The Ideal Money

This entry is part 26 of 31 in the series 2011B

So what would be the basis of the ideal money system? Before we can answer that we should list the ingredients of such a system. If we do not know what we are looking for there is not much chance of finding it.

(1) Stability
This is perhaps the most desired feature of a currency, but as we study history we discover that no currency has been completely safe from extreme fluctuations, inflation, deflation, stagnation, manipulation, fraud, degradation, theft, etc.

We have illustrated that even gold and silver money has its own set of problems and gives no guarantee of stability. Yes, it is true that actual gold and silver coins will always have some commodity value, but that value is affected by an increase or decrease in the substance as well as speculation. Remember that one action by President Grant reduced the price of gold from $165.50 to $135 in one day. Then another action by FDR increased the price from $20.67 an ounce to $35 in another day of time.

Yes, yes, I know – that if we had some type of purist system in play and men of Jesus type integrity in office this may not happen but that has never been and not likely to be in the future.

Fiat money also has its own set of problems, Unlike gold and silver it has no intrinsic value but represents value. Its value can be manipulated by the amount of money added to or taken away from the currency system. Usually the problem is inflation caused by too much currency being added and if the presses go too wild there can be a collapse of the money bringing its value close to zero. This insecurity causes many to look to metallic currency in the hope of establishing a stable system.

(2) Flexibility
One often hears about the importance of a stable currency, but not so much about the advantages of a flexible one. It is interesting to consider the importance of flexibility in currency, for without this quality stability eventually goes out the window no matter what currency base is used.

Lack of flexibility is one of the major drawbacks of a gold or silver standard. Ironically, advocates tout this lack of flexibility as its major selling point even though this flaw inevitably leads to the undoing of the standard. Let me explain.

Advocates state that a gold system is desirable because it has little flexibility in that the State just cannot magically create additional gold supplies by fiat or out of thin air. New gold has to be mined or acquired from other nations. Since this is a slow process it normally insures against huge bursts of inflation which troubles many fiat systems.

That’s a good thing, right? On the surface it seems so. Advocates simply state that all we have to do is stay on the gold system causing the growth of money supply to be slow and stable thus preventing any major inflation.

That sounds good in theory but the historical results have been far from that reality. And why is this?

Because of the lack of flexibility.

And what are the two situations that demand the greatest flexibility?

The first is war or a situation that threatens the very survival of a nation. If a nation has a choice between survival or a period of inflation – which will they choose? The answer is really a no-brainer that seems to go over the heads of gold standard people in their thinking and calculations. The only response I have seen from them on this point is: “IF all nations stayed on the gold standard then they would not be able to raise large sums of money and would be discouraged from going to war.”

If? If??? When has this “if” ever taken place except in some fictionalized idealistic future?

The hard-core fact is this. If a nation’s survival is at stake, the leaders will seek to raise money by any means necessary, even if the end result is the destruction of the money system. Any people would rather have their currency destroyed than lose their country to a tyranny.

This was the situation in the Revolutionary War. The Colonists had the choice of throwing the gold standard out the window and creating a shaky fiat system that would probably fail or lose their country. There was only one choice for them. If the money system failed they could create another, but if they lost their country all was lost.

The Colonists thus created a flexible money system and won a country at the cost of a currency. BUT the currency problem was temporary and a new start was made. As a result the United States soon became the greatest economic vehicle in the history of the world.

Both the North and the South felt they had to have more flexible money during the Civil War and moved away from gold to fiat money.

In 1914 at the beginning of World War I the international gold standard ceased to function because of its lack of flexibility. During the war the wholesale prices in the U.S., France and the UK more than doubled causing much difficulty in going back on the standard after the war. Attempting to adjust for the deflation caused by returning to a gold standard caused so much economic grief that a full return became impossible and redemption of currency was abandoned a short time later.

These problems caused by the inflexibility of the metallic standard are not peculiar to our age but similar problems have occurred hundreds of times throughout history. During the Roman Empire alone the government faced dozens of economic crises due to a lack of flexibility and this lead to either debasing the currency, plundering other nations or enslaving people to work in government mines.

It is interesting that gold standard fundamentalists place absolutely no blame for currency debasement or economic problems on the inflexibility of the metallic standard but maintain that it is all due to human corruption. If the leaders of nations could have just been pure in their metallic ideology then all would have been well.

While it is true that human frailties do create monetary problems this is far from providing the full explanation. The fact is that every generation or two a nation is presented with a life and death struggle for survival that demands flexibility in currency. If the money is not raised then their way of life will be gone.

It is not human greed or corruption that causes the people of a nation to seek to survive at all costs. It is common sense if their way of life is worth preserving.

The second situation that demands flexibility is a strong economic downturn.

For instance just as the various nations were struggling in an attempt to return to the gold standard we suffered the Great Depression and this pretty much ended the idea of paper money being redeemed for gold.

Powerful economic downturns demand a similar flexibility with currency as does war and if flexibility is not available then war can result. After World War I the winning nations demanded that Germany pay war reparations with gold standard money. This inflexible demand crushed their economy and led to the rise of Hitler.

Spain’s economic problems during the time of Columbus led to the plundering of millions of American Indians for the gold and silver.

This leads us to the irrefutable fact that during war or hard times the nations of the world will demand flexibility in their currency. If it is not there they will devise every possible scheme to create it. If they cannot create it then they will plunder their people or other nations and steal it.

Conclusion: A flexible currency is necessary for a nation to see itself through a major crises.

(3) A Debt Free Currency
A third quality a currency must possess is that its creation should not add to the public debt. If our Founding Fathers could see our national debt and the astronomical interest we pay every year they would roll over in their graves indeed. Had they seen our perilous state I’m sure they would have added a couple new paragraphs into the Constitution in an attempt to steer us on a better course.

We’ve already covered the fact that it is an insane idea for our government to pay private enterprise to create our money and loan it to us at interest when we the people can create debt free money for ourselves through our elected representatives and then owe nothing on it.

Wouldn’t it be great if our nation had a currency that fit in the guidelines of these three criteria: (1) stability, (2) flexibility and (3) debt free?

Is such a currency possible? I think it is.

Read This entire series. Here are the links.

Copyright 2011 by J J Dewey

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The New Greenback

This entry is part 28 of 31 in the series 2011B

There are a lot of different economic theories and ideas for an improved currency but one thing most thinkers have in common is this. The current system has a lot of flaws, is unstable and needs an overhaul.

So, what is wrong with the current system? Let us list a few items.

(1) Money creation is delegated to private banks instead of “We the people” through our elected representatives.

(2) The government borrows money adding to the public debt when it could create its own with no debt.

(3) The government borrows money at interest from private enterprise and other nations when it could create it’s own money with no interest.

