambler loses the money in the market, since the issuer can sell the house and get the money back. The real bills doctrine was rejected by twentieth century economists in favor of the quantity theory of money; but Wikipedia notes that it is actually the basis on which the Federal Reserve advances credit today, when it takes mortgage-backed loans as collateral and then “monetizes” them by advancing an equivalent sum in accounting-entry dollars to the borrowing bank.9
Professor Fekete states that the real bills system works to preserve monetary value only when there is gold to be collected at the end of the exchange, but other commodities would obviously work as well. One alternative that has been proposed is the “Kilowatt Card,” a privately-issued paper currency that can be traded as money or cashed in for units of electricity.10 The nineteenth century Greenbackers relied on the real bills doctrine when they contended that the money supply would retain its value if the government issued paper dollars in exchange for labor that produced an equivalent value in goods and services. The Green-back was a receipt for a quantity of goods or services delivered to the government, which the bearer could then trade in the community for other goods or services of equivalent value. The receipt was simply a tally, an accounting tool for measuring value. The gold certificate itself could be considered just one of many forms of “real bills.” It has value because it has been issued or traded for real goods, in this case gold. Some alternatives for pegging currencies to a standard of value that includes many goods and services rather than a single volatile precious metal are discussed in Chapter 46.
The NESARA Bill: Restoring Constitutional Money
One other proposal should be explored before leaving this chapter. Harvey Barnard of the NESARA Institute in Louisiana has suggested a way to retain the silver and gold coinage prescribed in the Constitution while providing the flexibility needed for national growth and productivity. The Constitution gives Congress the exclusive power “to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” Under Barnard’s bill, called the National Economic Stabilization and Recovery Act (NESARA ), the national currency would be issued exclusively by the government and would be of three types: standard silver coins, standard gold coins, and Treasury credit-notes (Greenbacks). The Treasury notes would replace all debt-money (Federal Reserve Notes). The precious metal content of coins would be standardized as provided in the Constitution and in the Coinage Act of 1792, which make the silver dollar coin the standard unit of the domestic monetary system. To prevent coins from being smelted for their metal content, the coins would not be stamped with a face value but would just be named “silver dollars,” “gold eagles,” or fractions of those coins. Their values would then be left to float in relation to the Treasury credit-note and to each other. Exchange rates would be published regularly and would follow global market values. Congress would not only mint coins from its own stores of gold and silver but would encourage people to bring their private stores to be minted and circulated. Other features of the bill include abolition of the Federal Reserve System, purchase by the U.S. Treasury of all outstanding capital stock of the Federal Reserve Banks, return of the national currency to the public through a newly-created U.S. Treasury Reserve System, and replacement of the federal income tax system with a 14 percent sales and use tax (exempting specified items including groceries and rents).11
The NESARA proposal might work, but if the government can issue both paper money and precious metal coins, the coins won’t serve as much of a brake on inflation. So why go to the trouble of minting them, or to the inconvenience of carrying them around? The problem with the current financial scheme is not that the dollar is not redeemable in gold. It is that the whole monetary edifice is a pyramid scheme based on debt to a private banking cartel. Money created privately as multiple “loans” against a single “reserve” is fraudulent on its face, whether the “reserve” is a government bond or gold bullion.
Precious metals are an excellent investment to preserve value in the event of economic collapse, and community currencies are viable alternative money sources when other money is not to be had. But in the happier ending to our economic fairytale, the national money supply would be salvaged before it collapses; and what is threatening to collapse the dollar today is not that it is not backed by gold. It is that 99 percent of the U.S. money supply is owed back to private lenders with interest, and the money to cover the interest does not exist until new loans are taken out to cover it. Just to maintain our debt-based money supply requires increasing levels of debt and corresponding levels of inflation, creating a debt cyclone that is vacuuming up our national assets. The federal debt has grown so massive that the interest burden alone will soon be more than the taxpayers can afford to pay. The debt is impossible to repay in the pre-Copernican world in which money is lent into ex-istence by private banks, but the Wizard of Oz might have said we have just been looking at the matter wrong. We have allowed our money to rotate in the firmament around an elite class of financiers when it should be rotating around the collective body of the people. When that Copernican shift is made, the water of a free-flowing money supply can transform the arid desert of debt into the green abundance envisioned by our forefathers. We can have all the abundance we need without taxes or debt. We can have it just by eliminating the financial parasite that is draining our abundance away.
Free at last …. Free at last …..
http://ragingdebate.com/economy/monetary-state-of-disunion-1#comments
Ellen,
Excellent. I am concerned with one thing. Another way to fell the money changers is to change the taxing system from the taxation of income to the taxation of property. If income is the value they utilize (via labor) to support their fiat system, then changing to a property tax system will suddenly remove the speculation of labor. the very fact that we tax labor at all and then allow the money changers in on the action is the an abomination, but to not tax property (which is a local thing) is just as bad. Property tax built this country and not the income tax. I wish you would spend some time on this. Please consider reading Samuel Louis Dael’s book The Platonic Idiom, just recently published in 2010. I strongly recommend it. Keith
I’ve never read Samuel Dael’s book, but I have read a book recommending the same thing — only it was written over a century ago by an American journalist, Henry George.
http://www.henrygeorge.org/pcontents.htm
finally …after years…I have found sanity. Yes to Ellen and yes to you Keith. As a North Dakotan native i have read extensively on the BND (Bank of North Dakota) created and later proposed in congress to create a US similar model. Of note the BND made it all the way to the US Supreme Court on it legitimacy, they wanted it killed when they seen it . My parent was both a commodities broker and stock broker, several of my friends are economists, I have followed currencies, precious metals, and politics for years. Many of us know what is going on. I have read several chapters of your book and many of your submissions. Good luck.
Thanks Troy!
“Excellent. I am concerned with one thing. Another way to fell the money changers is to change the taxing system from the taxation of income to the taxation of property.”
Good way to start a civil war…..
Thanks Ellen for the insight into the currency, its function, and the gold backing of it. But I wish to draw your attention away from the US to a Third World country, Pakistan, who is suffering from financial crisis (man made) which has almost wiped out middle class through inflation and tens of families committing suicide along with their children everyday because they cannot make ends meet. Pakistan does not suffer from private banks as Federal Reserve but has a state owned central bank who issues its own currency. I would like to get your insight on what the public could do to fight inflation because the politicians are cronies of IMF? Pakistan owes $51 billion to IMF while its GDP is $162 billion. Pakistan has $7 trillion worth of coal if converted to petroleum, gas reserves for next 80 years, and recently discovered largest gold and copper deposits, but millions go hungry everyday. It is believed that IMF put restrictions on coal extraction since no coal is extracted needed for electricity. about 80% of businesses have closed due to shortage of electricity. Government reports an inflation rate of about 14%, but the actual accumulated inflation of last decade is perhaps few hundred percent. Central Bank converts IMF’s SDR into local currency and has inflated money supply way beyond its GDP just to pay its employees and officials and to keep running two national companies. But the net effect is that the currency has devalued so much that normal wage does not pay even the house rent. what the public could do in this instance? Thanks. Z Malik
Hi Z. Malek, that is pretty tragic! I’d like to hear more. I would suggest this website –
http://alcoholcanbeagas.com/
It’s a way that any small town can be self-sufficient. The problem is, it probably requires more outlay to start than your villages have. I’m very interested in exploring the financial problem with you.
