Why not gold?

I’ve received many comments on returning to gold as the national medium of exchange.  Here’s my short answer on why I think it’s an insufficient solution:

A dollar lent at 10 percent interest compounded annually becomes 10 dollars in under 25 years.  That means that if the money supply were 100 percent gold, and if bankers lent out 10 percent of it at 10 percent interest compounded annually, in 25 years the bankers would own all the gold.  To avoid that, either the money supply has to be expandable — which means allowing fiat money — or the taking of interest has to be outlawed, as it was in the Middle Ages.

45 Responses

  1. All that you had described about “Socialism” applies to your National banking system, therefore I don’t believe I had put fourth a straw man.

    What supply and demand? As I understand, you want to monetize debt. In that case, since the “supply” of credit is arbitrary (not related to real savings of individuals), the supply, demand and interest rate curve is by definition, under constant manipulation of the National bank (Similar to today, which is why I said that we are half way to a National banking system anyway). So there is no supply and demand, there is only a central planner. Once again, “monetizing” debt is a tax. So like today, you are confiscating wealth for you sake of loans. I would call that socialism.

    No profit incentive for a National bank. In a free market, If a private business fails to make profits, he is either inefficient and outperformed by competition, or his services or goods are not in demand by consumers. In either case, he will have to close his doors, liquidate his assets, and free up his resources for the benefit of the more productive and efficient. At no point does his failure extract resources from others.

    A National bank, like any other Government service will be in business no matter how it performs. With no profit incentive or competition, but plenty of political incentives, all the system can be is a tool for massive Government spending and distribution of wealth. How will the system be financed if there are no profits? By monetizing its own expenditures? No competition and no profit incentive, I would say that is socialism.

    In a free market, a successful bank will channel real savings to the most profitable entrepreneurs. Since entrepreneurs themselves must accurately forecast consumer demand, successful banks will participate in real wealth creation, and since real wealth is a subjective value on each “utility” scale of each individual, creation of such wealth can only be created by the free market. Without the free market in operation, as in your national banking cannot participate in any meaningful wealth creation.

    In a free market, Consumer demand dictates the means of production. In your national system with no profit incentive, it is the politician influenced by pressure groups, special interest and other political interests that will dictate the means of production. I would say that’s socialism.

    I can go on for much longer to show you why your system amounts to socialism, but really there is no point. If you are planning to respond by claiming that you don’t see why a national bank cannot make profits, then don’t even bother.

    I will say that all the fears about banks acquiring all the Gold or forming a monopoly, since you’ve raised it once again, are based on fallacies. Look at my previous posts, I can continue the argument on specifics, but I don’t want to give the same argument here again.

    Where is the Gold FDR confiscated? The Gold is at Fort Knox and other US depositories. All assets of the Fed belong to the US treasury. It is a charted bank created by the US government. Do not be confused by its legal status; public, private, it’s actually neither. It is an arm of the government on the one hand, and a cartelizing tool for its member private banks on the other hand. The Fed is the “central bank” of the United States.

  2. In EC Riegel’s view, when the money is issued by the national government through a privileged monopoly known as bankers, there are only 2 possible outcomes:

    1. in peacetime, private businesses borrow and become debt slaves, subject to the credit contraction wringer;

    2. in war the government is the main borrower and the money is hyperinflated due to the huge circulation increase.

    Both of these are undesirable.

    It is understandable that those who would restrain inflation would require a gold standard. But if those vigilant enough to want a gold standard should reach a position of enough influence to bring it about, then they should instead insist that government stay out of the currency business entirely – because the natural right of creating money belongs to the individual purchaser.

    If money creation is out of the hands of government, then there is no need for a gold standard, because there would be competing fiats, competing on a basis of soundness (non-inflation) for the consumer to choose from.

    The realization of Riegel’s Valun System can be found in the Community Exchange System. I have started a local exchange for Leelanau County, Michigan called Leelex. Members have a 300 dk
    debit limit. A dk is a doorknob, the currency unit. There are no physical dk s, just account entries. Once you reach your 300 dk debit limit, you will have to give some guitar lessons, or mow some lawns or whatever, to bring your debit down so you can keep buying things.

    I currently am the only member. If you would like to see how the system works go to CES and click on the Register button. When you are prompted for which exchange you’d like enter United States and then Leelex. I am both members, the administrator and Warren Raftshol. Post some wants and offerings, it doesn’t matter if you live far away.

  3. The interest paradox is a fallacy, and if you don’t know such a basic economic reality, what are you doing writing a book about the subject?

    If I take out a $100,000 loan, and owe $100,000 in interest in addition to the principal, $200,000 is not needed to repay the loan. Say my first payment is $1,000 and $900 of that is interest. The $100 principal payment vanishes into the fiat black hole it was created from, but the bank keeps the $900 interest as profit. It can then pay me $900 to be a teller or wash windows or whatever, and then I can pay that $900 back for next month’s interest, at which time I work for them again.

