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A Special Gold and Monetary Discussion

WELCOME to an Archive of a Very Special Monetary Discussion! This discussion took place beginning February of 2000. It was joined by many fine-thinking individuals who touched upon several important and unique aspects of the interrelation of gold and the monetary system. We hope you gain new perspectives from this convenient collection of this most remarkable discussion. This discussion also provided the context in which ORO (02/11/00; 13:59 - Msg ID:25019) reached special acclaim with qualifying nominations for induction into the Hall of Fame from his fellows. Where this assembled discussion ends, please feel welcome to explore the continuation of this theme in the Forum Archives for the following days, or else add your own thoughts by posting a new message to today's discussion. Enjoy! [Click here for Part Two or for Part Three]

Aristotle (2/7/2000; 7:15:24MDT - Msg ID:24589)
It begins!
-----* Executive Summary -- an Outline of Observations *-----

*** Any monetary system that attempts to coin Gold, or otherwise use Gold as currency will naturally give rise to banks -- for security and quality assurance if for no other reason.

*** History reveals time and time again that this seemingly "perfect" Gold-only system naturally evolves into fractional-reserve lending because it is what the people want.

((i.e., People want to consume or to own now that which they have not yet saved enough to purchase outright. They are willing to mortgage their future productivity in order to have their house today -- they seek sources of loans. Meanwhile, those that already have a quantity of money are seen to seek a source of income from their wealth...and banks come to be actively sought and employed by both sides to act as the middleman.))

*** While lending depositors' deposits, the efficiency of banking to reallocate fungible funds allows many people to behave as though they all are "owners" of (i.e., have access to) the same original quantity of deposits.

((i.e., The bank uses its available, unlent funds to satisfy any depositors' requests for withdrawals rather than the alternative of reminding them that the funds are temporarily unavailable -- because in order to earn interest, the bank lent the money out, as per their agreement.))

*** Through lending (coupled with the phenomenon described above,) the artificial (i.e., man-made) increase in the money supply erodes its per-unit purchasing power.

*** A growing economy (complete with rising prices from a "softer" currency) raises the customers' demands upon the banker's art of money creation, widening the gulf between here and reality...between the vast amount of banking credit and the small original amount of real wealth-deposits upon which it was all built.

*** Because Coin and bank-credit circulate as equivalent, interchangeable currency and means of payment, the value the currency-unit, regardless of form (Gold coin or paper,) falls in accord with the growing supply of bank-credit.

((i.e., The many accounts filled with bank-credit "money" gives rise to the wealth-effect built upon the perception of abundant funds. This pressures prices higher and puts the effective purchasing power of the currency-unit severely out of balance with the proper and natural purchasing power that should otherwise have been enjoyed separately by the small quantity of real Gold on hand. In practice, this renders the metal used in the under-valued coins into little more than an artifact of "the good ol' days when things were cheaper."))

*** Thus, when the value of the coin comes in time to be viewed as merely a representation of the abundant supply of credit-money and thereby fails to reflect the value of its metal, from a practical standpoint it might as well be made out of anything at that stage.

((i.e., If a paper dollar can circulate at par with a Gold dollar, and the purchasing power of both is equally dictated by the supply of bank-credit money, then why incur the expense of minting token coins out of Gold??? If simple durability is desired, then copper or nickel would certainly be capable to represent the currency's function every bit as well as the paper does. Therefore, avoiding the expense of Gold in the production of currency for circulation would easily be seen to be an act of prudence, whether the value involved is 1¢ or 100 dollars.))

*** In this progession, the developing concept of "money" gradually loses its originally-perceived meaning along with ties to real wealth; it comes to be built upon the thin ice of confidence and good loan/counterparty performance through the banking system.

*** Fixed Gold Convertibility as a currency of the credit on account looms large as a threat to the banking system.

((Keep in mind that it is through natural human activity that banking evolves into an important system for much of society, built by a population that has come to depend heavily upon it. Therefore, a stage will always arrive in which the fixed Gold convertibility in the shape of circulating currency will be purposefully abandoned. It is done to preserve "lifestyle as we know it" in the eyes of those people living at such a stage in a currency time line.))

*** What then is the role for Gold? Gold qualifies as MORE TRUE than money. Among the many national currencies, only Gold in physical form fills the three standard monetary criteria (store of value; medium of exchange; and unit of account) without *WITHOUT* the associated risk of default. Gold, therefore, remains the ultimate, sovereign king of them all and subject to none... as long as it isn't attached in any official capacity to the fate or fortune of any one of them. Therefore, the monetary system architecture must be such that Governments find no temptation -- that they are unable to derive any benefit to their own situation through any efforts to "keep a lid" on Gold.

*** Gold must be set free to float, seeking its proper value among the world of circulating currencies/monies; preserved as a unique "international currency of wealth" that may NOT be lent (because lending effectively causes a perceived increase in its supply and corresponding decrease in its purchasing power, as outlined above.) Gold must only be bought and sold outright, and must remain free of the attachments of any and all financial derivatives.

*** All people, regardless of nationality, must be free to exchange their national currency for Gold at prices established by an open physical Gold market.

((As I've said before, any system in which a person is denied the liberty to own Gold as a form of savings is both financially and morally bankrupt.))

How will this work, you ask?

*** An extention of Gresham's law predicts that the world's supreme currency, Gold, will not actually circulate in the conventional sense. Gold will be saved (and will appreciate in value absent the lending/leasing of it for interest,) while national fiat currencies will circulate under the needs of the economy. It is these national fiat currencies that will continue to satisfy the demand of borrowers for loans. National fiat currencies will also serve as the means to satisfy the various governments' unrestrainable inclinations to "manage" their economies to the extent that they are able. They, too, will hold Gold in savings (reserves) for the same reason we do.

The supporting chapters are to follow in this commentary -- "Building the Perfect System by Capitalizing on Gresham's Law"

Aristotle (2/7/2000; 8:10:15MDT - Msg ID:24593)
Building the Perfect System by Capitalizing on Gresham's Law

At first cut, people fall into one of two categories: 1) those who recognize the value of an honest monetary system built upon Gold, and 2) those who have not yet given any serious thought to the matter. Proceeding with the small but special population that belong to the first category, my own experience has revealed them to be inclined toward idealism. Good people, to be sure -- I wish we were all that way! But while their general awareness of what makes for a more perfect world should be providing them with fuel for an enjoyable life, instead, this level of idealism often blinds many of them to any shades of gray -- and there is little comfort living in a strictly black-or-white world. I write this with hope in the off-chance that it may help provide a source of comfort to this small group of idealists, offering them some subtle shades of gray that won't completely undermine their idealistic integrity.

While reaching out to my idealistic friends, I also hope to present a "roadmap of thought" for that larger, all-important population which falls into the second category mentioned above -- those that have not tapped into a more thoughtful, enjoyable life which I have seen to be the general hallmark of my few Gold-minded friends (the ones who have themselves avoided the extremist idealistic trappings.) Why do I call this second category the "all-important" population? Because the Many do indeed dictate the terms under which the Few must also live. I must, therefore, grudgingly devote sufficient attention in this commentary to ensure some of the idealistic readers can see this important "shade of gray" regarding majority rule. It is my hope that they will then be prepared to pragmatically accept the terms/constraints under which this *perfect monetary system* must be designed.

In this commentary I shall attempt to clearly lay out what I feel this "perfect" monetary system to be -- the *perfect* system for a consistently imperfect world, that is. I am not so bold as to think that the world of human ambition and disposition is something that can be altered to suit the perfection of our preferred (Gold coin) currency's characteristics -- especially the limitations (fiscal austerity) it imposes on its users, the population at large. I therefore resolve myself (and hope you do, also) to the humble thought that our currency system as a whole might be artfully developed into a state of harmony with the world in which we do live. The present system, and all failures before it, have been as square pegs in round holes. With the system to be described, I hope to avoid any system that lends itself to the repetition of past abuses and failures.

The Stage Has Been Set; Let the Play Begin...

Those familiar with the popular discussions of monetary thought will recognize the common plea of the idealistic Gold advocate: calling for a return to a 100% fully "backed" and convertible Gold standard currency system. (As if that were somehow the magic pill to cure all that ails us.) The solution is not so simple, and to believe so is tragically naive black-and-white thought. For confirmation of this, look to our past where you will surely see a familiar world, populated with people that were motivated by the same thoughts that motivate us today. In "their" world (fundamentally the same as ours) we have already had a convertible Gold Standard, but, in fact, history reveals that it did not work. Or maybe more correctly stated, modern times reveal that it did not SURVIVE. To be sure, any conceivable system might be seen to work well for a limited span of time--and indeed, history paints a vivid landscape populated by many currency creatures of various lifespans--but true success is determined by who remains to answer the daily roll call. HOWEVER, from where we sit we can gain important wisdom in the observation that, despite the overthrow of the Gold Standard regime, Gold remains an unparalleled reserve asset; carefully weighed, numbered, cataloged, and stacked, resting well-guarded within central bank vaults throughout the world--unmatched in financial staying power even as all else fails.

Having acknowledged this history, there is no point in rashly calling for us to repeat the mistakes of our past. The problems that killed a fully-convertible Gold Standard back then are still with us today. But take heart. The problem was not with the Gold itself. The problem was with the Gold Standard's fit with the prevailing banking/financial "System." If we objectively face the cold hard reality, we realize that we can't very well live with the lack of either one. But paradoxically, history shows us that the two cannot sustainably coexist--at least not under the various system-designs tried in the past. In my usage here, the "System" refers simply to the dynamic interaction between a currency and its users within the context of evolving economic demands for development, commerce, and banking. (Even to the extent of self-destruction, the System is notoriously good at giving the people what they want.) It is the subtle changes to that system that I hope to spell out, revealing not only how Gold can survive society's preference for the current self-serving System, but also how the System can tolerate/survive the discipline of Gold. In fact, the diametrically-opposed System will not only survive in the face of Gold, but will actually be made more functionally viable by Gold.

Now that you see what we are in for, it seems appropriate to launch my endeavor with this quote from John Kenneth Galbraith: "Most things in life--automobiles, mistresses, cancer--are important only to those who have them. Money, in contrast, is equally important to those who have it and those who don't. Both, accordingly, have a concern for understanding it. Both should proceed in the full confidence that they can." It is in the spirit of that assurance that the playing field has been made level for a such a Little Leaguer like myself that I shall embark on this attempt at passing along my own view of the monetary system. We are told above that everyone should share a common concern for understanding it. Actual experience reveals that few people can muster a basic tolerance for any meaningful dialog on the subject (money.) To be sure, they can be seen to talk at great length on the various schemes for making more of it, but not a word is to be had on the design of it. For that reason, I am thankful that USAGOLD provides this dedicated roundtable of guests to serve where the general population fails to pursue this line of monetary discussion.

Before I go further, I must confess that the map I see before me for the proper delivery of this presentation reveals a path I nearly fear to tread. (Although this view may not match theirs precisely, I have been encouraged to see that some of these same thoughts have also been touched on by PH in LA, FOA, Solomon Weaver, Journeyman, and ORO, to name a few that come to mind. They are seeing the shades of gray.) As I've already hinted, it will likely go against the grain of thought among the staunchest of Gold advocates. But hopefully my long pro-Gold track record will buy me their indulgence as required to read and absorb the thoughts contained in this post with some remnants of objectivity rather than outright dismissal. Herein lies the thorn: for the reader to have any hope of finding merit in this commentary, he must admit--even if only temporarily--that fiat ("paper") currency (i.e. dollar, euro, peso, yen, etc.) is not "completely worthless"...regardless of the enduring popularity of that notion among Goldhearts. Please bear with me; I'm sure you'll like the ending--even if you've already decided that you don't like this ominous beginning.

It doesn't matter who I am, but...

A brief introduction may be called-for to help you to better understand my position, and thereby evaluate whether or not my own thinking behind this commentary is clouded beyond the best attempt on my part at objectivity. So, who is Aristotle? You will know me better for my actions than from any other detail. I seek to recognize both the benefits and the failings of our existing monetary system, and strive to live life for full enjoyment in accordance with each. As such, you should be made aware that I already live "in tune" with what I am about to describe as the perfect financial system within an imperfect world.

I fully realize that I live in a world of fiat currency. Specifically, mine is a fiat dollar world, though not by my individual choice. It's what the majority wanted and dictated, and it's beyond any of us to deny its existence and credibility. Recognize that, and recognize also its failings, and you are poised to enjoy the best life you can possibly muster. Fail to recognize either side in this day and age, and you are either shorting yourself now (by somehow feeling miserable that paper dollars actually work,) or you will be shorted later (by the inevitable rude discovery that paper dollars weren't quite as good as Gold after all.) I comfortably walk the line of this understanding that dollars work for a purpose, but are not as good as Gold.

I live and work in the real world of fiat currency--there is no point in trying to be circumventive about it. As I work I am paid by others with fiat currency, and I quite happily pay my own bills with fiat currency. I manage my expenses responsibly, and so there is always some fiat currency left over at the end of each month. This I exchange for Gold without fail--to serve as my savings for a later time. No doubt this arrangement will appeal to you in equal measure with your understanding that Gold is the ultimate money; with your sense that it won't/can't be manipulated into extinction; and with your appreciation for the notion that a person, on average, can produce over a lifetime more than he consumes. That final element should also hold true for a group of people (such as a nation,) and no magic of accounting can alter that long-term necessity. Establishing a reliable "accountant" for your life's period of productivity should be enough for any honest person, and Gold serves that role better than any other. I believe those who share this view are among the fortunate few that are ahead of their time--even as the world is rushing to catch up. This will be clearer in time as I explain.

Greed is the one trait that would preclude the successful enjoyment of this present position--a position one step ahead of the following financial evolution. It is a trait that I thankfully find myself lacking--perhaps due to deficiency of imagination. Greed (and arrogance too, I suppose) would entice one to attempt to capitalize on investment leverage and timing of the markets to maximize their gains for the precise day that the world awakens to a new reality. I am far too dull-witted to know the unknowable, so such a strategy of leverage and market timing is prone to unfold as a spectacular failure. Also, I find life to be full enough without the added burden of losing sleep at night worried about such risky investments. Only through the virtue of patience--in the understanding that we are for this historically brief time one step ahead of the world--will we find in the end that we are among the few who participate in the rewards of a world that suddenly wants to be where we already are. Hopefully this doesn't strike you as the rantings of an irrational star gazer, so with that view of the author let's now move on to the heart of the matter.

Aristotle (02/07/00; 10:52:39MDT - Msg ID:24602)
Part Three -- A Test of Your Monetary Maturity

The vagaries of the economic process in the real world make it infeasible to give this matter a comprehensive treatment in this format (nor would I be mentally capable!) so of necessity I will only build upon the most fundamental core principles throughout this commentary. With that caveat out of the way, let's tackle this fiat currency issue right now so that we may sooner breathe a sigh of relief that the bitter pill has been swallowed and that recovery is at hand. How often have we all rallied at one time or another around the Goldhearts' battle cries: "The Fed (or banks in general, or government) simply makes this fiat currency from thin air!" "Fiat money is worthless!" "Fiat currency is the Fed's (or banks', or government's) tool to keep the poor man down." Well, a cold hard reality is that contrary to this line of thinking, while I do indeed fit the description, I certainly have not been kept "down." Have you? Further, and directly to the point, fiat currency isn't "worthless." Have you ever tried to buy anything with it? Did you succeed? I'm sure that you did, so what does that lesson tell you? As a general rule, a person rarely gets "something for nothing." Therefore, the fiat currency must certainly be "something," and that "something" can't BE worthless.

There is a subtle but important distinction here between being "nothing of value" versus being no *thing* of value. A dollar (or any other fiat currency) is certainly no longer a *thing* although it once was (back in those days of yore when it was defined as a certain weight of Gold.) But it does in fact have value--a value it finds in measure of the success with which it retains the original Concept of value it represented at the time of its origination...at loan creation. This "Concept" is built on a unit foundation of arbitrary size, to be sure; and there can be no doubt that this remains a fundamental weakness for it to serve properly as money (medium of exchange, store of value, and unit of account.)

