Friday, October 20, 2023

Notes from an American Roadtrip


My wife and I recently drove just shy of three thousand miles to see friends and family in the American Midwest. We started just outside Philadelphia, located in the southeast corner of Pennsylvania on America’s east coast. Our furthest point west was Iowa City, Iowa, about a hundred miles west of the Mississippi River. Our furthest point north was Madison, Wisconsin, about sixty miles north of the Illinois/Wisconsin border. Our furthest point south was Owensville, Missouri, about a hundred miles southwest of St Louis.


The following notes are merely our observations along the way. But what better way to gauge the state of the nation than seeing it for oneself?


Electric Vehicles and Charging Stations


In our entire trip I did not see one EV charging station. My wife “thinks” she might have seen one somewhere. We drove mostly on interstate highways and stayed mostly at typical chain motels; i.e., Marriotts, Hiltons, and Wyndhams. We did not see any EV charging stations at any of them, although in fairness we were not seeking them out. They may have been in some remote corner or around back. Motel chains off interstate highways are the logical places for EV charging stations. The motel guests would be able to recharge their EV vehicles overnight. I asked the hotel manager at a Wyndham motel in New Stanton, PA, just off the PA Turnpike in western PA, if the motel had an EV charging station. She told me that it did not have one, but that a gas station a few blocks from the motel had one. Not very convenient for motel guests or anyone else for that matter! We did not see any EV charging stations at the rest areas on the interstates. Many of these rest areas were beautiful. Clean restrooms. Lots of eating options, etc.. Very nice. But no EV charging stations.


We saw very few EV cars on the road. Of course, one does not have to be traveling overnight to use the interstate highway system, so one can assume that the few EV cars we saw probably were driving within the charging radius of their owners’ home base. Our friends here in PA who own EV cars also have a second gasoline or hybrid vehicle for overnight trips.




Whether America is de-industrializing or not is a controversial subject among economists. For example, Café Hayek author Don Boudreau of George Mason University claims that it isn’t true; i.e. that America is near the peak of its historical industrialization. Be that as it may, here is what we saw, or more accurately, what we did not see. We saw no smokestack industries anywhere. Our route took us past Gary, Indiana, which used to be a huge steel producing town. One did not have to see the steel mills to know that they were there. One could smell them. A quick Google search shows that several still operate there. OK. But what about employment? My wife used Waze to reroute us around a big backup on I-80 near Gary, Indiana. It worked, but it also took us through deteriorating neighborhoods. One could tell that these had been thriving at one time. The homes were well-built; many were of all brick construction. They’d probably sell for a million dollars in California. But about every fifth home was uninhabitable. We saw two closed and deteriorating schools. We saw virtually no one on the streets. No kids playing outside or homeowners mowing the grass. Deserted. We made sure our car doors were locked, and we were happy to be back on the interstate in about twenty minutes.


We visited our home towns of Peoria and Decatur, Illinois. When we left in 1985, both were bustling factory towns. Peoria had been the international headquarters of Caterpillar Tractor Company for decades with six plants and a research facility. The research facility and one plant still operate there, but the headquarters was moved out of Peoria many years ago. No wonder. I imagine it would be hard to attract top management talent to live in Peoria these days. Peoria had other factories, plus a Pabst brewery and a Hiram Walker distillery, supposedly the largest distillery in America. The Pabst brewery is long gone and the Hiram Walker distillery now processes ethanol. The downtown area, once bustling with white collar workers, was deserted at one o’clock in the afternoon when we passed through. The streets told the story. Not only did we see almost no one outside, the quality of the streets was atrocious. One can only assume that road repair is the lowest priority for city government. Like Gary, Indiana, the quality of the homes was very poor. I grew up in a solid working class neighborhood. Nothing fancy, but the modest homes were well-kept. Not so today. My old grade school, a short six block walk from my boyhood home, had been closed for some time. Reportedly one of the high schools was closed. At one time there were six high schools within the city limits.


If anything, my wife’s home town of Decatur, about an hour and a half drive from Peoria, was worse. Its industrial base of Caterpillar, Firestone, and other factories was gone. Soybean processing giant ADM has its North American headquarters there, and there is a big Norfolk Southern Railroad operation, too. Nevertheless, like Peoria, the city is a shadow of its former self. No one was on the streets of downtown Decatur in the middle of the day.


The good news is that rural America looks very prosperous. We saw lots of beautifully maintained farmsteads. But a Google search reveals that less than two percent of the US population lives on farms and only nineteen percent in rural areas. The more prosperous small towns have been able to keep their Walmart Stores. Dollar Stores are ubiquitous. Mexican restaurants are popping up everywhere and often are the only restaurant in town other than fast food. Decently sized grocery stores are scarce. We drove a few hundred miles off interstates and found the quality of small towns to be spotty. Some looked prosperous, but others looked downtrodden and hollowed-out. Generally county seats looked better than others, especially those with an old-fashioned town square. Towns with a courthouse and/or a hospital seemed to be most prosperous.