I imagine Pakistan is like the Philippines, paying the majority of its budget in interest to the IMF and other foreign interests. Germany in the 1930s and Japan more recently broke out of that syndrome and issued their own currencies to rebuild their own countries. It got Germany into World War II, of course, and ended badly for them, but the Japanese have pulled it off very well. You’re right, it doesn’t matter whether the bank is publicly owned or not if the government borrows from foreign banks instead of its own central bank. It could, however, set up government-owned “development banks” and leverage whatever its got in the way of capital into 12 times that sum in loans, backed by the deposits of the people or the government. That’s how banking works: with an 8% capital requirement, the bank can create $100 in loans, assuming it can get the “liquidity” (deposits) to back them. The state could use state revenues for the deposits though. Just pull them out of the foreign-owned banks where they are now and put them into the state’s own bank. Then since it would own the bank, it would collect the interest back, so the loans would essentially be interest-free. If rolled over indefinitely, it would be the same as issuing money — essentially what Germany and Japan did.
Best wishes, Ellen
Thanks Ellen for your reply and therooster.
I checked out the website you mentioned Ellen. It would be a Big No for Pakistan as it is a Muslim Republic and anything deriving from alcohol (even energy) would be seen suspiciously by lawmakers and no one will risk exploring that avenue due the fear of prosecution.
Thank you for your suggestion and insight into the banking, which I believe is based on the North Dakota Bank system. It would be ideal if the people at the top are honest. Let me give you some examples what happens in Pakistan. The last president Musharaf, a military dictator, actually got rid of IMF altogether by borrowing from other countries but now the democratic government has increased IMF debt from zero to over $13 billion, $51 billion in total. However, Musharaf did make a big mistake by hiring Citibak Asia Pacific head( not knowing that Citibank is one of the major shareholder of Federal Reserve), Shaukat Aziz, as his Finance Minister, who later became Prime Minister. Mr Shaukat Aziz’s policies as Finance Minister wiped out middle class by reducing interest rates to almost zero, pushing people to spend their savings, which of course shows great economic activity on the books, inflating the GDP. This led people to invest in real estate and gold pushing their prices to sky. At the same time he eased the credit lines, enticing people to borrow unaffordable loans for luxury items. To add insult to injury, the currency was devalued to almost half. You can imagine what would have happened to public at large? Now the IMF has dictated who would be the governor of Pakistan State Bank and Finance Minister? Of course, they are IMF’s own men. If the people at the top were honest with their country then there would be no issue at all even with the IMF’s loan. To answer to your question of how much is paid to IMF in repayment, is $230 million a year, but the repayment on other loans together make up 25% of the GDP. But the worrying thing is that the IMF loan is increasing each year by about $10 billion. So any solution requiring change at the top would not be feasible. Do you have any advice for ordinary people, what they could do to get rid of inflation?
My worry is that Pakistan may follow Zimbabwe into dollarization to get rid of inflation. This would be extremely dangerous because then whole of Pakistan’s economy will be at the mercy of Federal Reserve. To kill the economy, all they have to do is contract the money supply. I read somewhere that some US cities have their own currencies and they are legal tender. I like to understand how could a currency issued by Private Corporation (Federal Reserve has the act of congress) have legal status? Is it just a US phenomenon or could it be applied to other countries?
Many thanks.
Zakir
Really! They don’t allow alcohol even as a fuel? That’s too bad. The Pakistan situation does sound pretty dire. U.S. cities don’t have their own currencies that are official legal tender, but some do have “community currencies”. People can trade in them by agreement, but they can’t force businesses to take them who aren’t interested. Any community in any country should be able to set up a community currency on that model.
Thanks Ellen for your reply. No, Pakistan does not specifically prohibits the use of alcohol as fuel, foreigners and non-Muslims are allowed to buy and drink alcohol indoors, but judging from the mood of the public, no one will dare try it. Authorities will also be suspicious of it trickling into black market for public consumption.
The other problem worldwide is that more and more people are planting cash crops, corn or sugar cane etc to be converted into bio/alcohol fuel, creating a world wide shortage of food crops, pushing food prices up, effecting directly the poor.
With regards to community currency, even when people use it due to mutual agreement, does it not conflict with the government’s sole right to issuing currency? US may be an exception, but rest of the world governments have absolute monopoly of issuing currency. My fear is that if any community tried community currency in Pakistan, then they would be prosecuted.
There’s no need for people “at the top” to be honest if there is no top. This is the structural problem that has to be addressed and can be addressed because of the information age that makes decentralization very possible. There’s no need to back a currency like dollars with gold when the actual gold ownership title, itself, can be distributed. Let the gold title and the fiat compete. It makes for a natural and organic transition.
Z Malik … Central banking is central banking whether it be private or government controlled. Structure is all important so this is why I’ve jumped in here. Decentralisation is the only conducive structure for a free democratic society and in order to have decentralisation, there must be an asset based standard such as gold/silver. We simply cannot all run around writing IOU’s can we ?
Ellen’s long post , above, is rather old. I suspect that it’s old in when it was posted and the concepts within that surround the issue of gold are also fairly old. They appear to be related to the gold-as-money experiences of a time when gold had a fixed value , such as the period between 44-71 (Bretton Woods) when gold was fixed at $35/oz and the USD was a fixed proxy.
The problem with fixed gold is not the gold … it’s the FIXED peg. Gold was set free in 71 which has now allowed the trade value to float. In the past, more demand for liquidity meant needing more gold from the ground in reserve to back any increase in paper notes (currency). This was unrealistic given the fundamentals of gold in regards to limited supply. Market law says that if you cannot deliver the supply, based on the demand, then the price should rise. This is what’s taken place. The only other obstacle that had to be overcome was the ability to “split the gold” by weight. This took place in 1996 with the advent of the digitisation of the gold ownership title and the transfer of the title, where the actual ownership title to bullion acts as the currency. In this way, one can buy a stick of gum or a yacht and make exact payment with fully backed digital currency that is a debt-free store of value and do so in an instant.
Gold was NEVER a problem as a historical currency. Only the logistical issues of distribution were a problem. The market valuation and ability for gold to float and the digitisation of its weight have taken care of those two issues. We’ve arrived, finally. The monetary design is not a problem anymore ….. it’s only the marketing that poses a problem ….. and it MUST be a bottom-up approach. There lies the real challenge.
Gold was ALWAYS a problem as a historical currency. It caused virtually all the depressions of history, because it was non-expandable. Lenders always required more back than they lent out, and gold couldn’t expand to meet that demand. The result was periodic waves of contraction, depression, default, foreclosure, and turning people out of their homes, which those with the gold then swooped up at fire sale prices.
You’re rehashing history on the basis that gold was not expandable again, Ellen ? Do you not get tired of that ancient history ? The expandability that you refer to was true based on limited liquidity that was only based on fixed values that were placed on bullion. Bullion’s liquidity is (weight x trade value) Liquidity can be raised by an increase in either. That’s just a fact, Ellen. We don’t need more gold for added liquidity anymore. We simply need to “vote the price higher”.
