All forms of money serve as a ‘medium of exchange’, and ‘unit of account’ and ‘store of value’, which is convenient and flexible compared to barter. Key Point: Note that when a valuable commodity (such as gold) is used as money (‘monetization of gold’), the money is worth as much as the goods or services in the transaction. It is not just a ‘symbol’ or ‘measuring device’. This is also true of barter, but with gold’s high value per weight and volume, etc., using gold is more convenient, and thus helps improve commerce.
Two more benefits of using commodity money are to; 1. Limit excessive expansion of the money supply (inflation; loss of value) by the government, and 2. Provide a market-based, and stable, store and measure of value, with coins and paper notes produced by private mints (including banks). Mints would not require a license, and there would be no legal tender laws, since that would put the government in control. The only government function would be inspections (which could also be done by a private org) to verify that the mints indeed have the gold reserves they claim to have for redeeming paper notes. The commodity used as money could be (and has been) wheat, iron, diamonds, notched sticks, or pearls, but the market (users of money) usually chooses gold because it works best.
For more details on the characteristics of sound, stable money; 1) read my book Monetary Revolution USA, which is available on Amazon.com, and is posted at part 2 in the left margin of my site Forward-USA.org, and 2) refer to my Aug-2014 article ‘The Key Factors in a Sustainable Gold Standard for Money.’
A Five-Step Plan to Convert the USA to Gold As Money
This Five-Step plan, first published in Jan-2010, has my original ideas, but builds on the work and concepts from many prior writings. Economist Ludwig Von Mises noted the true advantage of a gold standard when he said; ‘a managed fiat money must become a plaything of politics.’ My plan ends the government and Fed monopoly on control and issuance of money, and makes ‘weight of gold’ the unit of account.
Step 1: 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 (including counterfeiting), 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: Allow private mints and banks, with government licensing optional (to avoid damaging controls). Silver, semi-precious metals, and foreign coins could be used (based on market demand), but for simplicity, only use of gold will be discussed here. The mints would introduce new gold money labeled by law as to the weight and purity (fineness) of gold a coin contains, or that redeemable tokens or paper certificates represent (thus ‘weight’ is the unit of account). Mints with strong reserves will advertise their strength to attract customers. Customers will ‘wake up’ and pay attention to reserve status, rather than assuming the government is protecting them with regulations. The free market at work!
Step 3: 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 ‘Redemption Trust’ owned by the U.S. Treasury, to be used to redeem existing coin or paper currency, ‘digital deposits’, and bonds (such as M3) on demand, based on a certain weight per Dollar, in accordance with the plan below. The Fed would not be involved in such conversions. The U.S. government claims to have 8,134 metric tonnes of gold in its reserves (an audit is needed). The Fed stopped publishing M3 in 2006 (claiming high expenses; I say to hide its growth!), but private sources (Shadowstats.com) put it at about $17 trillion worldwide in Sep-2014. 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 0.0000153 oz. per dollar (1.53 ‘100 thousandths’). This means 65,359 ‘gold-backed’ Fed Note dollars would be redeemable for one troy ounce of gold. This implies a 98% drop in the dollar’s current value versus today’s about $1,220 per oz. on Sep. 19, 2014; a ‘gold value’ ratio of about 54:1, to be known as the ‘Conversion Factor’. Some suggest we repudiate all federal debt, but this would be immoral (of course other nations –Russia, Argentina, etc.- have done it without legal backlash). 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 two 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, and
d) Federal and State governments can issue new gold money, but it would have no privileges over private issues.
Step 4: To implement the new monetary system, I propose that Congress create the ‘Currency Act of 2015’. No government ‘commission’ is needed to ponder whether a gold standard is needed (unless forced for political reasons!). The Act should;
a) Set the weight and fineness of gold that the existing Fed Notes and coins (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 (or repudiating all debt) 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, repudiation, and theft! Reserves of 40% might be enough (to avoid redemption ‘runs’ that would destroy the new system), but it is better to be on the safe side. A ‘run’ could ruin the system, just as occurred in the 1960s, ending in Nixon ‘closing the gold window’ in Aug-1971.