Our journey was unique, of course. Our judgment was greatly influenced by knowledge of what had been there before. Perhaps Peoria’s and Decatur’s blue collar factory workers are now employed in different industries elsewhere. My biggest “take away” is that America is not ready for EV vehicles traveling long distances, especially overnight away from home and that swathes of the Heartland have become a wasteland.

The Dangers of a Cashless Society


Before delving into the dangers of eliminating cash and mandating that all transactions be conducted by digital means, let us briefly discuss the legal aspects of money. In the United States, as in all economies that have legal tender laws, only cash is recognized as money. Some may think that the balance of their bank accounts is money too, but that is not quite the case. Your bank balance is one step removed from legal money.


All banks must maintain minimum balances of reserves, either in cash held in their vaults or in their “reserve accounts” with their local Federal Reserve Bank branch (There are twelve of them). These reserve account balances may be converted to real money – i.e., cash – at your bank’s discretion. Bank reserve balances plus cash held in bank vaults—a very small amount – are reserves for the banking system but the total cash in our economy also includes cash held outside the banking system, such as the money in your wallet, cookie jar, or personal safe deposit vault.


The total of bank reserves plus cash held outside the banking system is known as the monetary base. The monetary base is not the same as the money supply. The vast majority of the money supply is composed of bank credit not backed by reserves. When banks make loans, they credit your account, which becomes bank credit money. Yes, this money was created by the bank out of thin air. Notice that the banks did not create reserves, only credit money, which is not the same thing.


As of July 2023, the monetary base in the United States was $5.5 trillion, whereas M3, total bank credit money, was $20.9 trillion! So, if everyone demanded real money (cash), the banks would be able to honor only about one fourth of the requests. The possibility of your bank failing is real. Over nine thousand US banks failed during the Great Depression of the 1930’s.


Risks of Electronic Payments


Your ability to hold real cash, and not just bank balances accessible by check or electronic means, protects you from the inevitable infrastructure problems associated with any electronic system but also from instantaneous seizure of at least some of your money. Cash is anonymous, whereas a bank account is not. You will still be able to function to the limit of the cash you happen to have on hand.


Now let’s say that cash has been eliminated by some legal means and you have angered the powers-that-be for some reason, probably for opposing them and asking others to oppose them, too. All the banks have to do is freeze your bank account or eliminate it entirely. We have two examples of this very thing happening in the recent past. First, the government of Canada froze the bank accounts of all those participating in the Canadian truckers’ general strike plus those who helped them. Secondly, British politician Nigel Farage had all his accounts closed for political reasons and found that no other British bank would serve him. Without the means to use money, Farage came very close to emigrating. Just think about that for a moment. You could not fuel your car, buy groceries, pay your rent, or a hundred other things without access to a bank account.


Risks of Central Bank Digital Currency


All the world’s major central banks are drawing up plans to institute digital currencies that they themselves control. This is very dangerous for our civil liberties. Now the government would not have to seek the cooperation of the banks to freeze your accounts or “de-bank” you entirely, as the British banking system did to Nigel Farage. At the stroke of a keypad, you would not have access to your accounts. No fuel for your car, food for your family, heat for your home, etc. No one should be allowed to hold such enormous power, which really is a life-and-death issue. Naturally it is being promoted as efficient and modern. It is no such thing. It is civil liberties issue and needs to be stopped.

Thursday, August 31, 2023

Gold Will Destroy Keynesian Fallasies


Leaders of the Western democracies are unprepared to deal with forces that will end the fiat dollar’s dominance as the preferred medium of international trade settlement, in place since the end of the Bretton Woods Agreement in 1971.


The BRICS summit, currently taking place in Johannesburg, South Africa, is expected to include an agreement on a first step toward establishing an alternative international trade settlement system based on commodities, which would certainly include gold. Dozens of non-Western and even some Western affiliated nations are attending with great interest. Six new members have been invited to join Brazil, Russia, India, China, and South Africa—Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates.


Although the coming change may be characterized as one between the Western democracies and the BRICS nations, the real battle is one of ideas between Keynesian economic theory and gold. The winner will be gold.


As Murray N. Rothbard explained in What Has Government Done to Our Money?, gold was never proven to be inferior to fiat money. The gold standard was not replaced by a better monetary system. It was suppressed in stages to satisfy the state’s insatiable need for money--first to make war and then to corrupt the people via welfare. The result, of course, has been never-ending wars, creeping expansion of the welfare state, unsustainable public deficits, and accelerating debasement of the currency.


The challenge to the fiat dollar began with its debasement, which lowered its purchasing power to gold by 98% since 1971, and accelerated with introduction of the so-called “Russian Sanctions” of freezing Russian owned assets in the West and denying Russia access to the international dollar trade settlement messaging system known as SWIFT. Russian monetary expert Sergey Glazyev has led the movement toward an alternative system.