Nonetheless, the value in any given currency-unit originates in the terms of the loan contract in which the borrower has promised to repay these units of currency to the lender. And while it seems that these currency units are indiscriminately created out of thin air, each of the many trillions in existence today were created through the joint cooperation of a lender AND a borrower. It takes two to tango. Want to find value in a dollar? Simply track down a new homeowner who toils each workday to pay off his mortgage. (Is he *evil* for borrowing money from "thin air"? More on this later.) It's easy to convince yourself that people will provide goods or services in return for dollars--either because they themselves are in debt and in need of the currency to repay their outstanding debts, or else because they believe with near certainty that these same dollars will be useful to them as a medium of exchange when they encounter somebody else who is burdened with outstanding debts.

A Commonly-stated Problem With Fiat Currency

All in all, the system works about as well as any other manmade thing. Unfortunately, taken as a whole, dollars retain their original value only as reliably as wage-earners and price-setters remain content with past pricing levels. And that is influenced in large part by the perceived ease with which additional dollars may be obtained or loans defaulted on. If a significant number of borrowers will not validate the dollars they borrowed through some manner of equivalent production, then the foundation of its value is eroded. Our own Federal government for example, in its consistent failure to balance its operating budget, has effectively become a significant collective of borrowers that refuse to service their debt--they don't pay back their loans. The government is thereby failing to validate its many trillions of borrowed dollars; and the currency system suffers. The dollar value falls and prices generally rise.

The flip side of the coin regarding money supply is where loans are being paid back more rapidly than new loans are written to keep the outstanding money supply expanding with the prevailing growth rate of the real economy. In this circumstance, increased competition for dollars during this relative contraction in the money supply generally results in an increase to the dollar's value; prices would generally fall. The problem with these expansions and contractions, these inflations and deflations of the currency supply, is that in business and in private life both, people tend to enter into long-term contracts. Because earning power, prices, and wages are subject to this variability over time due to changes based on business cycles and money supply, the act of entering into long-term contracts becomes a mixture of faith and gambling.

As I've stated in an earlier post, people have generally been more comfortable to see monetary supply inflation erode the purchasing power over time. The coping mechanism is to renegotiate for pay-raises--and to face paying higher prices. They are less willing and less happy to renegotiate lower rents and wages and lower prices received for goods resulting from a currency that gains value over time. Due to the prevailing inability of people and businesses to accommodate a currency that gains purchasing power over time, the fallout is harsh. Instead of adjusting the price of contracts downward, the reaction is typically to reduce production and cut back on labor when business profits yield fewer currency units. Economic recessions/depressions are frequently the undesired effect of currency supply that either fails to grow as fast as the economy demands; or worse, a currency supply that actually contracts. This has traditionally been the impetus for a well-intentioned government to attempt various degrees of monetary interventions to bring about more desired economic conditions.

A Solution?

No doubt you are familiar with these problems, and tend to agree with our intrepid forefathers whose anti-banking, anti-fiat currency pronouncements are legendary. In all frankness, these were a handful of exceptional men living at an exceptional time and who accomplished an exceptional feat -- the birth of a new Republic. It should not, therefore, come as a surprise to anyone that the opinions and desires so expressed by the likes of Thomas Jefferson and John Adams raised the bar for performance so high that practical performance by their multitudes of mortal descendants could not do but fall woefully short of their lofty vision. (In light of their exceptional life and times they desired perfection -- and why not? -- they thought they had set the world itself into a state of perfection!) I am not saying that perfection is not a worthwhile goal, but I am saying we must at least be rational about what can and can't be done in a real world populated by...well, just look around you.

Please for give my haste when I don't look up the exact quote here, but I seem to recall the great Thomas Jefferson once voiced his conviction which after all these years still has appeal and finds ample support among Gold advocates: "If banks are allowed to control the money supply first through inflation, then deflation, our children will wake up homeless on the continent their fathers conquered." The implication is that banks will issue their credit from "thin air" in return for a pledge of collateral against the return of that credit, drawing in everybody such that currency values fall, prices rise, and people seek ever more loans in their desire to buy before prices rise further, with the added benefit of paying off the loan with devalued currency. But then, in their nefarious desire to rule the world, the bankers would cause the money supply to deflate, making it difficult for everyone to successfully obtain the cash needed to repay their loans. The bankers then walk away with the collateral, leaving the borrower with nothing but a bad credit rating to show for the experience. On the face of it, this seems to be a noble enough assessment, and gives rise to the equally noble suggestion that our problems would be solved if banks could simply be done away with...these institutions that were once said to be "more dangerous than standing armies." So there you have the perfect inspiration for the monetary system of your dreams, worthy of any true patriot....you suggest we eliminate banks--and with them goes the inflation-threat from the paper money they create--leaving us with only Gold coins as currency.

Not So Fast, Sport Shoes...(you'd better rethink your advice)

Ok, for the sake of indulging this off-the-cuff "perfect" solution, let's be optimistic and assume that we could indeed suddenly find ourselves in a system in which banks are non-existent, and only physical Gold coin is currency. In our euphoric pursuit of perfection, we need only to roll the clock forward from this "perfect" starting point to see that we've rashly and incorrectly assumed that our modern problems could be avoided. First come the banks out of necessity, and then the fractional-reserve lending phenomenon naturally evolves into existence-- whether or not it was deliberately intended from the outset. Are you skeptical? Consider this: it would be a mistake to give thought to monetary matters without due consideration of the weave of our social fabric--examined through the magnifying lens of history.

In the real world, banks are necessary. We need only to look at the circumstances surrounding the appearance of the first significant public bank as documented nearly two centuries after-the-fact by Adam Smith in his "Wealth of Nations," written as America was just a newborn pup. The setting was Amsterdam, a bustling international trading center as the 1500's gave way to the next century. As Adam Smith describes it, the bank was formed and thrived by filling a specific market niche: addressing the corruption of the currency. In settlement of trade, Gold and silver coins from many countries and many mints (public, private, and some disreputable) were in circulation, and as is ever the case, the coins of inferior alloy or those clipped of proper weight were always the first to be offered to the merchants. In addition to the money-changing manuals that served to document the metal (money) content of the coins from the various known mints, the merchants had scales to verify the sum of coins offered as payment. However, the good quality and reputation of these scales was seen as suspect in the eyes of the shopper even as the coins were seen in the eyes of the merchants. Smith wrote: "In order to remedy inconveniences, a bank was established in 1609 under the guarantee of the City. This bank received both foreign coin, and the light worn [and other debased] coin of the country at its real intrinsic value in the good standard money of the country, deducting only so much as was necessary for defraying the expense of coinage, and other necessary expense of management. For the value which remained, after this small deduction was made, it gave a credit on its books." Here you see the coins naturally coming out of circulation in favor of "mathematically certain" bank accounting.

In this way, much of the effort and cunning that went into adulterating the coinage by men of low integrity was thereby rendered unprofitable. This system worked well for all parties involved in trade, and the popularity gave rise to similar banks in the nearby trading centers of Delft, Middlebourg, and Rotterdam, and then to other countries. (I've got to work Rotterdam into every long post...have you noticed?) History also records that "banks" have also come into being for the purpose of the security against theft. Early metal smiths also became early bankers by virtue of the security offered by their strongboxes. What practical-minded person would deny the modern need for a similar service in the event of a return to a strictly Gold-based currency system...for safekeeping and for quality assurance?

Yesterday's Performance is no Guarantee on Tomorrow in the 'Business World'

The Bank of Amsterdam was said to work well for a full century, with a man's deposits remaining his on actual deposit until such time as he transferred the money in payment to another man's account. The money (Gold) was not lent out, and so when Louis XIV's French army approached Amsterdam in 1672, causing the depositors to rush to the Bank in fear for the safety of their money, those panicky depositors all discovered that their money was indeed on hand for immediate withdrawal. The fear-induced bank run gave evidence of yet another universal truth about the nature of mankind--that when satisfied as to the apparent safety and availability of their deposits, they no longer desire to follow-through with the actual withdrawal of their funds, remaining content to let the bank serve as the guardian. And so we have the seeds of the eventual fall of the Bank of Amsterdam, and many thousands of its successors. The Bank's ownership by the City of Amsterdam gave rise to close associations with the Dutch East India Company by virtue of the same men often involved in the governing or management of both operations. Due to the nature of their business, when literally waiting for their ship to come in, even while still a solid company with solid profits, the East India Company would from time to time need a short term provision of credit. In a precursor of what modern banks would come to call their bread-and-butter business, the Bank began to provide these loans to the Company out of depositors' accounts. When business profits turned south for the East India Company in the late 1700's as many ships and cargo were lost in the war, the loans increased; the City government itself also came to rely on the bank for loans.

During the first century of operation, merchants preferred to receive payment in bank deposits instead of the uncertain quality of the coin of the day. But as the loans of the Bank increased, and as the Bank began to put limits on withdrawals or transfers to accounts at other banks, merchants began to cast a wary eye upon payment made in bank deposits, and they raised their prices to reflect this growing uncertainty, discounting the value of the bank money. As you might expect, when a bank can't be counted on to reliably provide your money on demand, its days are numbered. And so it was for the Bank of Amsterdam--the doors were closed in 1819. It should also come as no surprise that similar scenes were played out many times on a smaller scale by the metal smiths mentioned earlier. After being sought out for the security of their strongboxes, and after a period of reliable service, many smiths would observe the willingness of their depositors and citizens in general to leave the Gold under lock and key, opting to circulate the receipts of ownership instead. The more unscrupulous among them would come to grant loans to others for profit, or else grant loans to themselves through the issue of receipts for more Gold than they held. When rumor brought about sufficient alarm to bring in an abundance of receipts for redemption all at once, the game was up and justice was swift--though to be sure, this righting of the wrong on the inevitable day of reckoning was COMPLETELY unsatisfactory to the good citizens left holding worthless Gold-receipts from the bank after the Gold ran out.

Aristotle (02/07/00; 13:14:18MDT - Msg ID:24610)
Part Four -- Outright Bank Fraud IS Black and White, but this gets Very Gray Very Quickly...

You have likely identified the problem in both of these examples: the entity providing the banking service began issuing loans using their customers' deposits without the consent and cooperation of the depositor. Let's consider an example in which the bank is of the most noble character and management, simply offering safe storage and quality assurance of the Gold currency. It is human nature that those with wealth--such as we might find among those having deposits in our hypothetical Noble Bank--might seek to generate some income with their wealth. They might play an active role in this attempt as a venture capitalist, offering their money directly to entrepreneurs in return for some profits after personal negotiations convince them of the viability of the prospect.

But not all would-be-lenders and borrowers are well suited to negotiate and organize such arrangements themselves, particularly the smaller would-be lenders seeking an income, and the smaller would-be borrowers seeking funds for such things as small business expenses. The Noble Bank easily develops the in-house expertise in evaluating those borrowers that represent a good credit risk, and can organize the formal loan arrangements on behalf of their depositors. And rather than matching up a depositor/lender with a borrower on a personal, individual basis, the Noble Bank would come to pool the depositors' funds into an anonymous operation in which the profits from the lending of capital are then provided to the depositors (minus the Bank's own profit for providing this service) according to the amount of funds the depositor put into account with the bank. This provides the flexibility demanded by the banking depositor to generally be able to access his funds as needed.

It's like this. Assume that you, me, and someone else have all put $10 in Gold coin on deposit with the Noble Bank for safe keeping, with the added hope to earn a return on the Bank's ability to lend it at a profit in the meanwhile. Let's say a shoe cobbler needs to buy leather and a new sewing machine in order to make new shoes, so the bank lends him $18 of the $30 available. The cobbler takes his borrowed Gold, makes his purchases, and sets to work in order to repay the bank $19 from his anticipated profits within the coming months. In the meantime, you incur unanticipated expenses, and need to obtain your $10 deposit back from the Bank. Because this Bank wants to keep you happy, and to retain your future business, it doesn't tell you that $6 of your account is currently unavailable (out on loan) as per your wishes for the bank to earn you an income, and that the cobbler will be returning it (along with the profit you sought) in regular installments over a period of time. Instead, the Noble Bank gives you $10 of its remaining $12, and hopes that neither me or that third depositor will want to reclaim our own deposits anytime soon.

Here you can see that no money was created out of thin air. But the size of the Noble Bank grows as a good track-record of management attracts ever more deposits in which withdrawals don't threaten the remaining funds on reserve, and the depositors all come to perceive through their good experience that the entirety of their account is available to them should they need it. The bank would accommodate this concept of reality by shuffling the credit distribution among accounts to provide the depositor's money on demand. This creates the illusion of money being in more than one pocket at the same time through no *fault* or evil intent of the Noble Bank. This is what the users of the System wanted, and this is what we got. And as the cobbler's leather supplier deposits the cobbler's Gold payment into the neighboring Honest Bank in order to earn a return, the process may continue yet further. The economy seems to experience an abundant money supply, and the purchasing power of all funds are thereby diminished by rising prices as the actual goods offered for sale are then held more dearly than the money which has suddenly become so easy to come by.

Please note that in this example, I didn't once use the term interest in connection with the lending of money. A great many of the over-zealous Gold advocates try to equate the lending of money at interest with the evils of usury, so I purposely avoided that trap which has become a mental stumbling block in their thinking. While they might be inclined to say rightly or wrongly that lending at interest should be banned in order to eliminate the "sin" of usury, they certainly can't make that claim against the form of venture capitalism that I laid out above. And if the banks come to define the terms of providing venture capital from their available pool of deposits as a standard low interest rate rather than higher claims on profits that vary from borrower to borrower, what's the harm?

Too Much of a Good Thing

A quick historical note is in order here on the position of famed economist David Ricardo, who was a strong supporter of the Bullion Committee and its position in favor of the Gold Standard in monetary discussions hosted by the Bank of England in the early 1800's. The purpose of the discussions was to get to the root of the problem regarding rising prices, including [the price of] uncoined Gold bullion. The center of the debate was whether bank notes--which by that time had formed the bulk of circulating money supply--were losing value, or was Gold simply rising in price? Given the observation that other prices (such as bread) were rising, the verdict was against the bank notes, just as it was in the latter years of the Bank of Amsterdam when the merchants had diminished faith that the bank could successfully redeem its credits for Gold coins. In the course of the debates, Ricardo described in his works "it was most justly contended that a currency, to be perfect, should be absolutely invariable in value." While conceding that precious metals couldn't be held to the desired level of perfect invariability, they remain the best-suited item we have discovered. And yet while holding this position, Ricardo was not completely opposed to bank notes, finding them to be economical and convenient, so long as they were always fully exchangeable for metal upon demand.

I'll say again, if the Noble Bank could legitimately tell a rational depositor that a portion of his deposit wasn't immediately available for withdrawal, then things would likely be closer to OK, with the bank notes in circulation representing the Gold allocated to the borrower and properly held aside for redemption of the note as Ricardo would have it. While this sounds good initially, there would still be some perception of an abundant Gold supply due to the borrowed funds hitting the marketplace, and there would still tend to be the resulting diminution of the currency's purchasing power. And further, the banks would always try to accommodate the depositor's desire to withdraw funds by reallocating their available resources, leading to a false (and eventually fatal) sense of security in the general nature and supply of money.

As you can see from everything above, it begins innocently enough. The depositors' money is physically distributed (unlike the ledger creation of credit-money used today,) but it would not be long before the depositors who had thus risked their deposits for a return came to have faith that their full deposit would be returned with interest, and acted on faith as though the Gold was actually still at their immediate disposal. But inevitably, the day always comes when confidence is in short supply, and depositors rush en masse to reclaim their deposits, feeling that money in-hand is more desired than the prospects of any returns that the bank may have to offer, or perhaps fearing for the viability of the bank itself and its ability to provide Gold for the quantity of funds in account.

And as it begins innocently enough, it ends innocently enough, too. The availability for the common man to get a loan serves as an undeniably equalizing force in society. It allows a poor person with time and energy to participate in the economy on par with a man who has his own capital. Through the credit obtained from the banks' pool of deposits, a borrower is able to gain possession of land, buildings, tools, raw materials, or other goods and facilities with which to become a farmer, manufacturer, or merchant--using the profits from his time, energy and know-how to earn a living for himself and to compensate his lenders for their extension of credit. The poorer and more wretched a man might be, the more he might wish for the presence of a bank of low standards willing to extend credit to the likes of him.

