Skip to comments.Money and Power
Posted on 11/15/2008 10:42:51 AM PST by RWB Patriot
Who determines what your money is worth? There was a time when the American government did not have control over the nation's money supply. Should this be of concern to you?
If you want that $20 bill in your pocket to be worth $20 in a few years, you should pay close attention. At the heart of this issue - and something every citizen needs to understand - is that government-controlled paper money does not fit into the natural order of economics.
Through the phenomenon of gradualism, the government was able to replace intrinsically valuable commodities such as gold and silver with paper promises that were supposedly backed by those commodities. It was this sleight of hand that opened to the door to the price inflation to which we have become all too accustomed.
It took the government more than seventy years to nationalize all of the country's banks, and another fifty to start replacing the gold standard with fiat paper currency. Once the public began trusting the government to stand guard over the hard commodities backing that paper currency, it took barely ten years to abolish the gold standard and thus make every financial transaction dependent on the government's word that it would protect the value of its money.
How could a nation conceived in liberty allow itself to become completely dependent on the word of the government that it would protect the value of its money? More important, what can we do to reverse this situation and get back to a sensible system where paper money is 100 percent backed by precious metals?
Find the answers to these questions, and more, in this compelling series of articles.
(Excerpt) Read more at robertringer.com ...
I have that book somewhere. It came out in the 70s, didn’t it. It’s a classic.
We’re supposed to buy gold? The planet will never return to gold/silver money as a base. Uranium makes more sense.
In his book, “Looking out for #1”, he recommends “...anything that might be in demand at a time when people refuse to take worthless paper in exchange for a loaf of bread.”
And how. It’s amazing how an act that could make life better for everyone is so vilified nowadays, yet Mr. Ringer makes it almost crystal clear why rational selfishness is actually a good thing.
Liberty and freedom is a foreign concept nowadays. :-(
Not foreign, just wrongly defined.
When it gets that bad join the Army.
Precious metals nowadays include brass, copper, and lead.
“The planet will never return to gold/silver money as a base.”
That isn’t the point. Individuals will always accept gold and silver in exchange for goods and services.
At this point, I would suggest purchasing bags of silver quarters, and (if still possible) owning actual gold coins whose value has been assayed and vouched for by some third party. Silver for the small transactions; gold for the large ones.
By the way, it woulnd’t be enough for governments to return to a gold standard. Ideally, they would have to pass legislation requiring banks NOT to engage in fraud; i.e., requiring banks NOT to practice fractional-reserve lending.
As Murray Rothbard wrote in his classic pamphlet “What Has Government Done To Our Money?”, when a bank lends out more money than it has gold reserves on hand (the essence of fractional-reserve banking), the bank is IN FACT insolvent and bankrupt. It’s bankrupt from the get-go. When customers doubt the solvency of the bank, they simultaneously demand their money back (a “bank run”). This bank run merely makes apparent an already existing state of bankruptcy. It doesn’t cause the bankruptcy.
Rothbard also insists that a system of “free banking” would work better than a government monopoly over the creation of money. Under free banking, banks themselves would be responsibile for minting their own coins, as well as creating “warehouse receipts” (i.e., paper currency) for their storage. The market would decide which banks were trustworthy; third-party “consumer report” companies would rate banks and their coinage, keeping consumers alert as to which banks might be devaluing their own coinage by printing and distributing more receipts than they have gold to back them up.
Rothbard claims (rightly) that “money” is (and must begin its existence as) another commodity; unlike other commodities, however, it is demanded for its ability to exchange for other things rather than demanded for itself; aside from that, however, the same market forces that apply to other goods and services apply to money. Rothbard cites some examples of successful free banking in Scotland in the 18th century.
Gold is NOT "intrinsically valuable." It is too soft for most common uses, and too rare as well. All it is is "pretty." Likewise for silver. And before anyone points out the remarkable conductivity properties of gold, remember that it became a measure of treasure long before electricity was a consideration.
All instruments of exchange are fiat, to one degree or another.