Putting “Paid” to Keynesian Fallacies


Introducing gold into the trading system will expose the main fallacy of Keynesian economics; i.e., the elevation of aggregate demand to prominence in a nation’s economy rather than production. Keynes shunned Say’s Law of Markets in his General Theory of Employment, Interest and Money in order to hide his theory’s internal contradictions. As put succinctly by Emile Woolf, “Keynes endows the concept of ‘aggregate demand’ with god-like status while disregarding ‘production’-the only means of satisfying it.” Jean-Baptiste Say shows that production is required in order to enjoy the benefits of consumption.


On the face of it, it is hard to believe that anyone would believe that production either isn’t required for consumption or that it magically appears. Yet, this rather upside down theory appealed to politicians for obvious reasons; i.e., it gave them carte blanche to spend, all with money created out of thin air by the central bank. Rather than economize and prioritize spending that was absolutely necessary for the benefit of the entire nation, politicians were told by Keynes that it was their duty to spend if only to pay people to dig holes and others to fill them up.


Basics of a Gold Settlement System


The new international trade settlement system will require settlement in gold. A possible mechanism has been outlined by Alasdair Macleod of, which I have included at the end of this article. The benefits of the new system will become obvious to every nation, not just the current BRICS members. The political benefits are that no one nation can control or manipulate the system for its unearned benefit. The economic benefits are that government spending will be minimized so that resources can be allocated to production rather than state aggrandizement. A member can expand imports only by expanding exports. This puts market pressure on member governments to reform their internal economies in order to increase production.


To artificially increasing demand, per Keynesian orthodoxy, would be counterproductive, because gold would drain from the nation’s gold settlement account and imports would be suspended. Therefore, the system encourages sound economic practices within its members’ individual economies. Printing money, excessive and unnecessary regulations, excessive taxation, and excessive government spending do nothing to aid a member’s ability to engage in trade. Nations like the US who have huge welfare obligations and who have politically connected industries that do not add to the nation’s capital base will struggle. Having lots of nuclear weapons will be irrelevant and having bases around the world will be liabilities rather than assets.


An important point made by Macleod is that over time the gold settlement system for international trade will expand into members’ internal monetary systems. In other words fiat currencies, which can be inflated/debased by governments, will be thrown on the ash heap of history. They will become “barbarous relics” instead of gold, as Keynes predicted in 1924.



Possible Gold Settlement System by Alasdair Macleod


Credit must take its value from something else. We assume that commercial bank credit takes it value from bank notes, which is a central bank’s credit. Equally, if you and I agree an exchange for future settlement, we will value the settlement in credit, either in cash notes or bank credit. Each form or pool of credit is quite distinct, with all credit taking its value from another pool of credit.This is why gold almost never circulates in settlement of transactions. But for the whole system of credit to be stable in its value it must be attached to legal money, which for all currencies is gold, despite governments not permitting central bank credit to be redeemable in gold today.


My plan draws on the fact that in a gold-backed currency, gold is almost never used in settlement, settlement being in bank notes or more commonly commercial bank credit, both of which derive their value from gold. The objective, therefore, must be to devise a system of credit firmly tied to gold, without gold actually having to change hands. The result is a plan drawing upon elements of the Bretton Woods system, whereby exchanges of the gold currency for physical gold can only happen between central banks withdrawing or adding bullion from or to the New Issuer.


Accordingly, I suggest the following:


1. A New Issuer is established for the sole purpose of taking in gold, which is earmarked in designated vaults, against which it issues credit denominated in gold by weight (i.e. a gold gram) in the ratio of 1 unit to 2.5 units of currency (credit). This is designed to ensure Sir Isaac Newton’s ratio of gold to currency is maintained at 40% backing, while boosting the reserves of a participating central bank reallocating some or all of its gold reserves to the New Issuer. These gold currency reserves are recorded as an asset on the balance sheets of participating central banks, enabling them to issue credit denominated in the gold currency to commercial banks which have an account with them, and for the purpose of extending credit into the settlement system. This credit extension is recorded as a liability on the central bank’s balance sheet, and an asset on that of the commercial bank. It ties in the pool of central bank credit initially created by the New Issuer, into the pool of commercial bank credit used to finance cross-border trade, including the acquisition and sale of commodities.


2. A central bank can only submit gold currency units for redemption to the New Issuer to the extent that it has previously deposited bullion with it in the 1:2.5 ratio.


3. The credit denominated in gold is not initially intended for general circulation. Commercial bank credit denominated in the new currency will be created in the normal way for trade finance and cross-border sales and purchases of commodities. In any event, the whole system of credit linked to gold depends on genuine demand for it, unlike fiat currency which is debased by governments.


4. Commercial banks issuing this credit must be members of a clearing facility, which will also include central banks as members. Note that the New Issuer is not involved in any clearing activity: it simply runs a ledger recording the initial credit created in favour of a depositing central bank, and of any subsequent amendments based on additions and withdrawals of bullion by individual central banks.


5. Importers and exporters obtain trade finance denominated in the trade settlement currency from commercial bank members of the clearing facility, created in the normal way.


6. Since commercial bank credit ends up circulating locally, a government will have to decide whether to introduce exchange controls limiting its circulation to importers and exporters to “protect” its own fiat currency. Practicalities suggest that fiat currencies will be eventually displaced by the new gold currency units because of the stability of its value.


