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The Return to Good Money

|Includes: Randgold Resources Limited (GOLD)

Once again I’m indebted to a reader for passing along a superlative concept and essay on a practical means of returning to “good money” (i.e. some sort of precious metals-based currency). While most precious metals commentators (including myself) strongly advocate the return to some sort of “gold standard”, devising a plausible process for moving away from the worthless paper we carry in our wallets today has proven problematic.

If we follow the path of “converting” fiat paper-currencies back to precious metals-backed money, we immediately see only two options. Either we get all of the world’s major currencies to simultaneously convert their paper-currencies (an extremely unlikely event), or we must do this in some step-by-step process – which must begin with the world’s “reserve currency” (currently the U.S. dollar).

In my own attempt to reconcile this enormous logistical issue, I previously proposed a two-stage process: first switching from the U.S. dollar to China’s renminbi as the new reserve-currency, and then backing the renminbi with gold. My reasoning was that if the two changes were instituted (more or less) simultaneously that there would be an horrific plunge in the U.S. dollar – as a world full of U.S. dollar-holders all sought to rid themselves of their inferior paper in favor of gold-backed renminbi at the same time.

The only alternative to that approach for converting fiat-paper to gold- or silver-backed money would be to attempt to ‘re-back’ the U.S. dollar with gold. There are even worse problems confronting this idea. To begin with, most people now believe that the U.S. only has a tiny fraction of the gold reserves it pretends to have. This is the only rational conclusion with respect to any person/entity who claims to hold much more of something than anyone else in the world – but refuses to ever let anyone see it!

With no official audit of the U.S. “gold reserves” having been conducted for more than fifty years (despite the relentless efforts of groups like GATA, and the indefatigable Ron Paul), the question has now become not “does the U.S. have as much gold as it claims?” but rather “does the U.S. own any gold, at all?” Compound that problem with the near-infinite trillions of dollars of debts and liabilities amassed by the U.S. government, and it is obvious that the only possible way that the U.S. paper-dollar could ever be converted back to good money would be after the inevitable national default of the U.S. government.

With no especially attractive ideas before us, this is what got me so excited when I read the thoughtful proposal of Hugo Salinas Price, the President of the Mexican Civic Association Pro Silver.  Readers may recall that Price spearheaded a drive within Mexico to return their own currency to a silver standard.

That movement eventually fizzled-out – undoubtedly in part due to the enormous pressure which the U.S. government would have applied to prevent this change. With the U.S.’s large population of Mexican migrants, there would immediately have been a massive influx of that silver money into the U.S.

This would be followed by first the U.S.’s Latino population, and soon most Americans ditching their U.S. dollars in favor of Mexican silver-pesos. Not only would such a development be incredibly embarrassing to the U.S. government, but it would have accelerated the paper dollar’s devolution toward zero – through being rejected by the U.S.’s own, domestic population.

Price solves this problem with the innovative concept of having parallel currencies. To be fair, we can’t give Price all of the credit for this idea – since a similar concept has already been implemented in Indonesia. While the official paper-currency remains the “rupiah”, along-side the paper, government-minted gold “dinar” and silver “dirham” now also circulate in that economy.

A clip reporting on this development provided an anecdote from a middle-class Indonesian man, who opened his first bank-account in 2000, got himself a credit card and debit card – and then noticed how as soon as he allowed his wealth to be held by bankers that the purchasing-power of his paper-currency began rapidly declining.

In 2004, the man closed his bank account, and converted all his paper currency to gold and silver money. He reported that Indonesia’s inflation-rate soared to 20% shortly thereafter – and not only did his gold and silver money not lose any of its wealth (i.e. purchasing-power), but he earned a gain on his money (net of inflation) versus the value of the official paper.

It is in looking at how this Indonesian man (and his fellow-citizens) were completely shielded from the ravages of banker-produced inflation that we see the key to Price’s proposal. In order for gold and silver to function as parallel currencies, they must not be assigned some (arbitrary) “legal tender” denomination, but rather must be valued strictly according to the weight of the metal.

In theory, Canada and the U.S. also have “parallel currency systems”: both countries mint their own gold and silver coins. However, the arbitrary denominations of the coins are ridiculously (and deliberately) detached from the real world – with silver coins denominated at about 20% of the current value of the metal, while gold coins are denominated at less than 5% of their actual value. Obviously, the intention here is to greatly punish any Canadians or Americans seeking to emulate the economic liberty which exists in Indonesia.

Should we try to substitute gold and silver for the bankers’ worthless paper, not only are we instantly robbed of 80% (or more) of our wealth if we try to spend it as money, but our governments have instituted absurd and hypocritical “capital gains” tax rules. Our governments pretend that simply by choosing to preserve our wealth (in gold and silver) rather than to allow the bankers to steal roughly 10% of our wealth per year through their currency-dilution (i.e. inflation) that we have made a “capital gain” – simply from not losing any of our wealth.

