There is only one alternative to the dollar (gold)

FT ^ | 01/05/09 | David Hale

[TigerLikesRooster]

There is only one alternative to the dollar

By David Hale

Published: January 5 2009 19:01 | Last updated: January 5 2009 19:01

The great challenge confronting the foreign exchange market at the start of 2009 is finding a good alternative to the US dollar. One of the ironies of market events during 2008 was that the US financial crisis produced a flight to safety in the dollar. The dollar emerged triumphant from a financial debacle that centred on $1,300bn (€960bn, £890bn) of subprime US mortgage loans. The fallout has triggered a $32,000bn decline in global stock market capitalisation and driven all the Group of Seven leading industrialised countries into recession.

The dollar slumped against the euro during the final weeks of 2008 but fears about the financial system still drove US Treasury yields down to zero on three-month paper and less than 2.1 per cent on 10-year notes. This fear factor is likely to sustain demand for the dollar during the early months of 2009.

There is not now a clear alternative to the dollar because all big economies have slid into recession. Real gross domestic product could contract by 1.5 per cent in both the US and Europe during 2009 and by as much as 2.5 per cent in Japan. The decline in world trade and commodity prices will also reduce significantly the growth rates of the emerging market economies. South Korea and Taiwan are already in severe slumps. The growth rate of China could halve.

[TigerLikesRooster]

Ping!

[blam]

Willem Buiter Warns Of Massive Dollar Collapse

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

By Edmund Conway, Economics Editor
Last Updated: 9:06AM GMT 06 Jan 2009

The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

[snip]

[End Times Sentinel]

Dang it!

It says I’ve used up my allotment of free articles for this 30 days and I’ve got to register, which I kind of don’t want to do.

Can anybody cut to the chase for me and tell me what the article says about at what price will gold top out at and what date I should place my sell order for?

[HighlyOpinionated]

FDR took the USofA off the Gold Standard. This act was like punching a pin hole in a dike. “It’s just a little pin hole.” But it has turned into a dam-breaker and the flood has caused damage on Wall Street and Main Street.

So Banks started loaning credit, even though they knew it was illegal to do so.

Credit is the opposite of money. Money, which is legal tender for the payment of debts, is defined by Congress in 31 USCA Sec 392. For our purposes, we will call money either coins or currency. Also, no effort will be made to argue that Federal Reserve notes are unconstitutional.

The United States Supreme Court has ruled time and again against the legal authority for banking institutions to lend credit. Both Federal and state laws allow banks to lend money, but banks do NOT have the authority to loan credit.

Since the banks didn’t have the authority to loan me credit, I will no longer be an accomplice in their illegal acts. Join me and 2000 new customers a month in obtaining debt relief. See tagline. (The program is legal, the cost minimal, the length of time in the program averages six months. Within a year your credit rating will be restored.)

[Uncle Miltie]

Theoretically, I prefer an asset based currency (e.g. a gold-backed dollar, or the equivalent).

However, I do not believe there is enough gold in the whole world to support a currency, given the tens of trillions of dollars of commerce that occur.

Can someone explain to me how with mere billions of dollars worth of gold around (I think), you can base a currency on that gold that can support a world-wide economy worth many orders of magnitude more?

[TigerLikesRooster]

No such comment in the article.
It just says that inflation would be the norm of the day in major economies, ergo, gold would go up for some time.

[Dick Bachert]

I believe we’ve tried to explain this to you many times in the past. Not going to bother again except to say that you are valuing the REAL money (metals) against a phoney, fiat paper “money.”

The needed revaluation WILL be painful.

The alternative is to do NOTHING and let our grandkids live through this BULLS**T again in 40 or 5O years.

Not to worry, however. The idiot politicians now in office — and the morons who KEEP them there — will never allow it.

It’s the classic definition of “insanity:” Doing the same thing over and over while expecting a DIFFERENT result.

The Founders TRIED to spare us all of this, to wit...
****************
Submitted for your consideration while standing by for FURIOUS FLAMES from the FRIENDS OF PAPER MONEY!

(I wrote this a number of years ago when things were NOT going well with the economy. Trust me: They WILL get ugly once again as man — or certain men — cannot resist playing God. We continue to violate the universal, immutable laws of economics at our great peril.)