The Same Old Arguments have Always Been With Us...

But despite this common desire for banks, even from the very beginning there has always been an element of society that for one reason or another saw banks as fraudulent means of transferring the wealth of honest workers to an elite group (the lenders) with agendas to rule the world. In a letter to John Adams about his own fear and loathing over the proliferation of banks and their issuance of paper credit, Thomas Jefferson wrote in 1814: "I have ever been the enemy of banks; not of those discounting for cash; but of those foisting their own paper into circulation, and thus banishing our cash. ...these are to ruin both republic and individuals. This cannot be done. The Mania [of borrowing and lending] is too strong. It has seized by its delusions and corruptions all the members of our governments, general, special, and individual." But in contrast to Jefferson, in a little-publicized footnote of history, Benjamin Franklin was a strong supporter of paper money. He saw that a national paper money provided a "general benefit" of facilitating alternatives for a government against the dual "horrors" to its citizenry of taxation and deflation. And as mentioned in the preceding paragraph, very "specific benefits" were seen on an individual basis by those who sought loans of any form of bank money (Gold, paper, credit, whatever) in order to improve their position in life.

Because the "little guy" clamors for loans just as the "big guy" who pursues bigger projects, and because the banks (which were naturally established to help the marketplace maintain the safety and quality of its original Gold currency) come to naturally play the middleman between the population with money to lend to the population seeking to borrow, the blame for all that follows is hard to pin on anyone specifically. Almost everyone in modern society comes to rely on the continuing and smooth operation of the banking system. As outlined throughout this commentary, you can see that as civilization advances and as the economy expands and the population grows, the general trend is for the apparent money supply to expand, even if the banks themselves do nothing more than efficiently reallocate deposits as needed to keep everybody happy. The threat of a bank run grows with the growing disconnect between what is perceived as the fair value contained in the underlying Gold contained in the coin that originally defined the currency unit, versus the witnessed purchasing power of the same currency units as dictated by the apparently swollen supply as borrowed and efficiently allocated by banks. Due to the unacceptably disruptive nature of bank runs on society, and the hurt inflicted on those who were late to the doors and therefore left holding worthless receipts of a newly failed bank, the inevitable outcome (generally tolerated by most) is two-fold. First, for the officially-sanctioned (government) regulation or development of a national central bank to bring more order to the hodgepodge of wayward private banks, and second, for the eventual officially-sanctioned termination of Gold convertibility for the abundance of circulating bank notes and bank deposits on account.

Aristotle (2/10/2000; 3:37:44MDT - Msg ID:24877)
Part Five "Building the Perfect System by Capitalizing on Gresham's Law"

Who's to Blame When the System Fails?

Perhaps it would be clearer if I rephrased that question. "The System" as I've defined it is the ever-changing monetary principles, policies, and practices seen in the course of satisfying the real demands of conducting business and commerce among real people. At any given moment, the System is undergoing change from one form to another, generally smooth and gradual, but occasionally abrupt and painful. But never in the largest sense can the System itself be said to "fail," although parts of it certainly prove troublesome and are altered from time to time as economic efficiency dictates. Did the old Gold Standard era System "fail" when there was a bank run at one institution or another? Well, if you were a depositor who didn't get your deposits out before that particular bank closed its doors, you might indeed be inclined to say that the System failed. But more specifically, it failed YOU. Meanwhile, your contemporaries who lived half a continent away might say that the bank closure was a healthy adjustment to the system, weeding out a weak bank. As such, System "failure" might be viewed as any time YOU were legitimately dissatisfied with its performance. Therefore, it would probably be more appropriate to ask this question instead: "Who is to blame when the System disappoints you?" An important thought to consider in this regard is whether any conceivable System could please all of the people all of the time.

Let's briefly examine the dissatisfaction of the typical Goldheart. In his mind the System has failed because he is dissatisfied all the time--so long as Gold is not the circulating currency, apparently. How irrational is that? Romantic, to be sure, but completely irrational. This superficial desire will never be the impetus for a change to the System as we know it. Even in the "good ol' days" the coins quickly gave way to bank notes as the circulating equivalent. There simply must be more at stake than the whimsical preferences of an individual in order to inspire change.

Something to rally around...

Here's the key factor as detailed earlier in this commentary which ultimately argues forcefully for the proper role of Gold in the monetary system's architecture. In what has been revealed as a misplaced goal, with Gold as the circulating currency, artificial inflation of the Gold supply is the unavoidable consequence because money will always be lent by somebody to somebody else who wants to borrow. As a result, under any past System architecture, there has never been a truly satisfactory means to safely and reliably escape the ravages of inflation and deflation. Having Gold attached either directly or indirectly to the circulating currency (or Gold itself subject to being lent independently as we see today), the proper valuation of Gold is always understated by the market due to the perception of of an increased (artificial) supply. Truth be told, it is this element that gives rise to my own dissatisfaction--that Gold is not at all points in time held near to its honest physical-based monetary valuation as it should be. This is true at nearly all points in time except for those brief and historic moments when the adjustment inevitably comes and Gold reaches an entirely new price plateau. This proves unacceptable for those who live in the interim periods as they strive to protect their personal wealth...those holding Gold during these past 20 years, for example. (Although make no mistake, the extent of currency depreciation in various non-OECD nations would paint a more normal looking picture for citizens holding Gold within those countries.)

As the number of people increases who are dissatisfied with the System's performance at any given moment in time, the greater the pressure mounts to effect some degree of change. Similarly, the greater the level of dissatisfaction, the greater the impetus to effect some rectifying change. For those who are yet clinging to the notion that we need a Gold Standard with fixed convertibility of the currency, please forgive me as I verbally try once again to shake you out of your mental stupor. Under a Gold Currency-based system, any time someone borrowed money they would in essence be participating in a Gold loan (much as we see happening today--an act that is ill-tolerated by those who can rightly recognize its depressing effect on the value of that same Gold/Money.) For the hundredth time, because people will always have a desire to borrow money to meet their business or personal needs at one point or another, you would always be dissatisfied by any Gold Standard that allowed these (Gold-) loans to occur. Meanwhile, everyone else would be dissatisfied by such a Gold Standard System that specifically pleased you in which money (which would be Gold) could not be borrowed as needed.

Accepting the constraints of the real world...

Any properly functioning monetary system in the real world must accommodate those seeking to borrow funds. And if I've made no other point but one, we should all see from the extensive commentary (bludgeoning) presented earlier that such a system cannot sustainably coexist with a Gold Standard which has a fixed convertibility. Inflation is always a consequence, and then so are bank runs, a phenomenon unique to any such Standard of fixed convertibility. There can be little denying that those bank runs are the ultimate monetary catastrophe experienced on an individual basis. Think about it. If you were among the depositors left with unhonored deposits of metal on account at a failed bank, you might just as well be located in a modern-day Third World nation when its currency loses value...your life's savings have been wiped out through no fault of your own.

Examining this case of a bank run, everything was working fine for you and your currency-units yesterday, but then suddenly your world fell apart today. In truth, to witness that a bank run was "justified" by the bank's obvious (after the fact) shortfall of Gold necessary to honor all of the deposits reveals with abundant clarity that a goodly portion of the system's funds were actually "unbacked" currency. And since these same unbacked currencies were seen to be functioning well prior to the pain of the bank run, it makes little sense to those left holding the bag in a bank run. And as hard as it is for these unfortunate citizens to fathom fundamentally why these currencies could work yesterday but not today, it is even harder for them to grasp why the same currency could function properly at the front of the bank line, but not for those in the back end of the line. It is this kind of pain, especially when bank runs become an epidemic, that compel significant changes to be made to the System architecture. History reveals that a natural starting point to ease this pain is national regulation of the scattered and various independent private banks.

This leads to a united-we-stand, divided-we-fall solution in which resources are managed among the banks so that individual hemorrhages can be addressed without leading to domino-style bank failures. But ultimately, the whole system is put at unacceptable risk from bank runs inspired by the realization that the bank-money inflation has rendered a currency value that is less than the metal value in the system's few coins. Again, the institutional thinking goes, "Since all this unbacked paper worked yesterday, let's just get rid of the inspiration for bank runs--the Gold coins." Those finding themselves in the back of the lines certainly would welcome this. Their currency would not only remain just as good as the currency held by those in the front of the line, but it would also be not significantly different than it was yesterday.

OK, so who IS to be blamed for our disappointment with the System as it is?

The lesson to be learned is not to blame the push for fiat currency upon "the few and powerful" men of wealth of the world. While inflation can be bad even under a Gold Standard (along with the pain of bank runs for those who fail to rescue their deposits), inflation has the distinct opportunity and track-record to be much worse within a system built upon a fiat currency. The truth is, inflation hurts those with money (it erodes their purchasing power), and helps those with debts (it makes loan repayment easier.) David Ricardo said it eloquently: "The depreciation of the circulating medium has been more injurious to monied men...It may be laid down as a principle of universal application that every man is injured or benefited by the variation of the value of the circulating medium in proportion as his property consists of money, or as the fixed demands on him in money exceed those fixed demands which he may have on others." He said further that the farmer "more than any other class of the community is benefited by the depreciation of money, and injured by the increase of its value." This is likely for the dual reason that farmers as a general rule were often in debt to begin with, and because their annual creation of crops (from thin air!) could then be sold for more currency units in each subsequent year, even if the net real-world value of the product being offered remained entirely unchanged.

Don't waste energy on laying blame...

And so we can see, with more people in society having common wealth than uncommon fortune, it is distinctly the case that democracy proves to be the greater threat to a convertible Gold Standard than does even the unmanageable expense of war. I faintly recalled some historical figure who made the astute observation that in a democratic society, when the people come to realize that they can vote "largess" for themselves from the public treasury, they will do so, and hence bring about their system's collapse. And in researching this matter further (thanks Journeyman, ji, and RossL for your help) it seems that there actually have been a number of figures echoing this same sentiment through time. But regardless of the precise citation of this quotation, one look at the growing national debt in America (serving as the substitute for the taxes that would otherwise be necessary to fund our chosen social programs) gives credence to this assertion. Simply put: the people (the masses) get what the people want--and the people apparently want easy money. Even outside of a democracy, over time, the forces of the population always win out over the forces of the few men of power. And in the end it matters not which group is on the side of good, and which is destructive--the many prevail over the few.

So, what is the proper role of Gold in the monetary system architecture?

At this point, the staunchest Gold supporters are likely gnashing their teeth and forming a posse to hunt me down for a proper lynching, I'm sure. After all, I have made no bones about the need to cut Gold out of any ties whatsoever with the various national currencies. Due to inflation and deflation that naturally arise through variations in the rates of borrowing, payback, and growth of the economy, currency fluctuations lead to bank runs which are frankly too disruptive and are not to be tolerated. Fortunately, they are rendered completely meaningless under a fiat currency regime. National fiat currencies allow governments to manage their own national economies to the extent that that are able, and to take whatever efforts needed to avoid falling into those most destructive currency deflations that wreak havoc on economies.

Gold must be removed from these currencies so that governments are not tempted to manipulate its perceived value in order to give a boost to their own currency. The goal would be that sudden value shocks will be avoided because at all points in time the currencies will be fairly valued against Gold--there won't be an inevitable and recurring "day of reckoning" in which the pent-up false perceptions are unwound amid calamity and crisis of confidence. Gold must also be removed from any element of the monetary system that would seek to make loans using Gold because, as we've seen, these confound Gold's ability to reach its true physical-based fair market value. Gold derivatives must also be done away with for the same reason. Gold must remain a pure monetary asset, bought and sold and owned outright--nothing else would be allowable. National fiat currencies will ably serve the market's various needs to borrow funds...after all, that's how fiat currency is born in the first place.

Although I've seemingly cut Gold out of the monetary system, that is not the case at all. Gold qualifies as the only true money; being able to function as a unit of account, as a medium of exchange, and as a store of value. A fiat currency only meets the first two elements, but they fail as a store of value. Therefore, Gold will be be the money of savings, while national currencies will be the currency of commerce. They will all float relative to each other, and constantly seek out their proper value. Kept with special status as an independent and unlendable currency, Gold will be the ever-rising North Star of the monetary system. Central banks would be inclined to hold only Gold in reserves of any significant size--because Gold is not the liability of any other nation, and its real-world value would continue to grow over time. As said before, quantities held in other national currencies would be done only to the extent that they facilitate trade between active partners. Individuals across the Earth would also choose to hold Gold as their savings; their life's productivity forever protected from inflation and deflation, and from reliance upon another person's (or nation's) liability.

The beauty of reserving Gold as an unmanipulated monetary asset is that individual local currencies can still be "managed" by the government in whatever manner is seen befitting that specific country, without having an adverse effect on the meaningful wealth held in reserves (in the form of Gold savings) among other nations and local citizens alike. No single national currency need ever be held by another nation as a reserve currency (which "unfairly" allows the nation that issues the reserve currency to export its inflation.) However, a nation might choose to hold another's currency in a quantity simply because it makes for expedient trade.

The reassurance of Gresham's Law...

Perhaps a short lesson is in order for those new to this realm of thought. In 1558, Sir Thomas Gresham made his observation that whenever there was latitude in tendering payment (as could be seen in the major medieval cities where coins from many lands came together in the course of trade--as we covered in the case of Amsterdam,) inevitably the money of poorest quality was offered while the better money was retained. In describing the circulation of currency, Gresham's law says that bad money drives out good. (The inferior money circulates, while money of superior quality is held.) In our new system herein described, paper currency will circulate while Gold money will be saved.

Pause for a moment to fully consider this practical notion of saving Gold on one hand, while on the other, borrowing and spending paper just as we always have in our lifetimes (and know of no other reality from personal experience.) This is in perfect tune with Gresham's law. Given our own limited history, this accord with Gresham's law provides a very comforting reassurance for predicting the success of this system. Why? Because Gresham's law is arguably the only economic law that survives beyond challenge--an echo of the universal and enduring truth that given a choice, people will choose the option that serves their own needs best. Gresham's law predicts that the world's supreme currency, Gold, would not actually circulate in a conventional sense, though it would move from the hand of one saver to another as individual circumstances might require. Sure, you could use it outright as money if you insisted, but nodding to Gresham's law, wouldn't you rather keep your Gold for the rainy day and spend your paper instead? This system will enhance the transparency of national economics and financial positions, rewarding those with good fiscal policy and balanced budgets, and giving none an exorbitant privilege over another through reserve currency status. It will allow the citizens a natural avenue to protect themselves against depreciation of the national currencies (which will inevitably inflate until the end of time,) and to actually gain a no-risk real "return" by simply holding the metal without the self-defeating aspect of lending it out for interest.

Gold. Get you some. ---Aristotle

Solomon Weaver (2/10/2000; 7:36:14MDT - Msg ID:24886)
ORO this is about what I was thinking of in Gresham's law in the COMEX
ORO (2/9/2000; 23:23:06MDT - Msg ID:24865)
Solomon - Aristotle - Gresham's law
Gresham's law normally works the "other war round".

It is a result of two contradicting forces and the balance between them. Consumers (goldbugs) - want the hard money (gold) for savings. Business (bankers) - less sensitive to money longevity (day traders) because the (paper contracts) funds are (physical delivery) is demanded.

Consumers (those who want real gold) will continue to use the funny money (futures and options) even during its hyperinflation stage (inflation as described as money supply or number of open contracts, not price). However, they will not hold much of it. Their needs for cash balances (safe savings) will first move to "real assets" such as real property (numismatics), goods (bullion coins) and equity (gold stocks) in business. They will then move to hard money when they are "full up" on the latter items that are within their means. The less well off will hoard goods (silver spoons) and whatever hard money (junk silver in their attic coin collections) is within their reach.

The "good money" (bullion) is hoarded (held and not sold) and the bad money (gold paper promises) is used in commerce (trading on the exchange) till parity does not hold any longer ( as I stated in my note ì when these two bifurcate, meaning divide, meaning no more price equivalence).

