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What is honest money?
And what does it mean "to return to honest money?"
The most common answers to these questions have roots in the Austrian School
of Economics, developed and made famous by the Austrian economists Carl
Menger (1840-1921), Ludwig von Mises (1881-1973) and Friedrich Hayek
(1899-1992). At least the most common answers today come from modern
followers of the Austrian School. And modern practitioners will tell you that
gold and silver are honest money, and that the way to return to honest money
is to make money harder and/or to limit or eliminate fractional reserve
banking.
But this meme of honest money has been canonized in such a simplistic way
that its proliferation has become a bit of a credibility problem for those
that promote it, and a source of confusion among their more credulous
followers. So I have a slightly different take on honest money that I'd like
to share with you.
My definition is that honest money is simply money that does not purport to
be something it is not. I'm sure this doesn't seem any simpler than saying
gold and silver are honest money, at least not on the surface. But I think
that once we explore this subject a little more deeply, you'll find that mine
is a much more elegant view of a very important topic.
As you will see, I'm not here to challenge the Austrian forefathers, Menger,
Mises and Hayek. In fact, my view is perfectly compatible with theirs. Where
it differs is with some of the modern gold standard advocates and promoters.
In my view they have improperly reconstructed the money concept that was
deconstructed by their forebears.
I realize that some of you already have your defensive wall up as you sense
that I am about to attack the dogma with which you identify. But I invite you
to bear with me here. The view is quite nice from where I sit. As Aristotle
wrote, "it is the mark of an educated mind to be able to entertain a
thought without accepting it." Costata took some flak in the last post
for asking the reader to suspend disbelief. But this is all he meant. Try
thinking in terms of the principles and concepts I will present, and then you
can apply that view to both my conclusions as well as your own established
beliefs. This is the proper way to take in a new view, and then you can
decide to either accept or reject it, but at least you will have seen it.
I do believe that we are in the process of returning to honest money. I
believe this transition is necessary, natural and inevitable (unstoppable).
And that last part is why I sit back as an observer, rather than getting all
worked up as an activist. To my way of thinking, all you can do now is take
action to preserve your own wealth as we roll onward into this brave
new world.
Sell the Gold in Fort Knox?
Congressman Ron Paul is one of the leading proponents of a return to honest
money and a return to the gold standard. He is also
a firm believer in Austrian economics and has authored six books on the
subject. There was a curious headline on Drudge the other day that read,
"RON PAUL: Sell the gold in Fort Knox." Here's the link
and a quote:
The next
big question on the federal debt limit could be whether to start selling the
government’s holdings of gold at Fort Knox — and at least one
presidential contender, Ron Paul, has told The New York Sun he thinks it
would be a good move.
The question has been ricocheting around the policy circles today. An analyst
at the Heritage Foundation, Ron Utt, told the Washington Post that the gold
holdings of the government are “just sort of sitting there.” He
added: “Given the high price it is now, and the tremendous debt problem
we now have, by all means, sell at the peak.”
Mish then came out with a post
saying that Ron Paul had not said this. He wrote that the Sun must have
gotten it wrong:
People
have been sending me an article all evening that says Ron Paul proposes
selling gold to pay down the national debt. The article is nonsense and it
took me all of 5 seconds to spot the error.
Somehow the New York Sun confused Ron Paul with some clown I have never heard
of named Ron Utt, or the Sun misrepresented a statement Paul made.
[…]
Addendum:
I have read the Sun article several times now looking for other
possibilities. The only other thing I can come up with is the possibility
Paul may have said something to the effect of wanting the government to mint
and sell more gold coins, but that does not equate to selling gold reserves
to pay down debt.
Thus, I keep coming back to the thesis that the Sun is inadvertently mixing
statements of Ron Paul with Ron Utt or the Sun has misinterpreted or worse
yet, hugely misrepresented a statement Paul said.
I'm not trying to make a big deal out of this story, but I wanted to bring it
to your attention because it got me thinking about Ron Paul and his honest
money ideas. I'll admit that I'm not an expert on Ron Paul's ideas like Mish
is, but I could certainly think of a few reasons why Dr. Paul might make that
statement, not the least of which being that the gold that was nationalized
in 1933 needs to get back into private hands.
Gold does the most good for any currency zone being in the private ownership
of its productive citizens rather than the public ownership of big
government. Remember that I, too, made a "crazy proposition" for
the US gold with regard to Treasury's cash funding running out in Reference
Point: Gold - Update #2. So I'm not sure Mish got this one right. Perhaps
it will have been clarified by the time I publish this post.
Ron Paul and Honest Money
In any case, I know that Ron Paul advocates returning to "honest
money," and to him that means some kind of a
gold standard. So, because I'm not a Ron Paul expert, I did a little
research. I wanted to get a general handle on what realistic and actionable
ideas the gold standard crowd has today for returning us to their concept of
"honest money," other than the simplistic dogma: ldo, gold and
silver is honest money.
My hope is that if we can come to an understanding of the realistic
propositions of the gold standard advocates, we can then compare them to
Freegold in terms of practicality (feasibility), level of honesty (in terms
of the money concept) and probability. And then I also hope to compare both
concepts, gold standard and Freegold, to the words of the Austrian masters in
their deconstruction of the money concept. One would expect them to be more
consistent with the ideas of modern Austrian School hard money advocates than
with the thoughts of the anonymous ANOTHER and FOA. I guess we'll see about
that.
What I learned about Ron Paul from my research is that he sort of has two
overlapping ideas about how to move forward into a
gold standard. Over the last four decades he has somewhat gone back and forth
between these two ideas based on the political climate of the time. The first
one can be summed up as "End the Fed."
Ron Paul first became interested in economics in the early 60s when he read
the warnings of Austrian economists predicting that the US would not be able
to maintain the gold standard at $35/oz. because it was printing too much
paper. He was skeptical but still interested for the next ten years while the
gold price somehow stayed fixed at $35, despite what he had read. But then,
in 1971, the Austrian economists were proved correct when the US suddenly
abandoned the $35 gold fix and the entire gold exchange standard in one fell
swoop.
This revelation is what got Ron Paul interested in politics, and even more
interested in economics. During the 70s he became a proponent for ending the
Fed and in 1976 he ran for congress and served (that time) until 1984. But
then during the 80s and 90s we had "Paul Volcker saving the dollar"
and Credibility
Inflation, which changed the political climate somewhat. It was during
this time that Ron Paul seems to have developed his second position, which can
be summed up as "competing currencies."
Competing Currencies?
The idea with competing currencies, since the political will towards ending
the Fed had pretty much dried up in the 80s, was to make it legal for gold
and silver to trade as currency. With gold and silver contract settlement
supported by the courts, "obviously" (presumably) they would win
out over fiat in the currency competition of the free market.
It was during this "competing currency phase" in the 80s and 90s
that Ron Paul spearheaded the American Eagle gold bullion program by
presenting the idea to Reagan's Gold Commission which led to the Gold Bullion
Act of 1985. You might remember the video I used in my Indicium post that
was a 1983 debate between Ron Paul and Fed Governor Charles Partee. In it,
Congressman Paul argues for the gold standard while Partee explains the value
of a floating gold price:
In the video
Partee said that he wanted the Gold Eagle coin as an "indicium of public
attitudes toward financial conditions in the country" and that "you
destroy that 'indicia value' when you have a gold standard." What do you
think? Does this sound at all like Robert Zoellick's recommendation to use
gold as a "reference point?"
Indicia—plural for indicium—comes from Latin for
"sign," "clue" or "indication." In law it is
sometimes synonymous with "circumstantial evidence." Partee
elaborated saying he wanted gold to be an "indicator" and therefore
the price needed to "vary" [Me: float].
Here's the clip as I posted it, set to start at 19:30 referencing the
following two minutes:
I imagine that Ron Paul viewed the American Eagle gold coin program as merely
a step in the right direction. But when he spoke of allowing a gold-backed currency to compete with the dollar, he was
not necessarily talking about physical gold coins circulating. He was more
interested in a paper or electronic currency that
would be fixed to gold by weight, just like Bretton Woods, but redeemable to
anyone, and possibly run by a private enterprise like American Express (which
he mentioned).
His idea was that as long as you allowed the courts to enforce contracts
essentially denominated in gold by weight, this hard currency would win out
in the free market. Here is a clip from a 1995 interview with Ron Paul in
which he explains that there is "no way they are going to go back on the
gold standard now" and eschews the idea of a Central Bank sponsored gold
standard. So the way he wanted to address that reality was to legalize a "parallel standard" that would allow the use
of a private gold standard in the marketplace. It is set to start at 4:50 and
my reference runs for five minutes until the end of this segment:
At 7:55 is where Ron Paul mentions Amex as the host of a possible private
market money, backed by gold, and also backed by the government guaranteeing
the fulfillment of contracts denominated in this hard, free market money.
From there he is prompted by the interviewer to talk about money as
"wealth". This is a key distinction that the modern hard money
movement does not understand: the distinction between ANY circulating
transactional currency and wealth.
FOFOA's Dilemma
There will be much more on this later, but very quickly I'd like to share
with you a new "dilemma" coined by one of my readers. It is in the
spirit of Triffin's dilemma which I wrote about in my post coincidentally
titled Dilemma.
The fullness of this post will hopefully explain the following in
detail, but here it is in short, from my South African friend calling himself
The Motley Fool:
FOFOA's
dilemma: When a single medium is used as both store of value and medium of
exchange it leads to a conflict between debtors and savers. FOFOA's dilemma
holds true for both gold and fiat, the solution being Freegold, which
incidentally also resolves Triffin's dilemma.