Any thoughts on this?:
I'm with you, Jack. To put in bluntly, if "the full faith and credit" of the USA collapses to the point where commodities must be bartered, I'd rather have a cord of wood and a Bic lighter than a bar of bullion.
No one to date has been able to explain the supremacy of gold or silver to fiat money in any other terms than "but it's just better!". Money of any sort is a faith-based instrument. There is no reason to believe an ounce of gold should be worth any more than a can of baked beans under certain circumstances.
With this said, I will gladly consider a comprehensive argument for gold/silver. Just haven't seen one (despite numerous requests on this forum over the years).
Not happening. Buy uranium. By 2014 production of uranium will not meet demand for uranium and the Russian warheads will also have been recycled.
Do not take delivery of uranium as storage is too expensive.
“No one to date has been able to explain the supremacy of gold or silver to fiat money in any other terms than “but it’s just better!”. “
Gold is the only financial assets that is not someone else’s liability.
I don’t think it should be the only asset in a portfolio but it should be 5-10%.
In essence, is this just an argument for lots of smaller banks operating under the same philosophies we have in place now? I can choose from dozens of "banks" internationally, and I can obtain the information just the same on their worthiness.
Due to the "product" being sold, ultimately you'd still end up with monopoly banks, just not government run. Now, that's certainly an argument to have, but it's hardly the stuff of revolution. And the irony? The government would have to intervene once the monopolies succumb to their tendencies.
And if you think monopolization of privatized "free" banks is not inevitable, I think you are sorely underestimating the power of the public to accede to herd mentalities, and overestimating their willingness to tolerate multiple currencies among proximate locales.
“How could a nation conceived in liberty allow itself to become completely dependent on the word of the government that it would protect the value of its money? More important, what can we do to reverse this situation and get back to a sensible system where paper money is 100 percent backed by precious metals?”
To the first question, the majority has been unable or unwilling to understand that what is consumed must be paid for by what is produced.
To the second, no government wants to be restrained by a gold backed currency and will always find a way around it.
But isn't a 1974 Datsun in one's driveway absent any others' liability but one's own?
If I'm investing in gold, to remove someone else's liability, I have to take delivery and warehouse it, correct? And then find an efficient method of dividing it for suitable exchange? Otherwise, am I not just transferring liability (security, means of exchange, etc.) to someone other than the government?
Interesting. Thanks for the post.
Below is an excerpt from a much longer article by economist George Reisman (Pepperdine University). The article appeared on Reisman’s blog in March 2008 just after Bear Stearns failed.
See link for complete blog article.
Gold as the Source of New Bank Capital and Reserves
The Federal Reserve System holds approximately 260 million ounces of gold. The market price of gold recently reached $1,000 per ounce. This means that the Feds gold can easily be thought of as an asset with a market value of roughly $260 billion.
As an initial approach to understanding the solution to our problem, let us assume that the Federal Reserve declared its gold holding as being held in trust for the benefit of the American banking system, and proceeded to allow every bank to enter on the asset side of its balance sheet a portion of this gold corresponding to its share of the total of the $2.5 trillion of checking accounts presently in the economic system. The banks would not physically possess the gold but only book entries corresponding to it.
The gold entered on banks balance sheets could also count as equivalent new and additional bank reserves. Thus the measure would simultaneously add $260 billion of new and additional bank reserves in the form of gold as well as $260 billion of new and additional bank capital. The reserves and the capital would both be essentially permanent.
In order to prevent the monetization of the gold reserves, the Fed could mandate a permanent required gold reserve against all checking depositsthose counted in M1, those counted as sweeps, and those counted as retail money fundsin the ratio of $260 billion to $2.5 trillion, i.e., a little over 10 percent.
A major shortcoming of this very simple solution is that the addition of $260 billion in gold to bank assets would probably be insufficient. It almost certainly would be if the Fed decided, as it should, to take back its government securities from the investment banks and give them back their securities of far less value. That would probably bankrupt most or all of the investment banks. Furthermore, because the commercial banks are their main creditors, the assets of the investment banks would move into the possession of the commercial banks and do so, of course, at a far lower value than the loans that had been made to the investment banks. Thus, the present capital of the commercial banks and much more would be wiped out.