(4) The interest rate on borrowed money, public and private, is determined by private interests.

(5) There are no effective restraints to prevent the Powers-That-Be from adding too much currency to the system causing inflation. They also have power to withdraw money from the system to create deflation which could lead to a depression.

The only current restraint is a debt ceiling that is supposed to limit government borrowing, but it may as well not be there. Congress routinely overrides it whenever it decides to borrow extra money placing citizens in greater debt.

A gold or silver standard is also ineffective for government has always found ways around their restraints and when a big crises comes along the whole metallic standard is trashed and becomes as if it never was.

So, are we doomed to a flawed money system no matter what we do?

I do not think so and here is why. We as a human race are always moving forward, making progress and perfecting that which was once flawed.

I remember when I bought my first Mac, a Mac Plus. I also bought with it the most sophisticated word processing program at the time – it was Microsoft Word, version 1.0. My new fangled computer with Word was a lot better than the typewriter I had before but it was far from perfect.

Then later they came out with version two, three, four etc. Each had improvements until we now have a program that does everything but polish your shoes. I still may not call the latest version perfect but I have to admit it does a lot more than version 1.0, and if I read the manual or Google information I can figure out how to get it to do any task within its parameters.

We have to look at the evolution of currency with the same perspective as a computer program. It may have had kind of a rough start and some versions are not as good as others, but overall we are progressing toward something that is stable and will serve us well.

Ancient Greece and Babylon had money version 1.0. Rome had version 2.0. After the fall of Rome we had version 2.5. The Tally stick was version 3.0. Creating fractional banking based on gold was Version 4.0. We experimented with several fiat systems and paper money in version 5.0 and then moved back to a gold standard in version 6.0. Finally with the creation of the Federal Reserve under gold we have version 7.0. Then when Nixon dropped the gold standard completely we moved to version 8.0 – and that is where we remain to this day.

Now some people may look at this progression and say that they think that some of these steps were not progress but this is also the case with various versions of computer programs. My favorite version of Microsoft Word is version 5 from 1992. Even so, I keep updating to newer versions to keep up and do find some things in them which are useful while others are annoying and distracting.

Unfortunately, we have not yet arrived at the equivalent of Word 5 as far as money goes, but improvements have been made that the public likes and I am sure will be retained and refined. Most of these are centered around the idea of convenience.

The impetus for the beginning of money itself was for convenience sake. Instead of trading cows for wheat it became much more convenient to trade coins. Later, paper became accepted because it was much more convenient to exchange a piece of paper than 20 pounds of silver.

The next stage in convenience is electronic money. It is much easier to buy something from a shop 1000 miles away with some type of electronic transfer than to send cash, check or money order.

Now some are experimenting with various forms of virtual money. Time will tell if this adds to convenience.

The point is this. If an innovation adds to convenience, whether it is an improvement in a car, a washing machine, a computer or money, then that improvement is here to stay.

Yes it is true there are always exceptions. Maybe the Amish would rather have a horse than a car and a pencil rather than a computer, but as a whole civilization will embrace that which adds convenience and will refuse to go backwards.

There are those who want to go back to coined money and gold backed currency but the inconvenience of doing this will make the crucial support for going backwards well nigh impossible. We might as well try and talk people into going back to the horse and buggy to save gas.

People will resist inconvenience like the plague and though this quality in the human race is an irritant to some it is overall a benevolent force that impels progress.

The results of new conveniences are rarely 100% positive. Perhaps the greatest convenience of our age is the automobile but this comes with the drawback of causing over 40,000 deaths per year in the United States alone. Does this make us want to return to the horse and buggy? Never.

How about air travel? The time savings is very convenient. But do stories of hijacks, terrorism and plane crashes discourage us? No. Convenience still prevails. Convenience always prevails.

Civilization has been shown that the transfer of money can be much more convenient than the exchanging of hard money of the old days and will demand that convenience continue or be expanded in any new version of the money system.

Has any new version of Microsoft Word dropped the spell checker? No. That will never go and neither will the ease of transferring money at the click of a button as long as there are buttons to click.

Now we arrive at the prime criteria for any new and successful money system on the horizon. It must not drop, but continue (and improve if possible) the convenience achieved with current money. One can argue the benefits of revisions of other aspects of the system but history tells us that the people do not want to drop any convenience even if there is significant risk. Any developer of a new money system needs to accept the conveniences established and work with them, not against them – include them, not exclude.

To create a new and improved money system we need to keep the conveniences attained and add two improvements.

Improvement One
Instead of giving the Federal Reserve power to create money and loan it to us at interest the government needs to take back the power to create its own debt free money given to it by the Constitution.

This money would have several advantages over the Greenback money created by Abraham Lincoln. The Greenbacks did not have universal legal acceptance. The banks were exempted from receiving them as payment for their huge government loans. They also could not be used for customs duties and imports. All these had to be paid in gold.

An advantage we have now over Honest Abe is the dollar is the reserve currency of the world and we now have the opportunity to create a universal Greenback that could have worldwide acceptance giving it power to revitalize not only the economy of the United States but be a benefit to the world.

The second advantage is our nation is not involved in a life and death struggle like the Civil War when the Greenback was created. During any such great crises the stability of currency always suffers and is sometimes destroyed. For the first time we have an opportunity to create a modern Greenback when we are not in a war of survival. Because of worldwide economic chaos the times are far from optimal but the situation just pushes the need for a solution to the forefront more than ever.

Improvement Two
The solution to a stable Greenback money system is a simple one. The State must not add more money to the system than will be supported by the value or increase in value of the goods and services in circulation. The simple rule is this. If there is too much money of any kind (including gold and silver) is added to circulation then we will have inflation. If there is too little money then we will have deflation, which is a much greater problem.

For instance, the housing crisis, which started in 2006 deflated the value of homes creating a domino effect leading to all kinds of economic woes. Imagine how bad things would have been if deflation was more universal.

So, to create stable Greenback money all we have to do each year is calculate the amount of money that needs to be released and added to the system. The next year we assess a new amount and repeat the process.

That’s a pretty simple process isn’t it? It is so simple a formula for proceeding could be programmed into the cheapest computer. The problem with making a new Greenback work then deals not with the problem of how much money to issue, but as always with the people who have the power to create it in the first place.

The solution to stable money is ever so simple a child can understand it. The State should not create or borrow too much money. The hard part is keeping these guys in line. Once a person gets a taste of spending money that seems to have an unlimited source, an addiction seems to take hold and nothing, even impending doom, seems to hold some of them back. These guys would continue to run up a tab on the Titanic even as it begins its descent into the great deep.

Are we doomed forever to have money systems that are held hostage to such human weakness?

I do not think so. For every problem there is a solution. Let us look at some.

Read This entire series. Here are the links.