Yes, thank you MF! This must be viewed in the context I laid out in The Debtors
and the Savers. It is not only important, it is the key that unlocks the
view. There is an interesting nuance in modern society that many miss. And it
is that there is a significant number of people that are both debtors and
savers. They have loads of debt through their mortgages and credit cards, but
they also have saving in their IRAs, company 401Ks and union pensions. These
camp-straddlers, on average, have a zero net-worth as their debt cancels out
their savings. But they are useful, conceptually, in viewing how the future
monetary and financial system will work.
Today we denominate both transactions and savings in dollars: the dilemma! So
the dollar's collapse, today, will wipe out both their savings and
their debt. Net-worth will remain zero. Remember that this is a conceptual
exercise, a thought experiment to help you see. Now if you take the
deflationists' view you must imagine their savings being wiped out but their
debt remaining. They will be broke and owing. And somehow, the deflationists
think, this will keep the dollar not only functioning transactionally, but
make it even stronger.
Okay, here's the meat of the thought experiment. I want you to imagine the
opposite; that these debtor/savers had their debt wiped out, but their
savings remained intact. So their net-worth would go from zero to high, and
their lifestyle would improve. How would this affect the bankers? That's
right, it would not make them happy. And this is exactly how Freegold works
to keep the currency honest and the banks chained to prudence. More on this
in a moment, because I can hear some of you screaming disbelief.
Back to Ron Paul
So during the 80s and 90s the idea of ending the Fed had lost some of its
political appeal and Ron Paul went for the more Libertarian idea of letting
the people choose their own money in a free market. But then, lately, the Fed
has been taking more popular heat, so Ron Paul has gone back in that
direction with the 2009 release of his book titled 'End the Fed'. But even
so, Paul is still hedging his position with the competing currencies idea
because he is smart enough to know that you can't just end a 100-year
monetary tradition without some seriously disruptive economic and financial
consequences for which he obviously doesn't want to be blamed.
Here is Ron Paul in 2009, prior to the release of 'End the Fed', talking
about competing currencies. And he's talking about a hard currency to compete
with the Fed's dollar. This is obviously a
secondary idea and a hedge to the popular "End the Fed" idea.
Here's a little bit of the transcript, beginning at 1:25:
Ron
Paul: …and now we have a bigger problem. The transition would
be pretty tough, and I've written and talked a lot about this and you’d
have to devise a system where there would be a transition where maybe you
could have a gold standard competing with a paper standard and then obviously
gold would win out.
Reporter:
Well sure.
Ron Paul:
People would eventually go to gold because the paper, we’re getting
down to the bottom right now. The last thing before they really rush to gold
is the Treasury bill.
[…]
Reporter:
This is a silver certificate that was issued, I guess they stopped issuing it
about thirty, forty years ago something like that. But is this what you are
envisioning? …there it says, “Silver certificate for gold or
silver.” Is this what you want again?
Ron Paul:
To some degree, but there’s been a lot of writings about how you might
do this in the private market and not have a government monopoly, because we
did have shortcomings in our gold standard because we had bimetallism and we
had artificially fixed prices between gold and silver. You don’t want
that, you either have to be on a gold standard or a silver standard, but
you could… Hayek has written about baskets of currencies and having
this work in the private market. A competing currency could be private but,
yes, eventually what you’d want to do, a lot of people say, “Oh
we don’t want no gold, we can’t carry
all that gold around in our pockets."
Reporter:
Right.
Ron Paul:
No, I think your point that you’re making is right. You’re still
going to have certificates or you’re going to have electronic entries.
There are people today who are trying to promote this idea through electronic
gold, but the problem is the legal tender laws force us to use dollars in all
settlements, so one of my goals in Washington to move in that direction would
be to repeal legal tender laws. Actually, all we need to do is obey the
Constitution because it’s still very clear it hasn’t been
repealed that only gold and silver can be legal tender. Believe it or not,
they don’t even obey the Constitution anymore.
Two Monies
I couldn't agree more with Ron Paul above where he said, "we did have
shortcomings in our gold standard because we had bimetallism and we had
artificially fixed prices between gold and silver. You don’t want that,
you either have to be on a gold standard or a silver standard." What
he's talking about is a fundamental mistake that was made in the Coinage Act
of 1792 that haunted the American money system on a few occasions over the
next 200 years. From Ron Paul's book, The Case for Gold:
The
Coinage Act established a bimetallic dollar standard for the United States.
The dollar was defined as both a weight of 371.25 grains of pure silver
and/or a weight of 24.75 grains of pure gold—a fixed ratio of 15 grains
of silver to 1 grain of gold. Anyone could bring gold and silver bullion to
the Mint to be coined, and silver and gold coins were both to be legal tender
at this fixed ratio of 15:1. The basic silver coin was to be the silver
dollar, and the basic gold coin the 10-dollar eagle, containing 247.5 grains
of pure gold.
The mistake was price-fixing the two metals to each other, and this error
cost the US Treasury a lot of gold 100 years later, leaving it to be bailed
out by none other than JP
Morgan. Now I want you to pay attention to this recurring concept of two
monies, be it gold and silver erroneously price-fixed, or Ron Paul's hard
currency competing with (floating against) the Fed's dollar. This is an
important concept that will keep coming up, so I just want to draw your
attention to it at this point.
End the Fed?
Even though Ron Paul is clearly a practical thinker, he is also a politician
who enjoyed a groundswell of support in 2008 from the "End the Fed"
crowd. Here is the opening of a 2009 speech to the US
House of Representatives in support of the Federal
Reserve Abolition Act in which Paul implored Congress to end the Fed and
reinstate the gold standard, without offering much elaboration on how that
would happen:
Madame
Speaker, I rise to introduce legislation to restore financial stability to
America's economy by abolishing the Federal Reserve…
…Abolishing the Federal Reserve will allow Congress to reassert its
constitutional authority over monetary policy. The United States Constitution
grants to Congress the authority to coin money and regulate the value of the
currency. The Constitution does not give Congress the authority to delegate
control over monetary policy to a central bank. Furthermore, the Constitution
certainly does not empower the federal government to erode the American
standard of living via an inflationary monetary policy.
In fact, Congress' constitutional mandate regarding monetary policy should
only permit currency backed by stable commodities such as silver and gold to
be used as legal tender. Therefore, abolishing the Federal Reserve and
returning to a constitutional system will enable America to return to the
type of monetary system envisioned by our nation's founders: one where the
value of money is consistent because it is tied to a commodity such as gold.
Such a monetary system is the basis of a true
free-market economy.
In conclusion, Mr. Speaker, I urge my colleagues to stand up for working
Americans by putting an end to the manipulation of the money supply which
erodes Americans' standard of living, enlarges big government, and enriches
well-connected elites, by cosponsoring my legislation to abolish the Federal
Reserve.
Today it seems that Ron Paul is publicly more guarded with his 'End the Fed'
specifics, but he wasn't always that way. In the following paper, Murray
Rothbard (1926-1995) describes Ron Paul's ideas during his first stint in Congress
(1976-1984) which included liquidating "the Fed's gold" (perhaps
not so far off from the recent statement Paul reportedly made to the New York
Sun about liquidating Fort Knox):
Rothbard: Abolition of the Federal
Reserve would mean that its gold supply now kept in Treasury depositories
would have to be disgorged and returned to private hands. But this gives us
the clue to the proper definition of a gold dollar.
For in order to liquidate the Federal Reserve and remove the gold from its
vaults, and at the same time tie gold to the dollar, the Federal Reserve's
gold must be revalued and redefined so as to be able to exchange it, one for
one, for dollar claims on gold. The Federal Reserve's gold must be valued at
some level, and it is surely absurd to cleave to the fictitious $42.22 when
another definition at a much lower weight would enable the one-for-one
liquidation of the Federal Reserve's liabilities as well as transferring its
gold from governmental to private hands.
Let us take a specific example. At the end of December 1981, Federal Reserve
liabilities totaled approximately $179 billion ($132 billion in Federal
Reserve notes plus $47 billion in deposits due to the commercial banks). The
Federal Reserve owned a gold stock of 265.3 million ounces. Valued at the
artificial $42.22 an ounce, this yielded a dollar value to the Federal
Reserve's gold stock of $11.2 billion. But what if the dollar were defined so
that the Federal Reserve's gold stock equaled, dollar for dollar, its total
liabilities—that is, $179 billion? In that case, gold would be defined
as equal to $676 an ounce, or, more accurately, the dollar would be newly
defined as equal to, and redeemable in 1/676 gold ounce. At that new weight,
Federal Reserve notes would then be promptly redeemed, one for one, in gold
coin, and Federal Reserve demand deposits would be redeemed in gold to the
various commercial banks. The gold would then constitute those banks'
reserves for their demand deposits. The abolition of Federal Reserve notes
need not, of course, mean the end of all paper currency; for banks, as before
the Civil War, could then be allowed to print bank notes as well as issue
demand deposits.
This plan, essentially the one advocated by Congressman Ron Paul
(R.-Texas), would return us speedily to something akin to the best
monetary system in U.S. history, the system from the abolition of the Second
Bank of the United States and the pet banks, to the advent of the Civil War.
Rothbard then proceeds to expand a bit on Ron Paul's early plan, taking it
even further, which might set off a few warning bells amongst some of my fine
readers:
We could,
however, go even one step further. If we were interested in going on to 100
percent reserve banking, eliminating virtually all inflation and all bank
contraction forevermore.
[…]
To go over immediately to 100 percent gold, the dollar would be newly defined
at 1/1,696 gold ounce. Total gold stock at the Federal Reserve would then be
valued at $445 billion, and the gold could be transferred to the individual
holders of Federal Reserve notes as well as to the banks, the banks' assets
now equaling and balancing their total demand deposits outstanding. They
would then be automatically on a 100 percent gold system.