    This process can repeat indefinitely, eliminating the supposed paradox. I work for the bank repeatedly, they recycle the interest money back to me repeatedly. It is evil in that I now work for the bank, but as long as the bank spends an amount equal to my interest payment, there is no paradox. Not with gold money, paper money, or jujube money.

    Shame on you for parading yourself as an expert and misinforming so many about such a basic point.

    • I disagree. The point is that more money is always owed back to the banks than they create. The money supply has actually doubled or tripled every 14 years ever since they started tracking the M’s in the 1950s. Why? Because the money supply HAS to expand to cover the interest. $1 at 5% interest compounded annually becomes $2 in 14 years. Banks don’t put their profits into hiring people; they buy other businesses with them and invest in “money making money,” and that’s what throws off the math. If you want to have a serious debate on this, try Mike Montagne’s site; he’ll battle you for months! I’m a bit busy myself. Ellen

      • Ellen ….

        If you add real asets into circulation, in competition with any debt-currency, you overcome the debt management problem on the basis of the added debt-free liquidity. Your comment assumes that fiat has to be the only game in town. When real assets, or derivatives of real assets can ciculate, it alos picks up the slack to allow debt-currency to find the hands that need to service debt and remove that debt-currency from circulation. Assets fill the void.

        There’s noting wrong with the current system other than it is incomplete and a requirement for the marketplace that it’s role takes prominence in the second half of the production. It’s a reunification of the measure and the weight where the financial elite have created the real-time measure. The market is responsible using creating and using the weight where the measure serves the weight. It’s quite simple when you assume that we are all on the same team in the big picture.

        Some evils are necessary in the process. Follow the script. It’s all been laid out.

  4. Nemo,
    The $100 principal payment may vanish on your computer screen, but it is real and alive since it has become a liability to someone. Remember that the principal was put into circulation. Somebody owns it!

    Ellen,
    No reason to be “ashamed”, for any such book is an accomplishment, however, you are wrong on these basic issues.

    If they “buy other businesses” then they’ve exchanged their gold for a business, so at least take that off your math. A bank should not create money, and under a sound money system operating in a free market, your “web of debt” is gone!

    The argument that profits out of interest can just be accumulated until all the Gold is gone, can be made for any business; say a hot dog stand. There is nothing special about interest. Let me repeat that again: There is nothing special about interest. It is the premium charged on the service of the bank. It is revenue like the revenue of the hot dog stand. If the hot dog seller is successful, he will also accumulate all the “Gold” revenue and eat up all the gold.

    The argument is completely fallacious. There is no odd requirement for the money supply to expand or anything. All profits or wages are just means to an “end”. The “end” is always consumption. When saving/investing, that is just putting off immediate consumption for the sake of future consumption.

    Note that under the current system, which is inherently structured as a Cartel (with Government help) in order to maximize profits, the system is theoretically not even profitable, for if banks were now allowed to face the music, most of them would go bankrupt (especially the big players). The only reason that certain people are becoming billionaires out of such a system is the fraudulent and corrupted nature of Government.

    • Well, I would agree that in an all-gold system, profits from any source are going to skew the system; that’s why you need an expandable money supply. If I have a hot dog stand, I make hot dogs; I contribute to the goods and services in the community. The product starts out as raw materials and I put them together, adding the value of my labor to the product, and I sell it to you for its enhanced value. Goods and services go up, so the money supply SHOULD go up to match. Supply and demand have to match for prices to remain stable. Assume an island with 100 gold coins and 10 people. Each starts out with 10 coins. There’s no chance for anyone to “grow” his pot without taking that growth away from someone else. Historically in England, when moneylenders lent out their gold and demanded twice as much back, they quickly got very rich and the people got very poor. The people rioted and the king wound up sending the moneylenders back to Europe. That was in 1290. They weren’t let back in till the changing of the guard with Oliver Cromwell in the 17th century.

  5. Let me be more clear on the purpose of interest:
    interest is the premium charged not only for the service of the bank, but of course also, and especially for the “time preference” discount of the actual saver. For without the interest, no one would save and no economic growth would be possible.

    • Au contraire, I would say interest is what banks get for pretending they have money to lend, extending it as “credit,” and taking the risk that it will never get paid back, in which case they have to balance their books and come up with the money. Credit is not a bad thing; it’s a good thing. But as you point out, the banks are going bankrupt playing the credit game, because they didn’t have the money to start with and they can’t cover the defaults. A government could cover the defaults — it could just write them off as accounting entries gone bad; so the government should be the banker. You can argue all you want, but that’s the only solution that’s going to work. I’ll bet you any money that we’re never going back to a gold system. Electronic money and credit cards are here to stay.