Ellen … I acknowledge the history but it was not the gold that created the probelm. It was the poor logistics of the underlying distribution and lack of consistant liquidity. You’re reciting history. You’re not making an argument backed by any logic.
The expandability of any FIXED gold concept is unrealistic, what you term as being “expandable”, but that expandability was a function of weight at that time under those rules. It is not only weight that can be expanded, but trade value, thus the severing of the FIXED peg serves great purpose here. Beyond the FIXED peg severing, all that was left to do was to find a simple user friendly way of splitting up the enhanced value of gold by weight, thus the digitization of gold weight and the use of the ownership title as weighted currency.
Like I said (and I hate repeating myself), one can buy a stick of gum or a yacht with fully backed debt-free store of value and one can no do that with exact payment in the twinkling of an eye.
There is no monetary design problem at this time. There is only a marketing challenge, one that you don’t look eager to support at this moment.
Your historical observations may be correct, ellen, but the reasons were not about gold. The lack of liquidity was because of the fixed peg between dollars and gold. You argument is most accurate and about 40 years late.
I’ve only just come across this blog, hence the late comment.
There’s a problem with the ‘Shipwrecked with a Chest of Gold Coins’ and ‘Shipwrecked with an Accountant’ analyses, which I’d like to respond to.
First the gold coins. You make 10 baskets the first month. The underlying assumption of the example seems to be that baskets wear out and need to be replaced every month. You sell the baskets to others, who collect fruit, and sell the fruit to you, so we’re back to where we started. Next month, you make 10 baskets in half the time. What do you do? Well it depends on whether extra baskets are useful:
1. If making twice as many baskets allows the others to collect fruit twice as quickly, you make the extra 10 baskets, sell them for twice as much, and buy twice as much fruit. Again the money is back where it started, but you (and the others) now can eat more fruit so you are all better off.
2. If making extra baskets doesn’t allow others to collect extra fruit, you take a two week holiday (with no need for an accountant).
Now the problem with the accountant situation. You make 10 baskets, and get 10 credits. Or you make 20 baskets and get 20 credits. The accountant is fixing the price of baskets, irrespective of how useful they are to the community. How does the accountant decide what the appropriate price is? What you have here is central planning, by an individual with no idea of the real needs of society.
Suppose you make a machine to make 1000 baskets, which end up sitting in a pile on the beach because no one has any use for them. Should you get 1000 credits for that, and get to lounge around for 8 years, even though what you have produced is worthless?
The other danger with such huge power in the hands of the accountant is that he is susceptible to bribery. One way to be able to buy more is to produce more stuff. Another way is to persuade the accountant that the stuff you produce is more valuable. You could get the accountant to give you 3 credits for each basket (maybe you paint a pretty pattern on it to give an excuse for upping the price), and then split the 2 extra credits per basket between you and the accountant. The accountant and you can now buy more of the others’ fruit, even though you have produced nothing of value.
What I really like about about (genuine as opposed to crony) capitalism is the way in which it distributes the power to allocate goods and services throughout the population, based on their needs, instead of giving it to a bunch of flawed (as we all are) technocrats.
It is a simplified example. No one really needs to price the individual baskets or the fruit. The free market would do that. Now the question is how do you accurately capture the free market price without distorting those prices? This is always a problem. Under any system where money is loaned there is going to be an appraisal system to determine if the collateral, whether that collateral is a house one is buying or a business making baskets and picking fruit, is equivalent to the loan. This is the case whether the medium of exchange is gold, tally-sticks, or real bills. The borrower and the bank have the responsibility to make a business plan/transaction and verify the business plan/transaction, respectively, that will have a worth to customers that equals the original loan in order to maximize the chance the loan will be repaid. Gold is not special in this way since it also needs to be lent into circulation in order to become a medium of exchange just like anything else and therefore the goods, existing or yet to be produced, need to be appraised beforehand.
In the tally-stick example a bank would lend the tally-sticks based on an appraisal of a persons income and ability to repay or the worth of the proposed business models goods etc etc just like any banking model, it is based on current prices in other words an appraisal, and whether or not it is a feasible plan that will produce enough income to pay off the loan. The bank would also need to have consequences for giving out loans that are not repaid and that would be the loss of the tally-sticks and eventually the bank as a business.
Money is a medium of exchange which, in its proper function, only serves as a yardstick to relate the value of one good or service to another good or service subjectively in a way that increases efficiency compared to barter because of it’s divisibility in time. If I build a house for a rancher I do not have to take his milk and beef in trade with no other options. I get tokens that represent my goods and services that can be utilized when and how I see fit. The farmer takes out a loan which he pays me for the house I spend it wherever I see fit and eventually he earns that money back, in a roundabout way from whoever earned it from me, and repays the loan. This creates more choices and greater efficiency for me and those around me. The only thing those tokens measure is relative worth of goods and services in a subjective manner not that different from barter except it removes the inefficiencies of barter. Money is just a token that gives individuals the ability to abstract the relative worth of goods and services subjectively in a way that has the potential to encourage utilization of resources efficiently.
The best way to manage prices and inflation in a banking model is multilayered much like the causes of inflation. Loans and appraisals are important on an individual, business and corporate level but what is currently missing is a societal equivalent. For example there needs to be an equivalent way to manage the growth of all money on an annual basis so as to stop system wide inflation which is a tax that rewards, on average, the very wealthy at the expense of everyone else. One way to do this is to limit the growth of money to the same rate as productivity gains. In the island example if the productivity on average doubled, twice as many baskets made and fruit picked, then the money supply could double with appraisals and loans being the mechanism for the release of the currency up to that maximum amount. If that was the case and everything else were equal then the price of the baskets and fruit would remain the same. If their was a more efficient basket made then the fruit pickers could buy those instead with money borrowed against future productivity and the original basket maker would have to adapt. If inflation occurred or the potential productive capacity of the island was not being utilized then the money supply could be adjusted to compensate and correct those problems. I believe their are other problems that currently make a non-inflationary/deflationary system impossible without fundamental changes to the current system but I also believe that a non-inflationary/deflationary system is the most desirable and fair system. Gold does not have the flexibility to be managed in that way and would create a system that would leave everything up to the fates to decide.
I like the concepts of the examples. First let me say that collateral in the form of real wealth is not really a function of lending-borrowing money. It’s really a monetization service.
Next, on the issue of inflation, you refer to money as a transational tool or medium of exchange but later bring up the issue of inflation, which an issue of supply dicipline. What if you use gold ownership title as a currency where the gold is finite and cannot be printed ? In order to stave off the deflationary threats of history, you allow the trade value to float as per market demands and find a user friendly mechanism to “piece up” the gold into smaller and smaller weights. In this way, you can enjoy debt-free currency with store of value and instant global liquidity. Read that again … debt-free store of value with instant global liquidity ! Is that your goal ? If so, that system already exists.