Copyright 2011 by J J Dewey

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A Time for All Things

This entry is part 27 of 31 in the series 2011B

Objection 3
You want to create a fiat money system under government control with central planning. Money should be created by private enterprise for the private sector is always better and more efficient than government bungling.

Not many fiat systems have been managed strictly by government. The Federal Reserve is a private system loosely overseen by Congress. The Reichsbank that was responsible for the hyperinflation in Germany was privately managed similar to our Federal Reserve. During the last year where hyperinflation went to Biblical proportions money was completely privatized and private issuers were competing to see who could print the most money.

Private goldsmiths ripped people off and deceived them for centuries by creating fiat money backed by gold that didn’t exist.

As far as being stewards over our money, private enterprise has not proven itself to be reliable whereas the best examples of good currency in history has been that which is managed by the State.

I share the view of our Founding Fathers that as a whole the fewer powers the government has, the better, and the power of the individual should be honored when possible.

But even though these men were rebels against Big Brother they did acquiesce and give the government power over two important categories. These are (1) defense and (2) the creation of money.

So why did they select these two departments to be under government control?

Defense should be obvious. Suppose we left defense to private hands and then had to fight World War II. There’s no way we could have mobilized a few ragtime private militias into a unified Army, Navy and Air Force to defeat Hitler without government involvement. Even though government is much less efficient than private enterprise it has the advantage of being able to create a unified force when needed.

The same goes for creating the nuclear bomb or going to the moon. These could never been accomplished in such a short time frame by leaving it up to private enterprise. A government has the power of mobilization and unification of purpose that the diverse private sector cannot achieve.

As far as money goes, again its unifying power is needed to create a usable currency. The central government in the United States has always regulated the value of money as specified in the Constitution but there have been times that private banks have issued notes and when many such banks have done this numerous problems resulted. In 1860 there were over 1600 private banks issuing 7000 different types of notes. If you were in a different area or state than where the note was issued you had to exchange it at a discount. The discount was at least 10% and sometimes as high as 40% if the reputation of the issuer was not solid.

Many economic fundamentalists want us to have a completely private money system but few have stopped to think of what would happen if such a thing were in place. Perhaps it would be useful to paint a picture.

Apple decides to issue its own money backed by its products. The value is determined by the iPad, which equals 100 units or Apple dollars. Even though Apple has a great reputation less than half the retailers accept Apple dollars. Apple retail stores accept them at face value but others do not. Walmart, which also has its own currency, accepts them at a 10% discount and Apple in return discounts Walmart currency 10%

A number of retailers and manufacturers follow Apple’s lead and create their own private money. All of them only have a full redemption on their own products and are discounted everywhere else – some up to 40%.

Hundreds of private banks create their own money of many different variations. Some create 100% fiat currency and others have a currency backed by a 10% supply of gold or silver and others are 100% backed by gold or silver. Others still are backed by Apple dollars or a combination of dollars. A couple banks have their money backed by an average value of 20 different types of dollars in circulation. Still others have their money backed by oil, wheat, pork bellies or other commodities.

At first, a lot of customers gravitated to the 100% gold backed dollars. This seemed to be the best bet until one day China dumped 3000 metric tons of gold on the market to pay for oil leases. Within three days the price of gold dropped 35%. This caused a selling frenzy and many traded their gold dollars for Apple and Walmart dollars. This added to the panic and the value of gold dollars dropped to 50% of their previous value.

China then saw an opportunity and bought up 4000 metric tons of gold at a 50% discount and within another three days the price of gold tripled. This had several negative effects. No one felt safe putting their money anywhere and China decided to place their gold profits in building up their military.

In addition to large companies and banks creating money smaller companies and even private individuals started doing it.

There was one guy in particular that seemed very successful and was trusted but within a couple years his whole system fell apart. He was compared to Bernie Madoff because he sold all the gold that backed his money and when it was discovered that customers could not redeem their money for gold all his currency value fell to nothing.

This scam rocked all private money systems and the value of many of them fell 10% overnight.

After existing ten years on an all private money system there were literally thousands of entities attempting to circulate thousands of different bills all having different values.

Machines looking like ATM’s started springing up all over the country. If you punched in your PIN number you could exchange one currency for another but the exchange rate was high because the fraud rate was high. The exchange rate was between 10-20%. A lot of people who were paid in one form of dollar really grumbled when they had to lose 10% in an exchange.

Small businesses were linked to these devices. If you went to a flower shop to buy a dozen roses they may list three currencies they would accept. All others would have to be converted through the ATM machine.

On the internet, PayPal did not issue their own money but had a system where all other currencies were converted into PayPal dollars. Apple and Walmart dollars were the most stable so ten of their dollars were converted into nine from Paypal. Many were surprised that gold-backed dollars did not have the highest exchange rate, but since the price of gold was not set by the government it could go up or down in value 20% within a year and the Chinese made it fluctuate 100% in a couple days. To protect themselves from fluctuations PayPal only gave eight PayPal dollars for ten gold ones. Out of the thousands of different currencies PayPal only accepted the best twenty. All other currencies had to be converted to one of these twenty if they wanted to use PayPal dollars at all.

A research company did a study on the average loss that a worker suffered from having to deal with the exchanges necessary to spend his paycheck on the necessities of life. It turned out that the average family lost about 14% of their income through their various exchanges.

Now when one thinks of this situation in the light of reason this does sound like it would be a fairly probable outcome of an all-private system.

I am a big supporter of private enterprise and believe that in the vast majority of circumstances the private sector can trump the public bureaucracy any time. But major problems occur when a person becomes black and white in his view and needs to consider the wisdom of Solomon who said:

“To every thing there is a season, and a time to every purpose under the heaven.” Eccl3:1

While it is true that private enterprise is very innovative and can be very efficient, there is a time to use the central authority of the government and the Founding Fathers wisely saw that defense and money were two categories that the power of government could be used beneficially.

Isn’t it so much more convenient to have one universal currency that we can all use instead of the cacophony that was described in the above example?

Does this mean we have the best possible money system now?

No. It does not. We can create a much better one as we shall see.

Read This entire series. Here are the links.

Copyright 2011 by J J Dewey

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Examining Fiat Money

This entry is part 24 of 31 in the series 2011B

Some may wonder why I have spent so much time dealing with the gold standard and fiat money. The reason is quite simple.

There are two kinds of people in the world as far as economic theory goes. Those who think about how it works and what is the best approach and those who do not, but just blindly accept the crumbs that fall from the table wherever they land.

Unfortunately, the majority of Americans are in the second category. Any economic influence on their voting is very superficial. A meaningless sound bite can influence them if it tugs at their emotional nature. If they lose their job, suffer a pay cut, lose a benefit, hear of a fat cat getting exorbitant pay, see a homeless person or are merely told a certain politician is out to take what belongs to them they will vote accordingly without doing any research into the cause of their grievance.

