Posted by: John Gilmore | September 16, 2006

Capitalism Needs a Sound Money Foundation

As you can probably guess – I spend a lot of time reading about current events. Of all the things I read – I probably enjoy Chris Martenson’s website the most because it’s easy to see that he is an honest man who has a very firm grasp of what is really going on – and he tells the truth. It’s refreshing to listen to someone who does not have an agenda, but is simply analyzing data and then writing honestly about his findings.

In contrast, it seems to me that most of the mainstream media (CNN, Fox News, Wall St. Journal, newspapers, magazines, etc.) report only what they’re given to report. The government comes out with an economic plan and data – and most mainstream media outlets trumpet the news. There’s usually very little additional analysis to verify what they’re told. The government tells us this is good – so we report that it’s good. You don’t see a whole lot of in-depth analysis by the major media outlets. Most of the time – they simply regurgitate what they’re told.

It’s not hard to see that there are all kinds of political agendas at work within mainstream media. Because of this – I read mainstream media – not to learn the truth of what is happening – but to keep tabs on what the enemies of our nation (global elite) are doing. If you know the truth and pay attention – the mainstream media will tell you exactly what the global elite are doing and planning. You’ve seen me quote many world leaders over the past several months – all of the articles and quotes were obviously taken from mainstream media articles. They are telling you exactly what is being planned for your future.

Occasionally, I will see something in the mainstream media that catches my eye because it will be honest and speak to the true problems within our economy. Today I read one of those articles. I don’t know Judy Shelton nor have I read any of her work – but I do know this – the article she wrote for the Wall St. Journal is dead-on. She identifies the underlying problem inherent in our system. It’s a thoroughly researched article – and her analysis is right on the money (no pun intended). Of course, she’s not a reporter or analyst for the WSJ – she’s an economist who understands. This article was published in the Opinion section of the paper.

As things get progressively worse – expect more actions like what has been proposed in Indiana (see article below) – money based on a gold or silver standard. People are beginning to understand what is at the base of all this. Also expect that our Federal Government (and other World Governments) will eventually oppose such actions – and will forcefully respond. I have read recently where there are now over 60 local currencies throughout Europe – created by people fed up with the Euro. This will probably be allowed for a short time – then expect a proposed world currency once the world’s economy collapses. At some point, world governments will not allow anything other than their currency. This will be the time when things rapidly begin to deteriorate.

jg – February 12, 2009


FEBRUARY 11, 2009, 11:02 P.M. ET

Capitalism Needs a Sound Money Foundation
Let’s give the Fed some competition. Abolish legal tender laws and see whose money people trust.


Let’s go back to the gold standard.

If the very idea seems at odds with what is currently happening in our country — with Congress preparing to pass a massive economic stimulus bill that will push the fiscal deficit to triple the size of last year’s record budget gap — it’s because a gold standard stands in the way of runaway government spending.

Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money — i.e., currency with no intrinsic worth that government has decreed legal tender — loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation — which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.

Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.

In short, inflation undermines capitalism by destroying the rationale for dedicating a portion of today’s earnings to savings. Accumulated savings provide the capital that finances projects that generate higher future returns; it’s how an economy grows, how a society reaches higher levels of prosperity. But inflation makes suckers out of savers.

If capitalism is to be preserved, it can’t be through the con game of diluting the value of money. People see through such tactics; they recognize the signs of impending inflation. When we see Congress getting ready to pay for 40% of 2009 federal budget expenditures with money created from thin air, there’s no getting around it. Our money will lose its capacity to serve as an honest measure, a meaningful unit of account. Our paper currency cannot provide a reliable store of value.

So we must first establish a sound foundation for capitalism by permitting people to use a form of money they trust. Gold and silver have traditionally served as currencies — and for good reason. A study by two economists at the Federal Reserve Bank of Minneapolis, Arthur Rolnick and Warren Weber, concluded that gold and silver standards consistently outperform fiat standards. Analyzing data over many decades for a large sample of countries, they found that “every country in our sample experienced a higher rate of inflation in the period during which it was operating under a fiat standard than in the period during which it was operating under a commodity standard.”