Compared to the current system Gold would be definitely preferable but I see 2 problems with gold and I do not think it is the optimal solution. One is that there is the potential that it could be consolidated into the hands of a relatively small group of people. As Ellen says above if 10% of the population, who had 10% of the gold, lent it out at “6 percent interest compounded annually (continually rolling over principal and interest into new loans), in 40 years” they “would own all the gold.” If this were to happen it would be a consequence not of their productivity and the usefulness of their innovations, inventions etc but it would be due to the static nature of the currency. If the gold supply grew at %6 compounded annually the outcome would be drastically different. The lenders would still be much better off but they would not own all of the currency and therefore all the assets. This seems like a very arbitrary economic system that does not tie results to usefulness of goods, services, inventions etc that would be expected in a meritocracy and is instead dependent on outside forces such as the amount of gold mined.
If gold were the only currency that would mean that all the gold would represent all the goods and services in existence. If the productivity gains of goods and services grew at an annual rate that was faster than the growth of the monetary gold supply that would mean the same amount of gold would buy more goods and services every year. This is exactly the opposite of inflation but it creates a problem that is relatable to inflation. A person who earns gold can put it under his mattress and without being productive in anyway he gains spending power. The way I see it if someone gains spending power without contributing one iota he is taking that from another person who is currently being productive but that person loses the value of some of his earnings to the person who does nothing and gains spending power. In this scenario money (gold) gains value irregardless of that persons productivity this spending power has to come from somewhere (someone has to create the good or service) and that would be someone who is actually producing something. In the same way inflation in the fiat system rewards an individual even if they are completely unproductive as long as they are holding onto an asset that is increasing in value relative to fiat money which is losing value. My definition of productive is narrow in this case and I am sure many people would disagree with it but to me it means actually providing a good or service to another person and does not include pure speculation which does not create anything and only serves to shift money around without creating anything new. To me fiat inflation and the likely deflationary nature of gold are two sides to the same coin. I believe that a non-inflationary/deflationary system would be the fairest system that would create the best results for everyone by focusing much more of the worlds productive efforts on real innovations that would actually be useful to people vs a casino economy where money is completely divorced from the usefulness of the goods and services it facilitates. I believe it would encourage a true meritocracy vs the crony capitalism that the world has suffered under for too long now including under the fractional reserve gold standard. As I said I do believe gold would be better because more people would benefit from golds increasing value (middle class and poor) vs now where only those with mostly non-fiat appreciating assets (the rich) benefit most, on average. But as long as the system is inflationary/deflationary that would likely only be the case in the short term due to the reasons stated above.
Not sure where your premise is coming from, John. Gold is widely owned and gold as a currency does not have to be the only currency that’s used by the population. It can compete right along side any fiat currency and all the things that are associated with fiat can remain intact. Of course, in time, things would change based on the addition of debt-free liquidity being entered into circulation , which would free up fiat to find the hands that need it to service fiat related debt. In goes the good currency, out goes the bad. I dare say that Gresham’s law was predicated on gold that had a fixed peg and that’s why people would hoard it. I think your model of 6% is “way out there” too because interest is actually a risk premium that is based on declining future value of a currency, on the basis of currency inflation fears. With gold’s store values, I suspect that the market demands for interest on gold loans would not only be quite low, but quite stable by comparison with any competition. The real gold growth analysis that you are making in parallel to the needs for covering interest are not required unless you are in a fixed peg environment. This is not the case with floating gold values. Any demands can be placed on the market value of gold and as long as the gold is easily divisible, there are no liquidity problems that you might associate with older gold based systems such as Bretton Woods. Loans could be made measured in dollars or weight. That’s a market function.
Even the dollar would have a new role, one that may have well been by design. It has this new role at present. The dollar’s role within a fiat currency paradigm is that of the currency we all know and have come to despise based on its debt nature. In a free gold-money market paradigm, the dollar still has a very important role, but not as a currency. The dollars role would be/is based on “bridging the gap” between fiat pricing and gold weighted payment. The dollar’s new “value” would be based on being the real-time measure in a new relationship between the measure (dollars) and the weight (gold/silver), but this time around, that relationship would be in real-time.
You didn’t tell me what you thought of the ability to make an exact payment with a debt-free store of value in real-time and with instant global liquidity …. ??? The design is already a fait accompli. The only thing that remains to be done is marketing and scale up. This market currency is not a top-down concept. It can’t be for fear of crashing the legacy system (USD). Whenever there is a migration from any legacy system to a new system, it’s imperative that neither system crashes during the migration process. This is why the effort must be market driven. People will arrive at it in their own time and one person at a time. It’s been happening for about 15 years and grows year by year, month by month as of late.
In a gold-based currency, the bankers would only own all the gold after 40 years if they never bought anything. They would have to have part-time jobs hunting and foraging so they could eat, but it’s so much easier to pay someone to do all that tedious stuff for you. Just like it’s easier to pay someone to fetch you fruit when your main skill is making baskets.
Can you imagine the average pin-striped banker in a forest trying to find something to kill and eat, or rummaging in a bush to find berries, hoping that they’re not poisonous? And besides, they could be using that time to have a nice meal, get a bit of sleep, or do a bit more banking which they’re much better at.
Bankers would not own all the gold in 40 years. That could be true only if gold was given a fixed value. You assume that the 21st century gold-money system would be controlled by banks. I’m making reference to a free gold system. Anyone can own and monetise gold and use it for trade. It’s happening now and every single day. The use is getting wider and deeper, not as a top-down system, however, but as it should be , as an organic market system, decentralized and peer-to-peer. Sorry to confuse you with facts if you are perplexed.
Your paradigm appears to be locked into a top-down perception. History has had a hand in it, I’m sure as all of our institutions have been supply driven since the dawn of civilisation. There was no other choice, really, not a practical one given that there was no information age to change all that. Things have now changed quite quickly over the last century, however
Rather than assuming the bankers’ intentions, whcih is simply an opinion you have, try thinking along a factual axiom of capability versus incapability. You may come to the realization that in order to use gold-money in a debt-free and instantly liquid fashion and use it in real-time, a measure had to be created, a measure that bridges pricing and payment. When you makle a gold payment (by weight) for something that’s priced in a fiat currency, measuring the gold is a function of using the real-time measure of the USD. It’s simply a measurement tool in this gold-money application and someone had to create that measure. That’s what the FED did.
The currency role of the USD, which is likely the only role that you may consciously know of, has been a “necesaary evil” in the life cycle of the dollar’s journey to becomoing the real-time measure for gold-money. This is fact. This is not my opinion. I’m not discussing philosophy or opinion when I say this. I’m simply pointing to the fact that without a real-time measure, there was no way to make accurate gold payments the way we can now, within a floating real-time environment. Did you ever consider that bankers had this in mind all along in their mission statement and their role in folowing “the script” ??? In short, we’ve gone from gold payment with fixed values, through a floating fiat paradigm and we are emerging on the other end back into a gold payment paradigm but in real-time to reflect real-time fundamentals, based on supply-demand. The economy , after all, is a real-time event. I can buy a single stick of gum from a merchant anywhere in the world and I can make exact payment in fully backed gold weight, debt-free in the twinkling of an eye. What’s the problem with instant liquidity of a monetary asset , debt free ?
