a reply to an October post by one Eric Blair. by Walt Thiessen
(libertarian)
Friday, December 17, 2010
Eric Blair, writing at activistpost.com, penned an article entitled, "The After-the-Fed Solutions Debate Begins: Greenbackers vs. Goldbugs", in which he suggested that it's time to discuss a replacement currency system in anticipation of when the Fed is finally dislodged. He went on to make his arguments against a gold-based system and in favor of a greenback system. The post was written in October, but I just noticed it today. So he'll have to forgive me for accepting his invitation to debate a bit late.
Blair laid out his agreements and disagreements with the "goldbugs", who believe that we need to legalize the use of precious metals as money and to encourage a multiple currency monetary system while making fractional reserve banking illegal. He expressed specific concern with some of the pro-gold points and rather vaguely argued for a greenback system.
Before I begin to address his points, I want to make my own opening statement. I do not favor a "return to the gold standard" in the sense that most critics mean. Neither does Ron Paul. This is a critical point, because when critics refer to "returning to the gold standard", they usually mean reinstating a monetary system where gold is pegged to paper at a fixed rate, and fractional reserve banking practices are permitted by law, with the central banking providing coverage for the fallout from such practices. I oppose this, and so does nearly every pro-gold expert I've read. Ron Paul, for instance, is firmly against fractional reserve banking. He also argues for a 100% gold-backed dollar, which implies that by law there must be no more paper substitutes for gold than there is actual gold. It's not a big stretch to say that Ron Paul favors outlawing the counterfeiting of gold receipts, aka paper money, including by the people who legally issue such receipts.
Critics like Blair seem to relish overlooking this crucial fact. Those of us who support the use of gold and silver as money are strictly opposed to metal-receipt counterfeiting by anyone, including the banks and the government. Granted, if you allow such counterfeiting (as the Federal Reserve Act of 1913 and countless other government reactions to the panics of the 19th and 20th Century by the government did allow them), you're going to have all kinds of problems. It's through the issue of paper substitutes that gold manipulators managed to manipulate gold. They got away with their manipulations because the government steadfastly refused to crack down on the legalized counterfeiting. But Blair overlooked this crucial point. Instead, he (and Anthony Migchels, whom he cited in his article), focused on what they called "structurally scarce gold" or "interest-bearing gold".
What, exactly, is "structurally scarce gold" or "interest-bearing gold"? They didn't define their terms, so I'm forced to guess.
By "structurally scarce gold", I suspect they referred to Gresham's Law, which states that bad money drives out good money if the exchange rate is fixed and mandated by law. That's certainly true, but it's also why setting gold equal to paper substitutes of unlimited quantity at a fixed rate by law is a stupid idea. It's not gold's fault. It's the fault of governments (and bankers) who offer legalized thieves a way to leverage the use of paper money by linking it to gold but without requiring that the paper be limited in quantity the same way that gold is limited in quantity.
By "interest-bearing gold", I suspect that they meant that bankers would engage in fractional reserve banking using gold deposits as the base of their Ponzi-esque pyramid, thereby enabling them to lend gold that doesn't belong to them, at interest. I think we can all agree, "goldbugs" and "greenbackers" alike, that this is a terrible idea. It's not a terrible idea because gold is involved. It would be at least equally bad if greenbacks were involved and gold eliminated from the equation entirely. Indeed, it actually would be far worse, because that's essentially the system we have now. The only insignificant difference worth noting is that today's fiat money is issued by a private banking cartel, whereas greenback fiat money would be issued by the government. In practice, there would be no important difference in the end results between the two forms of fiat money. Backing either kind of fiat money by fractionally reserved gold is only marginally better at best. The minimal level of improvement isn't worth considering.
Blair and Migchels also repeat a baseless claim: "Gold is the preferred currency of the Banking Fraternity and they plan to reinstate it in their world currency." Oh really? Then why did the banking community fight so hard to get rid of gold from the equation, first with the creation of the Federal Reserve and other central banks, then with Bretton Woods, and then later with the Smithsonian Agreement? Even today, suggestions that gold be reintroduced into some sort of "basket" of currencies for a world-wide reserve system are met with disdain by the central banking crowd. Why? Because gold-as-currency puts a major crimp in their plans. The last thing that the bankers want is to be restricted once again by the restraints that a limited money supply foists upon them!