This would be identical to going to all of our churches and charities and telling them that while they are exempt from “income taxation”, that because their wealth wasn’t reduced by 20% per year (through taxation) like everyone else that this “windfall” represents a “capital gain” on all donations they receive. Obviously, the mere fact that we prevent ourselves from being robbed (by bankers) cannot constitute a “capital gain” in any fair and rational taxation system. For those interested in these taxation issues, I go into them in much greater detail in a previous commentary.

By valuing the gold/silver coins strictly by their weight, this allows gold and silver to exert their inherent characteristic as perfect vessels for preserving wealth. Here Price acknowledges the primary practical difficulty: with banker-inflation spiraling out of control, how do we maintain a fair-yet-flexible mechanism for exchanging and valuing gold and silver money?

When we previously had small-denomination coins made (partially) of silver, as soon as the value of the silver exceeded the “official” value of the coin as money, there was not only a problem with coins being melted-down for profit, but with our governments absorbing large losses from minting these coins.

Price’s solution to this problem is to have the value of these coins (i.e. their “price” in paper) be slightly higher than the current “spot” prices for the metals. Simultaneously, this eliminates the problem of coins disappearing from the system from being melted-down and allows the government to net a modest profit (or “seigniorage”).

Obviously this official price would have to be “pegged” at least on a monthly basis (and more often if/when the bankers’ currency-debasing accelerates even further). Price acknowledges that this leaves one, remaining, unresolved issue: how do we handle the inevitable downward “hiccups” in price for gold and/or silver?

He is unequivocal: the “official” value of gold and/or silver money must never be reduced. Price observes that when a short-term decline in the price of gold creates a gap between the official price of bullion-money and the spot-price of the metals, themselves, all this means is a temporary increase in profits (for cash-strapped Western governments) and it means the people’s money actually becomes better than bullion itself.

Obviously, many readers not familiar with precious metals (and the monetary depravity of bankers) will be asking themselves “what happens if there is a large, permanent decline in the price of gold and/or silver?”

These readers must understand the fundamental equation here. When the price of gold and silver rises, the vast majority of that increase is not an absolute increase in value, but only a relative increase in price – versus the paper currencies which are being so rapidly diluted. Indeed, “inflation” is nothing more than the speed with which the bankers are diluting their paper currencies.

Thus, asking what would happen if there was a large/permanent decrease in the price of gold or silver is an identical question to asking what would happen if there was a large/permanent decrease in banker money-printing? In other words, this is akin to asking “what if the Sun doesn’t rise tomorrow?” I’ll give regular readers a moment to recover from their laughter.

To illustrate my point, Federal Reserve Chairman Ben Bernanke is about to announce another $1 trillion (or so) in new money-printing for the sole purpose of creating inflation. Creating inflation through excessive money-printing is the primary means by which bankers have been stealing from the general population for centuries. They take full-value dollars from us (as “deposits”) and always give us back dollars which are worth much less (even including the pitiful “interest” they pay us) – because every time we give the banks a dollar, they are allowed to print ten new “dollars”, lend that money to us, and charge us interest on it.

This also deals with the last possible objection to such a concept: what if governments deliberately set the official price of gold/silver money much too high – so that they could reap excessive profits?

Understand that artificially pegging the price of gold/silver too high equates to artificially creating deflation in our economies. Given that all of the bankers, and all of our governments who serve the bankers have already demonstrated that they are absolutely phobic toward deflation, this possibility also ranks right up there with “what if the Sun doesn’t rise tomorrow?”

Price stipulates that because of the relatively moderate price of silver, that it must be the first form of good money re-introduced into our monetary systems – as it is economically accessible to all of the people. This further reduces the possibility of our money “losing its value”, since everyone familiar with the silver sector is already aware that global inventories of silver have been nearly totally depleted – due to roughly fifty years of price-suppression. There is less refined silver in the world today (relative to the amount of gold) than at any other time in the nearly 5,000 years in which we have used these metals as money.

I can’t end this piece without taking a moment to note the “intimate relationship” between bankers and precious metals. One might even call it a “love/hate relationship”: they “love” to hold gold and silver themselves – but “hate” to see anyone other than bankers possess any of it.

Astute readers will have already deduced that even a parallel precious-metals monetary system would affect our beloved bankers adversely. Price has some thoughts on this, including one wickedly devious suggestion, and I have a “few” thoughts of my own on that subject. I’ll deal with those topics in a sequel: “Good Money and the Fall of Bankers”.

Disclosure: none