The first category (the thinkers) is concerned about the economy and at least do a little reading and thinking about how it works and how it could be improved.

A large portion of the students and thinkers of economic theory and how money works are believers in the gold standard and are strongly against most fiat money. Many of these are adherents to the Austrian School of economics which ironically has its strongest supporters here in the United States. They cannot stand even the mentioning of Keynes name and love the words of Mises, Hayek, Rothbard, Ron Paul and others.

Most of these are good people of above average intelligence that have not considered the idea that there are several types of fiat money and it is possible to create a fiat system that brings as much stability as gold and even more prosperity.

Any workable money system has diminished chances of implementation when many thinking people are in opposition to it and it gains added power when a high percentage support it.

I have thus spent considerable time explaining the disadvantages of gold as well as presenting fiat systems of the past which have worked which tells us that we can put together one for the future that can serve us well. Actually this is an understatement. I believe we can put together a system that will bring prosperity that the world has never seen before.

In contemplating this I reflect back to a statement that Bobby Kennedy used when running for President.

“Many people see things as they are and ask why. I dream of things that never were and ask, why not?”

Our world has never had a perfect or near perfect money system, but that does not mean that we have to repeat the mistakes of the past, or even repeat the best of the past. We have the intelligence and the will to create anew a system that is better than anything that has existed before. There is no area of life where a breakthrough advantage is needed more than in our currency system. It hasn’t improved much in over 3000 years so it is about time for progress to be made.

Creating a better way was the attitude of the Founding Fathers when they founded this Republic and its Constitution. They didn’t just take the best of the past and recreate it. Instead they took the best working elements of past government and added new elements to create a government that was “a dream of things that never were.”

I don’t expect a lot of gold standard people to accept my writings right away but a few will at first and more will follow. If these ideas circulate among them they will be forced to discuss them logically without first just dismissing them as Keynesian or doomsday economics. In addition I hoped to reach many who do not have set opinions who can see the reasoning in that which I present.

First let us examine some of the problems many have with considering the use of fiat money.

Objection 1: Fiat money is not backed up by anything. It is created out of thin air. Real money is composed of metallic coins or is paper backed up by a commodity, preferably gold or silver.

Answer: This conclusion is not exactly true. If one only looks on the surface it may seem that fiat money is created out of thin air with no backing but such is not the case. If the dollar were really backed by nothing then it would be worth exactly nothing. This is obviously not the case because we purchase groceries, clothing, pay mortgages, buy cars and many other things with fiat money.

Our money obviously has value. Where does this value come from?

The most common answer is faith – pure faith. If one thinks about this answer he can soon conclude that this is far from the correct answer. Let me illustrate. If we find a person with no faith in the dollar and send him to the store to buy some bread does his zero faith take away value from the money so he cannot buy the bread? No. Even though he has no faith in the money the value is not diminished. His money will purchase just as much as the guy with lots of faith in the dollar.

If faith does not create the value then what does? Aristotle brings us closer to the answer. He stated:
“…Money exists not by nature but by law….There must then be a unit, and that fixed by agreement.”
Aristotle (Ethics, 1133)

This gets us closer to the truth. Money is created by law through a fixed agreement. This seems more reasonable than faith alone but it doesn’t give the full story. It doesn’t explain why fiat or any other kind of money has value.

If we could just create money by passing laws and making agreements then let us all agree that everyone will receive a million dollars in money each year and there will be no inflation.

We all know that would not work, don’t we?

Faith, law and agreements are all ingredients that help create the power of money, but what is the core principle? What gives a fiat dollar its purchasing power?

The answer lies in this question? What gives a gold backed dollar its purchasing power?

It’s gold you say? But what produced the gold?

It was human labor.

Money has also been backed by many other commodities such as houses, wheat, tobacco and Indian Wampum. What produced these products?

Adam Smith explains:
“Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.

Labour … is the only universal, as well as the only accurate, measure of value, or the only standard by which we can compare the values of different commodities, at all times, and at all places … By the quantities of labour, we can, with the greatest accuracy, estimate it, both from century to century, and from year to year.”

Labour was the first price, the original purchase – money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.
Adam Smith The Wealth of Nations, Book I, Chapter5

Benjamin Franklin agrees with this: “The riches of a country are to be valued by the quantity of labor its inhabitants are able to purchase, and not by the quantity of gold and silver they possess.

“All wealth is the product of labor.”
John Locke

“Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”
Abraham Lincoln

Thou, O God, dost sell us all good things at the price of labor.
Leonardo da Vinci

The bottom line is that money has value not because of any commodity, faith or law alone but because it is backed by labor and that which labor produces.

If I give my neighbor my word that I will mow his lawn tomorrow then that is as good as giving him the $20 (or more) he would have to pay a mowing service. It is also as good as $20 in gold, silver or wheat. I created this value seemingly out of thin air by the fiat of my word alone; but was the value created from nothing?

Not exactly. My word in this matter only has value because my labor has value. Labor does not come out of thin air but is energy guided by constructive intelligence.

Conclusion: Fiat money and commodity money both trace back their value to one source: human labor.

Copyright 2011 by J J Dewey

Read This entire series. Here are the links.

Copyright 2011 by J J Dewey

Copyright by J J Dewey

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Fiat Money of the Past, Part 1

This entry is part 15 of 31 in the series 2011B

Successful No interest Fiat Money of the Past

Before we explore fiat money more deeply let us give a definition of it to avoid confusion – as, at present, the term is used in a variety of ways.
The word “fiat” comes from the Latin, which literally means, “let it be done.” The common modern definition is expressed by as: “an authoritative decree, sanction, or order.”
Fiat money is often defined as unbacked money created by government decree or sanction but technically this extends to any money that is not fully backed by a commodity. So for the sake of clarification and purpose of this treatise we’ll define it as follows.

“Fiat money is any money, paper, coin, substance or digital creation which is not fully backed by a commodity. It exists only because of a decree or sanction made with enough authority to cause the people to accept it as money.”

That said we must now ask if it is possible to create a feasible fiat money system as illustrated in the parable. Many fundamentalists think not and feel that every possible form of fiat money is doomed to failure.

And why is this?

Basically because they look at the surface of a few examples of failed money in the past and lump all fiat money into one category. They pretty much call it the god-awful bad category. This is basically where their analysis begins and ends.

Let us look below the surface and first ask ourselves why fiat money has received such bad press.

Here are three reasons various economies have had problems with fiat money in the past and present.

(1) Too much money is printed or created and placed into circulation. If there is more money in circulation than the value of goods and services needed there will be inflation. If there is a shortage of money there will be deflation. If the right amount of money is in circulation the prices will be stable.