I definitely agree gold would be better for the average person with one reason being it would gain value over time vs fiat money which loses value but since gold is deflationary I do not think it is the optimal solution. The problem with floating gold was discovered a long time ago. Big business would invest an ounce of gold to make a good and while they were invested in the non gold asset the spending power of gold would go up, due to productivity gains increasing faster than the gold supply, and in some cases they would only get back the same ounce in gold that they had invested, or maybe even less eg 27 grams, which now had more spending power. This has the result that one would be just as well off, possibly better off eg the 27g case, putting the gold under a mattress and partaking of the increase in value without doing anything. This consequence of a gold monetary system has been reported to be a possible cause of businessmen lobbying to get off of the gold standard even before Bretton Woods. In essence it socialized productivity gains to whoever had gold while today’s inflationary system gives it to those who are mainly invested in non-cash assets, on average, for example houses historically have inflated at 3% above the average inflation for the rest of the economy. Houses under the current fiat monetary system are similar to gold under a gold standard. One is better off to buy a house and do nothing, akin to throwing gold under a mattress, and benefiting from the increased spending value, the work of others, that house gives you even though you really produced nothing. If gold is the main medium of exchange this increasing value of gold will be one of the consequences. The increasing value also disincentives investment. Even if the amount of money increased in relation to gold gaining value, floating gold values, this would still be a problem because even though the investor got $200 back on a $100 investment it would still represent the same amount of gold and so he would be just as well off putting the gold under a mattress and waiting with no risk.
The system you are talking about is an excellent hedge against inflation for individuals but as long as the main medium of exchange is fiat money it will not have an effect on the economy as a whole. If banks did not lend then unemployment would increase if they began out of control lending then inflation would result. What you are talking about is a stopgap measure for individuals to avoid inflation but it is not a fundamental monetary system it is a system that rides on top of the current system.
Fiat money which inflates has the exact opposite consequence of gold which is that, on average, non fiat assets appreciate in value while money devalues. This incentives one to invest so they do not lose spending power due to fiat money losing value over time. It also means that if those in the working class, or any job, do not get a raise every year they are getting a smaller percentage of the countries productivity than they were the year before. In other words you lose a share of the productivity of the economy which necessarily means someone else gains it and that is a person who has a small percentage of their assets as fiat money exactly the opposite of a gold monetary system where those with gold benefit irregardless of their productivity. Long term systemic inflation and deflation which result from a monetary system only serve to distribute wealth.
I believe money should be pegged to GDP or the productivity of a country. If the productivity increases %5 so should the money supply and if it decreased so should the money supply. What system would best facilitate that I do not know for sure but I do know it would not lead to inflation or deflation in the economy on average and would therefore remove those distortions. It should also not be implemented through coercion like the current system is. One idea I have had is that government federal and/or State attaches interest equivalent to taxes on money then reverse auctions it to private banks to lend getting rid of the current tax system and I.R.S. in the process. Inflation or spare productive capacity could be corrected retroactively. Something like that would streamline government making them smaller and more efficient. This would remove money from the casino financial sector and their derivatives and be used for services currently paid for with tax dollars.
John … gold is not deflationary. I challenge you to produce evidence of this. Any historical references that you put forward (and there are many) are all in context to gold systems that used a fixed gold value, such as what we saw during Bretton Woods. Gold was not the problem, never has been. The problem was the FIXED peg.
A FIXED peg system equates the need to increase liquidity to an increase in physical gold in circulation and/or in reserve to back the paper it’s pegged to. We both know this is unrealistic given the supply fundamentals.
Now sever the FIXED peg.
In a floating paradigm, where the demands on gold as a currency increase, the market will lift the trade value of gold and increased liquidity can be accomplished with a two step process.
1) The gold price has to move higher on the demand for more liquidity.
2) A convenient way needs to be found to distribute the enhanced gold value or fully backed gold derivatives, denominated by weight, not dollars or some other unit other than weight. The only suitable derivative applicable would amount to actual ownership title to gold. This can be (and is, currently) digitised and distributed in the tiniest of amounts via the NET
Once you evolve to the point of satisfying points 1 & 2 , you can purchase goods and services with debt-free store of value via the internet. Full liquidity in an instant ….this is what was missing from gold systems of the past. This has only been made possible in the age of information and is why using gold as money is no longer deflationary.
Like I said, the peg was the problem …. fixed peg. Gold had to be set free and then the weight had to be digitised for convenience and ease of use.
“1) The gold price has to move higher on the demand for more liquidity.”
If the gold price “has to move higher” then relatively speaking goods and services are cheaper, that is the essence of deflation. This is exactly the opposite of fiat money losing value, due to the fiat money supply expanding faster than goods and services, which means, relatively speaking, goods and services are becoming more expensive.
My opinion is that either gold gaining value or fiat money losing value are not optimal solutions, though gold is better, due to the wealth transfer mechanisms it enables which distort the economy.
I believe a monetary system that grows at the same rate as GDP or a countries productivity while discouraging non-productive speculation, where prices rise for no other reason than the fact prices are rising similar to proposed theories for the dutch tulip mania, is the most optimal solution. If gold could increase at the same rate as productivity gains then that would be fine, if not it will gain value relative to goods and services incentivizing people to not invest it and gain a share of the productivity gains others work for without needing to contribute or risk anything at all. If someone gains without risking or contributing in any way that is stealing from the person who did contribute and risked something therefore it distorts the economy.
As i read you going back and forth. Do you not realize that that unearned gain that you are speaking of is the sole purpose of capitalism. And just to correct you it is not neccesarilly stealing. If i am a thrifty person and do without certain luxuries in order to enjoy this deflationary gain that you speak of is that not the same as working. I seem to hear you saying that to save is to steal. We all have to make personal choises as to how we live and enjoy the gains or losses accordingly. The theives are the welfare recipients that feel they are entitled to enjoy the same same benifits that others have to work for. But that too is tied to monatary policy because the food markets are ran by monopolies that lobby the goverment to keep giving these people money that is actually going to end up in their pockets anyway. Gold and silver is the only way for productive people to have their fair share. Let the bums use the fiat or go to work and earn their keep.
No John, the rising gold-money trade value is not “deflationary”. I know it’s a little confusing because you’ve been raised and taught in a fiat paradigm. I’m speaking from a real-time gold-money paradigm. You cannot apply fiat rules & principles to gold-money applications any more than you can pour new wine into old wineskins.
What you’re concerned about in the real-time gold money paradigm is not lower prices (they’re good in this case), which is what you actually described correctly. The concern of what you refer to as “deflation” really is a lack of liquidity. Because the real-time application is moving the trade value of gold and all applicable good and services (and currencies) , enhanced gold is simply “pieced up” in greater divisible weights. The liquidity does not change in spite of the higher trade value on the gold bullion. Total monetary value has actually increased. This is why entering the real-time environment for gold was essential. Ironically, the development of the free-floating USD was what made this possible in the context of dropping the FIXED peg between dollars and gold. You should also factor silver into this equation too. Fiat currencies are also still in play in the scenario too and will remain with us, including the USD, until such time that the market decides to shift over to weighted pricing for good and services, which will be a long slow , smooth market process.