From the standpoint of the free market, there is admittedly a problem with this transition to 100 percent gold. For
the Federal Reserve's gold would be transferred to the commercial banks up
to the value of their demand deposits by the Federal Reserve's granting a
free gift of capital to the banks by that amount. Thus, overall,
commercial banks, at the end of December 1981, had demand deposits of $317
billion, offset by reserves of $47 billion. A return to gold at $1,696 an
ounce would have meant that gold transferred to the banks in exchange for
their reserve at the Federal Reserve would also have increased their reserves
from $47 to $317 billion, via a writing up of bank capital by $270 billion. The
criticism would be that the banks scarcely deserve such a free gift,
deserving instead to take their chances like all other firms on the free
market. The rebuttal argument, however, would stress that, if a 100 percent
gold requirement were now imposed on the banks, their free gift would do
no more than insure the banking system against a potential holocaust of
deflation, contraction, and bankruptcies.
Getting to Hard Money
As I have mentioned, Ron Paul's honest money ideas have evolved since these
early days. In fact, in many ways he is quite a bit closer to Freegold today
than he was in the early 80s. He is still stuck to the idea of a fixed price
for gold, but he seems to have evolved from a one-time government
price-fixing to more of a market-based "decision" on how high the
price of gold should be fixed. He still wants to denationalize the US gold
hoard and get it into circulation, but he seems to have evolved to more of a
Hayekian competition of privatized currency, which begs the question of how
to denationalize the gold.
Basically, it seems that over the last 30 years he has evolved his ideas from
strictly "end the Fed and institute a new gold standard" as
described by Rothbard above, to a more measured approach of "allow a
competing currency to circulate which will (presumably) win the day and
weaken the Fed and lead to its end." But even still, I think Rothbard's
description above reveals some important issues that are still lacking
clarification; issues that I have written about on this very blog.
For one thing, as I have written several
times,
the Fed does not own the US stockpile of physical gold. It is a common
misconception, even among some scholars, that in 1933 the gold was taken by
the Fed when, in fact, it was taken from the Fed and placed in
collective ownership via the United States Treasury. The gold had previously
been base money inside the banking system (the Federal Reserve System) and
was removed from the Fed and placed in the Treasury. In fact, today the Fed
is custodian of only 5% of the Treasury's gold (418 m/t). The rest (7,715
m/t) is in the custody of the US Mint, which is part of the Treasury Dept.,
held in Fort Knox, West Point and Denver. So ending the Fed hardly implies
the necessary denationalization of the gold.
(On a side note, I just noticed that Gary North came to Ron Paul's defense in
saying the US should sell its gold to pay down the debt. Gary says Ron Paul
is right, and he ends his short
piece with this: "The gold bugs honestly trust the Federal
government to restore a gold standard someday. There has not been one since
since 1933 that any government on earth will do this, but somehow, the gold
bugs believe, it will do it in the future.")
A few other thoughts that are addressed here at FOFOA but not above, and not
in the hard money circles of today, are how do you define gold? Should we
include paper gold like Bullion Bank liabilities, futures contracts, mining
forward sales and ETFs in the new gold standard? And how do we define the
link between the dollar and gold? How do we fix the price and then defend
that fixed price? In the past we did that by running down the gold reserves
from 22,000 tonnes to 8,000 in 20 years. And lastly, how will we transition
from the dollar being the global reserve currency, held in bulk overseas, to
defending a new fixed price of gold in dollars? These are tough questions,
and I think I have a few of the answers.
Fractional Reserve Banking
There is another angle to Ron Paul's honest money ideas that deals with
fractional reserve banking (FRB). There is a debate within the
Austrian/Libertarian movement between those that say FRB should be illegal in
a Libertarian society and those that say we should just institute a
"gold standard" and let the free market take care of the FRB issue.
Paul is Rothbardian in that he falls on the side of making it illegal. They
believe that FRB (for demand deposits) as well as borrowing short and lending
long (for time deposits) is fraudulent and creates the Austrian Business
Cycle of booms and busts. You can listen to the very beginning of this for a quick view
of the debate from Walter Block, another Rothbardian. And from Paul's End the Fed:
Rarely do
people ask what the fundamental source of instability really is. For an
answer we can turn to a monumental study published in 2006 by Spanish economist
Jesús Huerta de Soto.[1] He places the blame on the very institution of
fractional-reserve banking. This is the notion that depositors' money that is
currently in use as cash may also be loaned out for speculative projects and
then re-deposited.
[…]
The institution of fractional reserves mixes these two functions, such that
warehousing becomes a source for lending. The bank loans out money that has
been warehoused — and stands ready to use in checking accounts or other
forms of checkable deposits — and that newly loaned money is deposited
yet again in checkable deposits. It is loaned out again and deposited, with
each depositor treating the loan money as an asset on the books.
In this way, fractional reserves create new money, pyramiding it on top of a
fraction of old deposits...
This is obviously a problem, but I'm not going to spend much time on this FRB
issue because there is a very simple and elegant solution that the remainder
of this post will explain. Do you remember earlier when I drew your attention
to the recurring concept of "two monies," be it gold and silver
bimetallism or Ron Paul's hard currency competing with (floating against) the
Fed's dollar? Well, we can apply this "two monies" concept to the
term "fractional reserve banking" as well.
In this iteration of the concept, the "fractionals" are the easy
paper notes circulating as currency and the "reserves" are the
store of value for those paper notes. We solve the issue by simply cutting
the parity fix between the two and allowing them to float in value against
each other. Fractionals can then always be exchanged for an equal value of
reserves and vice versa, but the floating reserves are never lent. More on
this concept in a moment.
The debate mentioned above within the Austrian/Libertarian community boils
down to a free market solution versus a government dictate against FRB. But
either way, all Austrian Economists agree that the real issue is credit
expansion, which is at the heart of one of Mises' greatest insights –
the Austrian business cycle theory (ABCT).
Briefly, ABCT blames the boom-bust economic cycle on fractional-reserve
banking, or the expansion of credit without an actual act of saving by
someone in the economy. When credit is expanded beyond reserves, the
resulting drop in interest rates is an artificial (i.e. not due to actual
increase in loanable funds). This sets in motion an unsustainable boom period
of malinvestment and erroneous capital consumption that sows the seeds of the
inevitable bust. This process is supplemented by government intervention to
protect privileged bankers from being “caught” short by the
market and allows credit to expand far more than it would without such
intervention. This practice of absolving privileged bankers of their legal
obligations via intervention was institutionalized in 1913 with the creation
of the Federal Reserve.
And an understanding of ABCT provides the context for understanding why
Freegold is unfolding. Freegold simply offers a different way of controlling
credit expansion that is more effective than the modern Austrian suggestions
of making money harder and/or limiting or eliminating fractional reserve
banking. There is no need for all that convolution, just separate the store
of value so it cannot be fractionalized and then non-productive credit
expansion will be as limp as a eunuch (which comes from this
comment by yours truly). Snippet:
But debt
itself is not the cause of our problems today. Today we have a situation
where the vast majority of excess production value (excess capital) is
enabling massive amounts of global malinvestment through new debt creation.
That has peaked and is now contracting. But the problem is not the debt
itself. The problem is the enabling effect of excess capital not having a
viable alternative that floats against the currency. The problem is the
lack of the adjustment mechanism of Freegold. There is no viable
counterbalance against uncontrolled debt growth today. So we are only left
with credit collapse and hyperinflation of the monetary base to clear the
malinvestment from the system.
It is easy to blame this on debt as a principle, but unless you don't mind
being wrong, there are some deeper explanations out there. Debt under
Freegold will not reach such destructive levels. "Easy money"
thinkers may or may not get their debt-free money, but if they do they will
suddenly realize the flaw in their reasoning. Oops! That it can only have
expandable value (needed for the welfare state) if producers are willing to
hold it while it expands. Without that, socialist welfare expansion will
simply dilute the value of the currency and be as limp as a eunuch.
________________________________________________________
Sidebar:
For more about why FRB and time deposit maturity transformation are not the
root of the problem—the root is simply the lending of the monetary
reserve, a problem that would still exist even with Rothbard's 100% reserve
banking—please see my Reply to Bron.
Here's a short excerpt:
** Spending
Gold into the marketplace, whether by the owner or by a borrower, would tend to
result in prices "that weigh more"--cost more Gold, that is.
** As ever more Gold is borrowed out of other people's savings to be spent
into the economy, the Gold's purchasing power is lessened from what it
otherwise would be...hurting those who have elected to hold their Gold
instead of risking it by lending it out as a source of income.
[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]
** For Gold to find its truest value, all savers must retain their Gold for
their own use. Its properly retained value will more than make up for the
foregone interest income. Gold must not be lent! [Gresham's law alone is
adequate to achieve this.]
And for a brief explanation of how Freegold-RPG is different than what we
have now, see How
is that different from Freegold?:
…it
will be stable because of two main factors:
1. SUPPLY - Gold will trade on a stable supply of above-ground physical gold
in the absence of external influences like "paper gold" (Bullion
Bank "BB" liabilities that can be created on demand by a mere book
entry on a BB balance sheet, etc.).
2. DEMAND - Gold will also trade on a stable demand due to the global clarity
that will emerge as to gold's best and highest function—being only a
physical wealth reserve asset and nothing else.
How we get there is easy to visualize. As the physical reserves within the BB
system are all moved into allocated accounts, at some point the remaining
claims will simply have to be cash-settled. At that point all paper gold
markets will cease to exist and all that will be left is the stable supply of
above-ground physical gold in the absence of external inflatable (or deflatable)
influences.
________________________________________________________
Two Monies – The Separation of Monetary Roles
If you would like, you can think of my "two monies" concept as
"the recurring duality of money" because it will recur throughout
this post as we deconstruct the money concept. What we'll find is that even
with many potential monies in play, we'll always naturally end up with
two that attain "monetary status" in different time-related
roles through the forces of regression, the network effect,
game theory's focal point
and a dash of legal tender dictate.
