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Today,
people who believe that gold is money think that one should hoard gold.
They seek to take possession personally. Or when they have it stored
professionally, they look for a private vault outside the banking system
where they can (hopefully) trust their warehouse receipt. And why
shouldn’t they avoid the banking system?
Its
corruption was always inevitable. The advent of the central banks
before World War I ensured it. The theft (in the US) of the gold of the
people in 1933 cemented it, along with the dollar devaluation. The
treaty at Bretton Woods in 1944, in which the world agreed to treat the US
dollar as if it were gold nailed it in place. The default on the US
government’s gold obligations in 1971 by President Nixon set it in
stone. Today, we have a corrupt central bank that centrally plans
money, credit, discount, and interest.
The
regime of irredeemable paper money is going to collapse. Anyone who
understands it should want to get out of it, and not be a creditor to
insolvent banks. This is a rational personal response to an
irrational system.
But
it is not necessarily a vision for how the world ought to be run, or how a
banking system should be designed. Today, it is necessary to hunker
down, trust no one, hide one’s gold, and take no unavoidable or
unnecessary risk. Today, one is concerned with one’s stocks
of gold. One has what one has, one tries to get a little more while one
can, and then one hopes that after “it” happens, one will have
enough.
But
let’s assume we had the Rule of Law once again, reasonable expectation
of enforcement of contracts, and the absolute right of property. What
kind of financial system would we have? Would it be the product of fear
and distrust wherein gold does not move, but is hidden and buried in vaults?
Many
today propose that banks must back their reserves with 100% gold. They
envision a vaulting and payment processing system only. But without
realizing it (or in some cases deliberately), this policy rules out
credit. Perhaps it is based on this view, that detractors of the gold
standard say that there is not enough gold for modern production and trade.
And
they would be right! Most businesses make a small margin. They
buy their inputs such as raw materials, labor, tooling and other consumables,
and they sell their product for a little more. In any competitive
market, margins are thin. Therefore most companies will never have the
capital to buy their inputs for cash (and even for those few who could, this
would be an inefficient use of capital). And then what happens when
technological change allows a new business to insert itself into the supply
chain? The supply of gold coins would have to expand, which is clearly
not feasible. Or else a new business could not be added to the supply
chain. This problem is intractable. It does not go away when the
economy grows larger, technology improves, production becomes more
sophisticated, or markets interconnect globally.
The
point of this essay is that if we are to have a dynamic economy with
production, trade, invention, innovation, global markets, and growing
efficiency then there must be a financial system in which gold flows.
One
gold coin can do a lot of work in the economy if it is unshackled and thereby
allowed to move to where it’s needed to pay creditors and extinguish
debts. Then it can move to the next and the next. In a free
market, both Real Bills and bonds (and probably other credit instruments)
will arise. The structure of credit, who owes whom and when each
obligation is due, the amount of total credit, the terms and conditions of
credit, and the business models of those who deal in credit will evolve based
on the needs of the participants in the markets.
Credit
will be limited only by the creativity of the entrepreneur, the inventor, the
innovator, and others. That is, gold will flow and men will prosper if
there is no draconian rule that bank reserves must be 100% backed by static
stocks of gold, no onerous restrictions on who may deal in trade credit, and
no reactionary rules against lending based on ancient hatred of
“usury”.
As
we begin the earnest discussion of how best to go back to a gold standard,
and what that gold standard should look like, I think it is important to keep
in mind that gold must be free to move.
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