Accordingly, the book value placed on the Feds gold holding needs to be substantially higher than $1,000 per ounce, if it is to result in the creation of sufficient bank capital and reserves. The question is, how much higher?
The most logical answer to this question was supplied as far back as the 1950s by the late Murray Rothbard, who argued for the establishment of a 100-percent-reserve gold standard by means of pricing the Feds gold stock at whatever price was necessary to make it equal the outstanding supply of money.
Taking the outstanding supply of money today as being $3.3 trillion, Rothbards proposal implies a gold price of approximately $12,700 per ounce. At such a price, the Feds gold stock would be sufficient to provide a 100 percent reserve against both all US checking deposits and all US currency.
The provision of a 100 percent reserve would be an immediate guarantee against any reduction in the supply of checkbook money. This would obviously be the case if the banks simply paid out gold in response to customers demands for the redemption of their checking deposits. At $12,700 per ounce, the banks and the Fed would have enough gold to redeem every single dollar of checking deposits and currency in the economic system. (Thats the meaning of a 100 percent reserve.)
Of course, in the circumstances envisioned here, the banks would not pay out physical gold. But they would have the ability to pay out paper currency to the full extent of outstanding checking deposits, and that currency would have an undiminished gold backing at the price of gold of $12,700 per ounce. Thus whatever the recession that might develop in the months ahead, it would be contained, insofar as the money supply of the country would not be reduced. That would guarantee a major reduction in the possible severity of what might otherwise develop.
This 100-percent-reserve gold standard as thus far described would obviously be a long way from the full-bodied 100-percent-reserve gold standard that Rothbard envisioned, and which I myself have elaborated upon and advocated. It would be a standard that for some time was largely just nominal, in that the actual gold of the of monetary system would still be in the possession of the Federal Reserve System. Nor would there yet be any obligation of the Fed to buy or sell gold at the price of $12,700 per ounce or at any other price. The purpose of the system I have described would simply be the twofold one of providing reserves sufficient to prevent any possible reduction in the supply of checkbook money and also of providing capital to banks sufficient to substantially more than offset the losses otherwise resulting from a decline in the value of banks assets.
Indeed, given that what would be present is an addition to the assets of the banking system in an amount equal to the full magnitude of outstanding fiduciary media, i.e., of $2.5 trillion of checking deposits minus $40 billion of presently existing standard money reserves, the overwhelming likelihood is that the banks would be handed far too much capital. Even with losses of $1 trillion on their existing assets, they would still stand to gain practically $1.5 trillion in new and additional capital. Such a bonanza would not be justifiable. The solution would be to pass most of it on to the banks depositors in the form of bank stock or bonds paid as a dividend on their accounts.
It is not possible in the space of one article to explore, beyond the very limited extent to which Ive done so, the problems and the solutions entailed in moving on to the full-bodied 100-percent-reserve gold standard that is the ultimate objective of my proposal. Under such a gold standard, paper currency and checking deposits will, of course, be fully convertible into gold, physical gold coin will enjoy wide circulation, and the supply of gold in the country will be free to increase or decrease simply in response to market forces.
All I have tried to show here is how the twin problems of a lack of bank capital and of bank reserves, which are the core of the threat of deflation, could be solved by means of establishing the framework of a 100-percent-reserve gold monetary system.
Needless to say, such a system would not only end the threat of deflation, but, equally important, it could end the threat of inflation as well. For if it were actually followed, the increase in the quantity of money would be limited to the increase in the supply of gold, which is extremely modest compared with increases in the supply of irredeemable paper money. This is because gold is rare in nature and costly to extract. Irredeemable paper money in contrast is virtually costless to produce and is potentially as abundant as the supply of currency-sized sheets of paper, indeed, as abundant as the size of the largest number that can be printed on all such sheets of paper.