Back in October of 2009 I wrote a series of posts called Gold is Money.
Gold is Money
- Part 1
Gold is
Money - Part 2
Gold is
Money - Part 3
In this series I introduced the concept of the separation of monetary roles
into different media, not fixed at parity to each other. It's like saying
"fiat is for earning and spending while gold is for saving." Or you
could even say "silver is for spending and gold is for saving" as
Ender likes to say. It really doesn't matter what medium will win out for the
spending role, but as you will see, the winner can be reliably predicted
using the concepts mentioned above.
To some of my readers this revelation was like a
light bulb suddenly lit. For others, this idea became a real barrier to
understanding what I was writing. So in this post I'd like to take another
look at the necessary separation of the monetary functions from a new angle.
Hopefully this new perspective will add a few more into the "light
bulb" group. But first, here are a few excerpts
from Gold is Money.
From Part 1:
Functions
of Money
"Money", as it is understood today, has three main roles. The late
Dr. Willem F. Duisenberg, former President of the ECB, in his famous
acceptance speech for the International Charlemagne Prize in 2002 stated it
well...
What is money? Economists
know that money is defined by the functions it performs, as a means of
exchange, a unit of account and a store of value.
And from FOA in that same post:
Owning
wealth aside from official money units is nothing new. Building up one's
storehouse of a wealth of things is the way societies have advanced their
kind from the beginning. What is new is that this is the first time we have
used a non wealth fiat for so long without
destroying it through price inflation. Again, a process of using an unbacked
fiat to function as money and building up real assets on the side. Almost as
if two forms of wealth were circulating next to each other; one in the
concept of money and the other in the concept of real wealth.
This trend is intact today and I doubt mankind will ever pull back from fiat
use again. Fiat used solely in the function of a
money concept that I will explain in a moment.
Understanding all of this money evolution, in its correct context, is vital
to grasping gold's eventual place in the world. A place where it once proudly
stood long ago.
All of this transition is killing off our Gold Bug dream of official
governments declaring gold to be money again and reinstitution some arbitrary
gold price. Most of the death, on that hand, is in the form of leveraged bets
on gold's price as the evolution of gold from official money to a wealth
holding bleeds away any credible currency pricing of gold's value in the
short run.
To understand gold we must understand money in its purest form; apart from
its manmade convoluted function of being something you save.
In Part 1 I also introduced the Modern Money Triangle:
And I concluded with this:
The human
concept of money is changing whether we like it or not. It is being torn apart.
Gold, as a wealth reserve and wealth asset, will
exist and trade parallel to the world of fiat, the world of credit and debt.
Producers and savers will finally have the option to switch tracks so to
speak. To get on a parallel track that avoids the inevitable
collision with the debt-hungry collective their savings have always faced.
And as we pass through this phase transition, as gold switches from the
transactional track to the wealth-reserve track, it will take on a whole new
meaning... and a whole new value! The non-dollar part of the world already
knows this. This is why they are buying gold now!
A Flaw
In Part 2 I explained how the evolution of the money concept over maybe 2,500
years led to what we think of as money today: the three functions all tied
into one. And I also explained how the modern bastardization of the money
concept led to a fatal flaw in today's system:
This system
of lending a purely symbolic monetary CONCEPT instead of lending real wealth
requires the perceived value of that CONCEPT to remain relatively stable or
else the entire banking system will collapse. It is to this end that bankers,
governments, politicians and economists always try to entangle (think: forced
quantum entanglement) gold into the money system and control (manage) its
value in order to keep their CIRCULATING DEBT CONCEPT viable and valuable.
This is the problem with the architecture of the dollar, versus how all
non-reserve fiat currencies will work in a free gold environment. The dollar
must cheat in order to retain any illusion of stability. There are other ways
for a fiat to remain stable. Responsible currency management is one. And in a
system where the value of all real things (including gold) float freely
against the parallel universe of fiat currencies, this will be how they will
work.
When the dollar became a mere concept in 1971, so did all fiat currencies in
the world. Their only value lies in the tradable value associations we give
them, based on what can be purchased in the parallel universe of real things.
But because we have been encouraged to save these symbolic debt concept units
in lieu of anything with real value, a mismatch has grown to epic proportions
whereby not even a fraction of these debt units can be traded back into the
real economy at anywhere near today's prices.
We have lent, borrowed, saved, sliced, diced, sold, resold and insured so
many units of a mere CONCEPT while neglecting to pay attention to the
comparative size of the real economy with which the CONCEPT must run in parallel.
I went on to explain how the value of the transactional medium of exchange
will inevitably be sacrificed in a vain attempt to save the system. And that
this is why it is so dangerous to hold your wealth in that same transactional
medium today. This is why there are "two monies!"
You see they
are now faced with a dilemma they will not discuss publicly. On one side is
their product, the conceptual unit of credit account, their currency. And on
the other side is their offspring, the financial system, Wall Street. What
saves one will kill the other. They can save the present value of their
product and kill their offspring through starvation. Or they can save their
offspring by delivering what it desperately needs to survive... a constant expansion of credit (aka monetary inflation).
But this will, of course, kill the value of their product, the currency.
They can save one or the other, but not both. And it was always known, but
has now been proven, that the system will be saved at ANY cost. (Unfortunately
for them, they did not think it through far enough to realized that the cost
of saving their offspring will also kill it and a whole lot more. But that
line of Thought is straying a little too far from
the topic of this post.)
In order to survive, the system, the financial industry, Wall Street NEEDS a
constantly increasing supply of CREDIT! If the population won't give their
own blood to save this dying Frankenstein monster, then the CB's and
governments WILL! It is happening now. Right under our noses. For more than a
year now!
This is why it is SO important that we hold only physical gold in our own
personal possession in order to escape this tangled mess. Only touchable,
graspable physical gold metal under full ownership conveys ALL of the properties
that have come to be attributed to this kingly wealth asset. By contrast,
financial contracts denominated in gold as facilitated by bullion banks, gold
derivatives, gold loans, gold depositories, gold pool accounts, gold ETF's,
or known by any other name, are all at their core pure and simple... (wait
for it)... CREDIT. And what feeds the monster?? All together
now…………………
***CREDIT EXPANSION***!!
This is the very beginning of starting to understand the concept of "two
monies" not tied or fixed to each other by value, but floating against
each other in value. We understand this instinctively, but today's system
fools us into doing something that is very dangerous to our wealth today:
Today's
paper currencies are not just a medium of exchange, but they are still a
pretty good store of value in the short term. The greater the rate of price
inflation, the shorter the term that you will want to be holding the actual
currency. Wealth assets, on the other hand, are the store of value for the
long term. This differentiation is understood by almost everyone today. And
it is so close to the concept of Freegold that it will not be "a giant
leap for mankind" to get there.
The only difference is that right now, most of the public has come to believe
that wealth is simply paper ownership of wealth producing industries and
paper claims on real assets that can never be recovered at today's values.
This is true for most all items, not just gold. And as we hold these paper
documents for the long term, understanding them to be better than holding the
actual currency because they provide a "yield", the recoverability
of the underlying real asset is being constantly eroded away. In other words,
we are unknowingly losing principle at the same time as we think we are
gaining a yield!
[…]
Our ancient instincts have not gone away. We have not "advanced" as
much as we think. Our use of "the pure concept of money" has not
changed since the days when we engaged in direct barter trade. We still want
to accumulate wealth item along side and separate from our transactional
"pure concept of money" which is really just a number in our mind,
or marked down on paper. We know that this "number" is not
something to be saved, except perhaps for as long as it takes to arrive at
the next transaction. (See: Fekete's A ‘fairy’ tale)
You see our modern money concept has been surreptitiously eroded into only
one half of our ancient barter understanding of the money concept, and one
half does not equal a whole. Most of today's money, other than the monetary
base, is borrowed into existence. It represents a debt, and a debt is an
incomplete transaction. It is only one half of what our instincts require as
a wealth reserve, which is a fully completed transaction resulting in an
accumulation of hard value. And yet we still buy these "wealth
assets" denominated in only "half a concept", half of the
monetary concept that our mind intuitively understands.
This is a flaw! It is a big one, especially now as "the other half"
is waving the white flag of surrender and default. Some very smart analysts
see this as deflationary. They truly believe that the waving of the white
flag will make this "half a concept" actually rise in value against
its parallel real world economic counterpart. But that is not what will
happen.
A Different Approach
I began Part 3 by sharing with you my position as an observer of what is, not
an activist for what I think should be. My position is in stark contrast to
what you get from the gold standard advocates of all stripes. Sure, they have
their disagreements, but they all seem to propose what they view as the
perfect solution, which always requires unlikely political choices. Gary
North is one that gets this distinction well.
North's position is very close to Ron Paul's. North gets the benefits of
denationalizing and privatizing the gold. North, like Paul, wants to outlaw
fractional reserve banking, which means his eye is on the wrong culprit. And
North, like Paul, wants circulating "gold IOUs" at a fixed parity
with, and redeemable in, physical gold. And he also gets the difficulty of
enacting his vision, so he, like Paul, wants to amend the legal tender laws
to allow a private, competing fixed gold standard.
In this post
North describes "Two Kinds of Gold Standards," public and private,
and as for a government-run gold standard he concedes, "any call by
conservatives for the State to adopt a gold standard is futile. No one
will listen." And in this post called
"End the Fed, Get the Gold," North describes a
complex idea he has for de-nationalizing the gold through a massive gold
give-away. But alas, he must confess "This is why this essay is
hypothetical."
I responded to the ideas presented in that second post (not directly to Gary)
in this
comment, in which I wrote:
If you
cannot see that a two-way market (between the debtors and savers) for gold
(that's buy and sell - "two way") is infinitely better than a mass
give-away, then I really don't know what to say. You are what FOA and
Aristotle would call a "Hard Money Socialist."
