The Situation Today
The US economy continues to decline, despite the government bailouts and stimulus programs since 2008. The problem is that these measures only prop-up a system of fake money and crony-capitalism that was doomed from its start, and must be replaced.
Key events which started this decline were creation of the Federal Reserve System (Fed) in 1913, FDR’s ‘big government’ projects and confiscation of private gold starting in 1933, and Nixon’s termination of the right to redeem dollars for gold in 1971.
Both gold events were prompted by people and nations redeeming their paper dollars for gold when they feared (correctly) that the USA gold supply was getting low. Spending and debt have soared ever since because there is no limit imposed by gold redemption. This essay offers the monetary gold standard as the key solution, in parallel with reduced spending, and the end of Empire-USA and its wars for oil and control.
I have previously written (here) about the benefits of converting the USA to a free-market ‘gold as money’ monetary system. The primary cause of the ongoing economic decline of the US and Europe is fake money, which has been created out of thin air to fund excessive spending and debt. The desperate ‘patches’ and ‘bailouts’ used by the Fed have not solved the problem. The Eurozone suffers from the same problem, and the economies are dangerously ‘linked’ via the banks, and IMF. The bureaucrats are now considering a ‘world currency’ such as the IMF ‘Special Drawing Rights’ (SDR) to end the crash and keep their jobs. Sound money by a gold standard would be a far better solution!
The numbers are huge! On Jan. 22, 2012, TheDailyBell.com wrote:
We’ve estimated central banks – especially the US Fed – have probably backstopped the world’s financial system with funds in excess of US$50 trillion by now. That doesn’t sound like just a modest crisis to us. It wasn’t a real-estate crisis, either, but a crisis of central banking fiat money. It was ultimately a crisis of the dollar reserve system.
Our current system of fiat money (‘face value’ declared by government; with no intrinsic value) is operated by the unconstitutional Federal Reserve System (the Fed) to finance excessive government spending, wars, and bailouts to friends, while imposing loss of the dollar’s value (down 98% since the Fed started in 1913) on the people.
The free-market gold standard means gold is money, not just partial ‘backing’ for paper ‘money’. Gold is all or part of coins (a disc in the center), and paper notes (which would replace our Fed Notes) are redeemable for gold on demand. The requirement for gold redeemability of paper notes limits a mint’s (government or private) ability to create new money out of thin air. This would include competing coins and paper notes offered by private mints and the US Treasury. The Fed would be abolished. This money would only be marked by the weight and purity of gold it contains or represents, with no ‘names’ such as ‘dollar’. Prices would be in weight of gold (milligrams, etc.). History shows us this system always results in stable value of the money, and more peace (wars are expensive) and prosperity. Another lesson of history is that governments almost always ‘take over’ the monetary system and reduce or suspend redeemability so they can create money as needed.
I recommend use of the ‘Six-Step Gold Conversion Plan’ shown below. Using gold as money will bring new confidence and vitality to our economy and the private decision makers (large and small) who drive it. Money will be invested and people will be hired. Other nations, and the Eurozone, should follow the same plan.
To plan and implement the new monetary system, I propose that Congress create the ‘Currency Act of 2012’. No commission is needed to ponder whether a gold standard is needed. The Act should:
Step 1: Change Laws, Abolish the Fed: Repeal: a. All legal tender laws so private firms (mints) can issue new money, b. Laws that tax increase in market value (then to be known as ‘purchasing power’) of precious-metal coins (formerly considered numismatic), and c. Any other laws that prevent, inhibit, or tax the new money.
The only government role would be to prevent fraud, and to verify by physical inspection that reserves are as advertised (but with no reserve ‘requirements’). I recommend that ‘demand deposits’ (checking) have 100% reserves, and ‘time deposits’ have reserve ratios based on prudence of bankers and approval of their customers (or they will withdraw their funds or sell the stock). The Federal Reserve will be abolished three to five years after private money becomes legal (or if Congress refuses abolishment, let it atrophy to death from lack of customers and income). Its useful functions could be done by private firms.
