Sound money is the natural result of a free marketplace. It is only force or the threat of force that can override the natural tendency to accept that which has superior value. If we have logic and we have choice, why would we freely choose that which is of inferior value, fraudulent money, over that which is of superior value by definition, sound money? Truth be told, we wouldn't.
Yet, we must return to sound money without force. If force is used, we are no different than those whose hold us captive to the vagaries of phony currency. Is it possible to practice the art of non-violent sound money?
It seems there is little chance of a return to a completely free and competitive money system without the use of force. Although stranger things have happened and the future is always unknown, it appears the pillars of power are too deeply embedded in a monopolized system of money and would only respond to complete upheaval or collapse, both of which would cause great hardship to all.
Even though our laws protect money as private property, government monetary policy is a direct violation of that right. The random creation of money is a "taking" of the existing value of the citizen's money. Every new, unbacked dollar is a slap in the face to the savings and labor of the citizen.
The return to sound money must never violate this principle; the end cannot justify the means. The way to sound money should not be a "taking" of the existing value of money as private property, no matter how weak and fleeting this value may be due to the forced "Fiat" system we are under.
A gold backed system has many positive attributes and its destruction, no matter that at the time its integrity had already been diminished, was tragic. The real value of gold cannot be argued. There are drawbacks as with any system, government or private manipulation of the supply or exchange rate, the dependency of the monetary system on one specific commodity, but all in all a much better and obviously more value related system than our present "Fiat" currency. If money were backed by gold, it would certainly represent title to real value and would be sound.
But, it would be impossible to return to a gold standard without violating the property rights of the average citizen. In order to back our present money supply with gold, the price of gold would have to soar to stratospheric heights. While this would be extremely beneficial for those fortunate enough to have invested their wealth in gold before the conversion, those who hadn't would not only be at an extreme disadvantage, but the necessary changes would in essence impose an enormous tax on all other forms of wealth. Although this would be due to the abrupt return to "real" values rather than "paper" values, it would without doubt impoverish a large portion of our population, working or otherwise.
We would create an instant class of nobility, in not a substantially different manner than the method that the "fiat" system uses to enrich the financial sector; first in line, first crowned! And imagine trying to prevent what we refer to as "insider trading" occurring just prior to the conversion! Much like the conversion to Corporate Capitalism in China, where the Party Children were morphed into the Rich New Capitalists by some extraordinary coincidence of the market, those financiers most responsible for our present dire economic situation would miraculously evolve into the Golden Seers once faith based money was left behind! I am sure Bernanky would become Chief Golden Boy!
So, with full respect to the ideal that free money, free competition of money and free determination of the value and type of money is the ideal, there is a way to move towards a sounder money, without violence or the unfair taking of money or money value as property. It is also simple. We must just stop!!!!!!!!
We must no longer change the supply of money. The amount of money in the economy should remain at the same level through time.
Referring again to the role of money as title of value, when the money supply is fixed, the entirety of the money supply holds title to the entirety of the product of the economy. Each denomination represents a percentage of all the available value in the economy. In this manner, the power of determining the value of money has been returned back to all those who produce and grow the economy. The value is no longer controlled by the actions of the money "creators". All that is necessary for this to be true is for the money supply to remain constant and unchanged. Still, it's a very big "all"!
As the economy grows, a fixed supply of money grows in value. Prices will deflate and most likely wages also, as purchasing power is increased. Asset prices would also fall in line with the limited amount of currency, and this would help prevent the excessive boom and bust cycles.
With a fixed amount of currency and removal of interference by the Fed, interest rates would soon return to their natural level. A good portion of our present financial industry is built upon profiting from the difference between the suppressed artificial interest rate set by the Federal Reserve and determined by their money creation and the natural interest rate demanded by debtors. A large chunk of this industry would cease to exist.
Debtors, with access to suppressed rates removed, would seek the most efficient connection to creditors; those who need money would desire to obtain their financing without countless intermediaries obtaining a percentage for their signature. This would streamline the flow of Capital and benefit both Creditors and Debtors.