Getting the gold back into circulation is done through a free market
price, not through a suppressed price give-away.
Gary North "realizes" this, even if he doesn't realize it: "If
the price of gold rises, it pays someone to own gold. So, people begin to buy
gold. Gold-using producers start buying."
But debtors don't hold gold. Only savers accumulate. Producers! As he says. Gold
is for saving, fiat is for spending. The debtors will immediately sell
their gold claims to the savers.
In my mind, it would be infinitely better for the USG to acknowledge
Freegold, declare a starting price of, say, $10,000/ounce, and then open the
vaults and let the price float. They buy and sell at the market price
through the banks, starting at $10K.
The price would soon stabilize, much higher than $10K of course, but the
two-way market would be in effect. The gold would not be gone. The currency
would be stable once again.
You give it all away to the debtors at $42/ounce and let them sell it to the
savers for their final $1,350 welfare check, where does that leave you?
Half the population wants easy money. The other half wants to save what
they earn in gold. Can't you see this? It is not about "the
elites." They are all mostly in the easy money camp. If they give the
gold away at $42/oz the elites will buy it right back from the poor and then
lock down the price for a new gold standard. Buy themselves another 67 years
in power perhaps. Is this what you want?
Gary wants to divvy up the gold and then inflict Freegold. If you cannot see
the disaster that this is, I don't know what to say to you. All to take power
away from the central banks? This is the mistake. It is not their fault.
As Greyfox said, “We have met the enemy and it is us.” We are at
fault, for saving in promises. We give THEM power.
And Gary's proposal would do more harm than good to the overall modern
economy. And it's not gonna happen anyway. It's a dream. A fantasy. A picket
sign.
Would Gary's solution be okay with me? Sure! But it wouldn't last. And it
won't happen, so it's purely academic, which he acknowledges. But Freegold
is not!
And furthermore, all the power Gary wants to take away from the bureaucrats
will be taken away ANYWAY when the dollar loses its global reserve privilege,
and that privilege's sister, the paper gold market. Gone. Done. That's all
it takes.
Can you see the difference in approach? Well here's how I kicked off Gold is
Money Part 3:
Allow me to
start by beating a dead horse. There is a vital difference between what may
in fact be the ideal, perfect monetary system and what are the real monetary
changes we are heading straight into today. My purpose for writing this blog
is to share with you, and in return to receive your feedback on my own
discovery and understanding of the latter. There are plenty of other sites
that discuss the former.
If we can discover together where we are heading financially, economically
and monetarily, and why we are heading there, then perhaps we can know, in
advance, how the understanding of the global consciousness will evolve and
unfold in the coming weeks, months and years. And, with this understanding,
hopefully we can gain a certain peace of mind with regard to our own financial
decisions, positions and future as we head into very stormy waters.
I know from my own experience that a little peace of
mind is a priceless asset. It is one worth sharing, and one worth growing.
Sharing and growing this asset together with you is my goal.
Next I discussed some of the confusion that arises from our common modern
understanding of the money concept, including this paragraph which hints at
the problems with using the same media in two different monetary roles, even
if it is a pure gold coin standard:
In fact, as
a medium of exchange, money is only one half of a full barter exchange. The
other half is when you change your money into that item you desire. But when
physical gold is the common medium of exchange, then it is possible that the
concept of a "medium" (or middleman) is
incorrectly applied, because if gold was what you were after (for its store
of value function), then the exchange is completed in only one step! Direct
barter!
Actually, that paragraph hints at a whole slew of
problems that have plagued us over and over again for centuries ever since we
started using the same media for all monetary functions. But let's just
continue on and maybe this will start to make some sense.
Next I ran through the problems we encountered with a couple different types
of gold standard in the past; the gold exchange standard we had after 1913,
and the gold coin standard we had before 1913, which is the one yearned for
by the likes of Ron Paul and Gary North. That's right, there are problems
that arise even in a gold coin standard. I implore you to read the post,
but especially the account (in blue) by Randy Strauss. Here's a tease just to
get you to go read it:
And recall,
these comments occurred while on a gold [coin] standard AND in total absence
of a government-sponsored central bank [i.e. before the Fed] -- which was
authorized (against Baker's preference) a year later.
As you come to understand how
Money and Credit are interrelated, the more you will understand the separate
Wealth of gold and why you need it now more than ever.
I went on to discuss how the money concept necessarily exists in the fourth
dimension of time. How, if we only lived in a snapshot world of three
dimensions, one medium would work fine for all of money's functions:
But here in
the real world we must be concerned about how far we carry our money through
the fourth dimension. Without this vital consideration, we stand to lose everything!
At this point in the post I discussed the separation of monetary functions
through a few illustrations that I created:
Breaking
the Triangle
In part 1 of this series I used a diagram I created
called The Modern Money Triangle. The three corners of the triangle
represented the three primary functions of our modern understanding of money.
But as we pass through the coming phase transition in which the parity
between paper gold and physical gold will be broken, cracks will start to form
in certain parts of the triangle.
The fractures you see in this diagram are time related. On a short
timeline [length of time is the key variable: "t"] fiat currencies
will perform our necessary monetary functions, medium of exchange and unit of
account. But at some point on the time line, 'length of time', we will switch
to a different medium, gold.
On a long timeline, gold will perform our necessary monetary functions
perfectly, store of value and long term unit of account. By the way,
there is no upper limit on the 'time line axis' when it comes to gold. If
plotted out it runs to infinity!
The outcome will be my new Freegold Quadrangle!
The "time line axis" represents the amount of time you are willing
to hang onto the fiat currency you either earn or receive in payment. If the
monetary authority is printing money, "t" will be shorter and
shorter. In a hyperinflationary situation
"t" will slide all the way to the left with a value close to zero.
As the new Freegold system of natural, pristine balance emerges, the fiat
monetary authority will find its wisest move is to keep the money supply
under control. And with a "wise" CB, gradually the "t"
value will shift back to the right, little by little.
Clarify the View
This concept that the traditional monetary functions are now separating into
non-fixed (i.e. floating) media has been both an epiphany for some and a
stumbling block for others. My goal here is to clarify the view for those who
cannot seem to get it. When comparing any two monies, circulation velocity
(or the demand for
money to the Austrians) correlates to, and is a measurement of, their
respective store of value properties. In other words, the currency that
circulates with greater velocity is in low demand, it's the "bad
money" with a short store of value timeframe, while the slower currency
is in high demand, it's the "good money" with a greater ability to
store value through time.
This is a clear example of how the transactional and reserve functions of
money are able to separate right before our eyes into two different media.
Think about Zimbabweans quickly spending Z$s while hoarding US$s. Ludwig von
Mises called it a "secondary media of exchange."
The term "secondary media of exchange" obviously implies the
existence of a "primary media of exchange." But why only two? Well,
the answer is simple: because we are dealing with two needs, two separate
functions or roles in which we use "money." The two roles are
transactional and reserve (store of value). Another clear example can be found
on the Eurosystem's Consolidated
Financial Statement. The primary medium of exchange is on the right-hand
side, and the secondary medium of exchange is on the left. Look at how Line
#1 has grown in proportion to the whole of the reserves (secondary media of
exchange) from 30% to more than 65% in a decade. Now that's how
you spot a focal point!
Here's the new "FOFOA's dilemma" once again (with an added
hyperlink for the adventurous!):
FOFOA's
dilemma: When a single medium is used as both store of value and medium of
exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds
true for both gold and fiat, the solution being Freegold, which incidentally
also resolves Triffin's dilemma.
________________________________________________________
Another quick Sidebar:
For any real economists out there, here's how Freegold resolves Triffin's
dilemma.
Triffin's dilemma highlights two flaws in the dollar and its use as the
global reserve currency. Flaw #1 is the dollar being a national currency and
also a supra-national global reserve currency. Flaw #2 is the dollar trying
to be as good as gold in the store of value role via US Treasuries. What I
mean in flaw #2 is that the dollar's credibility is hurt by a rising price of
gold and, therefore, it must systemically manage that threat by backing the
fractionally reserved bullion banking system which eases the natural supply
constraint of gold.
The euro has eliminated both of these flaws in its fundamental architecture.
It is not a national currency and it does not oppose a rising (in the present
case) or a free floating (in the future case) price for non-fractional
physical gold reserves. I have written extensively on this topic, and the
bottom line is that gold is not yet free floating, even today, because its
market is encumbered by many forms of gold IOUs that trade at par with the
physical stuff through the support of the dollar system.
You can obviously resolve Triffin's dilemma by removing both flaws. But
removing #1 alone is not enough, while #2 alone is enough.
Triffin's dilemma observes that when a national currency also serves as an
international reserve currency (as the US dollar does today), there are
fundamental conflicts of interest between short-term domestic and long-term
international economic objectives. But this is only the case if that currency
does not embrace a "secondary media of exchange" that is allowed to
float in value in a quantity not managed by the currency manager (i.e.
physical only), and can be purchased and stored in lieu of retaining debt
denominated in the primary medium.
Imagine, if you will, the euro supplanting the dollar's role as the globe's
super-sovereign currency unit. This is (at this point) merely a conceptual
exercise for all you anti-conceptual mentalities. Let's compare the two with
regard to Triffin's dilemma.
How often do we hear euro critics repeat that the euro, a currency without a country, has no political union to back it and is
therefore worthless? The US dollar has a country, but in its role as the
world's currency it also functions just like the euro, without a global
political union.
The fundamental difference between these two units of account (the dollar and
the euro) is their relationship with gold.
If you have followed my blog at all, you know that the euro has Freegold, the
wealth consolidator and "real money" with no country, no links and
no political union to back it. So which unit of account (€ or $) is
closest to gold? Which currency, of these two, is most likely to be preferred
as the global reserve currency next to Freegold in the wealth reserve role?