Behind them is either a government (ESF Fund) or powerful bank cartel (Goldman, Deutsche, BoA) set on getting something for nothing if they can get away with it. To this purpose, legal tender laws (forced margin calls and threat of immediate cash settlements) are passed to force acceptance of the currency (paper gold) at par with its stated value (in gold bullion). If not stated in terms of gold or silver (dollars), it is often stated through wage and price setting (counter swaps with other hedgebook inventories like oil contracts). In any case, a (perceived) parity is established. Without a parity there is no application to this part of Gresham's law.

The legal tender law (open and free wheeling actions of the exchange) remains more or less effective as long as the rate of funny money creation (increase in naked put and call options) is never high enough to displace all the hard money (gold) or fixed price goods (futures contracts which can call for delivery in the month) from the marketplace - whatever it is that the currency is set to par with (that being in our case the idea that there is gold metal traded under the paper). As more funny money (contracts) or fiduciary money (margin) comes to market, prices of non-fixed items (longer term futures and options) rise relatively slowly and steadily.

When the cash (gold bars) and cash equivalents (valid claims on remaining vault gold) of hard money are all gone from the markets (exchange), and fixed price goods diverted to other uses where more is received (options are dropped because they cannot be used to opt for delivery), the situation turns suddenly sour. The currency (remaining contracts) is openly traded at a discount to par (bullion) and its purchasing power drops like a rock. The hard money (the real stuff) rapidly rises to command a smart premium till enough of it comes to market (back to the exchange to claim profits).

Outside the country (exchange) are those who have a choice as to what they will take as payment and so they take hard money (gold metal) as payment. In a reserve currency (cb-bb moderated system) system the government issuing the reserve currency (lending gold as needed) will see a steady stream of real assets (their real gold) and hard money leaving the country (cb-bb-gov vault) or changing ownership to foreign hands (arab, chinese, european) so long as the funny money (worthless gold contracts in an exchange which has allow excessive issuing of short paper) currency can be converted to hard money (any last bars of gold still around in the vault).
At times, an arrangement can be made, where a fiduciary form of hard money (oil or oil contracts) can be used to trade for funny money (discounted gold paper contracts). Thus the life of the currency (gold paper contracts) is extended. When the issuers of fiduciary media (oil parties who want cheap gold) come to near insolvency (at least fearing to ever get their real gold), heavy "players" (those who deliver oil tomorrow in very large ships) will accumulate the hard money (real gold off the exchange) while selling the fiduciary forms (oil and gold paper contracts) accumulated before.

The hard money (value of real gold) breaks from the funny money (value of paper gold) abroad (outside the the exchange) first. When conversion of the currency of the fiduciary money (paper contracts on paper contracts denominated in fiat currency) becomes difficult, the first stage is that payment in currency (paper gold) is accepted at a discount. Later the currency exchange is just too expensive and it is steeply discounted.
As prices of imports (getting more real gold back into the exchange) start rising, the currency (gold paper contracts) starts losing purchasing power at home (in the exchange they were issued). Once the trend is noticeable, the currency accelerates its decline.

Finally, the only accepted form of payment is the hard money (real gold).

If a funny money is not tied to anything in particular at a parity, then the currency will just erode as more is issued. The erosion occurs in bouts of "panics" as people repeatedly get indebted and are caught in debt traps just to find the value of the currency suddenly drop as soon as they pay off the debt or declare bankruptcy.

Poor old Solomon

Elwood (2/10/2000; 10:00:58MDT - Msg ID:24895)
Reply to Aristotle
Aristotle wrote in (2/10/2000; 3:37:44MDT - Msg ID:24877):
"For those who are yet clinging to the notion that we need a Gold Standard with fixed convertibility of the currency, please forgive me as I verbally try once again to shake you out of your mental stupor. Under a Gold Currency-based system, any time someone borrowed money they would in essence be participating in a Gold loan (much as we see happening today--an act that is ill-tolerated by those who can rightly recognize its depressing effect on the value of that same Gold/Money.) For the hundredth time, because people will always have a desire to borrow money to meet their business or personal needs at one point or another, you would always be dissatisfied by any Gold Standard that allowed these (Gold-) loans to occur. Meanwhile, everyone else would be dissatisfied by such a Gold Standard System that specifically pleased you in which money (which would be Gold) could not be borrowed as needed."

Elwood replies:
Aristotle, I think your 5 articles are based on a fundamental misunderstanding on the role of money in a market economy. I would refer you to a book by Ludwig von Mises, "The Theory of Money and Credit" which is available from www.mises.org. There is also the website of Dr. Frank Shostak. His feature articles may be helpful, especially the ones dealing with the Asian crises and the one entitled "Inflation, Deflation and the Future". It is at:
http://www.ords.com.au/frankshostak/

In short, a monetary system based on debt, which all fiat systems are, will always have this boom/bust cycle characteristic. It is the credit expansion which drives interest rates below the true market rate of interest and leads to a boom in economic activity. These lower rates cause entrepreneurs to make "errors" when determining the prospective rate of return on their investments.

This manipulation of the true rate of interest is only temporary however and, thus, requires more and more credit be thrown into the system to keep it going.

Mises stated, "The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."

Regards,
Elwood

Henri (2/10/2000; 10:47:07MDT - Msg ID:24900)
Elwood Msg 24895
It seems to me that these barriers to further monetary expansion were encountered and then circumvented by wholesale bundling of Mortgage Debt and sale to Fannie and Freddie allowing a whole new slew of massive credit/Debt$/liquidity to be unleashed. The massive increase in financial derivatives in the last few months also contributed by pouring gasoline on an already raging inferno. The resulting conflagration seems to have obscured exactly who owes who what and more importantly when.

I am beginning to think that the tag team interventions of the fed and treasury in the bond markets were deliberate with the intent of breaking loose the shackles of the derivatives traders and the rate-swap players. If only one or two levels of leveraged derivatives are allowed following the holocost now in progress and anything deeper prohibited, perhaps things might not get so out of hand...Nah.

Elwood (2/10/2000; 12:09:27MDT - Msg ID:24910)
Reply to Henri (2/10/2000; 10:47:07MDT - Msg ID:24900)

I think the barriers to expansion that von Mises was referring to are related to the refusal of the public to use the fiduciary media as money at all. This occurred during the Weimar hyper-inflation in which the monetary system broke down and transactions were based on barter of goods rather than use of money. It also occurred during the early 5th century in the Western Roman Empire after a few hundred years of monetary debasement by the Emperors. The Chinese, who invented paper money, also experienced this.

The government sponsored enterprises you reference are not engaging in money-creation at all. They are merely borrowing and lending that which is created by the banking system. I think there's a guy named Noland who writes on the Prudent Bear site that propounds this idea that the GSE's create money. I think he's wrong.

What we're about to face is merely the follow-through of Gresham's Law. That is, it's true that good money is driven out by bad money, however, bad money eventually ceases to be money at all.

Regards,
Elwood

Al Fulchino (2/10/2000; 10:59:54MDT - Msg ID:24904)
THE TRUE VALUE OF GOLD WILL ULTIMATELY PREVAIL
I am an expert in nothing, let me start by saying. However over the years a lesson has been taught to me. A lesson I was not always interested in learning, I might add. <smile>

I, like most, if not all people in the world, prefer to have my own way in everything. Especially, if it made me very important in the eyes of others or in my own mind <bigger smile>. Usually, I would be pretty successful. But for some strange reason, in the end, I would end up having some type of inner conflict over my successes. Things seemed right on the outside. The inside would often be different.

The conflict, I would come to learn was actually conflict with the truth. The truth about my pride and that ultimately is selfishness. Where did this conflict come from? My answer, if I may be so bold, is the Ultimate Ego, our Creator. So, the pain of the truth, or my conscience if you will, was actually what I needed. Sort of a humbling idea if you have followed me so far. Nevertheless, as I said I needed the clarity of the truth pointed out to me about my lack of being the all knowing one. Just like a child needs to be told that cookies fill but are not what your body needs. No matter what I constructed, whether it be in my mind or physically with material things, it was never enough. The same will be true with what I call God's physical representation of money. Gold.

The authorities which we have put in power, to serve us and to say what we want to hear, represent our selfishness. We correctly blame the manipulators of our currency. But we collectively don't look deep enough. Collectively we have placed these people in power. They satisfy our culture. They feed our egos. They keep the attention away from looking at ourselves. They even degrade our money so that they can do what they want with seemingly no consequences.

In reality, WE WANT them to tamper with the money, so we can try to have what we do not need or is good for us. Unfortunately, we never have been able to create something from nothing, (in truth very fortunate),and that is a good thing, which we will eventually be reminded of. When, it fits God's Will, I feel, we will see God's earthly money retake its proper, or as near proper role as serves his purpose. We will be reminded. No need for anxiety for those who see this. No need to check the quote pages each day. Those of you who see this, as I have stated on other occasions, have already found your chair in this game of musical chairs. The players who deem themselves smart or those who played with blindfolds on will be the ones scurrying.

As our good friend Aristotle says, Gold, Go get you some.

ORO (02/11/00; 04:58:34MDT - Msg ID:24980)
Aristotle - Monetary structures
Aristotle, your efforts of late are well noted and appreciated, however, you are mixing some apples and oranges and falling into many "western" conceptual traps and some of the social-democrat neo-fabian thinking.

A few comments should be put up here.

The myth of gold being deflationary

Gold standards are not deflationary. Gold is a cash money and can not cause deflation. I have detailed long ago how closely the improvements in gold mining/extraction/refining technology has allways been to the technology improvements in the economy. When economic producctivity increases in the broad economy, it increases in the gold mining arena in lock-step. Therefore, price stability, is the characteristic of a gold standard - banks and convertible 100% backed currency included.

What is inherently deflationary AND inflationary is a certain type of bank system characterized by the participation of government in either bank regulation or in issuing currency.

Gold banking in a free banking environment is by far more stable than any alternative ever attempted. As your own readings of the Dutch banking history indicate, it is not banking itself that is the problem, but the cartel imposed by government.

Under a monetary regime of free gold banking there are a few rules:
1. The bank that goes on a limb by expanding credit at a higher rate than its competitors without garnering a higher rate of return on its lending gets clipped. Bankers know it. This still happens today, but the failed banks get bailed out at the expense of everybody else.
2. During economic crisis no more than 4-5% of banks go under.
3. The free banking system does what banks are supposed to do - aggregate capital and lend it.
4. What they can't do is issue excessive ammounts of credit to the point of causing inflation - and therefore can't form deflation either.

Where inflation and deflation come from:
They come from bank cartels. Cartels in services are only possible through government regulation. Two sets of purposes meet in the formation of a cartel: Government - the purpose of the system is to allow government unlimited borrowing for purposes that the public DOES NOT SUPPORT. Banking - the purpose of the system is to eliminate competition among banks and thus lift the natural limits on credit creation that the competition causes. The banker's goal is multifold (a) lower reserves to increase profits - from 40-60% without a cartel to less than 3% with a cartel and with gold or less than 1% without gold. (b) Fleece depositors by transfering their gold into the bank's owner's pocket. (c) Capture goods with no cost by collecting interest on non-money. (d) Transfer the cost of fiduciary responsibility to the public. (e) Force people to deposit money with the bank - because the inflation causes the cash holder to lose purchasing power if he does not collect interest. (f) Force people to borrow - inflation puts housing and investment outside people's reach without borrowing. (g) The one-time profit from deflation is an uncommon opportunity, but when it is too big an opportunity, the banker will pull the rug. It will then bag the security people and businesses put up for the loans.

Neither inflation nor deflation are the result of banking itself. They are results of government participating in the banking cartel - without government rule making, the banks simply can not inflate significantly. Because that is the case, the banks can't deflate either.

Popular preference:

People do not like loose money, neither does business. They like hard money for their own holdings. They like soft money for their obligations. Without the inflation of the government sponsored bank cartels there is no lending in soft money, and there is only the preference for hard money on the part of cash savers and lenders.

In an inflationary system, the "real" interest rates are much higher than they are in a free gold banking system. This is because banks and people holding deposits want to retain purchasing power, and the only way to do that is to over-compensate for inflation. In reality, the yoke of credit costs is higher under inflation than in free gold banking.

People are aware of this. What people have a problem with is that their current obligations were taken under the inflationary system. Therefore, any stabilization in the value of money would make it more difficult for them to repay their contracts.

I suggest that you rethink the structures with this in mind:

The perfect monetary system is that in which there is no central planning and in which government plays no role.

1. No central bank
2. No national currency at all
3. No government guarantees
4. No government insurance
5. No regulatory bodies over banking
6. Tight laws on fiduciary responsibilities
7. Tight laws on truth in lending
8. No licensing requirements or regulation
9. No capital control laws
10. Government does not define money. Whatever is used as money it must accept in payment and must provide in its own disbursements.

This would lower costs of doing business by 15% and allow the natural interest rates to prevail - 1% shor term, 2% intermediate term - 3% long term. This would lower costs further - perhaps by another 10%.

When analyzing historical precedents you will see clearly that all banking disasters are a direct consequence of government obstruction and elephantine intervention of the markets.

The gist of Gresham's law is not that bad money drives out the good - but that good money drives out the bad. The common error is that the special case of parity is the one all remember.

Only when a legally enforced parity is imposed on markets between the near worthless and the precious, that your interpretation is appropriate. The source of the trouble is the imposition of an unjustified parity. Only then are people prevented from excercizing their judegement to distinguish between the trash and the treasure.

Journeyman (02/11/00; 09:17:12MDT - Msg ID:24994)
BRAVO! Aristotle & ORO (02/11/00; 04:58:34MDT - Msg ID:24980)

I couldn't have put it better myself, ORO. In fact, I could have put it only about half as well.

I may have a few coroborrating points later, but, well just great, as usual.

Aristotle, this DOESN'T detract from your work. You've raised many good points that need to be addressed, and raised them well. That's just what I've been looking for, and it's necessary to further the economic "education" that happens here at USAGOLD.

For too long the bankster/government inflationists have held ideological sway, and till the arguments they crafted are aired, the gold-bugs amongst us are fighting fog. You have ably aired many of them. And, of course, it's always possible the inflationists COULD be right. To have as staunch a gold supporter as yourself partially incorporate some of their positions gives me reason to more closely examine my preconceived pro-gold prejudices.

My personal thanks to you both, Aristotle and ORO, for helping me hone my own perceptions!! I salute you both!

High regards,
Journeyman

OK gold bugs, our ideational challenges are growing, but they're becoming more clear! Onward ---

Trail Guide (02/11/00; 09:49:21MDT - Msg ID:24996)
The Gold Trails
Thank you Aristotle!
A fine work that's worth a long study, my friend.

ALL:
Many writers today offer nothing less than a philippic discourse about the flaws in today's fiat systems. Always looking backwards, they are lost to grasp how what was considered "hard money policies then",,, "eventually failed then",,, as these same interacted within the economy. Truly, a hard financial structure trying to blend with a soft, flexible "human nature". In a larger degree, how much more could it not work in today's modern world. Once implemented today, these same policies would again "crash and burn" in response to the demands from "real people" living a "real life".

Aristotle, your five part series is trenchantly written and offers readers a glimpse into a future that must be. Will be!

My thoughts on a deep subject:

If the modern banking system has mislead us at all, it mislead by supporting a view that our wealth, our things, were not money. They implied that "paper settlement money" was our real wealth and only it could be as such. Truly, as we walk and breathe, human's things have always existed as both money and wealth. Side by side by side they walked with us in our financial life, in both modern and past context. Yet, in our modern "Western World" of thought, the largest portion of one's personal asset holdings now reside in the form of "paper money". Worse, the majority in it's "contract derivatives" forms. Gold included.

No longer do we hold our greatest portions in real forms that transcends the peaks and valleys of fiat money value ,,,, a variable fiat money system that our "changeable nature" demands. No, we option to ignore the true purpose of this paper money system and cast the entirety of our resources into it. Never stopping to understand that this money is but an "economic need" "to process a trade". Not an "economic product" and therefore wealth itself.