Despite the apparent economic strength of the American economy, history proves that EVERY house of cards eventually comes down. And the higher the card house, the harder the fall when it finally comes. And when it does, the more freedoms we will voluntarily surrender to “restore order.” It was the Founders’ concern about this historically valid problem which prompted their attempt — now ignored — to keep American “money” sound and honest.) Dick Bachert 1998

***************
UPDATE:
A fiat money system of the sort we are now painfully watching collapse creates a FALSE world of FALSE feelings of well-being and elevated lifestyles. During the expansion phase of such a system, those living under it spend or borrow more than they should, have more children than they can afford, nationally, come to believe they can afford to allow a score of millions of illegals to come here for educations, welfare payments, medical care, etc. They reject the immutable and universal economic realities and embrace what my old friend, the late Tupper Saussy, called “the IDEASPHERE.”

Now that the inevitable economic catastrophe is upon us, how much fun is it to watch the idiots in congress who triggered this thing scramble for cover by blaming everyone else? Not much!

The only folks who feel good now are the Hank Paulsons of the world who are in the process of conducting what may prove to be one of the largest raids on the REAL wealth of this nation – our labor and real property – ever witnessed.

“Liberty lies in the hearts of men and women; if it dies there, no constitution, no law, no court can save it.” — Judge Learned Hand, 1944

DB 10/2008

* * * * * * * *

The Forgotten History of Money
This is the fascinating story of the efforts by certain of the Founding Fathers to prevent the economic distress we find all about us today. It is also a sad story on the basis that modern, “sophisticated” Americans have abandoned the corrective institutional mechanism that remains in place to this day. As you read it, think about a world with many fewer S&L, banking and political scandals and economic problems now considered the norm.

“Blood running in the streets. Mobs of rioters and demonstrators threatening banks and legislatures. Looting of shop and home. Strikes and unemployment. Trade and distribution paralyzed. Shortages of food. Bankruptcies everywhere. Court dockets overloaded. Kidnappings for heavy ransom. Sexual perversion, drunkenness, lawlessness rampant. The wheels of government are clogged, and we are descending into the vale of confusion and darkness. No day was ever more clouded than the present. We are fast verging on anarchy and confusion. (George Washington in a 1786 letter to James Madison, describing the effects of fiat paper money inflation then ravaging America in the pre Constitutional period.)

“The annihilation (of the paper money) was so complete that barber shops were papered in jest with the bills; and sailors, on returning from cruises, being paid off in bundles of this worthless money, had suits made of it, and with characteristic lightheartedness, turned their loss into frolic by parading through the streets in decayed finery which in its better days had passed for thousands of dollars.” (Contemporary writer, Breck, 1786)

“Paper money polluted the equity of our laws, turned them into engines of oppression, corrupted the justice of our public administration, destroyed the fortunes of thousands who had confidence in it, enervated the trade and husbandry, and the manufactures of our country, and went far to destroy the morality of out people.” (Peletiah Webster, 1786)

At the drafting of the U.S.Constitution, there were many “Friends of Paper Money” present. On August 16, 1787, when the discussion arose on Article 1, Section 8, the proposed wording was this: “The Legislature of the United States shall have the power to...coin money...and emit bills of credit of the United States.”

A hot argument ensued on the power to emit bills of credit, which is another way of saying “printing paper money”.

Here are the actual words James Madison wrote describing the debate in his diary: “Mr.G.Morris moved to strike out *and emit bills of credit.* If the United States had credit, such bills would be unnecessary; if they had not, unjust and useless.

MADISON: Will it not be sufficient to prohibit the making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best.
MORRIS: Striking out the words will leave room still for notes of a responsible minister which will do the good without the mischief. The monied interest will oppose the plan of the Government, if paper emissions be not prohibited.
COL.MASON: Though he had a mortal hatred to paper money, yet as he could not foresee all emergencies, we was unwilling to tie the hands of the Legislature [Legislature = Congress].
MR.MERCER:(A friend to paper money) It was impolitic...to excite the opposition of all those who were friends to paper money.
MR. ELSEWORTH thought this was a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost anything else...Give the Government credit, and other will offer. The power may do harm, never good.
MR.WILSON: It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be resorted to, it will be a bar to other resources.
MR.READ thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelation.
MR.LANGDON had rather reject the whole plan than retain the three words *and emit bills*”.

The motion for striking out carried.