This runs contrary to the party line of some thinkers who believe that all fiat money is inflationary. It is not. It is only inflationary when too much money is added to circulation. For instance, during the Great Depression we had a contraction of the fractional fiat money in circulation and prices went down, not up.

(2) The second problem is the government borrows the fiat money from banks and burdens its taxpayers with paying the accumulating interest rather than creating interest free money itself.

(3) Because the money is easily created the temptation of governments to overspend by borrowing too much money is great. This straps their people with not only high interest payments but a large amount of debt.

These problems may seem significant enough to make us think we should ditch fiat money and go with a gold standard until we look at the problems of maintaining such a gold standard. Earlier we covered the gold standard and we discovered even more problems there.

Some simply state that fiat money is bad because it has always failed in the past. They count as failure every money system that is no longer with us but overlook the fact that money systems have often changed in history, not because they failed but because a new king or power comes to the throne. War and conquest has also greatly altered money systems of the past. Sometimes a good money system has been replaced with a bad one. If a new king saw the system benefitted the people more than himself then the temptation was to install one that was unstable but good for the elite.

Gold and silver backed currencies (as has been previously illustrated) have their own set of problems and one could also argue that they have all failed because they no longer exist. There is not one country in the entire world that has a gold or silver backed currency. The last one was Switzerland which backed its money with 40% gold reserves but in the year 2000 they had a referendum and the people voted to go off it. Now they merely have gold reserves for security purposes just as we do.

One might ask that if gold and silver backed currencies are so great then why has every nation on the planet abandoned them? If they are so stable and bring prosperity (as advocates claim) then why hasn’t one nation seen the light?

With all things considered a growing number of thinkers are considering that interest free fiat money represents the best hope for a permanent money system that allows for unlimited expansion of prosperity. To create this, a definite change from the one in use today is required. That is, instead of our government giving away its power to create money to private banks it will instead reserve that power to itself. It will then be able to create money for the people’s welfare, which will be interest free and debt free.

The Federal Reserve notes of today are a promise to pay. The new notes will not contain any promise to pay but will be real constitutional money.

Has there ever been any such debt and interest free fiat money in the past that we can examine to see how it worked?

Fortunately, the answer is yes. Let us look at a few.


For the first example let’s look way back to the foundation of the ancient Spartan way of life originated by its king Lycurgus around 800 BC. Because his story is almost larger than life some historians believe he was a fabled character but this is not likely as Plutarch wrote in detail, about him quoting historians Eratosthenes, Apollodorus, Timæus, and Xenophon as sources. No less than Plato and Aristotle also wrote of him.

There is no dispute though that an ancient powerful lawgiver created the legendary Spartan way of life along with a most unusual fiat interest free money system.

Plutarch presents Lycurgus as a dedicated spiritual leader who sought not for power but to elevate the minds and hearts of the people in a system of discipline and equality. He believed that riches, especially gold and silver, were a major detriment to the spirit. Plutarch says he banned “ownership of any gold or silver, and to allow only money made of iron. The iron coins of Sparta were dipped in vinegar when red hot to make the metal brittle and worthless. Merchants laughed at this money because it had no intrinsic value, so imports of luxuries stopped. Robbery and bribery vanished from Sparta instantly.

“All useless occupations were banned in Sparta. This law was hardly necessary, because along with gold and silver, all of the evil creatures that accompany them went away too. Who would come to practice fraud, fortune-telling, prostitution, jewelry, or the other trades of luxury and larceny, in a country where there was no gold and silver money? So luxury, deprived little by little of the fuel that fed it, gradually died out. The rich had no advantage over the poor because wealth was useless.”

The only money left in Sparta were iron discs called Pelanors. They had no intrinsic value as did gold and silver for the vinegar made them useless for anything except fiat money. Lycurgus set their value by fiat and this was their only money for centuries. During this period the Spartan city-state and way of life flourished.

Plutarch gives his reason for the end of this money system:

“For five hundred years, Sparta kept the laws of Lycurgus and was the strongest and most famous city in Greece. But eventually gold and silver were allowed in, and along with them came all of the evils spawned by the love of money. Lysander must take the blame, because he brought home rich spoils from the wars. Although not corrupt himself, Lysander infected Sparta with greed and luxury, and thus subverted the laws of Lycurgus.”

From Plutarch’s Lives of Noble Grecians and Romans, Lycurgus chapter


When Numa Pompilius came to power as the second king of Rome around 715 BC he contemplated a major problem that lay before him. To facilitate prosperity for his people he needed money and lots of it. The problem was that the authorized money of the world was composed of gold and silver.
Why was this a problem?

Because most of the gold and silver was in the private hands of the various religious temple cults or eastern religions and merchants. These private interests had power over the money and if he wanted an increase in the money supply he had to play the beggar and humbly strike his best bargain while placing Rome as collateral.

What do do?

Numa formulated an ingenious plan. He would decree that gold and silver would merely be commodities in his kingdom. They could be traded as commodities as unmarked coins or bars but the real money would be bronze, an alloy composed of mostly copper which was abundantly available.

Numa monetized bronze and the citizens used this internally for money or nomisma. In early Rome they called it nummi. Because his name was so close to “nummi,” some historians think Numa was his adopted name rather than given one.

Gold and silver was used internally for jewelry, medallions, ornaments etc and for trade with other governments. Since gold and silver were used for money outside Rome their reserves were used for necessary trade but not for internal money.

The brass money took on various shapes at first but eventually evolved into coins bearing an image. As long as Bronze was the designated money gold and silver coins and bars were blank and merely traded by weight with foreign interests or for practical internal use.

From the time of Numa the nummi had more monetary value than the commodity value of the bronze and the fiat value increased over time until the time of the second Punic war (218-202 BC) a one ounce bronze coin was worth 30 ounces of the commodity. In other words, over 96% of its value was fiat rather than intrinsic.

No one complained of being cheated during this fiat money system because the money was based on law and not the product of debasement as happened later in the Roman Empire. When the people expected a certain weight and percentage of gold or silver and the size or content was reduced then the people felt cheated and rejected the money. But because the bronze money was based on the fiat principle from the beginning and the value was established by law the people accepted it from beginning to the end of its dominance.

After war depleted their resources and plunder increased Rome’s supply of gold and silver, silver, and later gold, gained a legal status as money and by 146 BC Rome ceased producing bronze money.

So we had a period of over 500 years where bronze fiat money financed the rise of the longest lasting world power in recorded history.

During this period of time the people had their greatest freedom and were enterprising as they created a great nation state. Then when silver and gold became money hundreds of thousands of slaves were added to the kingdom – many of them mining for gold and silver to increase the money supply.

Then came the money changers which included the likes of which Jesus chased out of the temple.