Through out recent time, fiat money has responded well to human nature, flowing like a river as it expands and contracts to our wants and desires to buy and sell things. From drought to flood it is the channel of our trading system, as it moved the "end product water" that flows within it's wide banks.

Today we use the remains of this dying "dollar settlement system". It continues a natural death, as society struggles to use a currency that can no longer represent our financial structure. A changing structure in a world that marches on. The dollar's debt load has aged it and brought it to the end of it's time line.

Only today, the end of this "time line" will find many holding their wealth in this same system, for a purpose it should never have been intended to perform. That being, to represent one's life long accumulation of real wealth as their money wealth things. Most will understand the impact of this well after the fact as we are indeed in transition to yet another paper system. One we must have, requested and will use. Just as everyone used the old one to their own private advantage, we will indeed grasp the next one. Just as you point out, Aristotle, fiat exists more so because it does "what societies economic function wants", not because it's a function of "what society is forced to do"! Still, some will bark against this in a effort to stop people from following human destiny. Fortunately, relative to our lifetimes the world evolves quickly, with or without our agreement.

In this period however, we will return back in time much further than many can see. This time gold will be pulled away from it's strained attachment with "fiat contracts of currency" and again take it's place as the ages old "wealth money holding" it always was. It will occupy it's rightful place on the shelf with all our other "wealth things". And here it will, "for the first time in modern context" show it's true value in relation to modern paper settlement money. A value no one today will believe!

Should one risk financial assets based on this series (Aristotle's) alone? Never! On the contrary, no one should believe what he has written. Rather, we as a society should "study" his fine work and seek to understand it's meaning. Once fully understood, I think most would then agree with it's inevitable outcome. Indeed, a "free gold market", based only on physical holdings would impact the world economic system unlike anything seen before it. And Yes, it's impact on the relative value of gold will make that metal the monetary wealth investment for the next thousand years!

This my friends is why so many today, "Walk In The Footsteps Of Giants". They walk a trail that takes them further and further from derivatives of gold and the present currency it's (gold) priced in.

From Yesterday, through Today and onward into Tomorrow" ,,,,, we say buy Physical Gold for your future ,,,,,,, doing so will write your personal history in the palm of your hand!

"Soon, we will all hike the "Gold Trails" and see all there is to see ,,,,,,, over the mountains and through the valleys ,,,,,,, across rivers and plains ,,,, looking near and far as we stop along the way ,,,,,,, Truly, we will view the value of gold as modern mankind has never seen it before ,,,,, join in, it will be a journey in life, that's well worth taking.

thank you again Aristotle ,,, Trail Guide

Note to all: please study these fine works
Aristotle (2/7/2000; 7:15:24MDT - Msg ID:24589)
Aristotle (2/7/2000; 8:10:15MDT - Msg ID:24593)
Aristotle (02/07/00; 10:52:39MDT - Msg ID:24602)
Aristotle (02/07/00; 13:14:18MDT - Msg ID:24610)
Aristotle (2/10/2000; 3:37:44MDT - Msg ID:24877)

ORO (02/11/00; 13:59:00MDT - Msg ID:25019)
Aristotle and Trail Guide
What is to stop the gold markets to regroup and form a new gold banking system?

I would think that -
if there is gold there is also someone to lend it and someone to borrow it.
If there is new gold mined, it will be contracted for future delivery.
If there is gold of many players in a number of vaults, the gold will stay in the vaults and the title to the gold will trade electronically.

I still say that there is no economic reason, no justification for central banks at all. There is no economically useful purpose for national currencies. I will go further and state that the purpose of central banks holding gold is so their people remain beholden to the state and the bank cartels it has chartered. The best thing for the CBs and treasuries to do is to unload their gold and cease participation in the financial markets. Individuals and private organizations should hold their gold and trade its receipts, to lend and to borrow it.

The amount of gold and other PMs can not be insufficient in quantity to for the basis for the volume of trade settlement. It is precisely the point that the quantity of gold matters not. What matters is that it grows with the economy that trades it as money.

The myth of a living and breathing fiat system.

Many have proposed that there is some need in trade and business for the flexible money that fiat allows. I contend that there is no such flexible money, as its cost in trade and to business far outweighs the benefits of flexion.

Fiat currencies do not expand and contract as the markets need. Their mere existence forbids healthy interaction in the markets. The seekers of the conversion of income into wealth and those who must convert wealth into income are forbidden from setting the rates of conversion by the existence of fiat currencies. The necessary precondition of a fiat currency is the existence of a monetary authority that controls the quantity and the rate of conversion - the interest rate - at which both monetary and "real" wealth coverts into income.

They introduce the same centralized decisionmaking that we decry in cleptocratic Russia and in its predecessor's failed and dishonest social and economic planning.

The quantity of money and the interest rates are set by the monetary authority to fit the needs of those who run it. These bear no relationship to the needs of the participants in the markets. Indeed, it is with the purpose of favoring particular interests that monetary authorities are set up, not at all with an eye to service the markets.

The first necessary and indelible mark of a fiat currency system is that of the obliteration of the market's process of finding the correct wealth/income conversion rate - interest rate - that clears the markets. It sets a source of funds for borrowing other than the holders wealth. This source - the central bank - lends at a reduced rate to a favored cartel of banks so that their cost of funds is below that which is necessary to cause conversion of real wealth into income. When the pendulum swings to the conversion of income to wealth, the central bank inevitably intervenes by raising the conversion rate so that income converts into less wealth. We call the first inflationary policy and we call the latter fighting inflation.

The main point is that in the interest of the cartel the interest rates are moved upwards and downwards AGAINST the market's needs. The purpose is clearly thievery. It is in the interest of self-serving government and those who have purchased its services to effect the sale of economic privileges with which to fleece the public at large - those who hold wealth or earn substantial income. As we cheer the fleet footed economic managers when we enjoy their largess, we stare blind-eyed at the brazen lies these authorities author. When we benefit, we are benefiting from the sharing of the spoils of plunder. We are but economic canibals eating each other's wealth.

As the plunder goes on, we find that our turn comes up to be butchered, cooked and served for the "higher purpose" of satisfying the ravenous hunger of the fattest man and the scrawny flea bitten dogs that keep him company and share in his leftovers.

Wherefore is the justification, economic or otherwise, for national currencies? for fiat money at all? for the existence of a central bank? for the charters of banks? for the regulatory body that forces all banks to collude?

I claim there is none such justification. That any reason provided we would immediately recognized as a fraud or theft perpetrated upon us or an offer to join in its perpetration upon others.

Elwood (02/11/00; 14:18:06MDT - Msg ID:25023)
ORO (02/11/00; 13:59:00MDT - Msg ID:25019)

Hear! Hear! I second ORO's thinking and hereby nominate this one for the Hall of Fame.

Journeyman (02/11/00; 14:58:04MDT - Msg ID:25034)
HOF for ORO (02/11/00; 13:59:00MDT - Msg ID:25019 @ Elwood & Trail Guide

I second Elwood's nomination of ORO Msg ID:25019 to the Hall of Fame.

I also ask especially our new Trail Guide to address the issues raised by ORO in this post - - - otherwise I'm afraid I'll lapse back into my former ID as an inveterate gold standard advocate.

By the way Elwood, I believe since you made the nomination, yur supposed to sheppard the thing through, keeping track of the seconds, to make sure Town Crier doesn't miss any. Sorry buddy, but thems the rules.

Regards,
Journeyman

SteveH (02/11/00; 15:09:35MDT - Msg ID:25039)
ORO third and that puts him in
Mr. G.,

Not a problem.

TC let's get that ORO post in the HOF, he has got three nominations. Better yet, set aside all his posts too in a special section along with a special for FOA and Another, eh?

goldfan (02/11/00; 15:35:50MDT - Msg ID:25045)
Journeyman (02/11/00; 14:58:04MDT - Msg ID:25034)
Yes!! I add myself as third seconder to the request to put ORO's latesd in the HOF.

And I want to remind others that we need one more to get his post on Japan and
the relation of demographics to fiats into the HOF.
ORO (2/7/2000; 1:08:34MDT - Msg ID:24565)
In fact I PROPOSE that all ORO's stuff be automatically put into the HOF as also FOA's and Trail Guides.

Goldfan

Trail Guide (02/11/00; 16:01:51MDT - Msg ID:25047)
Changing times!
Thanks ALL! I'll leave these two posts to tell the truth for me. When (?) the new Trail page is up FOA will set a tough pace to keep up with, believe it! He has to, the preasure of oil is building fast.

ORO, I'll be arriving here soon, in debate mode no less. Your (and others) good post are noted.

ORO (02/11/00; 12:31:46MDT - Msg ID:25015)
Trail Guide - welcome
Welcome Trail Guide to your home.
We have kept it warm for you, awaiting your reincarnation.
Missed you badly.
Thank you for your return.

SteveH (02/11/00; 11:05:20MDT - Msg ID:25006)
Yep...has to be
One and the same?

SteveH (02/11/00; 11:02:35MDT - Msg ID:25005)
Trail Guide and FOA
One and the same?

Harley Davidson (02/11/00; 16:24:33MDT - Msg ID:25050)
@ORO, In your message ID:25019 you wrote...
"Wherefore is the justification, economic or otherwise, for national currencies? for fiat money at all? for the existence of a central bank? for the charters of banks? for the regulatory body that forces all banks to collude?"

I feel your pain, brother. The central bank is the brain-child concept "of the people" and "for the people" except that the "people" are the bankers that stand to gain by having the cost of their indiscretions and greed, when things go bad, transferred to the common people in the form of government bail outs so they can continue their plunder! While we hear talk of financial institutions that are "too big to fail" I can't help but wonder what happens when the cost is too great to save them when they do fail!

Thomas Jefferson was an ardent opponent to the central bank. He pointed out that the Constitution did not grant to Congress the power to create a bank or anything similar. In other words, such power is reserved to the states or to the people.

He also said:

"No one has a natural right to the trade of money lender, but he who has money to lend."

"A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army. We must not let our rulers load us with perpetual debt."

"I have ever been the enemy of banks, not those charging interest on loans of real money, but of those foisting their own paper into circulation, and thus banishing our cash. My zeal against those institutions was so warm and open at the establishment of the bank of the U.S. that I was derided as a Manic by the tribe of bank-mongers, who were seeking to filch from the public their swindling and barren gains... Shall we build an altar to the old paper money of the revolution, which ruined individuals but saved the republic, and burn on that all the bank charters present and future, and their notes with them? For these are to ruin both republic and individuals. This cannot be done. The Mania is too strong. It has seized by its delusions and corruptions all the members of our governments , general, special, and individual."

Edward Griffin's Creature from Jekyll Island is a well-documented account that lays it out in very readable detail (for a common man as myself) from the very beginning of banking in the US. And it is infuriating!!!

Trail Guide (02/11/00; 17:21:28MDT - Msg ID:25055)
A different view?

ORO (02/11/00; 13:59:00MDT - Msg ID:25019)
Aristotle and Trail Guide,
What is to stop the gold markets to regroup and form a new gold banking system?

Q: Please define "gold markets" in the context you use? We need to know exactly what this market is before one can "bank on it"!

I would think that - if there is gold there is also someoned to lend it and someone to borrow it.

Q: Why use gold to create a lending contract? Would society use gold as a "lend able" account unit if it freezes any further function of their money asset? To date, the history of the past gold systems points that such a function creates gridlock in the banking system. Doesn't this contradict the first purpose of gold: to act as a pay as we go medium, under no contract risk?

If there is new gold mined, it will be contracted for future delivery.

Q: Again, Why must gold be used? And why the illusion of future delivery in contract form? If society places a high enough value (currency price) on it, a" no collateral financing" would easily create a pay as you go operation, NO?

If there is gold of many players in a number of vaults, the gold will stay in the vaults and the title to the gold will trade electronically.

Q: Tell me, do we pay for our gasoline with "stock certificates" of IBM? Or any other ware - housed asset. Would not real estate titles also trade electronically? In this period of high speed trade, digits of anything could do the trick, no?

I still say that there is no economic reason, no justification for central banks at all. There is no economically useful purpose for national currencies.

Observation: Years of history and the nature of modern society say you are wrong, no? Our use of digital currencies for trade always flows like a river that's strong and wide,,,,, and it always flows to it's end in the sea. The water takes it into the air and rains it again upon the headwaters for another trip,,,,,a new currency starts again. All the while gold is held from it's value as officials grapple with it's position on the currency river,,,,,,,,,, stopping it's use as a wealth asset held by all.

I will go further and state that the purpose of central banks holding gold is so their people remain beholden to the state and the bank cartels it has chartered. The best thing for the CBs and treasuries to do is to unload their gold and cease participation in the financial markets. Individuals and private organizations should hold their gold and trade its receipts, to lend and to borrow it.

Observation: Again, society has proven that any and all currencies and moneys that are lent and borrowed,,,,,,soon become corrupted. Even gold itself,,,,,many times! Let gold become an asset of real wealth,,,,,and it will shine as the best background money this modern world has ever seen,,NO?

The amount of gold and other PMs can not be insufficient in quantity to for the basis for the volume of trade settlement. It is precisely the point that the quantity of gold matters not. What matters is that it grows with the economy that trades it as money.

Q: What will you do today that is different from yesterday? Can we pass laws that remove human nature?

The myth of a living and breathing fiat system. Many have proposed that there is some need in trade and business for the flexible money that fiat allows. I contend that there is no such flexible money, as its cost in trade and to business far outweighs the benefits of flexion.

Observation: We want and use this "flexion" today. Is not the only thing missing,,,,,,,,,,a way to shield our wealth from the effects of this "flexion"'s inflation ,,,,

Fiat currencies do not expand and contract as the markets need. Their mere existence forbids healthy interaction in the markets. The seekers of the conversion of income into wealth and those who must convert wealth into income are forbidden from setting the rates of conversion by the existence of fiat currencies. The necessary precondition of a fiat currency is the existence of a monetary authority that controls the quantity and the rate of conversion - the interest rate - at which both monetary and "real" wealth coverts into income.

Perhaps: But no one ever said that wealth was digits? no? A Western view of a world that's always going mad?

(smile)
thanks Trail Guide

Jason Happy (02/11/00; 17:28:11MDT - Msg ID:25057)
Aristotle & usury
There is a certain liberal (I mean liberal in a bad way) argument that goes like this:

People are going to do X (insert vice here) anyway, so why not make it both legal, and safe, even providing information and assistance?

For example,

1. People are going to get abortions anyway, so let's legalize them, avoid the back alleys, and even provide taxpayer money for poor mothers, since "abortion is a right"...

2. People are going to use IV drugs anyway, so let's institute a needle exchange program so that they can shoot up safely, and reduce the risk of AIDS.

3. Kids are going to have sex regardless of what we tell them, so let's give out condoms to all High School kids.

4. There are always going to be homeless people, and single mothers, so let's give them welfare.

5. Since people are going to gamble, let's have a state sponsored lottery so that the proceeds can benefit the schools and the state?

6. Prostitution will always be around, so why not have "brothels" where the girls can work and be safe? In other states where brothels are not permitted, we can hand out pamphlets on how to be a street walking prostitute safely.

I can go on and on, but the basic theme is that this argument is a very poor one, as tolerance and subsidies for evil never does society much good.

And thus, I'm very disappointed to hear Aristotle, in his latest, use the argument:

People are going to practice usury and particpate in loaning money or borrowing at interest, and are going to do it anyway, so we need to accomodate for it in the "perfect monetary system"...

I'm sorry, but usury is wrong. It's evil. I know it not just because the Bible tells me so, but because all manner of rational thought, and evidence declares it to be so.

This isn't just naive thinking idealism... Islamic nations, with the introduction of the new gold coin, the dinar, are attempting to create a monetary system where lending at interest, usury, is banned completely.

If "OIL" is headed in this direction, why can't we follow their lead? After all, this precept, "no usury" is common to all three: Judiasm, Christianity and Islam. So, in fact, if you consider the fact that the U.S. came from Christianity, they are actually following our lead!

A strong and great leader doesn't say, "Well, the South was going to declare their independance anyway, so we might as well let the Union break in half..." or "Well, Germany was going to invade England eventually, so we might as well transfer the nation over to Hitler..."

