Topic: Economics
Gold Standard Confusion A brief explanation of why deficits are structurally inevitable and why Ron Paul wants to revamp the money systemby Ivan from Oregon
(Libertarian)
Thursday, January 31, 2008
This article started as a comment to the Fugue's post on the gold standard, in which he said it was a "price control" on gold.
It's obvious to me that there is a lot of confusion on this topic in general. Money is a mystical topic for many people, including many "economists". It might benefit some of the posters here to glance at my (short) article "Money Q&A For Dummies" (no slight intended).
One of the themes Ron Paul reiterates is the money system and how it needs to be fixed. Let's take a look at what needs fixing.
The crime committed in 1913, (I think treason puts it mildly) is that our representatives delegated the Constitutional authority of the Congress to coin (create) money to a private corporation, not accountable to anyone, that creates our money with a stroke of the pen and lends it to us at interest. This corporation is called the Federal Reserve, though it's neither Federal, nor a reserve. Woodrow Wilson said three years later, "I have unwittingly destroyed my country".
The main problem is the fact that our money is created through "credit" (debt) which we have to repay with interest. When the interest has to be paid, we are forced to borrow more money to pay it, else remove that amount of money from circulation, impairing economic activity. Thus the debt can never be repaid - there's not enough money. If by some magic we could repay the debt, that would wipe out all the money, and we would have a huge disaster. Thus ongoing bigger and bigger deficits cannot be structured out of the system. Inflation is a necessary part of the structure. The structured inflation is a hidden tax placed on everyone to benefit the Fed's owners and their friends, not the people. The geniuses in Congress that say they will "balance the budget" and "pay down the debt" are either stupid or lying, or both. The ones that are benefiting from the system like it the way it is - they're getting very rich at our expense. They also lie about the real state of affairs regarding deficits and spending by using fantasy accounting which would land us in prison if we did the same.
This system has functioned as planned (by Warburg, JP Morgan, et al) since 1913, when the Dollar was denominated in silver and gold "certificates", until our gold was mostly gone by 1933, having been paid to the Fed as interest on the debt. In that year, Rosevelt stole the rest of people's gold and declared that "federal Reserve Notes" (based on nothing) shall be legal tender domestically. Nixon later finished the job by repudiating the dollar's redeemability in gold internationally as well.
Fiat money created from "credit" eventually has to fail, whether it's based on anything or not, because ongoing increases in the money supply are structured into it. Thus we see hyperinflation scenarios in fairly recent times where several "zeros" had to be erased from the currency, in South America, Mexico, the Weimar Republic (that one was nine zeros) Italy, etc. We have now inflated the dollar to the point of grave danger. This is why Ron Paul is sounding the alarm.
Thus the Constitution gave the Congress the power to coin money (without interest) in Article 1, Section 8. To prevent the overuse of the printing press (the founding fathers understood politicians), it mandated in Article 1, Section 10, that the States may not use anything but gold and silver coin for the repayment of debt.
This same section 10 also "sanctified" contracts, so private individuals may make "consideration" in any kind of "value" they wish. To address the Fugue's concern about "price fixing gold, let's consider the following. Say we have a money system in which the dollar is redeemable for a certain weight of gold ( the word "dollar" is a measure of weight). Assume the the treasury manages well and the amount of gold in the treasury and the amount of dollars in circulation are consistent with what's happeniong in the economy. Now say a couple of gold mines close and gold gets more scarce. People will then redeem dollars for gold and thus reduce the amount of money. The money will be more valuable, causing all prices except for gold to drop. So, yes, technically we have fixed the price of gold to currency, but not its value. The same is true for the opposite scenario.
Note that for this honest money system to function properly, the government must be honest about how much gold is in the treasury, how many "dollars" are printed and how much it is really spending.
The gold standard did not fail in our past, it was manipulated and raped. The "credit money" deal with the Fed called for payment of the interest on the debt, in gold. The government initially set the "gold price" at $20 and later at $35 as the exponential growth of the debt and the interest payable on it was cleaning us out of gold faster and faster. We (Rosevelt) ultimately had to sever the gold tie, as the total depletion of our gold would have been exposed, causing severe consequences.
Honest money and truly free markets are necessary for liberty! Go Ron Paul
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2008 Ivan from Oregon, all rights reserved.
Published: Thursday, January 31, 2008
Last modified: Sunday, February 24, 2008
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Posted By: Walt Thiessen
Date: 2008-01-31 06:18:04
Everything was great with your article until you wrote, "Say we have a money system in which the dollar is redeemable for a certain amount of gold."
But that's precisely what Dr. Paul is against. He's against setting a fixed price for gold in dollars. He has said so numerous times when he said that he's against reinstating the original gold standard. That's how the original gold standard fell apart. The price of gold was fixed, while the government (later in the form of the Fed, although they also did it previous to 1913) engaged in and supported fractional reserve banking.
The key to having gold work as an alternative currency is to NOT fix it to a certain amount of gold. In other words, let the prices change freely in the open market.
I belive the author intended that the dollar is redeemable for a fixed *volume* or *weight* of gold directly. Not fixing the numerical value on the dollar to a fixed volume of gold.
The notes would state '1g of gold' and nothing else. There would be no arbitrary numerical value on the notes whatsoever.
The gold standard did fail when the price of gold was fixed. The price of gold was fixed by stating into law that '$1 = Xg gold'. Keeping the notes redeemable for a fixed measurable physical quantity of the commodity does not fix the price.
Posted By: Ivan from Oregon
Date: 2008-01-31 09:44:44
Brian, thanks for clearing that up - I said certain "amount" in my example I should have used the word "weight. I will edit the article to clear that up.
Posted By: Ivan from Oregon
Date: 2008-01-31 11:26:27
Dear Walt,
I believe you're missing the point. Exactly how would you suggest "backing" the currency with gold if it was not redeemable for a fixed weight of gold. Fractional reserve banking is a fraud, creating credit-based money against non-existent reserves. In the days of the "gold standard", the banks were permitted to create money without any intention of backing it with anything. The gold standard was not responsible for this fraud. The government then arbitrarily increased the "price" of gold, which is theft. Less confusion would have been caused if the $Note actually said such-and-such a weight of gold, being essentially a Treasury receipt for gold that now belongs to you and is now on deposit there. Gold, or silver, or any other asset with recognized enduring value is OK, but precious metals are handy because they're compact and widely accepted).
Be that as it may, the usury-based creation of money is the fundamental problem. When we fix that, we can quibble about how exactly to implement the real backing for the money.
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2008 Ivan from Oregon, all rights reserved.