Historian George Bancroft later wrote: “James Madison left his testimony that *the pretext for a paper currency, and particularly for making the bills a tender, either for public or private debts, was cut off.* This is the interpretation of the clause, made at the time of its adoption by all the statesmen of that age, not open to dispute because too clear for argument, and never disputed so long as any one man who took part in framing the constitution remained alive.”

(Bancroft – founder of the U.S.Naval Academy at Annapolis among other accomplishments – wrote a book on this very subject entitled “A Plea for the Constitution of the United States: Wounded in the House of Its Guardians.” During WWII, FDR – a serious friend of paper money – ostensibly to supply the war effort, ordered the printing plates for many historical books smelted. Bancroft’s book was among them. A photocopy of one of the remaining originals can be found here

http://books.google.com/books?hl=en&id=bE7PP1ePQwgC&dq=Constitution+wounded+in+the+house+of+its+guardians&printsec=frontcover&source=web&ots=iiJ1_2B_IA&sig=ByRM-kVMIDAs4S5OttEqkCXGm8s#PPA4,M1 )

ROGER SHERMAN(1721 1793)should be a name familiar to every American. As familiar as Washington, Madison, Jefferson and Adams. He is the only man to have signed all 4 documents surrounding the formation of the United States of America: The Continental Association of 1774, The Declaration of Independence, The Articles of Confederation and The United States Constitution. He was a Judge of the Superior Court in New Haven, Connecticut, serving that office with distinction from 1766 until 1788. He served as Treasurer of Yale University from 1765 to 1776. He was renouned for his high intelligence and unswerving honesty and was described by John Adams “as honest as an angel and as
firm in the cause of American independence as Mount Atlas.” He served in the U.S.Senate from 1791 until his death in 1793.

Why is Roger Sherman*s name unfamiliar? HE WAS AN ENEMY OF PAPER MONEY!! In 1751, Roger Sherman and his brother William sued James Battle for paying a debt to their shop in New Milford, Connecticut, in depreciating paper currency. Over a period of 15 months, Battle had charged “divers wares and merchandizes” amounting to 129 pounds of what
Sherman assumed were pounds of Connecticut “Old Tenor”, a stable currency whose value were well preserved by taxation taking it out of circulation. But Battle assumed the debt was denominated in pounds of ever depreciating Rhode Island currency, tendered in same, and the Shermans took a beating in the payment and sued for recovery of loss by depreciation. The Shermans lost when Battle argued that he was merely following the accepted custom of the day. In 1752, Sherman wrote his book “A Caveat Against Injustice or An Inquiry into the Evils of a Fluctuating Medium of Exchange” indicting UNBACKED PAPER MONEY.

It was this experience that Sherman brought to the Constitutional Convention and prompted him to rise on August 28,1787 and propose new, more restrictive wording to Article 1,Section 10. The standing version under consideration was worded this way: “No state shall coin money; nor grant letters of marque and reprisal; nor enter into any Treaty, alliance, or confederation; nor grant any title of Nobility.” (From Madison’s Notes of the Convention) “Judge Sherman and Mr. Wilson moved to insert the words *coin money* the words *nor emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts* making these prohibitions absolute, instead of making the measures allowable with the consent of the Legislature of the U.S. Mr. Sherman thought this a FAVORABLE CRISIS FOR CRUSHING PAPER MONEY. If the consent of the Legislature could authorize emissions of it, the friends of paper money would make every exertion to get into the Legislature in order to license it.” Mr. Sherman*s and Mr. Wilson*s motion was quickly agreed to and became the supreme law of the land.

Some additional quotations to ponder:

“All the perplexities, confusion and distress in America arise not from defects in the constitution or confederation, nor from a want of honor or virtue so much as from downright ignorance of the nature of coin, credit and circulation” (John Adams in a letter to Thomas Jefferson, 1787)

“I deny the power of the general government to making paper money, or anything else, a legal tender.” (Thomas Jefferson)

“You have been doubtless been informed, from time to time, of the happy progress of our affairs. The principal difficulties seem in great measure to have been surmounted. Our revenues have been considerably
more productive than it was imagined they would be. I mention this to show the spirit of enterprise that prevails.” (George Washington in a letter to the Marquis de LaFayette, June 3, 1790 AFTER the United States Constitution prohibited unbacked paper money at Article 1, Section 10)