7. Only central banks registered with the New Issuer have the right to demand gold in exchange for the gold currency from the New Issuer. This ensures that the value of the new gold currency remains firmly tied to gold and is the sound basis for the value of credit issued by commercial banks for the purpose of trade finance.”


Of course, Glazyev may have other ideas.



Dollar Hegemony Ending Due to Geopolitical Change


Since the Bretton Woods Agreement in 1944 the dollar has been the world’s preferred reserve currency; i.e., the major trading nations of the world were willing to hold dollars in vast amounts to satisfy their need for a readily accepted worldwide payment medium. Even when in 1971 the US had violated its solemn promise to redeem its dollars for gold at thirty-five dollars per ounce, nations still were willing to hold dollars.


Germany Shies Away from Monetary Leadership


In the mid-2010’s I was certain that Germany would abandon the Euro and reinstate the Deutsche Mark. It was clear, especially to some German central bankers, that Germany was being cheated by the European Central Bank (ECB). Germany’s TARGET2 surplus represented a vast excess of German exports to other European Union members who were pledging near worthless government and corporate bonds in exchange for newly printed Euros from the ECB. These bonds would never be redeemed for anything of real value; therefore, it was simple rational self-interest for Germany to quit the charade. I predicted that such an action would cause the Euro zone to collapse and make Germany’s DM the preferred unit of trade in Europe and possibly threaten the dollar for worldwide reserve dominance. Obviously, this never happened. Why?


Germany knew and feared that alarm bells would sound all over the world that, once again, Germany was rising and would dominate Europe. The French, especially, would panic for at least two reasons. One, the collapse of the Euro would force France to make a stark choice. Either adopt the DM, as I expected most northern tier European countries to do, or try to revert to the French Franc, knowing that almost no other nation would be willing to hold Francs. France would be cut off from international trade unless it reformed its unsustainable welfare system. But every time in the past when France tried to institute any modicum of welfare reform, the population rioted. Two, France benefited immensely from internal EU transfer payments, most importantly farm subsidies. French farmers would be forced to reform or go bankrupt, ending a cushy lifestyle that seemed to be synonymous with France itself. The stark fact was that France had nuclear weapons and Germany did not. It was unthinkable that either Germany or Japan, along with Italy the losing Axis powers of WWII, would ever get nuclear weapons. Independent control of one’s own nuclear arsenal was the minimum stake for playing the reserve currency game. Thereafter, the game belonged only to nations with large economies that produced a variety of export goods and services desired throughout the world. That left only America in the game.


The great question is why Germany, even though it eschewed nuclear weapons under its own control, would ascent to giving up the DM and adopt the Euro in the first place. There are two answers. One, Germany wanted to reunite East and West Germany. The French, who legally held veto power over such a move, made adopting the Euro a condition for reunification. But why couldn’t Germany just ignore this now irrelevant agreement? Answer number two is just a theory but probably pertains to some extent, large or small to all major European nations. Germany had suffered between six and seven million military losses during the two great wars. (World War I losses) (World War II losses) Germany’s best and brightest, its future leadership, was lost for all time. These were wars in which the elite of all belligerents fought. Such leadership can never be replaced. The loss of future leadership was equally harsh on the other major European combatants. In the two world wars Russia/USSR suffered between nine and thirteen million military dead. France suffered a million and a half dead, the vast majority in the 1914 Great War. The United Kingdom suffered slightly over one million (this number excludes India, Canada, Australia, New Zealand, and South Africa.) As former member of the European Parliament Godfrey Bloom has stated:


“The 1914-18 war killed the best of the British Empire. The 1939-45 war killed what remained. Then the welfare state danced on their graves.”


The Event that Changed Everything


Then a great geopolitical event occurred--Deng Xiaoping rose to power in China following the death of Mao Zedong. Deng instituted sweeping, capitalistic economic reforms, and China rose to become a rival to America in terms of economic power. China had obtained nuclear weapons under Mao. Despite the fact that China was and remains a one-party dictatorship, it now had the two ingredients to challenge the US dollar—a large economy and nuclear weapons. China was blackmail proof. Like China, Russia had thrown off the worst of its Soviet economic policies under Yeltsin and Putin, but its small population and relatively backward economy was not in the same league with America and China. Nevertheless, after the US, NATO, and the European Union spurned Russia’s attempt to rejoin the old Concert of Europe (after all, Russia had been a great ally in WWII and had every reason to believe that, now that it had thrown off communism, it could become a vital part of Europe once again), it gradually saw its future as aligned with China.