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 foster public use of gold weight (such as ‘grams’) 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 conversion plans. I oppose multi-nation planning conferences; they would just cause delays and dilution of terms.
e) The Act should include a ‘Conversion Factor’ (about equal to the ratio of gold price between the new and old systems; ‘54’ 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: Terminate useless and harmful organizations such as;
a) 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), Export-Import Bank, USAID, NSA, CIA, NED, etc., etc. All of these are part of the government’s counter-productive intervention in, and manipulation of, money, private business, banking, and the affairs of other nations. While at it, end all unconstitutional departments and agencies!
b) International: Terminate US membership in counterproductive, meddling, groups such as the IMF (and get our gold back), World Bank, CBGA, BIS, G-20, G-8, NATO, United Nations, NAFTA, CAFTA, GATT, WTO, and others. The gold and silver price ‘fix’ groups are dying a painful death due to corruption. Free trade and embassies are adequate for contact with other nations.
I leave the above issues up to the Congressional debate during writing of the ‘Currency Act of 2015’.
U.S. owners of gold will enjoy a one-time increase in value (purchasing power) when the conversion occurs, but this will fade as prices are increased. The situation will be dynamic, with many unpredictable market and government variables, including: a) How much gold the US will own once an audit is done, and b) What M3 and the price of gold will be by the time the Act is approved.
There may be a rush of foreign buyers using their ‘now more valuable’ gold to acquire bargains in the US. To avoid losses, US sellers will increase prices as appropriate, per Step 4, item e), above. The free market will lead to adjustments.
Fortunately, the amount of gold per dollar or person is not crucial in the long run. When we start a new system of pricing by weight of gold, the market will adjust, and we will grow from there. The same applies to all nations that also convert, and they all will, or Sellers won’t accept their fake money!
Central banks have acquired more gold in recent years. They often scoff at the need for gold as a ‘barbarous relic’ but in fact fear it because a rising gold price means the currency value is dropping. Most central banks engage in buying and selling to ‘stabilize’ the gold to suit political goals. They scoff at gold, but show they believe it has fundamental market value since they keep it in their reserves (if they can afford to).
As the world moves to gold-as-money, names like ‘Dollars’ should be eliminated and ‘weight’ will rule as the unit of account! Since the U.S. has trillions of fiat ‘dollars’ in circulation worldwide, the market value of a USD for conversion (trade-in) purposes will be a small fraction of an ounce, as shown in ‘Step 3’ above. This implies that a minimum dollar amount may be required for an owner to redeem representative money for physical gold, since the tiny physical size of gold per dollar would be a problem in handling and measuring. If it were not a secret as to how much gold the government has at Fort Knox, the IMF, and in Federal Reserve facilities, a better estimate could be made.
Conversion of fiat money to gold money needs planning to avoid panic and uncertainty among current owners of fake money. Thus my Five-Step plan allows the Federal Reserve Notes to be redeemable for gold right away (but no new ones created), and used in a two year transition period during which they must be exchanged for new notes or coins from any mint. Since the existing Fed Notes will immediately represent gold, there will be no panic among Fed Note owners to get rid of their Notes (i.e., no ‘redemption run’).
When the major nations convert to gold, changes to expect, all based on free market reality, not laws or ‘G-20 style’ agreements, are:
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 and fineness 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’ ‘ESF’.
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 mint 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 money-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. Let’s get started!
David Redick (BS-Eng., MBA-Economics) is an activist for peace and prosperity via better (less) government and free markets. Send comments to [email protected]. Read more at his web sites www.Forward-USA.org, SaferInvesting.org, and his money-related books below (all on Amazon.com). You can see the text of both books at part 2 in the left margin of my site Forward-USA.org.
1) Monetary Revolution USA (Jan-2010, July-2014); Offers a Five-Step Plan to; Use Gold as Money, Private Mints, No FED, Prices and Currency in Weight of Gold
2) How to Protect and Grow Your Wealth (April-2014, Sep-2014); Shows how to protect yourself from confiscation and the falling value of the US$. ‘Internationalize’ by purchasing hard assets, including precious metals and non-US$ assets in a foreign trust.