“Since the federal constitution has removed all danger of our having a paper tender, our trade is advanced fifty percent. Our monied people can trust their cash abroad, and have brought their coin into circulation.” (December 16, 1789 edition of The Pennsylvania
Gazette)

“Our country, my dear sir, is fast progressing in its political importance and social happiness.” (George Washington in a letter to the Marquis de LaFayette, March 19, 1791)

“The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for.” (George Washington in a letter to Catherine Macaulay Graham, July 19,1791)

“Tranquility reigns among the people with that disposition towards the general government which is likely to preserve it. Our public credit stands on that high ground which three years ago would have been
considered as a species of madness to have foretold.” (George Washington in a letter to David Humphreys, July 20, 1791)

“It is apparent from the whole context of the Constitution as well as the times which gave birth to it, that it was the purpose of the Convention to establish a currency consisting of the precious metals.
These were adopted by a permanent rule excluding the use of a perishable medium of exchange, such as certain agricultural commodities recognized by the statutes of some States as tender for debts, or the still more pernicious expedient of PAPER CURRENCY.” (Andrew Jackson, 8th Annual Message to Congress, December 5, 1836)

DESPITE WHAT YOU WERE TAUGHT IN SCHOOL, THE HISTORICAL RECORD IS CRYSTAL CLEAR: AMERICA WAS TO HAVE BEEN SPARED THE DESTRUCTIVE EFFECTS OF AN UNBACKED PAPER MONEY SYSTEM. MOST OF THE PROBLEMS WE FACE TODAY CAN BE TRACED TO WHAT ANDREW JACKSON CALLED “THE PERNICIOUS EXPEDIENT OF PAPER MONEY”.

HISTORY TEACHES THAT AN “ARTIFICIAL” MONEY CREATES AN “ARTIFICIAL” WORLD WHERE THE PRICE FOR SOME ITEM...EVEN OUR MOST POPULAR WELFARE “PROGRAM”...CAN BE DEFERRED TO FUTURE GENERATIONS (OUR $11 TRILLION
NATIONAL DEBT) OR PAID WITH A “MONEY” CREATED OUT OF THIN AIR WHICH ROBS THE VALUE FROM THE MONEY WE MIGHT BE UNFORTUNATE ENOUGH TO HAVE IN OUR POCKETS AT THAT MOMENT (INFLATION). AND ONE THING YOU MUST REMEMBER ABOUT INFLATION IS THAT IT IS NOT AN “EQUAL OPPORTUNITY” DESTROYER: THOSE FIRST IN LINE TO GET THEIR HANDS ON THE NEW MONEY ROLLING OFF THE PRESSES (THE MODERN FRIENDS OF PAPER MONEY) HAVE A CHANCE TO SPEND IT BEFORE IT LOSES ITS VALUE. THE LITTLE PEOPLE (THAT’S US, FOLKS!) FARTHEST DOWN THE LINE ARE THE ONES WHO FEEL THE FULLEST EFFECTS OF THIS DESTRUCTIVE PROCESS.

[Uncle Miltie]

"I believe we’ve tried to explain this to you many times in the past"

Dude. I assure you we've never spoken about this.

But your response is more than telling. Thanks.

[Pearls Before Swine]

A gold-backed currency raises two issues
1) Those US citizens farsighted enough to possess gold will probably be forced to exchange it for the new US notes at the government mandated rate, as happened under FDR. Holders of gold might even have to declare a gain on the forced exchange, adding the insult of partial capital confiscation through taxation.
2) Gold backed currencies place restrictions on the ability to expand the money supply. Too much expansion, and the amount of backing becomes suspect, forcing a choice between runs on the currency or devaluation. Governments hate this. There are also cultural difficulties with a less expandable supply of money — prices will expand and contract with economic activity, rather than always rise. This means that labor rates will fluctuate (or else employment will to force that), and that’s contrary to expectations. Everybody’s been trained to expect an annual raise.

[ex 98C MI Dude]

The flaw in your thinking is that you are using todays inflated dollar totals that our GDP is expressed in to determine how much gold we ‘need’. If we express todays GDP (approx $14 trillion) in 1913 dollars, it comes out to around $638 billion. That isn’t too far off of what the GDP of the US was in 1913, suggesting that nearly all of our GDP ‘growth’ to this point has been inflation.

It is only a fair approximation, to be sure, because we do have a larger economy now than then by a pretty large factor. But in net terms we haven’t progressed very far off the dime.

