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October 18, 2007

The Tiger and the Tightrope: Part II The Remedy
by Alex Wallenwein

Last week's Euro vs Dollar Update summed up how we got where we are today in the world financial system and attempted a diagnosis of the malady that has beset all those of us who are not either bankers or politicians. Today, let's examine the most beneficial way to cure the disease.

The crux of any good remedy is to reverse the unnatural process that has lead to the deterioration of health. In the first part of this series, that root cause of the problem was laid out in the two very first full paragraphs under the heading "Kicking the Fiat Habit."

1. The dollar (as were most currencies in the 1800s) was once tied to gold. The law said that X amount of gold was worth Y amount of dollars, and that banks had to exchange Y dollars for X gold on demand, at any time;

2. The law allowed bankers to print more paper-dollars than there was gold to back them, calling this "fractional reserve banking" (banks only needed to keep a fraction or percentage of the total amount of dollars outstanding in forms of gold on reserve);

The Fallacy

The logical fallacy many analysts commit is to conclude that the root cause of the problem lies with paragraph 1 above, i.e., that it was the US government going off the gold standard that caused the problem. Not so. Going off the gold standard was only an effect of the true root cause. Reintroducing the gold standard would therefore do nothing to cure the disease.

Another set of analysts argue that the root cause was the banks' ability to print more paper currency than there was gold to back it up, i.e., the fractional reserve banking system, and that this was the reason FDR felt compelled to abolish the gold standard (i.e., to bail out the banks). Their suggested remedy is to simply deny the bankers that right so as to make sure that the gold standard could never be subverted again.

Wrong again. The solution proposed by these analysts is to basically make the gold standard better. The problem, however, lies with the gold standard itself.

Another problem is that both of the usually proposed solutions would involve the government in the alleged 'cure.' In truth, the disease can only be cured by preventing the government from even participating in the solution. As we will see, the government's most beneficial action would be to get out of the way so the solution can work.

This is essentially what the framers of the Constitution tried to do. They decreed that only gold and silver should be lawful money of the United States, and that the federal government only had the power to coin money - not to allow a private corporation to make ut up out of thin air and then charge the government interest on it.

The Remedy

The remedy lies in denying Congress the ability to declare by mere legislation alone, without a constitutional amendment what is and what is not "money", aka "legal tender".

When the law is allowed to call a thing something that it is not, we run into problems. Here is what I mean by that:

The law takes a piece of gold of a certain weight and dimension, and calls it a "dollar." More specifically, before 1933 the law decreed that an ounce of gold should be "worth" twenty dollars. In essence, therefore, it called a piece of metal by an arbitrary name and assumed the power to declare what arbitrary units this arbitrary name could be divided into. That makes no sense.

What's more, once the law assumed the power to call an ounce of gold something else and then determined what units that "something else" was to be subdivided into, it thereby assumed the power to 'jack around' with those very definitions.

The simple and outrageously effective remedy for all this is therefore to go back to calling an ounce of gold exactly that: an ounce of gold. Nothing else.

No legislation or constitutional amendment is needed for that. It already is what it is, so you don't need a special declaration affirming that fact.

In the world of physical money, what is needed is a set of coins that state nothing other than the bullion weight contained in it. Then, let the market decide what can be bought with it.

In the world of online precious metals currencies, this is even easier. They are already 'denominated' in weight units, usually grams, and there is no need for minting with the associated expenses.

Now, let's go and price the things, services, or ideas we manufacture, produce, or create in terms of bullion-weight units, and let those weight-unit prices compete with the dollar (or other fiat currency) price.

Is one ounce too big? No problem. Subdivide it into tenths of ounces, or even hundredths. If those units get too small in physical size, use silver instead.

Monetary 'Name-Calling'

All those who talk about reintroducing gold as a currency fret about Gresham's law. It says that if "good" (meaning "un-debauched) money and bad money (i.e., clipped coins, fiat, etc.) circulate side by side, the bad money will drive the good money out of circulation for the simple reason that people tend to hoard the full-bullion-value "good money" and spend the debauched "bad money", thus pocketing a windfall profit.

The only way Gresham's law can even operate is if the money in circulation is called something that it is not. It is the act of "denominating" one thing in terms of something else that causes the problem. We could also call it "monetary name-calling."

If you call an ounce of gold a "dollar" (or twenty dollars, or whatever") and then price the wares you sell in terms of "dollars" instead of weight-units of gold, you are inviting Gresham's little gremlins right into your house - and they will immediately go to work and undermine it for you.