Step 2: New Money. Private mints may be created, with government licensing optional. Banks could also provide mint services. The mints would introduce new gold money labeled by law as to the weight of gold a coin contains, or that tokens or paper certificates represent (thus ‘weight’ is the unit of account). Some might offer ‘Digital Gold Currency’ (see goldmoney.com).
All mints would be required by law to; 1. Publicize the weight and purity of gold they have as a reserve for redeeming paper or digital money, and the value of money issued, 2. Allow unscheduled physical inspections to confirm that the gold is in their possession, and free of encumbrances such as liens, leases, etc. The same would apply to base-metal coins. The ‘unscheduled’ requirement will prevent relocating the same gold to be put on display at different mints, or their branches, ‘just in time’ for an inspection! The results of these inspections would be published by the mint’s Internet web site, newspaper, poster in the mint, etc., and available from a government web site. The inspections would be justified as a routine function of the government to prevent fraud, but could be done by a private organization as well. Mints with strong reserves will advertise their strength to attract customers. Customers will ‘wake up’ and pay attention to reserve status, etc., rather than assuming the government is protecting them with regulations. The free market at work!
Step 3: Calculate Amount of Gold per Fed Note: Require the Federal Reserve banks, the U.S. Treasury (Ft. Knox), the Exchange Stabilization Fund, and any other part of the United States government that has gold, to promptly submit to a private audit of the amount and purity of gold they own and its title status (leased?, loaned?), reveal the results to the public, and then give it all to a ‘Redeem Trust’ owned by the U.S. Treasury, to be used to redeem existing coin or paper currency, ‘digital deposits’, and bonds on demand, based on a certain weight per dollar, in accordance with the plan below. The Fed would not be involved in such conversions. Some may argue that the Fed is a private firm and owns the gold it has, but this ignores the fact that it got that gold from the US citizens illegally in the first place by issuing fake Fed Notes, and perhaps some from FDR’s confiscation of gold in 1933. If the Fed manages to win a court fight on this point, the Treasury could buy it with US bonds.
The U.S. government claims to have 8,134 metric tonnes of gold in its reserves (an audit is needed). At 32,150 troy oz. per metric tonne, the US has 260.415 million troy ounces. There is also a question as to the purity (fineness) of the US gold (debased or fake bars in storage, or gone on lease or loaned?). Only a proper audit will tell.
Private sources put M3 (cash, checking accounts, savings, and securities such as bonds) at about $14 trillion worldwide in Oct-2011. If 100% of the M3 Fed Note dollars and bonds were made redeemable with our 260.415 million troy ounces of gold there would be 0.0000186 oz. per dollar (about 2 ‘100 thousandths’). This means 53,763 ‘backed’ Fed Note dollars would be redeemable for one troy ounce of gold. This implies a 97% drop in the dollar’s current value versus today’s about $1,600 per oz.; a ‘gold value’ ratio of about 34:1. The dreaded day of reckoning! But this issue fades as all nations convert to gold money (they must, or no sellers will take their trash fiat ‘money’ once the US dollar is redeemable) and there is no ‘price’ for gold, just its weight.
Once the legal tender laws are repealed:
a. No additional units (physical or electronic, including new credit) of the old ‘Fed Note’ money will be issued. The free market will provide new money as needed; if the Fed isn’t required to stop creating new money at first – due to politics, etc. — the new private money should proceed in parallel; let the best money win!
b. Holders of old ‘Fed Note’ physical money would be required to convert it to new private money within three years of private money becoming legal.
c. The government must accept payments by ‘new private money’ if the issuing firm’s reserves are at least forty percent, and have been verified to the public and government, and . . .
Step 4: Final Implementation:
a) Set the weight and fineness of gold that each existing Fed Note (physical, bond, or digital) will represent. This will involve debate as to % reserves and how many USD – M1, M3? are covered, and the effective date. I suggest 100% of M3 and activation of the new system within 3 to 6 mo. after the Act is passed. Using M1 would have a lower inflationary impact on the dollar’s value (more gold per dollar), but leave savings accounts, and domestic and foreign bond owners with worthless paper, which amounts to default and theft! Reserves of 40% or 60% might be enough (to avoid redemption ‘runs’ that would destroy the new system), but it is better to be on the safe side.