[Hostage]

I always thought it was Nixon in 1971 that took the USA off the gold standard and that it was Roosevelt that made it illegal to hoard gold.

See August 15, 1971
http://www.nvr.org/pres_content.php?pro=pres&sec=timeline&subsec=5

[Dick Bachert]

If I’ve confused you with one of the friends of paper money who have hammered me in the past — but who are now strangely and tellingly silent — my apologies.
db

[Oatka]

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, . . ."

For what? As bad as our economy/currency is, the rest of the world appears to be in even worse shape than us. A global economy based on Americans going into debt so they can buy foreign goods has come acropper with a vengeance. Consumers are either saving or unable/unwilling to buy (sated). Countries depending upon exports to the American consumers are and will continue to be, in a world of hurt.

My own feeling is at some point down the line, gold will again become a part of the financial system. That won't happen until the politicians try everything else, ruining almost everybody in the process.

[Uncle Miltie]

Okey dokey. I'm going to do a little math, just for fun.

World-wide GDP: $65T.
http://en.wikipedia.org/wiki/World_economy

Total Gold Ever Mined: 10 billion ounces.
http://money.howstuffworks.com/question213.htm

Okay. Let's monetize the economy of the world in ounces of gold. $65T / 10B = $6,500 per ounce.

That's what I've been asking, but nobody has been answering.

The problem with that math is that it is just the amount of productivity (GDP) expressed in ounces of gold for one year. I don't think that's the right comparison, since the value of the world is far more than one year's production. So, based on this calculation, the current (admittedly paper) dollar value of an ounce of gold is certainly "worth" at least one year's production ($6,500 / oz) or possible vastly more than that.

And, let me for argument's sake take the gold folks' arguments at face value, and that gold is a proper measure of value, not paper money.

Why is it then that gold does not trade for at least $6,500? If the economics of gold are so true, the market will devalue paper money, and someone is going to get rich hoarding gold. It must really be worth at least $6,500 of our readily combustible paper dollars. So, someone who is really smart and can put together enough of the lousy paper capital can crash the entire paper money system by buying all the gold in the world at less than $6,500. The Hunts should come back from the grave and corner the gold market.

The fact that this has not been done tells me something. It tells me that it is not a proper perspective to just look at the value of tradeable stuff each year in terms of gold. I'm no brilliant economist (just a regular-joe econ BA). But the gold-backed currency argument just doesn't pass my sniff test. It is wrong by about an order of magnitude ($6,500 v. $800 / oz today).

Huh. I've been thinking about this for awhile, because clearly the Fed is willing to just print dollars, a horrible idea.

When dollars and productivity change at the same rate, the value of the dollar is stable (see Friedman). When dollars expand faster than goods and services, you get inflation. The Fed may be institutionally incapable of resisting the impulse to inflate. Been there done that, gonna happen again. This is a serious argument in favor of a gold-backed currency. I get it.

But if the economy expands again in the future by 10X+(which it will, we human critters are incredibly capable), will the value of gold eventually equate to a year's pay for an ounce? Why not?

I feel (but can't prove from my little desk) that a pure and perfect gold standard is a constraint. Gold cannot be voluminous enough to support a medium of trade given the vastness of trade.

I'm more in favor of a basket of commodities approach. I would like to see a currency backed by several of the major available liquid commodities. I'll propose a list from scratch:

Gold, Oil, Copper, Wheat, Coffee, rolled steel, lumber.

There. I'll go with you gold-bugs to an asset backed currency, but let's just have one that is expansive and broad enough to avoid constraining the massive economy we are able to create.

[Uncle Miltie]

See #15. I just don’t want to be “Catholic” about one particular commodity as the basis of exchange.

[djsherin]

“Hoarding” is another way for a politician to say “owning” when it comes to gold.

[ex 98C MI Dude]

You are running into the same wall that everyone eventually runs into. No monetary system is perfect, and every one of them ever devised collapses, gold-backed included. That is a particularly inflexible system, and the only way to avoid that inflexibility during a crisis is to have large reserves not spoken for in the whole economic picture. It would also require politicians with enough self-restraint that they keep their grubby paws off of it. And we both know that isn't going to happen.

A true gold standard allows for expansion only so far as the miners can mine it, and the smelters can smelt it. That is to say, not very much expansion. Not a very surmountable problem. So such a standard is attractive only in the sense that it constrains the political ability to degrade the national currency at will, as is happening today.

