Sunday, April 19, 2009


No one alive today has ever experienced sound money; that is, money backed by a commodity of lasting value, such as gold or silver. So it is not surprising that even many who understand the concept and advantages of sound money have many serious questions about the possibility of reinstating a gold standard. Their questions usually occur in this order: Is fiat money so ingrained in our economy and our way of life that re-conversion is not possible? What are the obstacles? Would the U.S. be able to reconvert on its own or would most of the world have to join us? What would a transition entail?

If it really isn’t possible to reconvert and/or the obstacles and transition costs are too great, lets just forget the whole thing and concentrate our efforts on getting reformist politicians and bureaucrats in positions of power. In other words, get better men to rule in a benign dictatorship. Regrettably this really is not an option. Our current fiat money system will fail. No such system has ever met the test of time. All…let me repeat that…ALL such fiat money experiments have failed. Once men realize that they hold the power to create and spend money in unlimited amounts, no appeal to the better angels of their nature will prevent them from abusing their commissions. So, our only option is to reconvert.

Fortunately, fiat money is not so ingrained in our economy that it cannot be replaced by a gold standard. The main obstacle to doing so is not some mechanical barrier. Although such a transition would be easier the more countries that agreed to participate in a coordinated re-conversion, the U.S. could go it alone. And, finally, there are several intellectually solid transition strategies from which to choose.

There is no question that many American institutions cannot survive in their present form under a sound money environment. It is these beneficiaries of our fiat money system that present the most serious obstacle to re-conversion. I refer, of course, to government itself. A fiat money system enables government to expand its power by stealing the product of the people’s effort without overt taxation or honest borrowing. Such is the situation today. Our government--with the cooperation of our central bank, the supposedly independent Federal Reserve—spends money created out of thin air and intervenes to drive down the rate of interest. So far this strategy appears to work, and this is a shame. For the inevitable rise in prices and the interest rate will be delayed, perhaps for more than a year. Then the government’s apologists will blame price rises on everyone but themselves—greedy oil companies, greedy oil sheiks, greedy merchants, etc. If you think that the people will not be so foolish as to believe such nonsense, this is exactly the message that the government has so successfully spread as the cause of our current financial crisis. Therefore, you can imagine the tremendous propaganda effort from our government to discredit efforts to end their gravy train. Our response should acknowledge the source—such cries of panic are to be expected and should be ignored.

So, we have determined that there really is no choice but to re-convert to sound money, and we have discounted the objections from government itself, the primary beneficiary of our fiat money system. Can we go it alone or do we have to get the cooperation of our major trading partners? Professor George Reisman has addressed this issue (and more) in great detail in his magnum opus Capitalism and many other venues. He concludes that an internationally coordinated re-conversion would prevent the likely rise and subsequent fall in prices in the U.S., a one-time cycle caused initially by "outside gold" flowing into the U.S. and inflating the U.S. money supply to be followed by a later fall in U.S. prices as our sound money regime takes hold. If the European Central Bank, the Bank of Japan, the Bank of England, and the Bank of China coordinated re-conversion with us, there would be no such "outside" gold to initiate the cycle. But, even if these countries demurred in our re-conversion effort, Reisman explains that the U.S. would be the eventual winner, because the cycle would end and the dollar would gain against all other currencies as time progressed. Furthermore, the U.S. would not suffer the frequent boom/bust business cycles caused by our current, manipulated fiat money system.

Finally, how would we do it? There are several scenarios. Some economists claim that all the U.S. has to do is repeal its legal tender laws (laws that prohibit any other money from circulating within the U.S. other than our fiat dollar). A free money environment would allow the wonders of competition to work. The best monies would drive poor ones from the marketplace, a reverse of Gresham’s Law. Good money would drive out bad in the same way that any superior good drives lesser ones from the market. Whether only those currencies backed 100% by gold would circulate or if some lesser currencies also would circulate would be at the discretion of the real rulers of the marketplace—the consumer.

Most other scenarios give some role to government, at least for the transitional period. The U.S. confiscated the gold of the U.S. citizenry in 1934, forcing them to surrender their gold in exchange for depreciating federal reserve notes. So government, in effect, stole the nation’s gold and still holds vast quantities of it in its vaults. This gold would be returned to the people in proportion to their money holdings via some mechanism, of which there are many worthy ones. Then the U.S. dollar would be fully convertible to gold at some market determined parity price, such parity price then established by law as the legally enforced price of the dollar. Any dollar holder could redeem his dollars for gold at the parity price. At this point the U.S. dollar would become, in essence, a warehouse receipt for gold. The U.S. would be on the gold standard.

The sooner the U.S. re-converts to the gold standard, the sooner the U.S. economy will recover and, more importantly, the sooner the liberties of the people will be restored. No longer will the government be able to hide the true cost of its spending and blame others for the inevitable deleterious consequences. It must either tax the people or suffer higher interest rates. Then the people can decide whether such spending is warranted, because they will see first hand that they must pay the cost of such spending. Of course, it has always been the case that the people must pay for government spending, but now this fact will be immediately discernable and subject to the people’s control. That is the America in which I want to live. How about you?

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