The ratio of the value of gold to silver in Rome was usually set at 12:1, but in India and Asia it was set around 6:1 or 7:1. This meant that a money changer could take six pounds of silver to India and trade it for a full pound of gold. Then he could return home and trade that pound of gold for 12 pounds of silver and double his money. Then by repeating the process over and over he could become rich without producing anything.

Over time this created instability in the gold/silver money systems in both the East and West.

Contrary to the belief of many inflation was a problem on the gold/silver standard of Rome. Zarlinga tells us that “soldiers in the 2nd century BC got 110-125 denarii per year. A hundred years later, their pay doubled to 225; after another hundred years to 300; and by the 3rd century AD had increased to probably 600 denarii per year.”

Up to about 250 AD the silver content of coins remained fairly consistent but then started dropping. By 270 AD it had dropped to 4% of its original value. At this low point Diocletion instituted wage and price controls in an attempt to force people on pain of death to accept an inflationary currency. In the process many businesses were destroyed.

In 312 AD Constantine began minting the pure gold solidus, which gained the reputation of being the longest circulating coin in history – over 700 continuous years. This period was not immune to inflation as during periods of plunder there were excessive amounts of gold coins added to the system. Some think this contributed to the fall of Rome. The solidus was in circulation beyond 1000 AD long after the fall of Rome during our darkest age. It weighed 4.5 grams and was never debased and desired and accepted by all.

This gold standard did little to save the empire during the time of Rome’s greatest decline. It also did nothing to prevent a descent into the period we call the Dark Ages. It is interesting that during these two periods the world had the purest most consistent gold standard in the history of the world.

BUT… during the period of Rome’s greatest progress and individual freedom they were fueled with fiat currency.

Data on Roman money taken from
Lost Science of Money By Stephen Zarlenga

History of Monetary Systems by Alexander Del Mar, 1895

“The Imperial Foundations”. Coins in history : a survey of coinage from the reform of Diocletian to the Latin Monetary Union. Porteous, John (1969)

A History of Money by Glyn Davies, 1994

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Copyright 2011 by J J Dewey

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To Fiat or Not Fiat

This entry is part 13 of 31 in the series 2011B

Okay, says the critic, gold and silver money (or commodity based money) is not perfect but it is a lot better than fiat money. Your fanciful parable sounds good but in actual reality fiat money has always led to disaster. Just look at the current debacle with our economy, which is based on fiat money. Do we want to create just another version of what we have now? I don’t think so.

The problem with this point of view is one has to accept a number of misconceptions to embrace it. Among them are:

(1) There were halcyon days in the past we can point to when there was no fiat money where the economy was stable.

The Reality Is: In all the history of the United States where any semblance of civilization has existed there has been fiat money or thin air money. This also applies to most of the history of the civilized world.

What is a good example of a period where there was no fiat money?

The darkest of the dark ages – not too good of an example.

(2) All fiat money is the same and equally bad, or nearly so.

The Reality Is: There is a huge difference in different types of fiat money and they all produce different effects.

There are two main divisions of fiat money which are:

(A) Money created by private banks or institutions and loaned out at interest. Most of our national debt is created this way. The Federal Reserve creates the money by fiat and loans it to the government at interest.

(B) Interest free money created by the government.

When one considers that we are paying over $450 billion just on interest per year then the advantage of the second type become blatantly obvious.

The last time we have created the second type of fiat money was in the creation of the Greenbacks by Lincoln during the Civil War. Since then all fiat money fits in the first category.

In the past century the banks have had a monopoly on fiat money, but there have been numerous examples in history where interest free fiat money has been used quite successfully. We’ll be elaborating on these.

In addition to the four main categories there are two subcategories of fiat money.

The first category is pure fiat money decreed to be legal tender by law but neither tied to or backed up by any commodity.

Since Nixon took us off any semblance of the gold standard in 1972 this is the type of money the United States and most of the world has had

The second type is money that has its value set by gold or some other commodity, but is not redeemable by anyone. The commodity such as gold merely determines the value of various bills. Ancient China used this method.

The third is where the value of the money is set by a commodity and can be redeemed by other banks institutions and nations, but not by individuals. This was the type of money the United States used from 1933-1972.

The fourth is usually called fractional banking rather than fiat money creation. This is where more than the value of the commodity, usually gold, is placed in circulation. The money can be redeemed in gold by all including private individuals. The amount of money created from a dollar’s worth of gold may range from $4.00 – $10.00, but many unscrupulous banks used a higher ratio – sometimes going up to 1000 to 1.

If a bank creates ten dollars for each dollar’s worth of gold then $9.00 of that is only backed by thin air and it can be argued that this money is as fiat as money can be. If all the banks’ customers come to redeem their money for gold then only the first ten percent would receive anything. 90% would get nothing.

During the entire history of the United States from colonial times until the present there has always been some type of fiat (or thin air) money in circulation. Those who advocate that we return to the past where we had a pure gold or silver standard just do not know their history. We have never had such a standard. For the purest possible gold standard we would have to go way back to the dark ages.

There are a number of views on the ideal money but what the idealist rarely admits, when defending his view, is there is a common flaw that has adversely affected money of every type throughout history. That flaw should be obvious to all and needs to be encapsulated.

Money is power and power corrupts. Unless checks and balances are put into place a large percentage of those who are in charge of the money will abuse their power for selfish gain – even at the expense and suffering of their customers and their nation.

This problem, an offshoot of human weakness, threatens all money whether it be fiat or gold backed, whether it be private or public, whether the basic system is sound or unsound.

Are we doomed then to be forever, manipulated by unscrupulous money managers? Should we just throw our hands up and give up?

Of course not.

What shall we do then?

The first thing is to create the soundest most beneficial money system. This is essential, for without a sound system the economy will stagnate even with honest people in charge.

The second is to not place blind trust in any central, regional or local authority who has power over the money supply or storage. The power to create or borrow money that places taxpayers at risk must be held in check by the people or some other means.

If these two points are realized then a sound money can be had by all and there is no reason that an optimum system will not last as long as the nation does. In fact a good money system will strengthen the nation and extend its life.

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Copyright 2011 by J J Dewey

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The Gold Standard, Part 6

This entry is part 50 of 50 in the series 2011A

One thing I have not seen addressed by gold standard advocates is all the repercussions it would have on modern living if we went back on it in one form or another.

They look back at the supposed halcyon good old days and pick the best parts of historical periods as good things to return to, but often overlooked is the fact that many ingredients of modern civilization just did not exist back then.

In the days of the gold standard we lived pretty much like the Amish as far as technology goes.  Now the Amish have some positive ingredients to their way of life, but how many of us want to live the way they do with horse and buggies and no electricity or Internet?  If we were only prepared for the Amish ingredients of living then it would be tough living in New York City.