b) Require that new money issued by the U.S. Treasury (no Fed issues) be labeled only by weight and purity of gold (no ‘name’ or religious content) and made available on the day the new system is effective. All government transactions (fees, payments, taxes, Soc. Sec., bond principal, etc.) would be denominated by weight of gold. This will encourage public use of gold weight as the unit of account for pricing.
c) Include lessons from how other nations changed money.
d) Publicize the discussions, leading to the definition of the Act so US citizens and firms, and other nations, are aware and can submit their ideas and make their own conversion plans. I oppose multi-nation planning conferences; they would just cause delays and dilution of terms.
e) The Act should include a requirement to use a certain factor (about equal to the ratio of gold price between the new and old systems; ‘34’ per Step 3 above) to adjust values in existing agreements (bonds, wages, loans, mortgages, pensions, insurance, etc.), and set new values by weight of gold.
Using lower reserves, or M1, would reduce this factor but increase risk of a ‘redemption run’. Pricing for new transactions or agreements would be set in the free market, and using ‘weight of gold’ as pricing would be encouraged.
Step 5: Domestic. Abolish the unconstitutional GSEs such as Fannie, Freddie, Ginnie, and Sallie Mae, FHA, Pension Benefit Guaranty Corp (PBGC), FDIC, all TARP-Like projects, the Exchange Stabilization Fund (ESF), the Export-Import Bank, etc. All of these are part of the government’s counter-productive intervention in, and manipulation of, money, private business, and banking. While at it, end all unconstitutional departments and agencies!
Step 6: International. Terminate US membership in the IMF (and get our gold back), World Bank, CBGA, BIS, G-20, G-8, NATO, United Nations, NAFTA, WTO, and others. Free trade and embassies are adequate for contact with other nations.
Once launched, gold value (purchasing power) is self-controlled by supply and demand, with no ‘parities’ to maintain. Gold and money ‘values’ are the same (gold is money, and there is no ‘price’ for gold), and no ‘management’ is needed. Good! There is always ‘enough’ gold, because, with a history of less than two percent annual growth in supply due to mining, its purchasing power increases (Appreciation) as an economy (GDP) grows. This is Economics 101: supply and demand!
The above ‘Conversion Plan’ is unique because it cuts all mandatory ties to government (mint licenses are optional, no legal tender laws), abolishes the central bank, converts all existing money and bonds (M3) to ‘gold backed’ as a transition, and uses ‘weight of gold’ as the unit of account for all ‘new’ money. It offers more detail than any plan I am aware of. I hope somewhere Mises, Rothbard, and Hayek are smiling.
Key Changes to Expect
These are all based on free market reality, not laws or G-20 agreements:
1. The concept of a ‘reserve currency’ would no longer be needed because any gold-based money would be accepted in world trade, or for bank reserves, if there was confidence it could be redeemed for gold
2. When most nations convert to gold money, the concept of a ‘price’ for gold will vanish. The reverse will occur, as coins or notes are ‘valued’ in the weight of gold they contain or represent, and Sellers advertise ‘prices’ in grams (milli, micro?) or ounces of gold,
3. The foreign exchange business (Forex) with banks will wither and die as it becomes useless, as will government manipulation such as the U.S. ‘Exchange Stabilization Fund’ which was setup by FDR in 1933 to manipulate the market price of gold.
4. People like to give ‘names’ to money (Dollar, Franc, etc.), but these would be social terms and would not need to appear on the money (but weight of gold would), unless the minter chooses to do so. Weight of gold will be the unit of account.
5. Nations will convert to gold money on their own terms, as and when needed. There will be no need for grand conferences (G20, G100?) to set rules, although some ‘Agreements’ may occur, and then whither when the ‘rules’ become onerous and counterproductive.
6. There will be no ‘weak’ or ‘strong’ currencies or ‘pegs’, all of which were part of the manipulations in the past. Gold will be the great equalizer and honest broker. The games will be over (and most of the wars).
7. In the present system of constant inflation, borrowers have the advantage of repaying loans with depreciated (less value) money, but with gold as money (by weight) its value may increase during the term of the loan, thus giving the lender an advantage of being paid in a weight that is more valuable. I predict that loan terms will be developed to adjust for this, because both borrowers and lenders will demand it. The likelihood of appreciation will also be a positive incentive to save more, and borrow less.