The point is, once "Freegold" (nature's wrath) inflicts itself upon
us all, it won't really matter what is chosen/used as the super-sovereign or
supra-national currency to lubricate international trade. It could be the
euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's
dilemma will be gone. And you shouldn't worry so much over the transactional
currency question, because that will be chosen through the market forces of
regression, the network effect and game theory's focal point discovery at the
international level.
________________________________________________________
A Practical and Probabilistic Comparison
Now that I'm almost done with the intro, and before we move on to the main
body of this post which is the Austrian forefather's deconstruction of the
money concept and how it fits perfectly with Freegold, let's take a moment to
compare the gold standard concept to Freegold in terms of practicality and
probability. We'll save 'honesty' until after we discuss the money concept.
What the hard money/gold standard crowd ultimately wants is a single unit to
faithfully serve as both the monetary medium of exchange and long term
store of value. A single unit is, in fact, what we have now as the dollar is
the currency in widest use (network effect) and the US Treasury bond is the
focal point global store of value. Both are denominated in dollars and are
therefore a single unit through fixed parity. If the
medium of exchange was to collapse, so would the store of value.
So the hard money camp would like to harden (make more difficult to obtain)
that single unit by backing it with gold, making every single unit redeemable
in gold, or at least allowing the free market to do away with any entity that
fails to meet every redemption request. From a practical perspective this
would obviously require major political and legal changes which is why this
camp is full of activists with colorful picket signs. And this is why they
have lowered their initial target to simply changing legal tender laws to
allow their single hard unit to compete with the existing easy unit and,
hopefully, theirs will win the popularity contest.
But in order to achieve such monumental changes, they really need a
ground-swell of support from the people. You, dear reader, are probably much
closer to their view than 95% of the rest of the population. So, from a
probabilistic perspective, I'd like you to think about your own paycheck. How
much of it goes right out the door to pay for food, utilities and your
mortgage? 90%? And how much do you really care that the 90% of the money you
earn and only hold for a couple of weeks sustains its purchasing power for
the next 100 years (for the benefit of those people you gave it to)? I only
ask this to get you to think about what is important to the majority of the
people.
The hard money/gold standard crowd wants to make every one of those dollars
you earn hard (difficult to get) so that they retain their long-term
purchasing power. They want the banks to hold gold on reserve for every
single dollar you receive, even if it goes right out the door. There won't be
many pay raises in your future if these guys get their way.
Or would you simply be happy as long as the 10% of your paycheck that you
decide to save stores its purchasing power for 10, 20 or 100 years? Yes, see,
this is what really matters… to everyone! And this is why the medium of
savings must be separate from (and float in value against) the transactional
currency. I'm certainly not arguing the benefits of inflation, because there
is a better way to control inflation than simply making every single unit
hard (difficult to obtain).
The economy needs the lubrication provided by transactional currency for it
to run smoothly. Obviously not all of it is saved and stored as wealth. Only
a small portion of the flow of transactional currency is saved.
And those that would hope to print in order to buy are only stealing from
that small portion that is saved. If you "do the math" you'll find
that, in the long run, this is true. And if you separate that saved portion
by using a secondary medium that floats in value, then inflationary policy
becomes self-defeating to the currency manager. This is how you have a true competing currency. Not two currencies competing
for the medium of exchange crown. But a separate medium of savings competing
against the medium of exchange for "pole position" on the 'Time=t' axis:
This is Freegold, and it is unfolding today. It requires no activism or
political/legal changes at this point. It is, how do you say, baked into the
cake already? And once again, these
posts
briefly
explain
how we aren't quite there yet, how Freegold is different from what he have
today, even though it is "already in the pipeline."
The Money Concept
FOFOA:
The measure
of any money's store of value is a continuum of time. It is directly linked
to demand and velocity. Even the worst money (say, Zimbabwe dollars during
the hyperinflation) works as a very temporary store of value. Perhaps you
read stories about workers in Zimbabwe getting paid twice a day and then
running out to spend it before coming back to finish the shift. This is an
example of the briefest time period in which currency stores value.
FOA: Was gold a medium of
exchange? Yes, but to their own degree, so were the bowls. Was gold a store
of value? Yes, but to a degree, so were dinner
plates. Was gold divisible into equal lesser parts to define lesser barter
units? Yes, but to a degree one could make and trade
smaller drinking cups and lesser vessels of oil.
Here's the thing, 'store of value' and 'medium of exchange' are relative
terms. Anything real stores value (a painting, a
computer, a jewel), and lots of things are media of exchange in various
settings (dollars, other currency, cigarettes in jail, etc). And for stores
of value, there is a continuum as to how long things store value. What we are
talking about is degree. And this gets to the heart of a semantic
issue about money being media of exchange and a
store of value.
Menger: [I]t appears to me to be
just as certain that the functions of being a "measure of value"
and a "store of value" must not be attributed to money as such,
since these functions are of a merely accidental nature and are not an
essential part of the concept of money.
Mises: Money is a medium of
exchange. It is the most marketable good which people acquire because they
want to offer it in later acts of interpersonal exchange. Money is the thing
which serves as the generally accepted and commonly used medium of exchange.
This is its only function. All the other functions which people ascribe to
money are merely particular aspects of its primary and sole function, that of
a medium of exchange.
Both of the above quotes get at the idea that, because money is a medium of
exchange, it is also, to some degree, a store of value. Even Zimbabwe dollars
were a brief store of value, but being a store of value isn't what money is
all about. Being a store of value is not its central
function—it is derivative of its being a medium of exchange. Being a
medium of exchange is money’s essence—what makes money money.
This means that, by definition, money’s ability to serve as a measure
of value and store of value is secondary.
Now before I continue, I want to remind you of my definition of
"Honest Money" from the second paragraph of this post. In that
paragraph I wrote that my definition would eventually start to make sense,
and right about now it should be starting:
"My definition is that
honest money is simply money that does not purport to be something it is
not."
Compare my definition to what the hard money/gold standard crowd says is
"Honest Money":
"And modern
practitioners will tell you that gold and silver are honest money."
Since we're dealing with the semantics of "money" here, we should
keep in mind that the original Austrian definition of money was that it is
primarily a medium of exchange. So in this light, are gold and silver the
best monies? Let's check back with Carl Menger who is widely regarded at the
founder of the Austrian School of economics:
Menger: [M]oney is the most
appropriate medium for accumulating that portion of a person’s wealth
by means of which he intends to acquire other goods (consumption goods or
means of production).
[…]
But the notion that attributes to money as such the function of also
transferring “values” from the present into the future must be
designated as erroneous. Although metallic money, because of its durability
and low cost of preservation, is doubtless suitable for this purpose also, it
is nevertheless clear that other commodities are still better suited for it.
And while we're at it, how about a little Hayek?
Hayek: If I were responsible for
the policy of any one of the great banks in this country, I would begin to
offer to the public both loans and current accounts in a unit which I
undertook to keep stable in value in terms of a defined index number. I have
no doubt, and I believe that most economists agree with me on that particular
point, that it is technically possible so to control the value of any token
money which is used in competition with other token monies as to fulfill the
promise to keep its value stable.
Obviously I am including the link before each quote for those of you that
think I am taking these out of context. But hopefully you'll start to see a
pattern emerging from the quotes.
As I mentioned above, in the same way that a medium
of exchange is to one extent or another also a store of value, stores of
value are also to one extent or another media of exchange. The question is
one of degree, and this is how, through market forces, we end up with
"two monies." Being the focal store of value does not make something
the best medium of exchange, and vice versa.
This might be a good time to take another look at the ECB quarterly statement.
There it is, two monies. One on the left, one on the right. Separate roles.
And for you euro-critics, have another read of this because you
might want to brush up on your currency theory. Having a hard fixed rate
currency is just like sharing a standardized meter, liter or gram.
And speaking of the left side of the ECB statement, here's some more Mises:
Mises: Gold is the money of
international trade and of the supernational economic community of mankind.
Schwa! Supernational economic community of mankind? That almost sounds
like gold is the money of the Superorganism!
A Second Money?
But what use could we have with a second money?
Mises: For some of them it is
easier to find without delay a buyer ready to pay the highest price which,
under the state of the market, can possibly be attained. With others it is
more difficult. A first-class bond is more marketable than a house in a
city's main street, and an old fur coat is more marketable than an autograph
of an eighteenth-century statesman. One no longer compares the marketability
of the various vendible goods with the perfect marketability of money. One
merely compares the degree of marketability of the various commodities. One
may speak of the secondary marketability of the vendible goods.
He who owns a stock of goods of a high degree of secondary
marketability is in a position to restrict his cash holding. He can expect
that when one day it is necessary for him to increase his cash holding [p.
463] he will be in a position to sell these goods of a
high degree of secondary marketability without delay at the highest price
attainable at the market.
[…]
Consequently there emerges a specific demand for such goods on the
part of people eager to keep them in order to reduce the costs of cash
holding. The prices of these goods are partly determined by this specific
demand; they would be lower in its absence. These goods are secondary
media of exchange, as it were, and their exchange value is the resultant of
two kinds of demand: the demand related to their services as secondary media
of exchange, and the demand related to the other services they render.
What Mises is talking about here is the focal point effect. As more people
focus on a single secondary "money" for the purpose of storing
value outside of the primary medium of exchange, it starts to develop a
separate kind of demand, apart from its other uses. And just so we're clear
that he's not talking about money substitutes like bank credit:
Mises: One must not confuse
secondary media of exchange with money-substitutes. Money-substitutes are in
the settlement of payments given away and received like money. But the secondary
media of exchange must first be exchanged against money or money-substitutes
if one wants to use them--in a roundabout way--for paying or for increasing
cash holdings.