One of Migchels most startling claims is also cited by Blair: "Interest free money, either printed debt free by the Government or through interest free credit either by private organizations or again by the State, is simple, proven technology and centuries old." Yes, it certainly is simple, proven technology, and yes it's centuries old. What neither Blair nor Migchels bother to mention is that it's proven to be the government-favored mechanism of currency debasement. As a matter of fact, there is not a single instance in world history (where we have actual data from the time period to examine) where interest-free money wasn't debased by its issuers using this technology. In some historical cases, the issuers managed to debase it to such a degree before their experiment was forcibly ended that the currency ultimately achieved its true value, which is zero. Weimar Germany in 1923 is a classic example. In other historical cases, the experiment was abandoned before that end-state could be reached. In no case did paper money ever manage to retain its original, government-declared value over time; that's the crucial point. All such currencies always lost value because of government manipulation.
Unhappily, the few times that gold or silver has been permitted by government to operate as money under laws that prohibit their debasement are historically rare, to be sure. Again, the blame for this fact lies with government, not gold. Yet, despite the handicaps that government has routinely placed on precious metal currencies, gold and silver have managed repeatedly to slow and undermine the efforts of the government and banking fraternity debasers. Without enforced laws in place making it illegal to debase such currencies, it's impossible for any money supply to remain limited. After all, it's too easy to print paper substitutes. Yet, even when governments and bankers have played their dirty tricks on the unsuspecting public anyway, gold and silver have so often defeated them. That's a primary reason why most gold advocates support the use of precious metal currencies.
After taking Gary North to task for his take on the issue, Blair wrote, "The public banking movement opposes the Federal Reserve, like Paul, because it is unconstitutional, but also for a variety of other intellectually defensible positions, starting with the fact that they are a private monopoly who care not for Americans or the country." Meaning what: that Ron Paul favors a private monopoly on money? Nonsense! Bear in mind, this monopoly is impossible without government dictates backing it. For instance, if gold and silver were legal to use as money today, the entire Fed system would have long since collapsed, and everyone knows it. Such monopolies do not naturally occur; they require government cooperation to survive and thrive (if one can call a system of fiat money "thriving").
Blair then writes, "There are very real concerns that this group of banksters may maintain dominance of a gold-based system since they already have possession of most of the world's gold -- including much of the mining as well." Blair really needs to check his facts. Banks don't hold nearly as much gold as he wants us to believe, but let's assume, for the sake of argument, that they hold all the gold (even though they don't). What would happen? Would that be the end of gold-as-money? No. Assuming (for the sake of discussion) that banks decided to withhold all the gold, other forms of real money would emerge. For instance, there's no reason why copper can't be used a money. Eventually, the banks would either spend their gold or try to lend it at interest. So long as they don't have a legally granted monopoly, they could not manipulate gold-as-money using the choke collar that such a monopoly grants them. Under such circumstances, the marketplace simply wouldn't bother to use gold as money. Without the stranglehold, banks would eventually release their gold to the marketplace, and the feared stranglehold would be lost. But give them a legally-mandated monopoly stranglehold, such as in the form of a government dictate that gold must be the only money supply, and of course the banks will use that stranglehold to their own advantage.
This is why the key to understanding the pro-gold stance isn't to focus solely on gold. I advocate permitting gold, silver and any other metal to be used as money, with each currency competing with each other. So does Ron Paul. So also many (most? all?) other pro-gold advocates support this approach. The reason should be obvious. When currencies have to compete with each other in the marketplace, without any particular currency being given special government dispensation, it becomes impossible to leverage the produce of an entire society by placing a choke hold on a single currency. The biggest problem is government-mandated currency monopoly, such as declarations of "legal tender", or the outlawing of legitimate currencies, or forcing silver or gold to trade at par with unlimited issues of paper, much more than any particular currency itself.
Blair wrote, "However, the Constitution says nothing of allowing a fractional reserve gold standard run by private bankers which is promoted by some Goldbugs." Really? Which goldbugs might those be? I know Ron Paul isn't one. I know that I'm not one. I doubt very much that Gary North is one, either. So who is Blair talking about? I believe this is the crux of the misinformation carried and spread by the greenbackers. They've decided that a certain claim they've made about pro-gold people is true, so therefore it's true. Blair then concludes, "Therefore, if we were able to restore the Constitutional principle for a government of, by and for the people, it would seem that interest-free currency issued and controlled by our elected government would be considered more constitutional than the current system." Actually, nothing could seem less true, Mr. Blair. Setting up a strawman and then tearing apart that strawman does not prove that a bad or wrong idea is good or right.