As painful as the transition to ‘gold as money’ may be for some people and nations, it is better than the chaotic hyperinflationary crash (with money values approaching zero) that is otherwise 99% likely to occur under our present worldwide fiat money, and central banking system.
Benefits of a Gold-Money World
In summary, we can expect the following benefits when the new gold money becomes legal:
1. More Peace: Wars are very expensive. The absence of an unlimited supply of fake money will inhibit the starting of wars; diplomacy will be used instead. Imperialistic aggressors will have trouble getting funded.
2. More Prosperity: Gold money will increase in purchasing power if the percent of economic growth exceeds the percent addition of newly mined gold. Savings will be rewarded, and more money (purchasing power) will be available for investments. Managers can plan better with stable currency.
3. Less Government: Governments need money to grow. Taxation has its limits, and in the absence of the unlimited supply of fake money, government programs, staffing, and spending will be limited. There will be less intervention in, and control of, our lives and work. More Liberty, Peace, and Prosperity will be the dividends.
4. Fewer and Smaller Business Cycles and Depressions: The ‘highs’ of major business cycles are caused by bad investments due to excess availability of money (credit and currency); too many new dollars chasing a limited number of deals, many of which are high risk. The incentive is to ‘do something’ with the excess money. When the pool of money is reduced (Fed cutbacks) the frenzy drops like a rock. With a limited supply of real gold money, any frenzies would soon run out of money to feed them, and the cycles would be small or none.
5. Fewer Jobs and Factories ‘Off-Shored’: Due to major increases in US wage and benefit costs after WW2, starting in the ‘80s, factories were built in other nations where costs are lower (first Mexico, then China, India, etc.) and the jobs moved out of the US! The same applies to software since the ‘90s. In addition, there is no limit to how much a country can import when it issues the world’s reserve currency and can make it out of thin air. That’s why our imports have soared since 1971 (when Nixon ended the dollar’s tie to gold), and many of our factories have shut down. With gold as money, the importers run out of money, and local producers get the business. This is one of the self-regulating aspects of gold.
6. Fewer Sovereign Defaults and No Currency Devaluations: In the past, many nations have defaulted (stopped payments) on some or all of their debt when they became overburdened, and then devalued (reduced face value) their currency to increase exports (lower prices). This robs lenders, and holders of the currency, but lets the nation enjoy a ‘fresh-start’, hopefully with reduced government spending and fewer anti-business laws. Argentina in 2002 is a recent example. When gold is money, the devalue option ends, which should give politicians and citizens incentive to keep their laws and economy more competitive. This new attitude will also reduce the excessive spending that leads to defaults.
We can enjoy these benefits, and avoid a crash of our economy, currency and lifestyle if we implement this plan for gold money. If we crash, meaning severe reduction in economic activity (depression), and 50% to 90% loss of purchasing power of the US dollar, we will need to rebuild from the ‘ashes’. This can be viewed as an opportunity for the people to spontaneously start using gold as money. They will see its benefits, and demand to keep it! The laws can follow. Politicians will be desperate to keep their jobs, so they will cooperate to pass and repeal laws as needed; otherwise they will be fired and replaced.
It will require something like the above ‘crash’ circumstances, and a people-led Monetary Revolution, to take back our government from the self-serving career politicians, empire-building warmongers (neocons), and banksters.
On Jan. 17, 2012, presidential candidate Newt Gingrich said in a speech; “…We need to get our house in order. …Part of our approach ought to be to reestablish something Ronald Reagan did in 1981 and that is to have a Commission on Gold to look at the whole concept of how do we get back to hard money.” He also complimented Rep. Ron Paul M.D., a rival in the presidential campaign, for working since 1978 to restore the gold standard. These two have put the gold standard ‘on the table’ as a topic for mainstream discussion! Thanks Newt and Ron!
Will you help? A key purpose of this essay is to build support for the conversion to gold, and be ready to act when the right time comes to push changes through Congress. In the meantime, we should be working to elect like-minded people to Congress, and educating those who are already there.