Claims employed as secondary media of exchange have, because of this
employment, a broader market and a higher price. The outcome of this is that
they yield lower interest than claims of the same kind which are not fit to
serve as secondary media of exchange. Government bonds and treasury bills
which can be used as secondary media of exchange can be floated on conditions
more favorable to the debtor than loans not suitable for this purpose. The
debtors concerned are therefore eager to organize the market for their
certificates of indebtedness in such a way as to make them attractive for
those in search of secondary media of exchange. They are intent upon making
it possible for every holder of such securities to sell them or to use them
as collateral in borrowing under the most reasonable terms. In advertising
their bond issues to the public they stress these opportunities as a special
boon.
Here's an exercise only for the conceptual mentalities. Try applying that
last paragraph to the concept of Freegold. I did, and it makes a whole lotta
sense in the context of this blog!
Okay, so if we pay attention to the network effect of
those that actually have intergenerational-sized wealth to preserve, and we
look for the focal
point that game theory predicts will be the winner within the
Eurosystem's ConFinStat,
we can pretty much know without a doubt what the new "secondary medium
of exchange" winner will be. But what about the primary? Shouldn't it be
silver or something? Or isn't there some big NWO power that's going to
inflict upon us a sinister new SDR? Or perhaps, should we all buy Bitcoins
and Facebook Credits to prepare for barter exchange during TEOTWAWKI?
In Austrian economics there are basically two halves to the explanation of
money. One half is Carl Menger's explanation of the marginal utility of money
that emerged long ago from a system of direct barter, and the other half is
Ludwig von Mises' regression theorem that connects modern money to Menger's
emergent money through our time-value memory and expectations of a money's
ability to store value. And what I hope to show you is that the natural
progression toward Freegold (true honest money in my book) is consistent with
both Menger's marginal utility argument and Mises' regression theorem, while
the difficult regression back to a fixed gold standard is not.
Robert P. Murphy on Menger: ...Because of this,
owners of relatively less saleable goods will exchange their products not
only for those goods that they directly wish to consume, but also for goods
that they do not directly value, so long as the goods received are more
saleable than the goods given up. In short, astute traders will begin to
engage in indirect exchange. For example, the owner of a
telescope who desires fish does not need to wait until he finds a fisherman
who wants to look at the stars. Instead, the owner of the telescope can sell
it to any person who wants to stargaze, so long as the goods offered for it
would be more likely to tempt fishermen than the telescope.
Over time, Menger argued, the most saleable goods were desired by more and
more traders because of this advantage. But as more people accepted these
goods in exchange, the more saleable they became. Eventually, certain goods
outstripped all others in this respect, and became universally accepted in
exchange by the sellers of all other goods. At this point, money had emerged
on the market...
Taking the above in the context of the ongoing monetary evolution to
Freegold, gold is more "saleable" as a store of wealth or in Mises'
words, a "secondary media of exchange" in part because of its
historical monetary function, which raises its salience:
FOFOA: There is nothing that
makes "Grand Central Station" a location with a higher payoff (you
could just as easily meet someone at a bar, or the public library reading
room), but its tradition as a meeting place raises its salience, and
therefore makes it a natural "focal point."
And also because it has the highest marginal utility at storing wealth (the
gold tank can absorb an unlimited inflow), gold wins the "market
process" as the store of value as Freegold evolves and the "money
functions" separate into transactional medium and store of value:
FOFOA: Will that 26th gold coin
purchase provide the same utility or diminished (less) utility than the first?
Remember, the only utility of gold coins is that they retain their value for
thousands of years. That's all they do. And hoarding them doesn't interfere
with any other economic activity, at least not when they are not
"official money."
The answer is "the same utility," because unlike ANYTHING else,
(yes, even silver), gold has INFINITE marginal utility in this particular
role.
Moldbug:
However, because
silver was fully demonetized in the 20th century and gold was not, the market
capitalization of the gold stockpile is 60 times the capitalization of the
silver stockpile. Thus, comparable volumes of gas are pressing in to the gold
tank and the silver tank, but the silver tank is 60 times smaller. It is
actually surprising that silver has not risen faster and harder.
But this present advantage is also silver's long-term Achilles heel. The
silver tank, being so much smaller, cannot take this kind of pressure. It
will almost certainly explode. I have personal advice for those playing the
silver market: bring your steel balls.
Regression
And speaking of historical function and its salience as a focal point - as to
the other half of the Austrian money theory, the Mises Regression theorem:
Robert P. Murphy on Mises: People value units of
money because of their expected purchasing power; money will allow people to
receive real goods and services in the future, and hence people are willing
to give up real goods and services now in order to attain cash balances. Thus
the expected future purchasing power of money explains its current purchasing
power.
But haven't we just run into the same problem of an alleged circularity?
Aren't we merely explaining the purchasing power of money by reference to the
purchasing power of money?
No, Mises pointed out, because of the time element. People today expect money
to have a certain purchasing power tomorrow, because
of their memory of its purchasing power yesterday. We then push the problem
back one step. People yesterday anticipated today's purchasing power, because
they remembered that money could be exchanged for other goods and services
two days ago. And so on.
So far, Mises's explanation still seems dubious; it appears to involve an
infinite regress. But this is not the case, because of Menger's explanation
of the origin of money. We can trace the purchasing power of money back
through time, until we reach the point at which people first emerged from a
state of barter.
So, basically, marginal utility explains the original emergence of money
while Mises' Regression theorem explains the long-running connection of
modern money to its ancient origins. Regression kinda gets a "bad"
money "in the door" and then human memory and expectations provide
inertia. But part of the beauty of Freegold is the embrace of
marked-to-market physical gold reserves, which will, if you understand the
concept, provide a well-developed and stable price discovery for currency
priced in physical gold which will allow ready exchange by anyone, anywhere,
any time. Two monies, floating in stasis, freely exchangeable on demand.
So in this way, Freegold does not violate Mises' Regression theorem because
the regression needed to maintain the transactional currency doesn't go back
far at all. In fact, it's almost instantaneous. You will always accept the
primary medium of exchange for your goods and services because the market for
the secondary has been stabilized and made infinitely sustainable through a
floating price in conjunction with the elimination of paper IOU encumbrances.
Regression tells us that we accept a currency because we think in terms of
it, we remember in terms of it. Can you see some overlap between the above:
"People value units of money because of their expected purchasing
power;" and this from FOA?
FOA: Naturally, for gold to
advance as the leading tradable good it had to have a numerical unit for us
to associate tradable value with. We needed a unit function to store our
mental money value in. In much the same way we use a
simple paper dollar today to represent a remembered value only. Dollars have
no value at all except for our associating remembered trading value with
them. A barrel of oil is worth $22.00, not because the twenty two bills have
value equal to that barrel of oil: rather we remember that a barrel of oil
will trade for the same amount of natural gas that also relates to those same
22 units. Money is an associated value in our heads. It's not a physical
item.
The first numerical money was not paper. Nor was it gold or silver; it was a
relation of tradable value to weight. A one ounce unit that we could
associate the trading value to. It was in the middle ages that bankers first
started thinking that gold itself was a
"fixed" money unit. Just because its weight was fixed.
In reality, a one ounce weight of gold was remembered as tradable for
thousands of different value items at the market place. The barter value of
gold nor the gold itself was our money, it was the tradable value of a weight unit of gold that we could associate with that
barter value. We do the very same thing today with our paper money; how many
dollar prices can you remember when you think a minute?
It is because we think in dollars, or pesos, or rubles that we continue using
those units as the primary media of exchange. It is human inertia that keeps
them working. You can no more easily switch to a
different unit, like a Bitcoin for example, than you could switch America to
the metric system (like they tried in the 70s) or get an entire people to
switch languages. Even Murray Rothbard was hip to this:
Rothbard: Money, however, is
desired not for its own sake, but precisely because it already functions as
money, so that everyone is confident that the money commodity will be readily
accepted by any and all in exchange. People eagerly accept paper tickets
marked "dollars" not for their aesthetic value, but because they
are sure that they will be able to sell those tickets for the goods and
services they desire. They can only be sure in that way when the particular
name, "dollar," is already in use as money.
Can you see how this might be problematic for a "competing
currency" in the Ron Paul sense? A currency that will be competing
against "the dollar" for the transactional or "primary
medium" role?
Rothbard: Hayek should be free to
issue Hayeks or ducats, and I to issue Rothbards or whatever. But issuance
and acceptance are two very different matters. No one will accept new
currency tickets, as they well might new postal organizations or new
computers. These names will not be chosen as currencies precisely because
they have not been used as money, or for any other purpose, before.
One crucial problem with the Hayekian ducat, then, is that no one will take
it. New names on tickets cannot hope to compete with dollars or pounds
which originated as units of weight of gold or silver and have now been used
for centuries on the market as the currency unit, the medium of exchange, and
the instrument of monetary calculation and reckoning.
And with that, here is some more from FOA. Bear in mind, here, that FOA used
the term "Mises" to represent the modern "hard money/gold
standard crowd" or as I called them, modern practitioners:
FOA: My typical hard money
shared long held belief, back then, was always:
----"Gold is the only official money of the world and will return to
these roots one day"-------- and -----" some worldwide financial
dislocation will drive all governments back to this position"-----!!!!
It wasn't going to happen, no matter what, short of nuclear war. All we had
to do was look around and see how people the world over were attached to
using fiat currencies. The economic system itself was morphing into new
ground as world trade learned to function very efficiently with fiat digital
settlement. And that's something the 70s crowd said could never happen. That
was how many years ago?