Even so, any monetary standard we have today must accommodate modern day living standards and conveniences unless we are planning to join the Amish standard of living.

To see the point here let us examine different gold standard plans and see if they could fit in modern civilization.

Plan One
Some are proposing a private money system based on gold or other metals or commodities. Many want a gold only standard to eliminate the past problems associated with bimetallism. They want no fiat money whatsoever and every dollar to represent a dollar’s worth of pure gold.

Under this plan anyone could coin or issue their own money if they had some gold.  It seems pretty simple.  If you want to buy something from a merchant you just give him some gold.  Now the problem with this is many purchases are for small amounts.  If you wanted to buy $5.00 worth of goods you would only need to exchange a 280th of an ounce of gold, about the size of a grain of sand.

Since this is very impractical they recommend private warehousing of the metal.  The warehouse would work something like a bank except they do not issue fiat money nor do they make loans secured by your gold deposits.  They would make money by charging you for storing your physical gold and providing warehouse receipts that you basically use as paper money secured by gold.  You can use these receipts like a checking account and thus you can write a $5.00 check to purchase a small amount of merchandise. Another idea is to set up gold accounts on the Internet that work something like Paypal.

I haven’t seen a plan for using small change.  Maybe they would suggest private companies create their own coins of cooper or silver for this purpose.   The trouble with this is several hundred private issuers of diverse coins could create confusion, especially for elderly people who may be easily confused by the complexity of the many types of coins.

So, if we put the coinage problem on the table would the use of either gold coins/bullion or warehouse receipts work in today’s world?

First, let us look at the practicality of using pure gold coins or bullion.

In the days that the U.S. coined gold we had four denominations.  There was the Quarter Eagle worth $2.50, the Half Eagle at $5.00, the Eagle at $10.00 and the Double Eagle, containing just over one ounce of gold, valued at $20.00.

As of this writing with the value of an ounce of gold at over $1400 the face value would be 70 times these amounts so the $2.50 coin would be valued at $175 and the one ounce coin would be $1400.

If we used actual gold coins as a major source of exchange we would have the same problems that we did in our early history, but more so.  Here are some of them.

(1) Theft.  Anyone known to be carrying around any amount of gold on his person was in danger of being attacked and robbed and those known to have a stash in their homes were in danger of being burglarized. Even putting it in a bank wasn’t safe for there was no deposit insurance in the old days and a bank robber could take your life savings. Most everyone who carried gold on his person or stored it in his home was armed and prepared to defend himself – even in England and Europe.

If we went back to this gold standard today and most people carried gold on their person or stored it would they be any safer?  With the crime rate as high as it is the danger would probably be much more.  Currently, with the use of credit cards and banks the average person only needs a few dollars on his person.  Imagine the danger if a large percentage started carrying around thousands of dollars worth of gold so they could transact business. It doesn’t take a university study to conclude that would be a problem waiting to explode.

The modern banking world is far from perfect, but one of the benefits it has given us is a reduction in danger from personal robbery due to carrying or storing large amounts of money.

Imagine the danger today if a couple thugs caught wind that some little old lady had $50,000 worth of gold stored in her basement?  Her life would be in danger whether the story was true or not.

(2) Inconvenience. If you didn’t trust a warehouse to store your gold you would be forced to store it yourself and carry it with you for shopping. As we said, making the correct change would be a nightmare and buying something from the Internet would be almost impossible.  You’d have to mail a piece of gold to pay for an item.  This is not only time consuming but you’d have to pay for insurance with each order just in case your gold got lost I the mail.

(3) Wear & tear on the coins.  When gold coins were in use they often went through a lot of wear over time.  This caused some coins to lose as much as 10% of the gold just through the friction of use. Many merchants would not accept a worn coin at face value so they weighed the coin and would value the coin according to how much gold remained.

This was a huge inconvenience in the past which would be amplified today with our faster pace of living.

(4) Coin clipping. In the era of gold coins thieves figured out ingenious ways to take gold out of coins.  Sometimes they would shave gold filings from the outside of the coin and other times they would hollow out part of it and fill it in with lead and plate over the top.  Still others would create forgeries out of lead and plate them with gold.

Those who were fooled by these shenanigans were usually the ones who could least afford to lose their money.

Most gold standard advocates want some kind of warehouse system to store gold and make transactions easier.  Actually, we do not have to wait for a gold standard to be enacted for a warehousing system is evolving at the present time.

There are companies which will sell you gold (and collect a commission) or other precious metals and store them for you for a yearly fee.  The online gold services can pay with gold credits of most any denomination to those who are willing to accept. Gold used as online money is called Digital Gold Currency, or DGC.

Currently all warehoused gold is paid for with regular currency, but if we switched to a pure gold standard then there would be no fiat money with which to purchase warehoused gold.  One would just have to deliver his gold physically to the warehouse.  It doesn’t make sense to buy gold with gold.

The warehouses today make a good portion of their money through commissions of customers buying and selling gold.  This helps them keep the prices for their services low.  But if we were on a pure gold standard and there were no sales of gold for fiat money, and hence no commissions, then the cost of the services would go up.

Today’s banks have the advantage of being able to create money out of thin air when a deposit is made and then loan that money out and collect interest.  Despite this tremendous advantage many still go out of business.

A company that warehouses gold has the disadvantage of relying on charging for services to make money.  They would not be allowed to loan money on the gold reserves so this prime source of income must be made up with other charges if the company is to be profitable.

If a pure gold or metallic standard were implemented through privatization then some type of warehousing would be essential.  By the use of the web transactions could be as smooth and seamless as credit card purchases… IF the warehouser is a trusted entity and its transactions are accepted by the public at large as is VISA and MasterCard today.

Would there be disadvantages to a warehouse system on a pure gold standard?  Here are a few.

(1) Since their profit is limited to storage and transaction fees they are likely to be fairly high – especially if they do not make money through gold sales.

(2) Currently there is no insurance on any type of gold transaction and the government would be reluctant to create an insurance program.  Why?  Currently, if they need funds for back up insurance claims they can borrow or print it.  If they had to back up insurance claims in pure gold such insurance may be an impossibility.

If someone warehouses gold today, has their identity stolen and their gold spent then it is just lost.  This may also be a problem on a pure gold standard.

(3) The possibility of fraud or bankruptcy. A few years ago in my hometown of Boise one particular company became very respected and trusted as a gold dealer. Customers trusted the owner to warehouse the gold they purchased. Then the guy had a bright idea.  He saw that there were some great investments available so he just “borrowed” the gold assets and invested them in some sure deals.

Of course his gambles eventually failed, his customers lost most of their money and were about ready to lynch the guy.  Fortunately for him he only went to jail.

Among the companies that warehouse gold today most are honest but some have committed fraud or went out of business due to poor management.  If we have a pure gold standard this problem would continue to exist.