So, what does all this have to do with the end of dollar hegemony? The answer is that the new Asian nexus saw a way to break the US use of dollar hegemony as a political tool. The Achilles Heel of the dollar is that it is a fiat currency. This suits the US political establishment very well, since it allows the US to inflate the dollar at will to pay for welfare and warfare. It also allows the US to impose sanctions on its perceived enemies, such as Russia and Iran, by cutting them out of the SWIFT international trade messaging system. It is similar to what happened to Brexit advocate Nigel Farage in the UK. For strictly political reasons his bank closed his accounts, and Farage was unable to find another that would accept his money for deposit. No bank account, no way to exist in a modern economy. Farage feared that he might be forced to leave his own country. The US-imposed Russian sanctions froze billions of Russian owned assets. But rather than cause Russia to back down in Ukraine, it seems to have sped up the process, started by Russia, to develop a new world reserve currency backed in some measure by gold. The “BRICS” nations—Brazil, Russia, India, China, and South Africa—have been joined by dozens of others who are determined to break away from the fiat dollar hegemony and use an honest, gold-backed trading settlement system. This new BRICS+ group claims that it will announce a first step in pursuing this goal at its meeting in Johannesburg at the end of August.


The US Will Be Forced to Embrace Gold…or Become Isolated


There are many who dismiss this development. After all, the US and the US dollar have been supreme worldwide for eighty years. These critics fail to understand real economics, real monetary theory, and real international statesmanship. The US has been enthralled by three destructive concepts. The first is Lord Keynes’ economics, which ignores Say’s Law of Markets, effectively endowing the Keynesian concept of ‘aggregate demand’ with god-like status while disregarding ‘production’-the only means of satisfying it. The second is the so-called Modern Monetary Theory, which posits that sovereign states can never go bankrupt due to their ability to print all the money they need. And the third is out-and-out arrogance since the end of WWII, which deigns to cancel entire nations. All this will come to an end when gold returns as the focal point of the BRICS’ monetary reform project. At that point the US will start losing friends until it, too, reluctantly regains its senses and returns to gold and honest dealing and honest, respectful statesmanship. America will need new leaders for this task. They are there, waiting to be called by the people. The US and the world will be a much better place as a result.


Thursday, June 22, 2023

Do Not Mourn the Fiat Dollar's Demise as a Reserve Currency


The Promise and Betrayal of Bretton Woods


The US dollar has been the world’s premier reserve currency since the Bretton Woods Agreement of 1944. Until 1971 it was redeemable by foreign central banks in gold at $35 per ounce. As long as the US did not print more dollars than it could redeem in gold at that price, all was well. But, as Henry Hazlitt predicted, the US did print more dollars and was forced either to abandon gold redeemability or to devalue the dollar to gold at some higher exchange rate. In 1971 President Nixon chose to abandon gold redeemability. This nefarious act opened the floodgates to US spending.


The Destructive Siren Song of a Pure Fiat Dollar


Despite the fact that it could not be redeemed for gold, the dollar continued to be used as a reserve currency by most of the world. American politicians could not have been happier. The stockpiling of dollars in foreign central banks dampened higher prices in the US and allowed politicians to spend on war and welfare. There seemed no need for spending discipline; in fact the Keynesian economists in government, the financial press, and academia place spending as more important than savings. Spending was supposed to stimulate the economy. Therefore savings was bad; i.e., the so-called paradox of thrift.


But the US dollar’s end as the world’s premier reserve currency is nigh. Printing money in unbelievable amounts has led to the dollar’s loss of purchasing power by over 98% to gold ($35/$2,000) Weaponization of the dollar in international trade has accelerated that process. Foreign owned dollar accounts in American banks have been frozen or confiscated, plus the US has cut off some foreign governments, such as Russia and Iran, from the international financial messaging system known as SWIFT. Led by Russia, the BRICS+ nations will abandon the dollar for international trade settlement and reintroduce gold in some form. No nation has a legal or practical monopoly on gold. Furthermore, gold cannot be debased--it has no counterparty. Therefore, we should expect the entire world to embrace gold for international trade settlement in the coming years.


Americans should welcome the end of the fiat dollar. The fiat dollar has been a tool for government to rob not only the rest of the world but the American people, too. Monetary debasement destroys capital. We see irrefutable evidence of this in the fact that America spends as much on defense as the next  ten nations combined. Defense spending is non-productive. It may be necessary, of course, but excessive defense spending represents real resources withheld from meeting the needs of the American people. American industry has been starved of the capital it needs. The inevitable rise in consumer prices represents a real transfer of wealth to the early receivers of the newly printed dollars from the rest of society, especially retirees attempting to live on a lifetime of savings. Their savings diminishs in purchasing power every day.


Fiat Money Corrupts Society


But there is more, much more. Fiat money produced at the click of a computer at the Fed corrupts the people. Rather than becoming self-reliant, the people become dependent upon government to provide them with the basics of modern life—schooling, healthcare, employment, housing, you-name-it. Why prepare oneself for a lifetime of toil when the government has unlimited money to take care of your every need? This is a prescription not only for class warfare and social unrest but for preventing the nation from meeting its productive potential due to the lack of production from millions who are perfectly capable of contributing something to society. I daresay that in addition to government the people themselves rationalize their dependency as merely taking one of the many “entitlements” due to them as being fortunate enough to have been born into a fairly prosperous country. But whence comes this so-called entitlement? Who provides it? Not government, although government may be the legal transfer agent. Entitlements come from the toil of one’s fellow citizens. It can come from nowhere else.