A great leader leads the people to do the right thing, even if the path seems hard at the time, knowing that the benefits in the long run, are better for everyone. Which is why God says, "no usury."

Aristotle (02/11/00; 17:46:56MDT - Msg ID:25059)
ORO and Elwood, and Trail Guide & Journeyman
Thanks for all of your comments; for the criticisms where you deemed them necessary and for the compliments where warranted.

Uncharacterisic of me, I shall now try to offer SHORT posts as time allows to address some matters that were raised.

ORO, I hope you are smiling as you read this, as I am as I type. A friendly exchange of ideas is good for everyone and makes for entertaining reading; agreement has the distinct look of a blank page or a silent room.

With that said, where can I get admission to the world you are living in? It is surely a more perfect version of the one I have found myself in all these years.

Remember, my goal was to lay out the "perfect" system for an IMPERFECT (real) world. I took on the project with no preconceived notions one way or another. Going in, I was a charter member of the Goldhearts club, and I emerged even more excited about the prospects of Gold than before. The future for Gold is bright, and it is rapidly approaching in the manner I laid out, if I'm reading the signs correctly.

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole.

Looking back at the finished text, I see that I could have opted for another method of presentation that would likely have been offered up immediately for canonization, rather than the form I chose that was met largely with...nothing. This was done for a purpose. I wanted the commentary to have a decidedly real world brutality to it to establish its credibility among those (not here) who don't understand Gold. Had I written it for the pure pleasure of those gathered here, I would have written it from back to front. In short, it would have looked like this:

** Gold is the only real money there is--fiat currency is not money--so only Gold should be used as currency.

** Fractional reserve lending destroys a currency's value in trade, and therefore must not be allowed.

[time for concessions to the real world]

** People will always want to borrow for the things they want to have beyond their current financial means.

** Spending Gold into the marketplace, whether by the owner or by a borrower, would tend to result in prices for goods that weigh more--costs more Gold, that is.

** As ever more Gold is borrowed out of other people's savings to be spent into the economy, the Gold's purchasing power is lessened from what it otherwise would be...hurting those who have elected to hold their Gold instead of risking it by lending it out as a source of income.

[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]

** For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent! [Gresham's law alone is adequate to achieve this.]

** With Gold as the only money, people will not be able to get loans. [In the real world, this is hard to imagine!] As an alternative, they will work up complicated contracts for the item they desire (new home or car?) in which they promise to deliver a certain level of their future productivity against a pledge of real wealth collateral.

** These contracts for the delivery of future man-hours would eventually be organized into their own market, and quantified into standardized units (called something like "manos" [generic form for the modern dollar]) functioning as a currency. Everyone would know what the price for a loaf of bread would be in "manos," and they would all revel at the high price of Gold as quoted in "manos".

** As more future productivity is brought forward into today's market, we would see this "manos" currency-supply inflate, and each pledge of future manhours would be seen as less and less valuable when compared to real goods.

** Someone holding Gold in savings who needed to get some work done or to buy goods could purchase it directly with Gold. They could also sell a quantity of their Gold on the free market to buy the Man-hours they needed to get the job done. There will always be people with an excess of "manos" that will want to move them into this supreme monetary asset--Gold.

** Such a system is not prone to shocks (bank runs and currency crises, etc. are like earthquakes where pressure builds and then is suddenly released) because at all points the assets may freely come into balance against each other in the free markets of the world.

There is little difference between a manos in Bangladesh and a manos in Canada where one manos is taken at a moment in time as the work equivalent to a healthy man shovelling sand with a spoon into a soda bottle. Who cares if one manos is actually called one, ten, or 27.34 rupees in one dialect while in another language it is called one, two, or 6.45 dollars? Its really just a mathematical exercise. Who's to stop the real world from pursuing such a system? It's basically what we have now, except the evolution took another route!

The key is that Gold must be assisted towards its own final and perfect destiny through the straightforward mandate (whether social, governmental or religious) that Gold shall not be lent as it has been, or otherwise attached to various financial derivatives. You can work for it, mine it, buy it, and sell it. You can't borrow it. Monetary perfection for an imperfect planet.

Gold. Get you some. We are moving in this direction faster than you imagine. ---Aristotle

Aristotle (02/11/00; 18:19:20MDT - Msg ID:25062)
Jason Happy, to accommodate your convictions I wish I hadn't offered the example of usury in my commentary
Indeed, I could have left it out and the substance of the post would have remained the same. Please see my latest comments to ORO where I again stress that much of what we often call "bad" and attribute to "banking" could effectively be brought about through other channels that aren't so easily demonized. With the system I described, I have slayed not only "demons," but the root of the problem as well. If I haven't, then I sadly missed my mark.

Gold. Get you some. ---Aristotle

Elwood (02/11/00; 18:26:25MDT - Msg ID:25063)
Response to Aristotle and Trail Guide
http://www.ords.com.au/frankshostak/feature_articles/paper_money.pdf

I offer the above on the nature of money, and why our current system can't be reformed into a lasting system based on a Euro/Gold combination.

I would add that the lending at interest is a beneficial thing because time itself is a scarce economic resource. Free market interest rates are the mechanism by which the division of labor progresses through investment.

Elwood

Cavan Man (02/11/00; 18:35:53MDT - Msg ID:25065)
Aristotle
Sir Knight, you are a wise man indeed.

Jason Happy (02/11/00; 18:38:45MDT - Msg ID:25067)
Elwood and interest
Elwood, I believe you are making two false assumptions.

1. You are assuming that, over time, money becomes worth less. Not necessarily so. As a society progresses, money buys more and more. Today, people on welfare live better than Kings who lived 300 years ago. Air conditioning, more food choices, better sanitation, etc. Thus, the time factor works to the advantage of one who is repaid the same ammount of money in the future, (as long as there is no corruption of the gold).

2. You are assuming that investment will not take place without "interest". False. In fact, the reverse is true. No bonds, no usury, actually means more investing in business. If there are no "bonds" or lending mechanisms available, then the ONLY way for money to receive greater returns in the future is to either hold it, or invest it directly. Thus, there is only savings (all agree is a good thing) and direct investment (all agree is a good thing).

Aristotle... I'm still thinking about your latest post, ie., mano's...

Elwood (02/11/00; 19:18:27MDT - Msg ID:25075)
Reply to Jason Happy:

Money is a present good as well as the medium of exchange. As the medium of exchange it can be traded directly for other present goods. The fact that our civilization has progressed from the days of the horse and buggy and before to the present day is not related to the changing value of money but, rather, the degree to which our laws and institutions promote the division of labor.

Because man is a mortal creature, an individual's time on this earth is limited. This fact gives rise to a difference in man's valuation between present goods and future goods. That difference, in any economic system is the true or real interest rate. Mises called this the originary rate of interest.

If there is no economic incentive for a person to forego present goods in order to gain the same present goods in the future there will be no such forbearance. You appear to be arguing that if I, or anyone, has saved a sum of money then I would be willing to lend that sum to another and risk losing it in a business venture without some kind of compensation other than a promise to return my money at some point in the future. If you believe this then we'll just have to agree to disagree on the issue.

Elwood

Cavan Man (02/11/00; 18:46:47MDT - Msg ID:25068)
To Jason
We live in an imperfect world that will never be made perfect until The One who left us here returns and all Holy Scripture is fulfilled. In the interim, while not disagreeing with you, I humbly submit that the type of system Ari describes is not only a step in the right direction, it is evidence of positive incremental progression towards the type of system you might feel more comfortable with. IMHO, the world we live in requires debt, lending bankers etc. It is not the "system", but rather, the operators of that system that cause so much pain. The real problem is you and me and everyone around us. Seek theosis first, illumine yourself and then, those around you. That is what is important. That is what this world needs desperately. That my friend, is the (very) hard part.

Enjoy your thoughts!

RossL (02/11/00; 19:15:50MDT - Msg ID:25073)
Sir Aristotle

One question please. How do you prevent gold from being lent?

What if I, in a private transaction, lend 1 ounce fine gold to my neighbor for improvements to his house. He then pays me back 1.1 ounces fine gold at a later date. This is a voluntary contract to all persons involved.

What law have I broken? Where is the victim?

Harley Davidson (02/11/00; 19:28:28MDT - Msg ID:25077)
@Aristotle
I enjoy your thoughts and struggle in the effort to gleen from your intellect.

It seems to me that rather than looking for the perfect banking system in an imperfect world, there might be something to be learned from perfect banking systems that existed, in the past, in an imperfect world. I offer the following examples that where successfult for hundreds of years for your consideration:

The Bank of Venice, where abuses had reached such a point that the Venetian Senate passed a law forbidding any other commercial pursuit other than the primary purpose of holding coin, exchanging currency, handling the transfer of payments between customers and notary services. The bank thrived because its paper receipts were widely accepted and, as a matter of fact, instead of being discounted for exchange in gold coin, enjoyed a premium because of the confidence in their value over the wide variety of coins circulating at the time, some of dubious quality.

The Bank of Amsterdam, of which I think you are familiar.

And, The Bank of Hamburg which for over two hundred years adhered strictly to the principle of safe deposit.

The common denominator of all of these, once honest and successful, banks turning to failure is fractional reserves lending and perhaps that is where we should turn our attention. When looking at where things go wrong, it seems that fractional lending sows the seeds of all that follows. Perhaps because it is simply immoral.

Thanks for your thoughts...

Peter Asher (02/11/00; 20:47:42MDT - Msg ID:25090)
Aristotle -- Michael
Aristotle (02/11/00; 17:46:56MDT - Msg ID:25059)

This is an excellent train of logic you have laid out, a very valuable building block in the structure of understanding money and fair exchange that we endeavor to create here.

Consider this an HOF nomination but please help me track the seconds, I'm very tapped out for even reading time at the moment. You, ORO, Ellwood, Solomon, Goldfan, Journeyman, and Trail Guide have been doing an incredible job of inspirational analysis of late, aided and abetted by "Give 'em hell" Farfel.

Michael: your Forum child is attaining manhood as we speak. Congratulations on an superb job of parenting.

Jason Happy (02/11/00; 22:11:49MDT - Msg ID:25097)
Cavan Man & Elwood; about interest free loans
Re: Cavan Man: "Will you admit that liquidity is required for economic development; that in order to advance the material circumstances of mankind at a needed pace, the monetary system must be flexible?"

No. I don't admit that liquidity is required, nor must a monetary system be flexible. Under strict authoritarian rule, under Hitler, Stalin, the South American Indians (either Aztecs or Mayans, I don't remember which) (and increasingly the U.S.A.) money (gold) is not used as a medium of exchange. Moneyless societies have existed in the past, and have experienced tremendous economic development.

Liquidity, specifically, Money (gold) is needed for freedom. Which also brings about economic development, and at a faster pace. Also, a pure "gold as money" system IS flexible.

Assume I am a fantastic artist who, with $100 in paint, can create a painting worth $1,000,000. Does the Fed need to whip up a batch of paper out of nothing to balance out the value of my painting? Would I sit in front of a blank canvas, and not start my creative work until such excess money is made available? Sillyness! Absurd! Yet, in its bare bones form, this is the argument made to advance the "need" for a flexible money supply!

And I am not against debt. Nor am I against collateralized debt. There are no prohibitions against debt in the Bible. The law is against usury, interest on debt.

Elwood... about "forego present goods in order to gain the same present goods in the future"

If you had a 40 year supply of wheat for one person, created by your own sweat and labor, knowing that you can only store wheat for 20 years, would you give up 20 years supply right now, to receive a 20 year supply 20 years in the future? I'm sure you would. And you would benefit greatly from such an arrangement, as you would not be eating spoiled wheat 21 years down the road. Under this scenerio, you don't need usury to give you "economic incentive" as you put it, to make the loan. There are many other examples I could come up with, use your imagination. But, interest free loans are not the primary means of economic development... WORK, savings and investment are.

Re: "You appear to be arguing that if I, or anyone, has saved a sum of money then I would be willing to lend that sum to another and risk losing it in a business venture without some kind of compensation other than a promise to return my money at some point in the future."

No, I am not saying that loans should be uncollateralized... as you put it... "risk losing it in a business venture without some kind of compensation". Just interest free. Once again, loans are not the best path to economic development; even if they are interest free; savings and investment are the keys.

Elwood (02/11/00; 23:44:35MDT - Msg ID:25101)
To Jason Happy:
Jason Happy in (02/11/00; 22:11:49MDT - Msg ID:25097)

Elwood replies:
Sir, you are forgetting that it takes more than just sweat and labor to amass 40 years worth of wheat. It also takes land, capital and TIME, none of which fall in abundance from the sky. If I am to amass my 40 years worth of wheat I must work at an occupation long enough to acquire the goods to trade for the needed capital and land or I can borrow it from someone who has acquired the means through saving over time. Only then can I apply my sweat, labor and still more time toward the effort which may, in fact, fail due to my incompetence in farming or inclimate weather or a myriad of other reasons.

If I choose to borrow the money in order to economize my time, I must compete with others who wish to engage in equally socially acceptable occupations who also require capital and land for their efforts. Assuming that this competition takes place in a free market then there will be a free market interest rate as compensation to those who forego present goods in order to purchase more future goods. The question of security of the principle amount through collateralization is a separate issue entirely from the forbearance of consumption now in return for more later.

If you propose that there be a law passed to render illegal this free market interest rate then I will be unable to legally economize my time and "society" will be worse off because the wheat will be had later rather than sooner while the loan proceeds sit, unused, under a mattress somewhere. Such a law would fly in the face of the concept of a free market economy as I understand it.

Elwood

ORO (2/12/2000; 5:54:36MDT - Msg ID:25113)
Aristotle and Trail Guide - more comments
Trail Guide and Aristotle
The comments below - particularly those to Aristotle, are somewhat harsh. I hope this is taken in the spirit of friendly criticism. I have done the same kind of analysis of these concepts as I do to my own. I show myself less mercy than I have shown your work.

I do very much appreciate it and have learned much from reading it.

The main point of divergence is that I peg the problem of monetary stability squarely in the hole shaped like a government. Both Aristotle and Trail Guide associate the problem with borrowing as such.

My view on debt:
Borrowing is a powerful necessity. It does not cause problems of prolonged instability on its own. Even fractional reserve banking, when done in the open, is not destabilizing when coupled with free trading precious metal. It is the government's attempts to leash the power of gold and the trade of debt to its own uses that corrupts the system and puts gold down for prolonged (but temporary) periods.
======================
To put some perspective:

The reality:

1. Economic laws.
Particular actions result in particular consequences. In many instances they are well known. Keynesians, monetarists, marxists and the quantitative theorists were not ever thought to be students of economics for the purpose of discovery of economic laws nor for the design of better legal infrastructures that allow economies to function more productively. These economic schools, as were many others, are engineers and salesmen working to justify the intended actions and define for their masters in government and finance what the likely benefits to them would be. Their focus is distinctly reserved for giving honest advice to their employers and providing propaganda aimed at the intended victims. These are the inhabitants of macroeconomic text books.

Actual interest in discovery of economic laws and better systems is reserved for the Austrian school. Though some monetarist calculations are useful, the theories were never intended to be discoveries, nor to describe the economy. Though much can be learned from their methods and some from their theory, it is pretty much a waste of time.

There are consequences to the existence of a fiat currency and for the use of debt money for trade settlement.
FIAT HAS NEVER BEEN THE CHOICE OF THE PEOPLE ACTING IN COMMERCE OF THEIR OWN ACCORD.
Even when wildly popular, fiat money has not had a single instance when it had not been established by force - by laws imposing its use.

Fiat money without parity loses value within 5 years unless combined with debt and/or a hidden parity. Debt money has life spans of 2 to 15 years, more often it is 10 years. Gold standard (or open standard) cash and debt money is stable indefinitely in an environment of free gold banking - it does not fail of its own. It takes a government's collusion with bankers to make for a disaster out of the gold standard by the forcing of all banks to act in unison when regulated through charters. When legally forced collusion occurs it is the cause of banks over-expanding credit - and then meeting the inevitable disaster of its deflation and the subsequent depression.