A lot of the Mises crowd tried to point out that ---- "hey, this is all
very good but if you were on a gold system this economic game would be all
the more better" ----! Ha Ha, no one cared,,,,,,
why risk what was already in process. Even the third world didn't want to
hear it. They figured that any return to a hard money system would harken
back to a time they remembered well. These guys suffered during the early
century and no one was going to tell them that the gold standard wasn't the
fault. The US is today, and was then, robbing them blind, but the situation
seemed, to them, that this new dollar standard was building them up. Looking
at it all,,,,, we robbed the Japan lifestyle
standards the most. All to buy us an almost free standard [of living], and
they loved it.
When it came to using fiat money in our modern era, it made little difference
what various inflation rates were in countries around the world; 50%, 100%
1,000%,,,,,, they went right on playing with the
same pesos. There have been countless third world examples of this dynamic,
if only we look around. Mike, look at what happened in Russia after they fell,,,, the Ruble stayed in use and function with 6,000%
inflation. My god they still use it now.
No,,,,,,, my guys are dead on the money with respect
to the political dynamic that's playing out. The world is heading towards a
huge financial / currency crack up, but it won't work out with gold coming
back into the money game. This very long term transition is playing on a move
away from dollar domination with Europe preparing to suffer less than us by
pulling in as many other political trading blocks as they can.
When you look at who they are reaching for; every one of these blocks wants
gold moving higher to shelter their dollar trading losses. None of them
expect to unload dollar reserves because our end time trade deficit won't
permit it. They can't just send the dollars to each other, buying their own
goods; that would never exhaust the external dollar float. Hell, they now
have their own money to do trade with, the Euro.
If you're still with me, I hope you are starting to see some of the problems
with all of the various "hard money" propositions. Even competing
currency ideas like e-gold or GoldGrams are unlikely to be adopted according
to Mises' Regression theorem:
Timothy D. Terrell on Regression and new
currency viability: ...If the digital currency plan requires people to trade and
quote prices in terms of something other than the widely used dollar, yen,
mark, euro, or other established currency, Mises’s regression theorem
would imply that the plan is doomed. Well before e-money became possible,
Rothbard addressed this problem:
Even the variant on Hayek whereby private citizens or firms issue gold
coins denominated in grams or ounces would not work, and this is true even
though the dollar and other fiat currencies originated centuries ago as names
of units of weight of gold or silver. Americans have been used to using and
reckoning in "dollars" for two centuries, and they will cling to
the dollar for the foreseeable future. They will simply not shift away from
the dollar to the gold ounce or gram as a currency unit.[4]
What will work is a plan that simply facilitates the exchange of
already-recognized currencies...
Thinking it Through
This kinda throws a wrench in the whole competing currencies idea to which
the hard money crowd has somewhat retreated. Just like Mexico still uses the
peso and Russia the ruble, we'll likely be thinking in terms of dollars long
after it collapses. Which brings us back to their only other idea, which is
to somehow make the dollar redeemable in physical gold at a fixed weight and
in any quantity the dollar-holders demand.
If this sounds a little bit familiar, it should. Yes, we've tried that
before. Of course the hard money crowd would like to change it up a bit this
time, although they can't quite agree on the right combination of changes.
Here are a few of their suggestions:
1.) Denationalize both the dollar and the gold so it can be fixed by the free
market.
2.) Outlaw fractional reserve banking.
3.) Renationalize the dollar (end the Fed) and redefine it as a fixed weight
of US gold.
Obviously there are major hurdles to each of these, as well as serious
impracticalities and contradictions. Monetary systems tend to evolve
naturally, in their own version of punctuated
equilibrium. And the rare changes that actually take hold throughout
history, whether judged morally good or bad in hindsight, whether ultimately
credited to politicians or the free market, have always been aligned with
this evolutionary process.
And today, the dollar's past relationship to gold is problematic for all of
their ideas, yet not for Freegold. Here is Murray Rothbard again:
Rothbard: Before proceeding to
investigate what the new definition or weight of the dollar should be, let us
consider some objections to the very idea of the government setting a new
definition. One criticism holds it to be fundamentally statist and a
violation of the free market for the government, rather than the market, to
be responsible for fixing a new definition of the dollar in terms of gold.
The problem, however, is that we are now tackling the problem in midstream,
after the government has taken the dollar off gold, virtually nationalized
the stock of gold, and issued dollars for decades as arbitrary and fiat
money.
I also wrote about some of the "midstream" problems for the dollar
in Confiscation Anatomy:
FOFOA:
The US gold
hoard is now off the table. Think of a poker cheat who pockets his winnings
yet still wants to play. When he loses he writes paper IOU's to the other
players. Can he ever pull his money back out of his pocket without having it
taken away? Think of an individual who declares his own insolvency and
defaults on his obligations to pay, only to resurface later with a windfall
inheritance. What problems will he face?
[…]
The US government will never take this risk! It will never expose itself to
this legal nightmare! The US is already a golden outlaw!
To skirt the obvious problems in dealing with these issues head-on, some of
the hard money camp has subtly retreated even further, now asking for a mere
"commodity standard." Here is Ron
Paul again:
News
Anchor: And just one more thing which is that when you talk about the
right course, if I am not mistaken, you want to go back to the gold standard?
Is that the right way to run monetary policy, in your opinion?
Ron Paul: No, but I’d like to go forward to a commodity
standard. There were a lot of flaws in the old
gold standard because there was bimetallism and a fixed price between gold
and silver.
[…]
I really like the idea of allowing the market to determine what backs the
currency, make sure there are no-fraud laws, and really look into the
matter whether or not we should have fractional reserve banking.
Reminds me of the old saying, "what a tangled web we weave…"
You see, it's kind of like playing Whack-a-Mole when you resist the nature of
the beast. Unfortunately for the US, it's gold, not "commodities"
that is the money of the Superorganism. Mises again:
Mises: No government is,
however, powerful enough to abolish the gold standard. Gold is the money of
international trade and of the supernational economic community of mankind.
It cannot be affected by measures of governments whose sovereignty is limited
to definite countries. As long as a country is not economically
self-sufficient in the strict sense of the term, as long as there are still
some loopholes left in the walls by which national governments try to isolate
their countries from the rest of the world, gold is still used as money. It
does not matter that governments confiscate the gold coins and bullion they
can seize and punish those holding gold as felons. The language of bilateral
clearing agreements by means of which governments are intent upon eliminating
gold from international trade, avoids any reference to gold. But the
turnovers performed on the ground of those agreements are calculated on
gold prices. He who buys or sells on a foreign market calculates the
advantages and disadvantages of such transactions in gold. In spite of the
fact that a country has severed its local currency from any link with gold,
its domestic structure of prices remains closely connected with gold and the
gold prices of the world market.
Did you catch that? In his magnum opus, published in 1949, Ludwig von Mises
described Reference Point: Gold, which is the underlying nature of a
global marketplace that reveals where our monetary evolution is actually
heading! Here are a few of my posts on the subject:
Reference
Point Revolution!
Reference
Point: Gold - Update #1
Reference
Point: Gold - Update #2
Ron Paul is absolutely correct about at least one thing. Fractional reserve
banking is the problem, and it will soon be history. But I'm not talking
about fiat fractional banking, I'm referring to fractional reserve Bullion
Banking. This is the root of all our monetary problems! It is even the
root of the problems that arise in the fiat currency banking system. I
realize what a bold statement this is, but I have gone into great depth on
this blog exploring it from many different angles. Here are a few recent
posts on this subject for those that are interested:
The
View: A Classic Bank Run
Who is
Draining GLD?
Reply to Bron
So what is honest money? And what does it mean "to return to
honest money?"
Honest money is simply money that does not pretend to be something it is not.
And the only way you get there is with "two monies." One that is a primary medium of exchange but does not pretend to also
be the primary store of value. In doing so, it will actually become a pretty
good short term store of value as it finds stability through stasis with a
floating counterweight.
And a second one that is the focal point primary store of value, but
does not pretend it can also be a primary medium of
exchange at the same time. (There is no need to lend or borrow the secondary
medium of exchange!) In doing so, it will become the greatest "secondary
media of exchange" that ever existed! It will be a sight to behold!
And yes, we are returning to honest money today! The signs are
everywhere, the most prominent being the rising price of gold against a
falling dollar. Those who are buying gold, like China, Russia, Europe, India,
Asia and the Middle East, are preparing for the return to honest money. They
are preparing because they realize there is a huge
advantage in preparing for something that is coming versus just watching it
arrive from the sidelines. Yet, for some reason, we don't hear them demanding
a new fixed dollar-gold standard from the US. Hmm. Fool me once, shame on
you. Fool me twice, shame on me!
As you browse the web you will find dozens or even hundreds of
interpretations of what the rising price of gold means. You now have mine to
add to the pile. It means we are in the process of returning to honest money.
But there are those that would like to take advantage of this to fix (read:
manage) the price of gold to the US dollar once again. Does this sound
honest to you?
There is a good reason why my future gold price
projections are roughly one order of magnitude greater than those who want
the US to manage the price of gold and to fix that price to the dollar…
once again. It's also why those giants that exist outside of the
dollar-centric world of the hard money activists are buying gold, and only
gold, in preparation for the transition. Here are a few of my posts that will
give you a clue to the "order of magnitude" difference:
It's the
Debt, Stupid
How
Can We Possibly Calculate the Future Value of Gold?
Gold:
The Ultimate Wealth Consolidator
Relativity:
What is Physical Gold REALLY Worth?
The Value of
Gold
I would recommend reading them in that order.
So let's see. I think we have a winner. Let me check
my scorecard:
And the best part is the probability, because there's no activism required.
All you can do is prepare your own savings to be safely shuttled through the
transition. So put down that picket sign, take off the t-shirt, undo the
CAPSLOCK and go buy yourself some physical gold. Then, just like the Giants,
you will be prepared for the return to honest money.
And finally, a big, dramatic tip of the hat to JR for his invaluable
contribution to this post!
FOFOA
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