Above all, the solution I have proposed would constitute a major step toward the establishment of a full-bodied precious metal monetary system and thus toward ultimately eliminating the governments physical control over the money supply and all of the violations of individual freedom that that control represents and makes possible.
And what is more, it could be accomplished at a cost to the Federal Reserve not of hundreds of billions of dollarsthe sums the Fed is risking in exchanging its government securities for bank assets of vastly lower valuenot for the $30 billion it has risked to bail out just Bear Stearns, but for a little more than $11 billion! Just $11 billion is the value at which the Fed carries its gold stock on its balance sheet, at a price of gold of approximately $42 per ounce.
Thus, to say it all in one sentence, the threat of massive deflation can be eliminated, the threat of inflation ended, and the actual and potential domain of economic freedom greatly expanded, for $11 billionan $11 billion that would not even be an out-of-pocket expense to anyone but merely a balance-sheet charge on the books of the Federal Reserve System when it deducted its gold holding from its balance sheet and added it to the balance sheets of the banks.
A 1974 Datsun is not a financial asset (240z might be an increasingly valuable collectors item but it’s not a financial asset)
the “someone else’s liability” point is related to: does the asset have value because someone else is making payments to you (eg bond coupon or bank interest or stock dividend). If they stop paying, your asset may be worthless - hence the someone elses liability (it’s a little tricky with non-div stock)
Gold is like a really liquid collectible with an easily assessed value.
Thanks. Good read..
I think you're illustrating my point of confusion rather well. Why is gold (owned and managed) a financial asset but a car is not? Because someone has arbitrarily assigned it a "useful" status as an asset, right? In and of itself, a 200 pound block of gold is no more or less useful or valuable than the Datsun.
To your point about liability, if someone is making payments to me on gold, then they are the de facto owner, are they not? Why would someone pay me for something I own? Or are you proposing that someone would rent my gold? If that is the case, is not the Datsun analogy even more apropos? I may rent the Datsun to someone, however if they stop paying, the car is still mine.
As I have posted before, I am not trying to be difficult. I would just like a very simple explanation as to why gold (or silver, or granite, for that matter) is a more valuable holding than anything else. I see gold is worth $X/ounce, but that is still a relative value, to the dollar. Eliminate the dollar (or the yen, the ruble, whatever), and why is gold worth anything?
I think the difference is that gold has a multi-thousand year history as a store of value, it is compact, easily stored, easily assayed, everyone recognizes it’s value.
Also, no bankruptcy, repudiation or default can destroy its value (the only risk is physical theft). Companies can go bankrupt (their stock is worthless). Bonds can be defaulted on (they become wallpaper). Banks can become bankrupt (deposits become worthless if not insured, and then they are the liability of the insurer.)
The value of gold cannot be destroyed by some elses default.
I understand the confusion, because you can lease gold just like a car and a house. Cars/houses are rental of a real asset, you can go get it if the borrower defaults. (You can also go get your gold if the lessor defaults). Real assets still have value even if the debtor defaults.
I guess golds status as a financial asset (as well as a real asset) is due to it’s history. Under convertibility regimes, gold was a financial asset as it could be converted to currency at a fixed rate.
Today, i guess gold is a financial asset because it is seen by almost everyone as a financial asset (rather than just as a valuable collectible).
“As I have posted before, I am not trying to be difficult. I would just like a very simple explanation as to why gold (or silver, or granite, for that matter) is a more valuable holding than anything else. I see gold is worth $X/ounce, but that is still a relative value, to the dollar. Eliminate the dollar (or the yen, the ruble, whatever), and why is gold worth anything?”
I didn’t quite answer this part, but at the core, gold has value because people are willing to trade things for it. If the ultimate economic doomsday scenario happens, and all paper currencies return to their intrinsic values, gold will still have value because people will trade food, fuel, weapons etc for it, just like they did thousands of years ago.
His “Restoring the American Dream” is even better.
$260 million x $1000 = ??
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.