As to why gold isn't trading at $6500? It isn't ‘worth’ that much, nor is the world economy really ‘worth’ $65T. An ounce of gold is worth one ounce of gold.

I am with you on a pure gold standard. It really isn't feasible in the long run. A bi/tri-metallic might give enough opportunity.

Cornering the market isn't possible, COMEX won't allow it. The system is set up to prevent it, and if it is tried COMEX will change the rules. Ask the Hunt brothers. They almost had the silver market cornered, then COMEX changed delivery and margin rules.

A commodity backed currency might work for a while. But most commodities are consumables, and so shortages of any given one in the basket could skew things badly.

So after all that rambling, I don't have the answers. If I did I'd be rich.

[djsherin]

Gold (and silver and other precious metals) was selected by the market (i.e. people) originally because it was divisible, durable, people liked it, store of value, etc. Paper currency came along to represent a weight of gold and in every example I can think of, the units were some fraction of gold (the dollar was about 1/20) so it was even more divisible. In this case, the dollar isn’t its own currency, but a representation of an equal amount of gold. I’m sure you know this I’m just pointing to the fact that precious metals were chosen as the best medium of exchange specifically because they facilitated trade best. I’ll get back to that in a moment.

As you correctly pointed out, in order to back the world economy (using $65T) with gold, it would be $6,500 an ounce. It’s not obviously though. IMO this is because gold is not legal tender. As valuable as it is, the government won’t accept it in taxes to my knowledge and that alone is the cause of a huge demand for dollars; dollars simply must be held and used.

Going back to gold being selected by the market, let’s say the economy grows by 10X but relative to gold, all other things being equal. If there were truly a free market in money I suppose 2 things could happen.

Case 1, gold would continue to be used, but the currency representing gold would be used much more and the government might even issue a new standard of weight even more divisible than the dollar. Instead of 1/20 of an ounce of gold, this new weight might be 1/1000 or something like that, so that way you still have gold backed currency but you keep divisibility. In practice, redeeming gold would probably be rare (even more so than now), and what may end up happening is that the gold coins would be devalued so that they could produce more of them (this is not inflationary since the metal in the coin is presumed to be of little value and the important part is the weight of gold in the coin). I suppose this is kind of a case within a case but to illustrate what I’m saying, if you debased gold coins so that they were only 10% gold instead of 100%, you would have 10 times as many but presumably at the same size as the other coins and worth 1/10. The whole point here is that there are ways of getting around the scarcity of gold IMO.

Case 2, the market phases out the use of gold for a more abundant commodity such as silver. Silver has typically been used in smaller transactions anyway, so it may take gold’s place as the leader of the pack so to speak, with let’s say copper taking silver’s old place, with perhaps an even more abundant and less valuable metal taking very small denomination transactions. The market will respond to whatever problems exist with a money by replacing it with something more efficient. In turn, government would accept in taxes (and pay out to employees and military personnel) whatever metal or commodity was most popular in the market place, rather than setting the money unit as it does now, and forcing the market to use it.

I absolutely believe that more than one asset or commodity should be included as legal tender, but not under the same unit of weight. For instance the dollar shouldn’t be defined as 1/20 of an ounce of gold and say 1/200 of an ounce of silver because these two metals fluctuate against each other, causing one to be overvalued at times and the other to be undervalued. In this case, the undervalued one (the inherently more valuable) would be driven out of circulation because people would recognize its value and not want to use it. You sell gold to the government at the government’s exchange ratio of $42.22. Instead, you would have “silver-dollars” and “gold-dollars” (we’ll assume a dollar represents 1/20 of the weight of something), thus as gold and silver fluctuate, by definition so gold-dollars and silver-dollars would fluctuate in exactly the same manner. silver-dollars would certainly be less valuable than gold-dollars, but they would each represent (always) 1/20 of an ounce of their respective metal.

I’m in favor of the government expanding legal tender laws to include precious metals and perhaps other valuable commodities and assets. I hope I’ve addressed most or all of your concerns. If anything doesn’t make sense obviously feel free to respond.

[djsherin]

I think I forgot to add this, but the market in the future may choose something other than metal as the most valuable currency. I’m not going to speculate what that may be, but it’s entirely possible that some other item/commodity/asset/natural resource/whatever could be used.