Given that the driving force of free-market capitalism is competition, it stands to reason that the best way to improve money is through currency competition. Individuals should be able to choose whether they wish to carry out their personal economic transactions using the paper currency offered by the government, or to conduct their affairs using voluntary private contracts linked to payment in gold or silver.

Legal tender laws currently favor government-issued money, putting private contracts in gold or silver at a distinct disadvantage. Contracts denominated in Federal Reserve notes are enforced by the courts, whereas contracts denominated in gold are not. Gold purchases are subject to taxes, both sales and capital gains. And while the Constitution specifies that only commodity standards are lawful — “No state shall coin money, emit bills of credit, or make anything but gold and silver coin a tender in payment of debts” (Art. I, Sec. 10) — it is fiat money that enjoys legal tender status and its protections.

Now is the time to challenge the exclusive monopoly of Federal Reserve notes as currency. Buyers and sellers, by mutual consent, should have access to an alternate means for settling accounts; they should be able to do business using a monetary unit of account defined in terms of gold. The existence of parallel currencies operating side-by-side on an equal legal footing would make it clear whether people had more confidence in fiat money or money redeemable in gold. If the gold-based system is preferred, it means that people fully understand that the purpose of money is to facilitate commerce, not to camouflage fiscal mismanagement.

Private gold currencies have served as the medium of exchange throughout history — long before kings and governments took over the franchise. The initial justification for government involvement in money was to certify the weight and fineness of private gold coins. That rulers found it all too tempting to debase the money and defraud its users testifies more to the corruptive aspects of sovereign authority than to the viability of gold-based money.
Which is why government officials should not now have the last word in determining the monetary measure, especially when they have abused the privilege.

The same values that will help America regain its economic footing and get back on the path to productive growth — honesty, reliability, accountability — should be reflected in our money. Economists who promote the government-knows-best approach of Keynesian economics fail to comprehend the damaging consequences of spurring economic activity through a money illusion. Fiscal “stimulus” at the expense of monetary stability may accommodate the principles of the childless British economist who famously quipped, “In the long run, we’re all dead.” But it shortchanges future generations by saddling them with undeserved debt obligations.

There is also the argument that gold-linked money deprives the government of needed “flexibility” and could lead to falling prices. But contrary to fears of harmful deflation, the big problem is not that nominal prices might go down as production declines, but rather that dollar prices artificially pumped up by government deficit spending merely paper over the real economic situation. When the output of goods grows faster than the stock of money, benign deflation can occur — it happened from 1880 to 1900 while the U.S. was on a gold standard. But the total price-level decline was 10% stretched over 20 years. Meanwhile, the gross domestic product more than doubled.

At a moment when the world is questioning the virtues of democratic capitalism, our nation should provide global leadership by focusing on the need for monetary integrity. One of the most serious threats to global economic recovery — aside from inadequate savings — is protectionism. An important benefit of developing a parallel currency linked to gold is that other countries could likewise permit their own citizens to utilize it. To the extent they did so, a common currency area would be created not subject to the insidious protectionism of sliding exchange rates.

The fiasco of the G-20 meeting in Washington last November — it was supposed to usher in “the next Bretton Woods” — suggests that any move toward a new international monetary system based on gold will more likely take place through the grass-roots efforts of Americans. It may already be happening at the state level. Last month, Indiana state Sen. Greg Walker introduced a bill — “The Indiana Honest Money Act” — which would, if enacted, allow citizens the option of paying in or receiving back gold, silver or the equivalent electronic receipt as an alternative to Federal Reserve notes for all transactions conducted with the state of Indiana.

It may turn out to be a bellwether. Certainly, it’s a sign of a growing feeling in the heartland that we need to go back to sound money. We need money that works for the legitimate producers and consumers of the world — the savers and borrowers, the entrepreneurs. Not money that works for the chiselers.

Ms. Shelton, an economist, is author of “Money Meltdown: Restoring Order to the Global Currency System” (Free Press, 1994).

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