Encapsulate this evolution going back to the classical gold standard of the 19th century.
1)Fixed gold payment for variable currency pricing
2)Fixed gold-dollar payment for variable currency prices (Bretton woods)
3) Floating fiat payment for floating fiat pricing (current)
4) Floating gold payment for floating fiat pricing (current also, although little known)
5 Floating gold payment for floating gold pricing (future)
I believe that a system where gold prices constantly gain value would not be optimal as I said above it is the flip side of fiat money losing value. The reason I say this is because it would enable someone who has gold to gain spending power even if they put the gold under their mattress and do nothing. If they do nothing and in turn gain spending power to buy cars houses etc they are essentially stealing from people who produce those things and who then have to share their productivity with gold hoarders who do nothing. This is a situation ripe for speculation and instead of houses, commodities and other assets being speculated on in order to retain spending power it would create a situation where gold or money would become the object of speculation. Speculation does not engender productivity which is the true originator of societies ever increasing quality of life. My opinion is that a system that does not have the average asset prices or average value of money, gold in this case, increasing every year, throughout the entire system, would be the most optimal because it would be the most discouraging to speculation and other non-productive “jobs” and would therefore encourage real productivity vs derivatives and casino style wall street brokers.
I have read your other posts and I entirely agree with you about decentralization being the answer. Free banking, which seems like a pipe dream, would be a good solution because then people could choose whatever works best for them whether it be tally-sticks or gold. I personally do not believe it would be gold because with the information technology and infrastructure we have in place today much more innovative and efficient systems could be deployed today that could possibly do away with money altogether in exchange for liquid assets or who knows what someone would come up with. It might be gold but I think given the freedom to come up with new systems gold as money would be relegated to a relic of history .
Wow, like the shipwreck thing. Put the real problem is human nature and abuse. Then there is speculation, which causes another issue that you have not analyzed. The unrealistic aspect of the “joe” accounting properly and not having the people with power accumulate a lot of the tallys is the problem. In any of the ideal ways, how do you deal with speculation? Low margin requirements that raise prices or allowing non real tallys. Someone has to say that a tally is real.
Alkane … you have a keen instinct based on your opening comment. We cannot fix human nature but the human nature issue is only a problem when the greed and abuse have any power. This is a structural issue that we can inluence & control. The environment that allows for this kind of abuse (greed) is “housed” within the hierarchical paradigm, specifically at or close to the apex, something that has been with us since the dawn of civilization and throughout modern history. Structrure is the guiding principle of how power flows just as the shape of a prism is the principle by which light flows. Now that we are in the information age, we can address this issue and have been in recent years as more tasks and opportunities are redistributed away from corporations , right down to the individuals at the aggregate level. Money should be no different on the basis that it’s created as an asset (debt free) because only an asset based monetary system can be decentralized in the process of creating a more organic structure or what I sometimes refer to as a “rounder world”. A structure that morphs will also address the issue of speculation. You are thinking of gold & silver in ther roles of a commodity in the fiat paradigm, which I completely understand. When you place yourself in the real-time gold-money paradigm, the market participation is so much larger and there is so much more participation by the aggreagte forces of the market (you & me) that market stability is a process that is unavoidable , regardless of how long the process takes.
Just in follow up to this last post, my answer was given from the macro perspetive where the micro perspective (accounting) may still be vague. I move from the system level to the component level when defining complex issues like this, so getting more specific with the “bits & bites” is certianly welcome in follow-up.
John … you say “The reason I say this is because it would enable someone who has gold to gain spending power even if they put the gold under their mattress and do nothing. ”
This statement says that you are not in favour of wise investment on the basis of trading for something that can become short in its supply. Do you not believe in investment and free markets ? Your argument is not an argument for or against sound money with liquidity but a philosphical statement that is of your personal choice. I believe in free markets and investment into those markets and yes, I should absoltely benefit from making wise investment decisions, whether I buy houses, gold, copper or cottton.
I agree with John that letting someone gain spending power without doing any work is contrary to the best interests of society. It *is* the underlying cause of the vast inequality between those with lots of wealth and the many with little wealth. In other words, it is the underlying cause of unnecessary poverty and all the problems that go with it.
Most of the poor people I know are diligent workers, doing the best they can for themselves and their families, yet all the wealth they help produce is sucked up by so called “investors” and vacummed straight to the top of the economic heap. Which allows a few people to enjoy vast wealth at the expense of everyone else.
The problem with our current monetary system is that a powerful and valuable privilege (the right to create money) is held in the hands of a few who do not properly compensate the rest of society for the privilege they hold nor do they use it in the best interests of society, but rather for themselves at the expense of society.
Zarepheth..
The nice thing about gold is that it subscribes to market law and is an asset. It is debt free. The reason is that the finished bullion product must be worked “by the sweat of the brow” and cannot be created by pen & ink from thin air. In order to rightfully invest in gold or own gold , one must work for it or pay for it based on “the sweat of the brow”, so labour always goes back to the creation of the real money and/or the continued ownership. This differs from debt currency where the payment of the debt would follow the currency creation. With gold, the labour/economic activity is up front, before a finished coin or ingot can even make it to the marketplace.
If I understand your grievance properly, you have an issue (as I do) with the structure of the debt currency paradigm which is structured on hierarchy and the “top of the economic heap”. That’s an issue of structure by your own use of language, the core issue that I actually stand on. My passion for gold-as-money is based on it being an asset because the real issue is to be able to get away from hierarchy and create what I loosely define as “a rounder world”. That can only be achieved with asset based money, decentralised. For glaringly obvious reasons, we cannot all run around issuing IOU’s. The basis of a debt based system is centralisation for this very reason. Centralisation is a necessary evil when debt money is created because some central figure or figure at a focal point (apex) has to be the “keeper of the books”.
You’re actually supporting my argument when you dig it down to causal issues a little deeper. Make your structural choice. That will lead you to asset or debt based currency. If you choose decentralisation as your structure of preference, then there is no choice but to use assets. IOU’s cannot be decentralised, certainly not down to the sovereign individual.
I appreciate your observations about bad or greedy people. They congregate at or close to the apex of power. Without the apex, they are actually impotent because it is not their greed that gives them power, but their position. That’s not about gold, however.
In a system that rewards people for ownership of the means of production, gaining ownership of land, natural resources, and special privileges is a “wise” investment – but such a system enriches the few who first gain such ownership while punishing all those who fail to acquire it. And since those resources are limited, it is difficult or impossible to equally provide the resources to everyone.
The only way to properly allocate such resources is through common ownership where everyone who wants exlusive access to those resources (land, minerals, harvesting rights, permission to create money, use radio frequencies, etc…) must rent that privilege from the commons for full market value of the privilege. In this manner, the community as a whole benefits from use of land, mining of minerals, harvesting of wild flora and fauna, and the exercise of special privileges. It would also dissuade speculation as “investors” would have to continue paying rent on land and various privileges even when sitting idle; thus investors would only put their money into actual, productive use – instead of restricting access to raise prices.