If the unit or measure of value that counts in making a spending decision is called a "dollar" or whatever, and if you have both debauched as well as un-debauched "dollars" in your possession, you would be considered a fool if you used your un-debauched dollars to buy what you want. Instead, by using the "bad" money (that only has a certain exchange value because of its inscription, not its actual weight) to buy what you want, you are making a windfall bargain.

If you are a government and you engage in monetary name-calling, you are enticing your citizens to engage in this morally reprehensible - but in practical terms quite sensible - practice. You are causing a moral hazard to exist. The only way to cure this is to prohibit people from 'keeping the gold' while 'spending the mold', so to speak. One bad government action always leads to another, usually worse, action in an attempt to cure the first one.

Nullifying Gresham's Law

By calling money what it really is - weight-units of precious metals - you avoid this entire pitfall and stand Gresham's silly law on its head.

If bullion coins are inscribed with their exact weight and nothing else, and if a simple machine is used at the point of sale that measures the dimensions of each coin and compares them it to its actual weight to weed out clipped or phony coins (such machines exist and can be easily mass-produced), and if goods and services are priced in terms of actual bullion weight units, then there is no "bad money" that can be deceptively spent to gain unjust profits.

The machine can determine whether a coin passing through it is actually gold or silver by comparing its dimensions to its weight. If there is a shortfall, it is immediately calculated and can be made up on the spot.

Killing Two Birds with One Coin

In this scenario, the government's involvement would be reduced to passing and enforcing laws that ensure the reliability of the machine's calibration process and severely punishing those who try to subvert it. That would be a perfect example of a law that constitutionally preserves and protects people's property rights. There would be no way for the government to unjustly enrich itself, and a class of banker-elites along with it, as it does now.

Naturally, in that system there is simply no need for a federal reserve bank. Anyone would be allowed to coin money - if they wanted to - as long as the weight and purity requirements are met. (Coins that do not meet the requirements would be stopped from circulating as soon as they are run through one of these measuring devices).

Just as naturally, because the government would not owe the Fed any interest for borrowing the currency it needs or wants, it would not have a need for taxing the people's income in order to pay that interest.

In this scenario, bullion money can compete with fiat currency on an even keel - and the market itself can decide which is worth what in terms of the other with its customary and well-known efficiency.

That way, by the mere introduction of a weight-denominated bullion currency we would kill two birds of prey with one silver bullet (or coin). Gresham's infamous law would be made inoperable, and the government's lawmaking power could no longer be used to enrich itself via the inflation stealth-tax.

No Alternatives

Nothing short of a true, market-based bullion-weight standard will cure the world's monetary ills in the long run. Everything this or any other government could do other than allowing such a standard to come about will only delay the inevitable - and will make matters far worse in the meantime.

Whether the world goes to the euro as its new 'reserve currency' or not, whether the US elites push for a pan-American 'amero" currency or not, even if the government agrees to go on a 'gold clause' of some sort or reintroduces the classical gold standard, none of it will have the curative effect of a true free-market bullion weight standard.

The reason for that is because whenever you replace the truth with something else, you end up with a flat-out lie. Technically, calling a certain quantity of yellow metal a 'dollar' may not have been a lie quite yet - but it sure opened the door to an entire flood of shenanigans. It certainly enabled the US monetary powers to keep shading the truth until there was nothing left but shade. It gave them the chance to rig up the greatest bait-and-switch campaign in human history: that of replacing solid tangible wealth with nothing more than fleeting DEBT as the commonly accepted measurement of economic value.

An ounce or gram of gold is an ounce or a gram of gold. You can't argue with that; a "dollar," however, is just a label you can attach to whatever you want - even to a piece of paper or an electronic blip.

That name-calling and the resulting lie are the root-cause of the world's economic disease. You can't cure the disease by adjusting the quantity or the velocity of your lies. All you can do is to either stop lying - or to stop forcing the people to use your lies as "money."

Lies have become the standard by which we measure the value of everything. No wonder we are all so confused.

A Goldmine for Businesses

As the economic wool our power-elites have pulled over our eyes rapidly unravels in the ongoing dollar decline and associated credit crunch, we can see clearer and clearer what can and must be done.

Merchants or service providers can be a huge driving force behind our effort to get it done. Simply showing them that they can hedge against the coming fiat-crash by earning physical gold instead of dollars will move them to encourage their customers to place some of their spending cash in gold. Their role in moving the US economy back onto a foundation of value rather than a debt will be clearly laid out on a new web site I am building. Please stay tuned.

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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