Actual interest rates experienced by debtors, might or might not be higher than our controlled rates. Rates would be a reflection of the economic conditions, rather than the applied fuel or brakes of the economy. Rates would be determined by actual supply and demand of money that would be directly linked to value that is produced within the economy. They would be where they should be, determined by action and choices rather than power and computer software.
Trade would be affected. There is no question that any nation that fixed the quantity of its money in today's world of funny money would possess the strongest currency. Many foreign goods would lose value and become very inexpensive. This would be neither good nor bad. An exodus of fixed money is no tragedy. It eventually raises the cost of foreign goods and lowers the cost of domestic goods.
What is important is that the fixed money by its limit is directly linked to all goods that are produced domestically and offshore. There is no disconnect between product and currency. The consumer is spending whatever the cost of the good is, no more and no less, unlike a money whose value constantly fluctuates and is determined more by its own creation than by those who utilize it. In other words, the gap between pricing and value narrows.
While not the perfect plan, not the pristine and completely pure textbook example of free market money, fixing the amount of our current supply of money is a doable solution that might even be widely accepted. It is also the simplest solution as it requires doing absolutely nothing other than refraining from doing what we shouldn't be doing anyway, creating money from nothing. As it stands, there is more than enough money for years to come; why not give it a rest?
©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Tuesday, May 5, 2009
Last modified: Tuesday, May 5, 2009
The views expressed in this article are those of Gene DeNardo only and do not represent the views of Nolan Chart, LLC or its affiliates. Gene DeNardo is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: Jake, the Champion of the Constitution
Date: 2009-05-05 16:56:14
Great article Gene! My two bits - just finished reading Gnazzo's Honest Money - will have a review out shortly:
The ideal way to revert back to honest money would be a public discussion and then chose this course. To create this, there would need to be massive calls from the populace - not bloody likely at this point, so this is a bit of a thought experiment.
I believe the safest way would basically be to stalwartly march back through the same progression that we followed to this day. This would take years, and this time would allow the gold + silver prices to attain a realistic market price (in dollars I have no idea what this would be, just a lot higher!) I suppose (Gnazzo's!!) idea would look like this:
pure fiat --> loose tie to gold (the gold exchange standard --> "payable to the bearer currency"/metal-backed fractional reserve --> Austrian standard (the holy grail, people use whatever they want as money - probably 100% commodity money as Gresham's law would hyperinflate anything else.
[We have the technology to do 100% commodity money, ala goldmoney.com]
A second way would be a catastrophic event or government preemption to avoid the Misesian crack-up boom. - I agree with your concern on the enrichment process, as it is possible to cause problems between the have-golds and the don't-have's
A free market solution would be to follow the GCR equation that Thorsten Polleit at the Mises Institute promotes from Ludwig himself :) In short, you yank away everyone's fiat junk and replace with gold basically overnight, so there is no chance for the PM speculators to make out any crazier. Polleit doesnt mention it in this hour-long video, but his estimates are currently in the neighborhood of $6,000/oz following the equation, and $30K/oz if M2 is used.
http://www.youtube.com/watch?v=5w9mqaE10_A&feature=channel_page
A more sadistic totalitarian way (probably preferred by gov'ts and the gold cartel in other words) would be to create a FED "Gold Certificate Ratio" as jsmineset.com discusses. Presumably this would take place shortly after D-Day - the gold price super-spikes, as in at least doubles from $1000, then gov't's step in and force a trading window. This might be done to save the cartel banks from immediate default and bankruptcy - heck, they might even find a way to make a fortune on it, as the silver and gold futures markets looks to me like its setting up for a spike, although I could be wrong.
Hey, I'd like to run something by you privately later this week if you dont mind and would be willing to take a read. My email is jaketowne [AT] gmail
Posted By: gene
Date: 2009-05-05 17:58:17
That is a great idea, marching back through the same progression that got us here! Slowly and surely, not quite how we got here, but actually the slower the less detrimental effects.