I completely agree but I do not believe that the “rent” should be on the commons such as land etc but on money in a non coercive manner, meaning without outlawing commodity money. If government takes back direct control of money and taxes it through an interest rate or flat rate that equals expenditures, they would be doing exactly what you suggest but in an abstract manner. That money should then be reverse-auctioned to the private banks that can get it into the economy most efficiently and cheaply at the lowest service cost without special interests being favored . Since money represents the commons Government would in essence be taxing it but without the inefficiencies that arise when Government tries to appraise “rent” values. The market would then do the appraising and Government would be once removed along with being in compliance with the constitution. Then all other forms of tax could be done away with. The best way to implement this would be through the individual states in order to decentralize the system. I believe Ellen is right about public banks but that the money should be reverse auctioned to the private sector in order to create a partnership between them and to facilitate low service cost on money that takes advantage of the positive aspects of free-market principles.
Since the idea of decetralisation is alive and well, why create hierachies at the state level when decentralisation can be brought right down to the individual level where money is personally privatized and competes with any/all forms of government paper ?
When the organic structure of the market is creating and distributing asset-based money, the trust is dispersed to the market instead of being focused & entrusted to a hierachy of the priviledged few. Hierachies create an inducement on the basis of “the greed factor” (apex), something that will far outlive any good people that you put into them.
Structure is the guiding principle of power, not applications as many tend to think.
I am not saying to remove that option that is why I said ” without outlawing commodity money”. I completely agree that choices should be available for people to choose between in case the predominant model becomes too oppressive. To me that is the biggest draw of free banking. Without coercive measures being implemented what will always happen when one option stops working is another one will take it’s place. I do not believe that Government should be removed from those choices simply because it is Government but that checks need to be in place so that other options are available if it becomes to inefficient or oppressive, commodity money could fill that role nicely as would free banking. States should compete with the private sector in some areas especially where monopolies form in order to force true competition and prevent stagnation due to the status-quo being more profitable than the alternatives.
Your tring to make a point with socialists rooster give it up. I heard it in their tone for a while but the last post says it all. Paying rent to the commons. There are lots of working poor at a mere 65,000 a year I consider myself one of them. But there are plenty that are a drain on the ecconomy.
Zarepheth … You appear to be defining gold with a FIXED peg. The weight of gold may be somewhat limiting, but the trade value is now theorically limitless, which is exactly why the FIXED peg had to be abolished. This has made the distribution qualities such that it can overcome any lack of good liquidity that FIXED gold values could never address. We can now split gold (of enhanced value), by weight, a zillion ways and distribute the fully backed, digitised title as currency. Debt-free store of value has now been integrated qith instant global liquidity. Name me any fiat currency that has that quality .. ?
By contrast, how can a fair system based on hierarchical creation be compared as being favourable ? Gold/silver can be monetised by the individual. It does not need the necessary evil of hierarchy that we associate with debt-money (fiat).
The store-of-value properties are intrinsic to its debt-free nature.
The comparison should be considered from a point of view of structure, not simply the nature of the currency. It’s been a desire for decentralisation (more freedom) that has led to the monetisation of assets.
Sure there is nothing wrong with investing in goods services that may prove to be more efficient and useful than current goods/services but then there is the speculation which is in line with the dutch tulip mania where prices rise because prices are rising or in the gold monetary system where it increases solely because gold supply grows slower then productivity increases grow the economy. Those are two different categories and one produces nothing of worth for society at large and is likely detrimental by encouraging concentration of wealth while the other does. These two examples have rising prices not because of their usefulness and market forces but due to systemic distortions. As I said before in a non inflationary/deflationary economy these types of speculative ventures would be drastically curbed resulting in more people actually producing goods/services that have an actual use and which increase quality of life vs wealth distribution schemes that produce nothing. In my view there are different categories of speculative investments and the ones that arise due solely to the systemic distortions due to a specific monetary system are negative while ones that arise due to supply and demand or desirability of goods and services are useful except maybe when they are due to a distorting bubble which should be discouraged not encouraged.
Are you against free banking? Because my ultimate belief is that people should be free to choose what they use as money without government coercion and in today’s world I believe gold is obsolete, much better systems could be innovated. Gold and silver might be a good start to ween off of government coercion but better systems could be created and possibly even compete with government giving people more choices.
John …
You said : Sure there is nothing wrong with investing in goods services that may prove to be more efficient and useful than current goods/services but then there is the speculation which is in line with the dutch tulip mania where prices rise because prices are rising or in the gold monetary system where it increases solely because gold supply grows slower then productivity increases grow the economy
I say : I understand the concern. You’ve imported it from the fiat paradigm. The dutch tulip bubble came about as an overproduction of tulips. Are you concerned with an over-production of gold, really ?
You said : Those are two different categories and one produces nothing of worth for society at large and is likely detrimental by encouraging concentration of wealth while the other does. These two examples have rising prices not because of their usefulness and market forces but due to systemic distortions. As I said before in a non inflationary/deflationary economy these types of speculative ventures would be drastically curbed resulting in more people actually producing goods/services that have an actual use and which increase quality of life vs wealth distribution schemes that produce nothing. In my view there are different categories of speculative investments and the ones that arise due solely to the systemic distortions due to a specific monetary system are negative while ones that arise due to supply and demand or desirability of goods and services are useful except maybe when they are due to a distorting bubble which should be discouraged not encouraged.
There’s no distortion. As gold provides a useful source of accounting AND store of value as money during economic growth, the value of the gold goes up , creating a win-win. Past distribution problems would have made this situation deflationary buy gold now floats to overcomes the liquidity issue. You need to work the word “liquidity” into the conversation.
Free banking ? Bring it on ! The market would gravitate to gold in time. The reason is in the genesis of the money in terms of how it’s created, a subject you appear to avoid. If banking is to be truly free and decentralized, then it becomes academic that asset based money (debt-free) must be used. If you want some form of centralization then you’re free to make comparisons of what kind of debt-currency favours you personal philosophy. The trouble with the centralized structures is that you cannot remove the apex/concentration of power and you can be damn sure that history will repeat even if you put good people at the apex because in time , the apex will become the very distortion that you want to avoid. Good people in a bad systems still makes for a bad system unless, of course, those good people are immortal and are in place to stay.
I say : I understand the concern. You’ve imported it from the fiat paradigm. The dutch tulip bubble came about as an overproduction of tulips. Are you concerned with an over-production of gold, really ?
An overproduction of gold is not the problem it is the fact that it would create a bubble where it’s prices would rise because it’s prices are rising. This produces nothing and only serves to redistribute wealth in a the same manner as a casino. If you play the odds you win if not you will eventually lose.
Gold does not have some intrinsic store of value or ability to be an accounting tool. The only historical difference between gold and any other good is it’s liquidity but just like anything if people reject gold it’s liquidity would disappear. The only thing special about gold is that it is a good that the average person would accept in trade for another good/service historically. Fiat money also has these characteristics now but the problem is the monetary framework for fiat money is flawed and leads to inflation if this could be corrected then it would be better than gold because it would not need to be dug out of the ground and the amount in existence could be adapted to the needs of the economy whereas gold cannot. This inflexibility of gold is the reason it was superseded because as I said before a businessman would invest an gram of gold and get less than a gram back due to gold constantly gaining value vs other goods. His work, the difference between the original gram and what he got back which was less, was given to someone who held onto gold during the interval he invested it, whether that person produced something in exchange the good he acquired or not. Businesses did not like this aspect of gold and that is likely the reason it is gone replaced with a system where one gets back more in the interim on average, inflation, vs less.