The Nations of the World Are Moving On, With or Without the US


Led by China and later by Russia, some nations of the world, not wholly within the US orbit, have been building the necessary infrastructure and rules for conflict resolution and increasing trade and investment. Countries representing the vast majority of the world’s population, and also most of the world’s proven commodities, are intent upon industrializing as did the West. The basis for world economic development is sound money, which means gold. Only sound money can provide the irreplaceable information about the true costs and benefits of economic development. Only sound money can reassure investors--whether they are individuals, corporations, or governments—that their investments are secure and that payments will be made in non-depreciating money. This is only fair, and the US and its allies should join this project rather than ignore or fight it.



Sound Money Is Required for Real Budget Discipline


Sound Money Is Required for Real Budget Discipline

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TAGS Big GovernmentThe FedInflationMoney and BanksPolitics

Listen to the Audio Mises Wire version of this article.

News here in the USA has been full of the latest farce known as raising or not raising the debt ceiling. After the usual dog-and-pony show, a budget deal was reached. But was it progress? It was a foregone conclusion that the debt ceiling would be raised, yet again, for the simple mathematical reason that unless the budget is cut, via spending cuts or increases in taxes, it can do nothing else.

With the budget deficit projected to be (hold on to your hat!) $1.5 TRILLION, that is a political impossibility. Notice that I used the adjective “political.” Of course, technically it isn’t impossible to balance the budget or even run a surplus. But under the current monetary regime of fiat money that can be produced in any amount at the click of a computer at the Fed, there is no support either in Congress or among the electorate to do so.

All of us are corrupted collectively, as described by German economist Thorsten Polleit. Since the sky will not fall, yet, by printing more fiat money, no one can be expected to support real budget cuts—not the military, retirees, Medicare and Medicaid recipients . . . the list goes on and on. The Fed will continue to print money to support the rising government debt, in nominal terms only, until the dollar’s purchasing power is destroyed.

The only way to prevent this catastrophe is to return to sound money; i.e., linking the money stock to a commodity, almost certainly gold. By “linking” I mean that what the people call “money,” whether in the form of paper certificates, bank accounts, or some other form such as digital currency, is backed 100 percent by the commodity. The commodity is money. Nothing else. Certificates, bank accounts, or other forms are merely convenient ways to transfer ownership of claims upon the money stock.

Yes, this is the only way. Forget about electing or appointing the “right” people to Congress or the Fed. As long as any person or entity CAN print fiat money, it WILL print fiat money. It is illogical to support a monetary regime in which printing fiat money is permissible and expect that anyone exists who will refrain from doing so. Therefore, turn off your TV. Stop reading the business press. The US federal debt will grow and grow, and nothing can stop it under the current monetary regime.

The Return of Gold as Money

So, is that it? We are doomed? NO! Gold will return! Why? For the simple and rational reason that gold and only gold works. For five thousand years gold was money and money was gold. Gold allows complete strangers to engage in productive exchange. Not only complete strangers but even enemies can engage in productive exchange. You don’t like the Russians? OK, but you don’t have to like them in order to buy their natural gas. Cooperative exchange means, per se, that both parties expect to benefit.

For all I know my local hardware store owner may be an Atlanta Braves fan, about as low as it gets for a Philadelphia Phillies fan like me. Nevertheless, I appreciate the convenience and quality of his store’s products and services, and I’m sure he appreciates my patronage. This is not a frivolous matter. Gold allows everyone to benefit from a worldwide division of labor that requires no vetting of personal or political views or affiliations. In other words, gold leads us to a world of peace and prosperity.

The “East” Will Lead the Way, and Eventually the “West” Will Follow

The era of fiat money and dollar hegemony is coming to an end. Russia, China, India, the Arab nations, South Africa, Brazil, and others—let us call them the “East”—soon will settle their international trade in gold. It will work. Then the Western fiat money nations, led by the United States, will watch as, one by one, former allies start jumping ship. This does not mean that they are willing to be dominated by Russia or China, for example, only that real prosperity is dependent upon honest money; i.e., gold. The dollar will be thrown on the ash heap of history just like the French assignat, the Confederate dollar, the German papiermark, and more recently the Zimbabwean dollar. Of course, real statesmen, especially American, would understand this and start preparing their nations for this immense change in which military power is irrelevant.

Time for Humility

It never hurts to remind ourselves that the world is a very big place and America is just one small part of it. We must learn to be good citizens of the world, honest in our commercial affairs, friendly and respectful toward all, and meddle in the internal affairs of no one. For a nation that has arrogantly assumed that it is special, this will be a very hard pill to swallow. American military power and the dollar as the world’s premier reserve currency created a hubris that is evident in many areas.

Preposterously we claim the power and authority to change the weather and the earth’s temperature, to control the health outcomes for billions of people through international vaccine mandates, the ability and maybe authority to change a person’s biological sex . . . the list goes on and on. It is time for a return to humility, honesty, and above all freedom of the individual to live his life as he, and only he, sees fit.