2. Power Politics.
The reality is that a government is the organization controlling the overwhelming power of violence in a geographic area. That is all it is. Anything else one may ascribe to government is not essential to its function or purpose. These are clear: (1) self preservation, (2) expansion of powers at home and abroad, (3) control of more resources for distribution among its members.
Be it Rome of Ceasar, Kohl's Germany, or Stalinist Soviet Russia, the role and function of government is the same, as are its methods.

So long as governments can take for themselves a large portion of individual's output they will do so unless restrained by their populations' citizens who do one of two things: (1) avoid the government's grasping fingers, (2) act politically to restrict its actions.

Their success in either action will result in determining the level of economic development and the level of welfare within the nation.

Success in avoidance of government's thievery takes three routes:

(1) moving one's person, wealth and income away from territories where government is particularly grasping and powerful to where it is not.

(2) joining with government in alliances to further assist the government in its efforts in return for a share in the spoils. Or just plain bribery of the officials to change their allegiance from government to you.

(3) acting within "black markets" where taxation is avoided and assets are hidden from confiscation.

Success in politics depends on the degree of freedom within the state and the intellectual powers of the citizenry, as well as their ideological predispositions. The one thing missing in the arsenal of the propagandist for economic freedom is the promise of government largess and the ability to promise pieces of someone else's pie.

Finally, it is the physical realities of the government's ability to exact tribute - in one way or another - that determines the success of the three strategies. The easier it is for government to seize and control property, the more it can exact.
The world has changed considerably since the heyday of the industrialization periods. Colonies became very expensive to control directly because the cost of firearms had dropped and fell within the reach of the many. The benefits of warfare were lost when the running of industry became less an issue of warm bodies at the plant, now creativity and speed of response make more of a difference in productivity. The advantage of communications that was the privelege of government and the wealthy has made a mockery of secrecy once it became widely available. The ability to control financial flows disipated in the late 60s - where there were capital controls there was no capital. The ability to control banking has disappeared. Information control has been lost. Those who wish to find out about something can look it up on the net. Those who desire privacy can escape wire taps and even the NSA's automated snooping on the net.

Finally - there is the question of what kind of system is being referred to.
1. One that accomodates the thieves-because-they-can in the capitals of nations?
2. One that accomodates the thieves-if-they-had-a-chance bankers?
3. One that allows markets to function without distortion so that people can freely contract among themselves in trade?

If your monetary system has such a thing as a bank regulatory body, or a central bank, or a national currency, it is not aimed at #3

Now for specific comments:

Trail Guide (02/11/00; 17:21:28MDT - Msg ID:25055)
A different view?

ORO (02/11/00; 13:59:00MDT - Msg ID:25019)
Aristotle and Trail Guide,
What is to stop the gold markets to regroup and form a new gold banking system?

Q: Please define "gold markets" in the context you use? We need to know exactly what this market is before one can "bank on it"!

===============
Any holder of non-fractional gold can and will use it through open exchange systems that have now grown for eveything from screws to talcum powder. The surviving gold bankers who had much of their business in fully allocated custodial accounts - not fiduciary accounts will be able to entice the holders to trade and lend it. The LBMA and the other paper gold exchanges will reform the day after their explosion to trade physical gold. The old backroom banking world will be superceded by the automated exchanges that can be established in no time anywhere and at multiple locations to have gold move among those who wish to trade it.

The physicality of location is a dead element. It is unimportant.All one needs is protocol, and these protocols have been well established. The only reason they have not been used so far is because of the existence of a current market that does the job well and cheaply.

+++++++++++++++++++++++

I would think that - if there is gold there is also someone to lend it and someone to borrow it.

Q: Why use gold to create a lending contract? Would society use gold as a "lend able" account unit if it freezes any further function of their money asset? To date, the history of the past gold systems points that such a function creates gridlock in the banking system. Doesn't this contradict the first purpose of gold: to act as a pay as we go medium, under no contract risk?

=============================
Gold has many purposes. As a money it is used as wealth money and as exchange money. Any and all forms of wealth are contracted at some rate. If I wanted to be owed anything, I would like to be owed gold. When currencies become unstable, few want to be owed a currency AT ANY RATE OF RETURN. The bonfire of the currencies in Asia and the other NICs and LDCs taught well the lesson that even a 60% interest rate is not attractive when a currency is in the throes of crisis. Therefore, gold clause contracts will reappear as they had in the 70s. The lender and lessors will demand payment in the stable currency. If the dollar becomes sufficiently unstable, the smaller currencies will suffer too. The Euro may survive if its gold backing is recognized by the markets and if the Euro debt system can be maintained while the US dollar implodes and the established gold markets implode.

Credit risk is less of a problem than one might imagine. It is far easier to understand, quantify and allow for than currency risk during periods of instability.

Incorrect:
" To date, the history of the past gold systems points that such a function creates gridlock in the banking system." The latter statement is true under only one set of circumstances:
That is only true of government chartered banks that are granted the privelege of enless credit expansion by freedom from competition. It is particularly true while the banks act as one by the coordination of a central bank. When this occurs, leverage in banking rises from its natural levels of 40-60% reserves to under the 3% point. A double of fiduciary money ocurring in a free banking system is a slow and gradual process. The banks then truly lend mostly client money. To do otherwise brings rapid bankruptcy and no chance of salvation.

Again, you are sticking the gold standard with the history of debt money in a bank system controlled by a cartel enjoying government sponsorship. The limitless expansion of credit to the point of deflationary gridlock is the result of arbitrary settings of reserve ratios by regulation. Three types of regulation cause this (1) central banking - causes this immediately, (2) selective charter - closes the door to new competition and makes effective collusion among the chartered banks possible, (3) regulation of reserve ratios - the regulatory body eventually succumbs to bank pressures to lower reserve raios. The conservative policy of the regulators rarely survives the first year of regulation.

See http://www.mises.org/humanaction/chap17sec12.asp for an explanation. A detailed accounting is given at the end of this post. Suffice it to say - at this point - that it is government intervention that causes banks to issue excess credit. Without government to enforce coordination, the bank that expands most goes bankrupt. After the first goes belly up, the rest of them become more careful.
+++++++++++++++++++++++

If there is new gold mined, it will be contracted for future delivery.

Q: Again, Why must gold be used? And why the illusion of future delivery in contract form? If society places a high enough value (currency price) on it, a "no collateral financing" would easily create a pay as you go operation, NO?

============================
The contract is as good as the people signing it. Illusions of delivery will quickly bring the buyer to disillusion and the seller into disrepute. Creditworthiness is a determinable parameter for individual corporations/banks. The creditworthiness of a system with central bank guarantees, expressed or implied, is only determinate if information is available. The bullion bankers of today see no reason to reveal their secrets. The CB guarantees allow them to hide the secrets because once the CB is involved the depositor's doubt is quenched. The source of the credit risk is the liberal use of CB guarantees.

The concept of a "high enough value" is part of the thinking that the absolute quantity of money matters. It does not. Only the change in quantity matters. The changes in quantity are dictated by economic needs and legal privelege or restrictions. In the "cash gold only" approach you and Aristotle say will come, there is implied a legal restriction that has never been enforceable in any market. People have an overwhelming need to continuously adjust the balance of wealth and income. This necessitates both equity contracts and debt contracts. It is the balance between debt assets, equity assets and cash that are important for the markets. No amount of money - no particular quantity of cash - is enough to replace the need for this switch among contractual forms and title forms of wealth (all wealth is title or contract wealth). Therefore, forcing "pay as you go" on the markets reduces their efficiency and is an arbitrary rule lacking in economic justification.

Gold must be used because in the currency turmoil we predict, gold is one item we can be assured that people would want to be paid in. Therefore, there will be demand for gold denominated contracts by the lenders.

Hey, gold is no more a holy relic than it is a barbarous relic.
++++++++++++++++++++++++++++++++++

If there is gold of many players in a number of vaults, the gold will stay in the vaults and the title to the gold will trade electronically.

Q: Tell me, do we pay for our gasoline with "stock certificates" of IBM? Or any other ware - housed asset. Would not real estate titles also trade electronically? In this period of high speed trade, digits of anything could do the trick, no?

============================
The holders of gold can, do now, and will in future increase their use of electronic depositories such as E-gold to place some of their gold. Putting bank's more established custodial gold depositories in more liquid form is not a problem either. Holders of gold can use the credit and debit card systems to do all their purchases and trading just as an American does in Europe with his credit/debit card. Trading gold in the form of checking accounts, bank depositary receipts etc. has never been a problem. As many examples show, receipt money will trade at a premium to physical money except in time of war, when physical possession takes priority.

Gold is a money. Unlike houses, one ounce is identical to all others. Unlike stocks, all gold has the same properties that made it a financial asset in the first place. It is not a house. It can be digitized just as well is it was used for Five Centuries in the form of receipt money and fully allocated checking accounts.

Digits of anything can do the trick. However, digits of gold do the trick better. Wouldn't you like to keep your cash balance in the best cash? If there were a convenient gold debit card, would you not use it? Keep 0 dollar cash balance in your accounts - using only gold cash balances till the very instant of transaction? The technology to do this has been around just as long as credit cards have. The debit cards and "cash value" smart cards are perfect technologies for this.

As you can see, fiat currencies are easilly replaceable. Very easily. That is because they are inherently inferior for any purpose outside of the government's and banker's interest in fleecing the public without their knowledge.
++++++++++++++++++++++++++++++++++

I still say that there is no economic reason, no justification for central banks at all. There is no economically useful purpose for national currencies.

Observation: Years of history and the nature of modern society say you are wrong, no? Our use of digital currencies for trade always flows like a river that's strong and wide,,,,, and it always flows to it's end in the sea. The water takes it into the air and rains it again upon the headwaters for another trip,,,,,a new currency starts again. All the while gold is held from it's value as officials grapple with it's position on the currency river,,,,,,,,,, stopping it's use as a wealth asset held by all.

=======================
The nature of modern society says I am right. Don't you see how much legislation, regulation, obfuscation, lies and propaganda are necessary to keep central banks and national currencies afloat? Are not debt traps and fraudulent lending practices to beleaguered young countries the necessary precondition for our system and the coming Euro system? Is that not evidence enough that modern society abhors fiat currencies in their digital guise just as much as it did before when they were paper?

The years of history show the need for hard money, competitive banking (i.e. no central bank, no regulation, no currency), definite and quick accounting and trade settlement through digitized systems today and through the convenience of paper receipts (honest ones) and checking in the past.

"All the while gold is held from it's value as officials grapple with it's position on the currency river,,,,, stopping it's use as a wealth asset held by all." Obviously one needs to remove the officials and the currency. They are both completely useless for the markets. You see, the officials need currency in order to have their powerful jobs, the currency needs the officials to make it acceptable - moreover, it is necessary for the officials to command secret service agents to force the currency on the population.

Imagine a world where the international trade and the internal trade of countries is all done in physical metal and paper + electronic gold certificates. No bid/ask on each currency conversion, no need to hedge currencies and borrow them from their creators, no opportunity for governments to manipulate exchange rates to force their citizens choices as to where and from whom to buy, or where to invest. The current payment excised by both banks and governments for dealing in currency exchange amounts to nearly 13% of global cross border trade. This cost could disappear completely and lower the real costs of goods. I will shed not a tear for the bank's loss of business and would gladly take a former currency trader to tend my garden.
++++++++++++++++++++++++++++++++++

I will go further and state that the purpose of central banks holding gold is so their people remain beholden to the state and the bank cartels it has chartered. The best thing for the CBs and treasuries to do is to unload their gold and cease participation in the financial markets. Individuals and private organizations should hold their gold and trade its receipts, to lend and to borrow it.

Observation: Again, society has proven that any and all currencies and moneys that are lent and borrowed,,,,,,soon become corrupted. Even gold itself,,,,,many times! Let gold become an asset of real wealth,,,,,and it will shine as the best background money this modern world has ever seen,,NO?

======================
No!
History has shown that government debt and debt sponsored by government IS the corruption. In all times when governments played only the role of peacekeeper and mediator only, gold, silver, salt, cows and gems served well for both cash and the denomination of debt. Corruption of money is done by government for government with or without a banker's participation. The source of corruption is the quiet acceptance by people of the government's unchecked power when it grabs the authority to denominate and regulate money and credit.

Forever, bankers will solicit or intimidate government to allow them form a cartel that excludes competition and changes the rules in their favor. Forever will government solicit bankers to lend it infinite amounts of real money.

Disallow the government from regulating banks and from issuing currency or minting coin, and you have forever solved the problem of opportunity beckoning the banker to solicit privelege.
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The amount of gold and other PMs can not be insufficient in quantity to for the basis for the volume of trade settlement. It is precisely the point that the quantity of gold matters not. What matters is that it grows with the economy that trades it as money.

Q: What will you do today that is different from yesterday? Can we pass laws that remove human nature?

==========================
The thing I would do is so:
Transition:
1. Set a clear date of completion
2. Announce and execute a program to monetize the current debt into cash dollars and that the terms of contract will be changed to floating market rates at a certain date. Past this date, the Federal Reserve would no longer lend, issue credit, add or drain liquidity in the markets, nor to any bank or to government. Past this date banks are free to set their reserves at any value, individually. At this date, the FDIC, guarantees for mortgages pension funds, for foreign government debt and for any other purpose would be null and void.
3. Set the dollar to be convertible into a particular quantity of gold that is now held in the treasury and is expected to come in through the payments of the debts.
4. Allow settlement of dollar debt and taxes in any of a variety of settlement media - gold, silver, platinum, palladium, rhodium, 4-5 sizes of white grade diamonds, 3 grades of gasoline in storage tanks, and whatever else may be appropriate in the form of electronic titles. The rate of exchange between them will be the going market rate.
5. Set a clear final date and redeem each dollar for gold or the other equivalents up to that time.
6. Close the Federal Reserve bank forever.
7. Set up a custodial account for the government to receive the payments on the monetized debt. Better yet, set it up as the sole assets of the social security fund, split it into 5 or more parts and float it into the private markets.
8. Leave a tiny staff at the office of the comptroller of the currency to make market measurements of the use of commodity money in the markets to maintain a list of legal tender commodities acceptable for payment of taxes.

At this point government would be excluded from regulation of banking aside from setting clear rules of disclosure. After an economic education campaign to teach the workings of this mechanism, the government should no longer have the options of regulating bank reserve ratios, capital sufficiency, lending to banks, or otherwise interfering in the financial world.
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The myth of a living and breathing fiat system. Many have proposed that there is some need in trade and business for the flexible money that fiat allows. I contend that there is no such flexible money, as its cost in trade and to business far outweighs the benefits of flexion.

Observation: We want and use this "flexion" today. Is not the only thing missing,,,,,,,,,,a way to shield our wealth from the effects of this "flexion"'s inflation ,,,,

===============================
As I have indicated before, the flexion does not exist. It is an illusion. The only possible course of a stable pure debt money system is inflationary. There is no flexibility in that. As a result, there is a constant tendency for interest rates to over-compensate for foreseable drops in purchasing power. This alone is sufficient to eliminate any possible stabilizing effect that this flexion allows. Furthermore, the moral hazard issue comes into play as each bailout encourages banks to lend with further recklessness. The risks mount till the inevitable cycle of alternating price inflation and widespread bankruptcy spins out of control. You have pointed to this yourself, at least implicitly.

You, FOA and ANOTHER have indicated that the market trades real goods and services and real wealth through the monetary system. Clearly there is no benefit to be found in issuing more currency if no more product is produced. Credit expansion does not solve problems for the economy as a whole. It only solves temporarily the liquidity problems of particular weak hands. Perhaps the recently bankrupted Builder's Square, Venture stores, Hill's department stores and Sun TV should have benefited for a while, but they had not. For the economy as a whole, there is a cost greater than the sum benefits to the particular individuals, corporations and banks that were saved from the consequences of their own actions, because of the inflation premium in the interest rates.
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Fiat currencies do not expand and contract as the markets need. Their mere existence forbids healthy interaction in the markets. The seekers of the conversion of income into wealth and those who must convert wealth into income are forbidden from setting the rates of conversion by the existence of fiat currencies. The necessary precondition of a fiat currency is the existence of a monetary authority that controls the quantity and the rate of conversion - the interest rate - at which both monetary and "real" wealth coverts into income.