Wow … you’re all over the place. You’ve been hoodwinked by a great deal of banker speak, IMO.
Keep it simple. Gold’s expandibility is in the trade value because it now floats. Expandibility , for the sake of increasing liquidity, does not have to be in the gold weight as it was under the fixed peg rules of Bretton Woods. Now that monetary demand can be met with a higher trade value and that weighted trade value can be effectively pieced up, the 21st century real-time gold currency offers the best of both worlds, debt-free store of value and instant global liquidity. No debt currency can offer this. You can now buy a single piece of gum from a merchant on the other side of the globe and pay for it, exactly, with a debt-free store of value that has no residual debt associated with the currency. You can also do this with a click of the mouse. There’s been no currency ever created that is this efficient or this impacting. It will also purge existing fiat debt (purge , not redistribute) on the basis of adding much needed liquidity (debt free), thus allowing for fiat to return to nothingness in the serviceing of fiat based debt. ONLY A DEBT FREE ASSET CAN PURGE THE FIAT DEBT IN THIS MANNER, WITHOUT ADDING ANY NEW DEBT. Don’t complicate a simple issue. Gold is just like a barter standard where you are trading a blue widget for a red widget or a gold widget. It’s simply another widget. Its intrinsic value is by way of the fact that it must be laboured by the sweat of the brow in its creation and cannot be created from thin air, thus adhereing to market law. That’s the intrinsic value and the proof of this is when you drop a brick on your foot.
If gold backs all goods and services as a currency and gold supply grows slower than goods/services grow than gold will gain value. on average, relative to those goods/services. While you are invested in gold you will gain spending power and while you are invested in goods/services you will lose spending power as, on average, the goods and services will lose value relative to the gold. Under those circumstances, which will happen unless their is an influx of gold equivalent to productivity gains, someone who invests their gold will lose their spending power to someone who hangs onto gold. This is not banker speak.
If you are talking about denominating gold in dollars that is not a monetary system that is a stopgap measure for individuals to lose spending power but it in no way will correct the systemic distortion of the current fiat money system it will only piggyback on it and if it morphs into a pure gold monetary system the above paragraph will apply.
I do not know how I am all over the place everything I have written above is part of one interconnected framework of ideas, it is in no way “all over the place” and I am not complicating a simple issue just pointing out simple conceptual problems with gold that are actually very similar to fiat money though they are in some ways completely opposite.
John … I’d call that a good academic observation I think it lacks the fundamental reality of human nature and human needs. People need things that provide utility value and will trade for them. Real-time gold-money will likely trade in a range once it finds this range on the way up. It will not continually move up and up, endlessly, which is what your post suggests (?). What gold will do, however, is it will promote more conservative, steady growth and savings. Savings is something that is essentail to long term investment.
I think you may assume that my support for gold as money is at the expense of the fiat system, which may include its demise. I don’t. I see the competitive need for both. Adding gold as money is mostly about choice and the ability to manage overall debt. The monetary system of the 20th century was very much incomplete, much more so than it was flawed. It’s still a work in progress because the real-time gold component still has the marketing challenge to contend with, something that the financial elite may not visibly support (for legitimate reasons concerning the legacy system) , other than carrying the stick (inflation).
I think you may assume that my support for gold as money is at the expense of the fiat system, which may include its demise. I don’t. I see the competitive need for both.
เงินด่วน …. Yes, that’s common . Do you not find it outrageous, even hypocritical , that in a so-called free market, there hasn’t been any real choice of currency that people would recognize and utilize ? It’s the elephant in the room , isn’t it ? I guess the FED has just had a better marketing campaign …. but that doesn’t make for a better currency. Competitive gold gives people a port in the storm on money-printing. It will also give the PTB pause for concern and make them sharpen up the whole banking industry. Choice is ALWAYS a good thing. It is the almost exclusive use of fiat money that has led to banking abuses, not the currency in of itself. Problems will always arise when your currency is completely created from debt, as a promise to pay. When you choose to use another service, just wait and see how they (banks) will change their abusive habits. Competition is what keeps business honest. I notice that you used eastern lettering for your name. Have you been reared in a left leaning country ?
As far as I know, there is no law to prevent you and your family and friends from starting to exchange goods and services for gold coins amongst yourselves. Amongst the problems you’ll need to consider, of course:
Theft. The same things which made gold valuable in past ages also made it easy to steal and untraceable when stolen.
Murder/mayhem etc. Theft victims often got killed in the age of gold.
Counterfeiting. I.e. the question of whether gold you take is actually pure gold or has been alloyed with other metals. You’ll need somebody like Archimedes to travel with you on shopping trips.
Consciousness. In other words, the possibility of the human race waking up to the realization that the value of gold is entirely based on psychology and psychiatry, and not economics or physics. Eighty percent of gold currently being mined is used for rings and bracelets and there are much cheaper things to make rings and bracelets out of. There are also much cheaper things to make electrical connectors out of. There is no other or more meaningful use for the stuff…
Good luck…..
As far as I know, there is no law to prevent you and your family and friends from starting to exchange goods and services for gold coins amongst yourselves. Amongst the problems you’ll need to consider, of course:
- all trades, exchanges would still be reportable and taxable in dollars even if there is no dollar transactions. And coins have a higher tax rate than income.
You’re right, there are only a few legitimate, non-monetary uses for gold. Though there are cheaper alternatives for both jewelry and the industrial uses of gold, there are rare occasions where the slight electrical or thermal performance boost using gold makes it a better choice than any other material. In most cases, less expensive options are good enough. As for jewelry, I think its color, tarnish resistance, and even its expense are the reasons it continues being used.
If gold had no non-financial utility value, whatsoever, it would be awesome ! It’s fundamentals would strictly be conducive to its investment & monetary demands. Gold’s greatest value, which is still yet to be realized by this market, is the monetary role , based on intrinsic value to real economic activity. Do any of you folks realize that Gresham’s law is actually reversing ?
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Monetary Mantra for the 21st Century.
In 1971, at the so called “demise” of Bretton Woods, when the fixed dollar-gold peg was severed, the very desirable Real-Time genie was loosened from the bottle and set free. In the process, however, the very evil debt genie managed to escape. The great irony is that the real-time genie actually holds the secret on how to get the debt genie back into the bottle.
Keith says; Aug,4, 2012
Great book: I am in the apartment rental business; I have a problem with you suggesting that government get in the rental business if treasury is authorized to create its own money. That seems socialistic to me, like government being in the automobile sales business or any other competitive business. To get me on board or any other business person, I think you need to take government out of private business, except for banking. I have no problem with private banks if they are competing with treasury banks, but I do not think we need to compete with treasury in other business ventures. Am I missing something? Thank you!
To which comment or part of the article are you replying?