  6. “interest is what banks get for pretending they have money to lend”,
    Yeah, and that’s the problem! It’s not suppose to give out money it doesn’t have. The interest rate is now made up of (real savings + money pumped in by Fed) X multiplier factor (usually about 10). So in today’s era, the interest rate is distorted from the “natural” rate of the free market. That is, it does not match the real supply of savings. This is your source of all economic crisis. Nearly every failure of the market has to do with price fixing and manipulations. You seem not to “want” to even understand this point (real savings vs expanding credit). Yes, it will refute the validity of your theories, but you know I believe it was John Adams who sad: “Facts are a stubborn thing”. You can’t wish it away.

    “A government could cover the defaults”, as it does already today? No thank you. This is your idea of freedom? Government means tax payers. My idea of freedom, is not to have government or anyone with a free unlimited access into my bank account, which is basically what your proposal amounts to. You want to take away the “direct tax” system, which at least is out there in the open for all to debate and oppose, and give the politicians an unlimited method to Tax with a printing press.

    “Supply and demand have to match for prices to remain stable.” Why? that is simply false! Prices are what they are according to the laws of supply and demand! Prices in a growing economy would drop, as they should. Your Plasma TV has dropped in price considerably over the last few years. There are many goods that have dropped in price due to an increase in Capital leading to more efficient and greater production output. The “stable prices” requirement is simply false!
    By the way, a free market and sound money system does not mean a fixed money supply, new money could be added according to demand ( but I won’t get into that right now) dictated by the market.

    You are designing an airplane without wings.

    And by the way, electronic money ,credit cards, etc. don’t require fiat money.

    • Going back to a gold system is not going to happen. We’ve got a credit system that is here to stay; I’m just suggesting how it could be tweaked so that it works to the public benefit and comes out right mathematically. I’m super super busy and shouldn’t be messing with this: 2 articles, 1 foreword, 3 conferences (2 abroad) and speeches to prepare in the next 3 weeks, not to mention shopping to do! Maybe later.

  7. I do not believe Ellen is proposing an unlimited tax system the natural opposition to this would be transparency and rules which would give more control to the people. This system worked very well for the people of Pennsylvania under Benjamin Franklin and could work even better today. Today better checks and balances, rules and transparency could be put in place than was possible then. As I said before this is not comparable to socialism since it would not reduce competition or property rights in the general economy. As long as loans were given out based on similar rules they are today and Government spending was limited to interest revenue there would be no similarity to socialism. Under that system the economy would be the same as today minus inflation/deflation cycles, direct government seizure through taxes and deficit spending. I do not understand how removing these 3 detrimental problems from an economy could possibly equate to socialism. especially considering property rights and competition would still exist every where in the economy.

    I completely agree with Warren’s view that the right to produce money should fall to the individual and under that condition maximal freedom would be obtained. It is very problematic though since there would not be confidence due to fear of cheating and dishonesty. If there was a machine that could watch a persons production and calculate the worth of the goods/services produced through an appraisal of the worth of similar goods/services on the market then there would be no need of money just a bookkeeping entry stating the worth of the goods/services produced. This is not possible so what is needed is an oversight of the persons right to make money to keep confidence and stop dishonesty. Since a person being able to make his own money based on his own productivity would be the maximal condition of freedom I compare that to other systems to see which system would most closely mirror this ideal. I believe gold is better than our current system since it removes the ability to inflate but see problems in that gold could become consolidated over time causing problems similar to today. Today money is consolidated in western countries and because of that 3rd world countries do not fulfill their potential productivity not because of a lack of ability but solely because of the lack of the organizing influence of money. On a gold standard if money became concentrated in other countries the same unfulfillment of potential productivity could occur here due to the lack of the organizing influence of gold. This would not be possible under a sovereignly controlled credit system since the ability to repay the loan would be the sole condition on credit putting more control in the hands of the people and not on the arbitrary conditions of outside circumstances.

  8. To confound things a bit more, maybe Silvio Gesell’s negative interest money should be considered. Gesell’s money declined 0.1% per week. Gesell’s background was a store owner who felt at the mercy of consumers who preferred to hoard. So he created money that would be uneconomical to hoard.

    Aristotle said money performed 2 functions 1) a store of value 2) a medium of exchange.

    However, only gold/silver money meets this definition. Gold bullion serves the first purpose, and fiat paper serves the bookkeeping purpose of the second.

    It is curious that fiat paper money should bear interest, since it is not scarce. If banks can leverage a loan 10 times through fractional reserve banking, shouldn’t they reduce the interest to 1/10th?

    If the government does resume money creation, I vote for negative interest money.

    Of course, the Austrians can still loan their gold for positive interest.

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