Monday, April 3, 2023

Simplicity and Honesty in New Central Bank Golden Currency System


For many months now Alasdair Macleod of has been writing about the efforts of a group of non-Western nations, led by Russian economist Sergey Glazyez, to establish a new settlement system for international trade. For many months I have been carefully following Mr. Macleod’s explanations of this initiative and have been privileged to correspond with him to gain a better understanding of what may well be the most momentous and consequential economic and financial initiative in decades. Therefore, much of what you read here has been vetted by Mr. Macleod, although I take full responsibility for any errors that may have arisen due to my lesser understanding.


The impetus for the creation of a new currency for international trade settlement stems from two sources. The first was the continued debasement of the current medium of international trade settlement—the US dollar, since 1944 the world’s premier reserve currency. For many years the dollar’s value has been steadily weakened, so that today it is worth only two cents of its value in relation to gold in 1971, the year that President Nixon closed the US gold window. Since the Bretton Woods Agreement in 1944 until the autumn of 1971, the US had pledged to redeem dollars for gold at $35 per ounce. The world trusted that the US would not expand its money supply without first accumulating more gold to back the new dollars at the agreed upon exchange value. Of course, the US cheated almost from day one, but especially after the end of President Eisenhower’s administration in 1960 and the expansion of the US welfare/warfare state under Presidents Kennedy and Johnson. It didn’t take long for astute economists in Europe, initially in France, to figure out what was happening. The predictable run on the US gold supply ensued, forcing Nixon’s hand. To his everlasting discredit he took the short-term, easy way out. His alternative would have been to devalue the dollar to gold and pledge to end dollar debasement.


The second impetus came from the sanctions directed at Russia and a few others, which froze Russia’s dollar assets in Western banks (some would call this theft) and cut Russia out of the SWIFT international messaging system used for settling trade. Iran, for example, had been the cut out of SWIFT previous to the Russian invasion of Ukraine and has signaled its intention to join this new system. The West has infuriated many non-Western nations by using financial and economic sanctions as punishment over non-trade issues. Commentators call this “weaponization of the dollar”. But the non-Western nations are building a better system to using the dollar as the reserve currency and SWIFT as the messaging system.


Establishing a Gold Currency for Trade Settlement


In his recent (February 23, 2023) weekly essay, Alasdair Macleod moves from the theoretical to the practical steps that are required to establish this new settlement system. He titles his essay “CBDCs—The good, the bad, the ugly”. The term “CBCDs” refers to Central Bank Digital Currencies. Mr. Macleod quickly explains that there is no need for CBCDs to establish the new trade settlement system. Ordinary accounting systems and clearing house mechanisms are perfectly capable of dealing with international trade accounts; therefore, any foray by central banks into establishing their own digital currencies is for other, possibly nefarious, purposes. Thus, the “bad” and “ugly” role of CBDCs to which Mr. Macleod alludes.


The key insight for the establishment of a new trade settlement system is to create a new gold backed currency. Macleod’s eight bullet points lead the reader through the process. Once understood, one sees its simplicity and inherent stability and honesty. A “New Central Bank” (NCB) will be established in which each member nation’s central bank has a gold currency account. The size of the account depends upon how much gold the member houses in one of the system’s approved vaults. The size and stability of each member’s internal currency becomes less relevant. What is important is the size of its gold holding.


So, immediately we see that a third party ensures that payment in specie cannot be abrogated, as the US did in 1971, because the gold used for trade settlement will be housed outside any single member’s control.


Net Settlement Will Not Require Vast Amounts of Gold


The system of net settlement is the same, in a mechanical sense, to that of ordinary intra-national check settlements. Commercial bank customers accept checks drawn on many banks during their business day and deposit them at their local bank. The local bank sends these checks to a branch of its central bank for credit to its central bank account, called a “reserve account” in the US. All other banks do the same. Some banks deposit more money drawn on other banks than other banks deposit drawn on them. And the roles change every day; i.e., a bank deposits more some days than is presented against it and vice versa the next. So the net settlement is seldom very large, one way or the other. The same mechanism pertains to international settlement with gold backed money units.


A key point to note is that the financing of trade is not settled by the new currency itself, but in commercial bank credit denominated in it. Whether an individual trade transaction is financed and on what terms is always a commercial banking decision and should not be a matter for government policies. Each nation need deposit only enough gold at the New Central Bank to give its regulated commercial banks the credibility to issue bank credit based upon the new currency. If a nation runs consistent settlement deficits, its credibility for trade financing purposes may start to dwindle and the cost of obtaining credit in the new currency will rise. This is a market signal to reform ones internal economy in order to participate in the wider world economy, for imports are funded by exports. The member running consistent deficits can always send more gold to one of the member-approved vaults in order to continue to import.


It is the market rating of a commercial bank’s creditworthiness which sets its ability to discharge its obligations to depositors in the new currency, not access to the new currency itself. That remains available to participating central banks only, available to swap with other member central banks if needed in a crisis. A commercial bank that extends too much credit too quickly in the new currency unit and loses the market’s confidence is a problem only for the bank and its customers. The currency is unaffected. The market is the disciplinarian.