Blair went on to write, "But gold, as a limited resource, is interest bearing and can be hoarded by those with thewherewithalto do so." There it is again, that unfounded claim of a commodity bearing interest. The only interest that commodities bear is the interest that people have in using them. But "interest" in the lending sense is not directly related to the nature of commodities themselves, including gold and silver. Rather, it has to do with time preference. I suggest that Blair read Murray Rothbard's Power and Markets (among other books of his) to learn about the time-value of money, in order to understand the real meaning of lending-related interest where money is concerned.
Of course, under the current fiat-money system, interest as a lending concept is so distorted as to be virtually meaningless. After all, what's a fair interest rate on lending money that never belonged to the banker in the first place? Answer: there is no fair interest rate on such lending.
Interestingly, Blair never actually lays out any argument in his article in favor of a greenback monetary system. Instead, he limits himself, in his final paragraph, to a single observation: "Perhaps I'm naive, but I'm not sure why a combination of the two solutions is not feasible, with interest-free paper Greenbacks redeemable in gold or silver, while also producing silver and gold coins for circulation -- all tightly controlled by Congress, not a private organization, as per the Constitution. "
You want to know why it's not feasible, Mr. Blair? Okay, here's why. Government, when it gives itself a monopoly over money, will always do the exact same thing that bankers do when they're granted (by government) a monopoly over money. They will debase it to their own advantage. They will destroy its value over time, and anyone who is unfortunate enough to be forced to use it as money will find that they are the losers. As I mentioned above, history is chock full of instances where government debased its own money. If you want to read a full history on the subject, read Ron Paul and Lewis Lehrman's book, The Case For Gold: A Minority Report of the U.S. Gold Commission. Published in 1982, it includes a considerable, detailed history of the various ways that government printed its own money, then debased it, including all of the colonial era examples and, yes, the debasing of the greenbacks under the Lincoln administration. Let me quote from the 2007 edition released by the Mises Institute.
Paul and Lehrman wrote (starting on page 75):
The U.S. government quickly took advantage of being on an inconvertible fiat standard. In the Legal Tender Act of February 1862, Congress authorized the printing of $150 million in new "United States Notes" (soon to be known as "greenbacks") to pay for the growing war deficits. The greenbacks were made legal tender for all debts, public and private, except that the Treasury continued its legal obligation of paying the interest on its outstanding public debt in specie (gold). The greenbacks were also made convertible at par into U.S. bonds, which remained a generally unused option for the public, and was repealed a year later.
In creating greenbacks in February, Congress resolved that this would be the first and last emergency issue. But printing money is a heady wine, and a second $150 million issue was authorized in July, and still a third $150 million in early 1863. Greenbacks outstanding reached a peak in 1864 of $415.1 million.
Greenbacks began to depreciate in terms of specie almost as soon as they were issued. In an attempt to drive up the price of government bonds, Secretary Chase eliminated the convertibility of greenbacks in July 1863, an act which simply drove down their value further. Chase and the Treasury officials, instead of acknowledging their own premier responsibility for the continued depreciation of the greenbacks, conveniently placed the blame on anonymous "gold speculators." In March 1863, Chase began a determined campaign, which would last until he was driven from office, to stop the depreciation by controlling, assaulting, and eventually eliminating the gold market. In early March, he had Congress levy a stamp tax on gold sales and to forbid loans on a collateral of coin above its par value. This restriction on the gold market had little effect, and when depreciation resumed its march at the end of the year, Chase decided to de facto repeal the requirement that customs duties be paid in gold. In late March 1864, Chase declared that importers would be allowed to deposit greenbacks at the Treasury and receive gold in return at a premium below the market. Importers could then use the gold to pay the customs duties. This was supposed to reduce greatly the necessity for importers to buy gold coin on the market and therefore to reduce the depreciation. The outcome, however, was that the greenback, at 59 cents in gold when Chase began the experiment, had fallen to 57 cents by mid-April. Chase was then forced to repeal his customs duties scheme.
I won't repeat the entire chapter here. The above should give you a taste for what they wrote. I leave it to you, Mr. Blair, to carry on the research on your own.
Why should we use gold (in combination with other competing money supplies) rather than replace the current, fiat currency with a government monopoly greenback currency? It's very simple. Neither bankers nor government can ever be trusted!
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