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Returning to Honest Money

May 13, 2011 2:39 PM ET
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In July 1966, Alan Greenspan wrote a brief article in The Objectivist, titled “Gold and Economic Freedom.” In the article, he describes the stages of how humans developed a system of money and how by 1966 our fiat money was in danger of becoming obsolete.
First, he describes the attributes of money:
1.      As a medium of exchange, money is a precondition of division of labor and labor specialization.
2.      The medium of exchange must be acceptable to all participants.
3.      It must be a durable commodity (won’t rot in a store house), homogeneous (a substance wherein all parts are of the same material), and divisible (each part, no matter how small, must be of proportional worth to the whole).
4.      Most important, the medium must be a luxury, therefore always in demand and always acceptable.
Dr. Greenspan briefly describes how humans whittled down the list of usable money to two metals: gold and silver. The difficulty in using gold as money, he says, has always been that large payments were difficult to transact, and that limited the degree to which society’s labor could specialize. Banking systems naturally developed as gold’s usage in society increased, and fractional reserve banking using credit instruments backed by gold extends the ability of gold and silver to be used as money. Thus, he states, that a free banking system based on gold is able to extend credit, manage the money supply (create currency), and respond to the production requirements of the economy.
Money is created in this type of system when loans are made, and money is destroyed when the loan is paid off. If the cycle of borrowing money and paying it off quickly is not interrupted, bank credit is generally available at reasonable prices. Please note that in a gold standard banking system, each piece of currency is backed by some amount of gold. So, a $1 piece of currency would be backed by an amount of gold worth one dollar. Dr. Greenspan was trying to tell us that there is always enough gold in physical form, because the price of gold will increase or decrease as the world demands more or less pieces of currency.
For the citizenry, having a gold backed currency holds some very interesting benefits. First, when your country has a gold backed currency, your government cannot willy-nilly spend money that it does not have, because that would mean the number of dollars in circulation would increase while the pile of gold that backs your current number of dollars in circulation would remain the same. That’s how you, as a citizen, would know absolutely that your currency was being inflated. Right now the only way you know that your government is spending too much money (i.e. the Fed is printing too much money) is that prices are increasing.

Second, it would mean that your legislators would have to look you in the eye and tell you, “Yes, I inflated your currency, so we could spend more money.” In fact, having a gold backed currency means that legislators would either have to get even more sneaky than they already are, or they’d have to be honest about what was happening in the government budgets.
The best part of having a gold backed currency, that it keeps our government legislators honest, is also what makes gold the worst thing to back our currency: you cannot have deficit spending with a gold backed currency because the citizenry would know for sure that you were deficit spending. In fact, a gold backed currency would mean that government would have to balance their budgets, unless legislators wanted to stand in front of their constituents and tell them, “Yes, I purposely inflated your currency, so the prices you pay are higher, in order to fund social programs for people other than yourself.” (Something I find highly unlikely to happen.)
Forgive me. I digress from Dr. Greenspan’s story about gold. By 1966, Dr. Greenspan had finally noticed, or at the very least had finally put into words the legislator’s biggest fear: we cannot have Medicare, or any social program, until and unless we spend more money than we bring in in revenue (i.e. deficit spend) –and the people will know their taxes are going to go up. The welfare statists, meaning our government legislators, started using the banking system to fund their welfare programs. Every dollar that was spent over and above what was received in revenue had to be borrowed. In the USA, the government borrows money from the Federal Reserve Bank, which was given sole proprietorship to print our currency in 1913. You cannot have a fiat currency and have the citizenry be able to protect their wealth using gold, so on April 5, 1933, gold was removed from the citizenry by presidential edict. Until 1971, there was been no way for the people to protect themselves from an over-spending congress and an accommodative Central Bank.
The more money that was spent the more our dollars became inflated. Inflation is called the hidden tax, because as the dollar inflates your little pile of money in savings buys less goods and services. The more they print money, the less your savings buys, and the harder and longer you have to work to buy goods and services you really want.
Our government legislators’ biggest fear is that we, the citizenry, will finally wake up to the fact that our savings is being whittled away with every dollar that they spend. The Fed’s biggest fear is that the legislators will finally pull the plug on their little scheme of printing money. When the sleeping giant finally wakes up the change to our banking system could lead us to a new system of money. Asian banks are already getting ready for the new shift in banking, as is JP Morgan, Middle Eastern countries, and smart money.
As Dr. Greenspan put it in the last paragraph, “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

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