Export prices will be established in the export market, denominated in gold money prices. For example, a barrel of Saudi oil may be priced in gold money of two to three units, which is completely independent of the dollar, yuan, rupee, etc. price in internal markets. What matters most is that the importing country has sufficient credibility among its peers to settle its daily trade account in the trade currency.


The New Central Bank will adopt a forty percent ratio of gold to gold money, a ratio that was adopted by Sir Isaac Newton when he was master of the (British) Royal Mint which has stood the test of time. This will enhance the value of gold reserves otherwise maintained by a central bank by two and a half times.


(Please see the appendix at the end of this article in which Mr. Macleod explains the relationship between the New Central Bank, the participating national central banks, and the members’ commercial banks themselves.)


Keep Trade from Being Used as a Geopolitical Tool


Many in the West may not think about the falling purchasing power of the dollar and its effect on international trade settlement as a big problem in their everyday lives. Also, they may agree with the Russian sanctions, high handed and possibly illegal though they may be, as giving Russian despots their just desserts. But I think that Macleod sees a much bigger problem with such short term thinking. Let me offer this scenario. Would you rather live in a world in which a criminal gang controls money production and can print as much as it desires for itself and its friends, not taking into account the damage done to the larger society in which you live, or would you rather live in a world in which no one can produce money ex nihilo for his own benefit? Would you rather live in a world in which a criminal gang can freeze your bank accounts, denying you the ability to buy food, fuel, shelter, etc. or would you rather live in a world where the rule of law protects your civil liberties and your property? I think I know the answer that most freedom loving people will give. Therefore, it should not be a surprise that many nations of the world agree with you on these issues as applied to world commerce. The steady depreciation of the dollar and the high-handed sanctions are turning into the Achilles Heel of the Western controlled international trade system. The rest of the world has decided that it has had enough and is taking matters into its own hands, difficult though that process may be.


The new system, owned by all the members and controlled by no one member, should not veer from its specified purpose of settling international trade accounts. Nor can the medium of exchange (gold) be debased. It is an honest, strictly limited in scope trade settlement system only. Geopolitical issues will be settled in more appropriate forums where each side can present its grievances.


One can hope that continuing trade with a country with which one has a temporary geopolitical issue may actually result in a quicker and more harmonious resolution. In any event, we must remember that people trade with other people and that nations do not trade with other nations. Using the trade of ordinary people as geopolitical tools should be reduced somewhat, forcing diplomats and statesmen to do their duty and find diplomatic and statesmen-like solutions. Well, one can only hope.


Appendix by Alasdair Macleod:


In this detailed explanation, the New Central Bank is the NCB and a participating central bank is the PCB.


Commercial banks can access credits representing the new currency in the form of deposits, conventionally labeled reserves, through their account at a PCB. This can be funded simply by depositing the PCB’s national currency, or any other currency which can be sold on the foreign exchanges, in exchange for a credit representing the new currency in favour of the commercial bank.


The only accounts maintained at the NCB are with participating national central banks. In return for a gold deposit, the NCB credits the participating central bank with the new currency 2.5:1 — in other words a 40% reserve. This is an obligation of the NCB in favour of the PCB, and in effect creates the currency in accordance with a strict formula.


The PCB records the new currency on its balance sheet as an asset. In other words, it is an obligation of the NCB in favour of the PCB.


The book entries are as follows: the PCB records its credit obligation in its favour from the NCB in the new currency as an asset. If a commercial bank wants credit access to the new currency, it sells domestic or other acceptable currency to the PCB in return for a deposit, which is a credit obligation between the PCB and the commercial bank. And if the PCB wishes to operate a minimum reserve policy in the new currency, it is free to do so. That is a matter between it and its own commercial bank network, and does not involve the NCB.


Alternatively, if through circumstances the PCB agrees to make a loan to a commercial bank in the new currency, it will be free to do so by the normal process of credit creation, whereby the loan denominated in the new currency is created in favour of the commercial bank (recorded as an asset on the PCB’s balance sheet), with a matching liability recorded as a deposit (on the liability side of the PCB’s balance sheet) upon which the commercial bank can draw. This is how a discount window currently operates, and similarly will be seen as last resort funding by commercial banks. Furthermore, it allows the PCB to participate in the commercial banking clearing system.


Banks based in jurisdictions which are excluded from participation at NCB level, or choosing not to join can still participate by setting up branches or subsidiaries in participating jurisdictions, if the relevant PCB is prepared to authorise an account.


Note that in this structure, no extra currency is created by the NCB. In fact, only the NCB can create new currency. In effect, the new currency is ring fenced, and only expanded if a PCB deposits more gold with the NCB. Therefore, all credit based on it becomes firmly tied to the new currency, the only variation in value being in the discount rates (interest) which reflect individual counterparty risks and time preference, if appropriate.


The expansion of credit based on the new currency is not an inflationary concern, because the new currency is used to facilitate production from commodity acquisition to final product, and not for financing consumption. Furthermore, the mechanical tie to gold bullion is the ultimate guarantee of the currency’s value and that of all credit based upon it.