Perhaps: But no one ever said that wealth was digits? no? A Western view of a world that's always going mad?

===============================
It is very clear that fiat system was never intended to raise the efficiency of trade and commerce, it was simply intended to erect toll gates along the financial roads with a banker at each gate and a government to collect the proceeds into its pocket.

This is a view of the mad Western world.
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(smile)
thanks Trail Guide

Thanks again.
I have enjoyed this tremendously.

Aristotle (02/11/00; 17:46:56MDT - Msg ID:25059), I may have criticized harshly, however, I do very much appreciate your posts. I did find them very informative and thoughtful. Much of your thinking sets the problems well and in a thought provoking manner. Your presentation lacks nothing.
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"With that said, where can I get admission to the world you are living in? It is surely a more perfect version of the one I have found myself in all these years."

==========================
As indicated at the opening of this message, the reality of life is clear enough to me. I am indicating that the imperfections you accomodate are exacerbated by your attempts to remedy the inevitable consequences of these imperfections.
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Remember, my goal was to lay out the "perfect" system for an IMPERFECT (real) world. I took on the project with no preconceived notions one way or another. Going in, I was a charter member of the Goldhearts club, and I emerged even more excited about the prospects of Gold than before. The future for Gold is bright, and it is rapidly approaching in the manner I laid out, if I'm reading the signs correctly.

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole.

==========================
Stout goldheart that you are, understand this criticism from one who accepts that actions have consequences that are often foreseable. By addressing the wrong problem we inevitably arrive at the wrong solution. I intended to explain that we do not, never have, never will need the paper currency in order to have a gold money. Instead, I will, at least for the current post, show where your problem is.

Gold can only be set free to be real property under your program. It can't serve its purpose as full money because it would not denominate debt and would not be used in exchange. Trading in the background it does not display its full value. The supply demand balance keeps it at only one-tenth of its potential.

"**Gold is the only real money there is--fiat currency is not money--so only Gold should be used as currency."

Wrong. Gold is A real money, not the only one. Modern fiat currency is a money in part.

"**Fractional reserve lending destroys a currency's value in trade, and therefore must not be allowed."

Wrong. Fractional reserve lending can be limited by the natural operation of the markets in a free banking world. Since the supply demand balance is not altered by the slow expansion of fractional/fiduciary money when banks are allowed to compete on the basis of solvency. The debt money portion of the gold accounts is fully balanced by future commitments of the borrowers to obtain the gold. Competition among banks prevents excessive credit expansion as explained in the section at the end of this post and the URL above.

[time for concessions to the real world]

**People will always want to borrow for the things they want to have beyond their current financial means.

True!
No problem. They should. They need to.

**Spending Gold into the marketplace, whether by the owner or by a borrower, would tend to result in prices for goods that weigh more--costs more Gold.

Wrong. Government sponsored bank cartels - which is the situation I assume you are referring to - close down the natural mechanism for control of the rate of expansion of fractional reserve banking. The result is that the system does its damage in a cyclical manner. It starts by inflating the apparent gold supply, then it deflates steeply as the contracted parity between the inflated supply of banknotes and the gold is broken. Gold will then far overshoot its natural value as the banknotes are ground into dust. Over time, the cycles cross the true value mark repeatedly. Just that the cycles are long in time (50-60 years in two sets of two10-15 year cycles of inflation and deflation) and cause great damage as wasteful boom turns to bust.

As I have said repeatedly, given enough rope, all bankers will hang themselves.

Under a free banking system, the same fluctuation occurs, however, the amplitude is limited by the size of the reckless bank that hung itself. The time for the cycle is about 4-7 years up 1-2 years down, and gold purchasing power remains much more stable as prices tend to remain constant because the rate of fractional money expansion actually stabilizes the system a little.

**As ever more Gold is borrowed out of other people's savings to be spent into the economy, the Gold's purchasing power is lessened from what it otherwise would be...hurting those who have elected to hold their Gold instead of risking it by lending it out as a source of income.

Wrong. Non fractional lending does not increase the money supply because the great variety of non-bank notes are not bearer bonds, and not redeemable upon demand. They don't function fully as money substitutes - $1 of bank debt = $2 of money supply, $1 of bonds = $1 to $1.2 in money supply, and up to $1.5 for the most liquid bonds. (I am assuming that the situation is the one you refer to in the brackets). This bond type lending only increases the velocity of circulation and has little effect on gold's purchasing power.

[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]

Wrong. The situations you describe can only occur if there is a bank involved.

**For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent!

Wrong. In order for gold to retain its true value, it must be used for exchange or to back exchange media and to denominate debt. The cause of the inflation is not borrowing or lending in themselves, it is the monopoly that government gave the bank cartel which made fiduciary restraint a losing proposition.

**With Gold as the only money, people will not be able to get loans. [In the real world, this is hard to imagine!] As an alternative, they will work up complicated contracts for the item they desire (new home or car?) in which they promise to deliver a certain level of their future productivity against a pledge of real wealth collateral.

**These contracts for the delivery of future man-hours would eventually be organized into their own market, and quantified into standardized units (called something like "manos") functioning as a currency. Everyone would know what the price for a loaf of bread would be in "manos," and they would all revel at the high price of Gold as quoted in "manos".

**As more future productivity is brought forward into today's market, we would see this "manos" currency-supply inflate, and each pledge of future manhours would be seen as less and less valuable when compared to real goods.

**Someone holding Gold in savings who needed to get some work done or to buy goods could purchase it directly with Gold. They could also sell a quantity of their Gold on the free market to buy the Man-hours they needed to get the job done. There will always be people with an excess of "manos" that will want to move them into this supreme monetary asset--Gold.

**Such a system is not prone to shocks (bank runs and currency crises, etc. are like earthquakes where pressure builds and then is suddenly released) because at all points the assets may freely come into balance against each other in the free markets of the world.

This system assumes that any legal limitation you intend to put on gold lending would work. It can't. It will be borrowed, it will be lent.

The "manos" system above is remarkably simillar to the dollar system, just way more complex because of the individuation of the units, which would all trade at different values depending on the different values of each person's hours.. The only way this would work is if all the "manos" are aggregated into a single pool. Since the pooling makes the "manos" non-particular and non-individual, they are nobody's obligation. Therefore, the structure that would be necessary would be an obligation to repay "manos" created at the time of contract (and used by the contractee to purchase "stuff") at a particular rate - an interest rate. This would be a pure debt system without stabilizers and trading in parallel to gold. .

Since one can not force a person to perform the work promised, but only to sue them for restitution up to the value of their current asstets, the system would lose value as it goes along with people constantly dropping out of the system and breaking their bonds. If you do not do so, but make the bonds stick, you have recreated bondage and then slavery.

This system would very definitely exhibit the same problems that the dollar - and any other debt currency has. Indeed, any system placing a current value on the performance of individuals in the future is subject to boom and bust. This contains the same boom and bust generating mechanism. It is bound to suffer perpetual instability.

As to the thought that the "manos" would trade at par upon their issue - forget it. They will have to bear an interest, otherwise they will never be created. There is a distinct time value of current labor and products whereby the value of a future unit of labor or product would trade at a discount to a current one. The rate of discount is called an interest rate.

Quite frankly, the interest bearing "manos" system could only develop/evolve out of the gold banking system, because the "manos" would not have an initial value at all unless it were initially pegged to a current item. Since the structure of the trade of future labor for current money units is called debt, it would suffer the same fate as a pure fiduciary money must. It will boom, and then crash - unlike gold or a pegged currency, the bottom is 0 purchasing power.

There is little difference between a [currency] in Bangladesh and a [currency] in Canada where one [currency] is taken at a moment in time as the work equivalent to a healthy man shovelling sand with a spoon into a soda bottle. Who cares if one [currency] is actually called one, ten, or 27.34 rupees in one dialect while in another language it is called one, two, or 6.45 dollars? Its really just a mathematical exercise. Whose to stop the real world from pursuing such a system? Its basically what we have now, except the evolution took another route!

The key is that Gold must be assisted in towards its own final and perfect destiny through the straightforward mandate (whether social, governmental or religious) that Gold shall not be lent as it has been, or otherwise attached to various financial derivatives. You can work for it, mine it, buy it, and sell it. You can't borrow it. Monetary perfection for an imperfect planet.

Aristotle, by this system you would create a lesser purchasing power for gold, and would prevent it from taking its place in the sun as money. While the current system deprives gold of its value temporarily (since the gold price repression is unstable), yours would prevent it forever, while making millions into felons.

Furthermore, you will prevent people from doing their natural trading process in which the goods lent denominate the goods received in future payment of the debt. You will have just poked another stick in the spokes of commerce and reinvented the gold police.

We are moving in this direction faster than you imagine.

Yet there is no reason for this to happen but for a short while. The system you see is no better than the one we have now, it is a great deal worse. It preserves all that is wrong with the current system and piles up another set of un-natural rules.

+++++++++++++++++++++++++++

From your Part I

*** Fixed gold convertibility of the currency on account looms large as a threat to the banking system.
((Keep in mind that it is through natural human activity that banking evolves into an important system for much of society, built by a population that has come to depend heavily upon it. Therefore, a stage will always arrive in which the fixed Gold convertibility of the circulating currency will be purposefully abandoned. It is done to preserve "lifestyle as we know it" in the eyes of those people living at such a stage in a currency time line.))

This is not the case. "lifestyle as we know it" does not depend on whether fractional reserve is or is not applied. Given the kind of symmetry markets allow in money, lifestyle - which I take to mean true economic considerations of the exchange of real goods and services - would come through the market's monetary system as long as it is allowed to treat all money according to its interests. The point is that the purpose of money is to allow the exchanges that market participants desire in the most efficient way.
Where the government issues a currency at all, it will tend to use this power to further its own wants and find friends among bankers who would kill honest money within a NY second the moment it is made possible. What is important is that governments do not have currencies at all. Furthermore, that they define the unit of account for themselves alone.
The debt system is necessary and useful. National currencies are not necessary and not useful for the economy. If you are referring to gold banknote convertibility, the banknote of the fractional reserve system's members are never overstreched as a whole. They can only become overstreched if there is a single bank system, one which acts as an equalizer among all banks and has a monopoly on the issuance of banknotes.
The stage of breaking the fixed convertibility comes only if an effective monopoly bank has been created and has done its damage. Had such a bank not been imposed by government (in its pursuit of powers that can be used to sell favors to bankers), the break of the common fractional banknote's convertibility would never happen.
You are making the error of ascribing to a free market "currency" - fractional bank accounts - the same properties as a monopoly currency.
Note on the simple math of competing banks vs. single banks. Under conditions of competing banks without a common reserve organization (a monopoly bank):
Two or more banks A, B, C .... having an average reserve ratio Ravg, and individual reserve ratios RA, RB...and having a reserve base M, equal to the sum of each bank's reserves: MA, MB.... and the overall sum of fractional money is F = sum (FA, FB, FC...) of each bank's liabilities. RA = MA / FA etc... Ravg = M / F
In trade within each bank's clientele, the loans issued to one client become the balances of another. Upon settlement the bank needs not transfer funds to anyone but its clients. The client's preferences for cash rather than account money are those that dictate R for the particular bank.
In trade among the clients of the different banks, the new loans issued to clients of bank A in excess of loans by other banks, LA, are spent on the purchase of goods and services from the clients of banks B, C...in a sum equal to the loans. By issuing loans to clients, the bank has changed its reserve ratio by increasing FA without increasing MA, so when we denote the initial condition as subscript 1, the condition after the loan as subscript 2, and the condition after settlement with subscript 3, then:
FA2 > FA1, MA2 = MA1, and RA2 = MA2 / FA2 = MA1 / FA2 < RA1 (because the new denominator, FA2 is greater than FA1)
Since the overall reserve base has not changed, i.e. M = constant, then the other banks will receive deposits of the sum of the loans of bank A, LA, and will deliver the demand for settlement by Bank A.
After bank A settles, it will have transferred a quantity LA to the other banks, M - MA = MB2 +MC2... = LA + MB1 + MC1 +...., who will now have increased their liabilities in proportion to the deposits: F3 = F1 + LA
FA3 = FA2 = FA1 + LA
MA3 = MA1 - LA
RA3 = MA3 / FA3 = (MA1 - LA) / (FA1 + LA)
The numerator is smaller than before and the Denominator larger. Each excess loan lowers the reserve ratio twice. Thus the excess loans make the reserves of the aggressive lender, bank A, shrink. After numerous aggressive loans it arrives at the point of MA3 < 0, whereupon it must sell assets in order to settle its accounts. Thus, the reserve ratio of each bank will tend to be close to the average reserve ratio, R. Those banks that lower reserve ratios by excessive lending will eventually become insolvent. Thus, the process of growing the fractional money supply is naturally limited by the simple fact of there being more than one bank.
Most often, a great many banks exist in a free market. Few large banks are only possible when they are provided with an overwhelming advantage. The only overwhelming advantage short of a near perfect prophet of the markets, is government subsidy through charters and monopolies. Otherwise, the above holds.

Journeyman (2/12/2000; 9:20:24MDT - Msg ID:25133)
"Interest" vs. "return on investment" @Jason Happy, Elwood,

Sir Happy, I believe your position is that "interest" on a loan is not OK. I also understand you to say that "return on investment" IS OK.

Question: Do I understand your position correctly?

Regards,
Journeyman

USAGOLD (2/12/2000; 9:46:55MDT - Msg ID:25135)
Nickel 62....
When Alan Greenspan made his now famous statement about "central banks stand ready to lease gold in increasing quantities....etc.", it was during his testimony on why derivatives should not regulated. He wasn't so much making a conspiratorial statement on the nature of the gold market as he was saying that international organizations public or private that fall outside the purview of U.S. law can still have an effect on markets despite domestic regulatory stricture. I tried to make that point at the time Greenspan made the statement. As it is, I won't begrudge Mr. Greenspan his "free-market" approach to derivatives, if he will remain consistent in the application of these principles. In other words, when any number of banks or hedge funds get in trouble over derivative losses (perhaps resulting from the lack of regulation) then they should be allowed to fail. There should be no bailouts (a form of regulation). No transference of the loss from the private to the public sector (another form of regulation) either directly or in a hop- scotch, stretch-it-out, pass-it-to-the-next-guy, hope-nothing-happens-down-the-road mentality. If one is going to take a free market approach, let it proceed to its logical conclusion rather than have the Fed jumping in with its bottomless checkbook whenever one of its favored institutions gets pushed to the ropes. That way the market disciplines itself. If we do not allow the free market to function with respect to derivatives, (and as long as you have the Fed stepping in to save the LTCM's of the world), then regulation is going to be needed.

It's either one or the other. Not even Alan Greenspan can have it both ways, and those that say that the Fed fears derivative regulation for what it might do to the markets have a legitimate gripe. Here we have the Chairman of the Fed making a free market argument for an leveraged instrument that is used widely to disguise and alter the true direction of markets. So far, the Fed and federal government have displayed no stomach for stepping into the fray despite the repeated abuses for which corporate managers find a fall guy, wash their hands of it, then pass on the loss to the taxpayer if they can get away with it.

If we do not have a free market comeuppance, the burden of losses in this derivative game when they come (and they will come) will be put upon the taxpayer through direct levies, just as the burden of interest on the national debt is placed on us without permission now, or through the hidden from of taxation commonly referred to as inflation. Alan Greenspan will go to Congress and say this must be done or the entire economy goes down the drain and the Congress will give the government to tax out of our assets to support the financial institution losses.

So it goes...

Over the past week or so, we have heard a flood of rumors of major institutions in trouble due to the bond market meltdown as well as gold's rise. I'm sure this is derivative related, and we may get a test of this issue, if the Republicrats don't sweep it under the carpet.

Continued on Page Two . . . beginning with:

Trail Guide (2/12/2000; 9:52:36MDT - Msg ID:25137)
Reality
(etc.)

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