(4) Limited accessibility.  One of the main reasons that people buy gold today is to protect themselves if there should be world chaos or an economic breakdown.  If all your gold is in some warehouse thousands of miles away – could you access it if there was some type of collapse?

One of the most reputable companies today that warehouses gold is from New Jersey. Many do not realize that their gold is stored in vaults in Switzerland.  Now this works fine in normal times but suppose we had a breakdown that made these vaults inaccessible.  In this case the guy who stored physical gold under his floorboard has usable gold and the guy who warehoused it is out of luck.

While I strongly believe we should be free to coin our own legal money and exchange or warehouse it as seems fit, there are disadvantages to attempting to return to a government decreed pure gold or metallic standard as our only money in this day.

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Copyright 2011 by J J Dewey

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The Gold Standard, Part 5

This entry is part 40 of 50 in the series 2011A

One of the main reasons gold standard advocates want us to return to gold as a backing for money is its stability.  Gold has always been a stable valuable metal, they say.  Some go so far as to claim that gold has always kept its same value over the ages.  For instance, some claim an ounce of gold bought a new suit of clothes in the days of the Roman Empire, in the 1920s and even today.

Overlooked by them is the variables in the cost of clothes.  As of this writing one can buy a high end suit for the price of an ounce of gold (around $1350) but a consumer can get a nice suit at the Men’s Warehouse for around $200 and less than that in some discount stores.  This means you can get seven suits today for what it cost a Roman to buy one.

On the other hand, a decent suit cost $30 or more in the 1920s, which was equal to one and a half ounces of gold, valued at $20.67 and ounce.1

So instead of gold maintaining the same purchasing power for a suit of clothes over the centuries, in relation to this one item, it lost 50% of its it’s value by 1920 but gained by almost 700% by 2011.

Just as gold varies in value compared to a man’s suit of clothes even so did we illustrate great fluctuations in relations to the other monetary mental – silver.

How about other items? Would the value of gold fluctuate over the decades and centuries compared with wheat, beef, land, diamonds, seasonings and other items?

Yes it would and in many cases the variation of value is quite profound.

But what if we don’t single out the value of one commodity in relation to gold but take an average as is done with the wholesale or consumer price index?

We have illustrated the fact that deflation of value can occur during a depression, but how about inflation?  Can this occur while relying on a gold standard?

It is common knowledge that pumping too much money into the financial system will cause inflation.  Has this happened in the past when large amounts of gold was added to the supply?

Adam Smith points out that the value of gold is not always stable using Spain as an example.

“Gold and silver, however, like every other commodity, vary in their value, are sometimes cheaper and sometimes dearer, sometimes of easier and sometimes of more difficult purchase. The quantity of labor which any particular quantity of them can purchase or command, or the quantity of other goods which it will exchange for, depends always upon the fertility or barrenness of the mines which happen to be known about the time when such exchanges are made. The discovery of the abundant mines of America reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had been before. As it cost less labor to bring those metals from the mine to the market, so when they were brought thither they could purchase or command less labor; and this revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account. But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity which is itself continually varying in its own value can never be an accurate measure of the value of other commodities.”2

Spain thought it had hit a huge bonanza when it began to rob the New World of its gold and silver. It plundered 1,230 tons of gold and 60,440 tons of silver from 1493 to 1690 but all that inflow of precious metal not only led to high inflation but to its undoing as a world power.3

A major problem was that their attention and labor was directed toward plundering as much gold and silver as possible instead of manufacturing at home.  Why produce anything when they could just buy it from other nations with all that gold and silver?

Consequently their true base of power and wealth – productive labor – declined and they fell off the stage as a world power.

The period of the California gold rush was another famous example.  Australia also had its own gold rush about the same time.  From 1851 to 1861 the world’s gold supply increased 161% accompanied by inflation of around 5% per year.4

In the gold rush communities inflation was much worse. It cost an ounce of gold (worth $1350 in today’s money) to just hire someone to wash and iron a dozen shirts.  Good food and supplies were also outrageously inflated.5

Not only did gold discoveries increase money supply and inflation but so did technological advances in mining and processing.  These caused an increase gold supply and inflation.  From 1897 to 1914 the U. S. gold supply increased 7.5% per year and prices rose about 50% during this period.

This led to a tremendous increase in our leveraged money supply.  “From June 1896 to June 1914, total bank deposits rose from $3.43 billion to $14.32 billion, or an increase of 317.5 percent or an annual rise of 17.6 percent…”6

Variations in gold supply has influenced its value since then but the next big change in the purchasing power of gold came not from supply but by presidential decree from FDR in 1934 that instantly changed the value of gold from $20.67 an ounce to $35.

Then when Nixon took us off the gold standard in 1971 it went from the decreed value of $35 to over $500 an ounce in 1980 and then down to $288 an ounce in 1998, then up to $1350 by 2011.7

Conclusion:  Truly it is established by history that, even though gold is one of the more stable commodities, it is susceptible to value fluxuations up and down just like everything else.  Gold and silver have been used for money, not because they are the ideal, but because they are the most practical of metals

Concerning gold, even the hero of the gold standard philosophy, Ludwig von Mises, said:

“But even if the 100 per cent reserve plan were to be adopted on the basis of the unadulterated gold standard, it would not entirely remove the drawbacks inherent in every kind of government interference with banking.”8

“The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd.”9

Friedrich Hayek, another gold standard hero stated:

“The gold standard, even if it were nominally adopted now (1992), would never work because people are not willing to play by the rules of the game.”10

If gold, the most practical of metals for money, is far from an ideal standard then are we doomed to be held hostage to a very fallible money system?  We  will consider this question and explore the alternatives.



2. Adam Smith; Wealth of Nations, Part 1

3. Lost Science of Money By Stephen Zarlenga; Page 102-3

4. A History of Money by Glyn Davies, 1994, Pages 481-482

5. California Gold Rush Cooking; Lisa Golden, 2001 Schroeder, page 18

6. The Case for Gold by Ron Paul and Lewis Lehrman, Pg 120


8. Human Action; Fourth Revised Edition; Fox and Wilkes, 1996, , Ludwig von Mises, Page 440

9. Ibid, page 473

10. Interview with Thomas W. Hazlett from the July 1992 issue of Reason


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The Gold Standard, Part 1

This entry is part 14 of 50 in the series 2011A

As noted, the gold standard has appeared in three different incarnations in our history and many conservatives are advocating a return to it in some form.  Are any of them practical?  Let’s take a look.

We will call the first of these “the purist gold standard with no fiat money.”

One could say that this system is a refined form of bartering, for before there was any standardized money system people exchanged goods through this system of exchange. In our early history individuals had to garner some type of product that was in demand so they could trade for other essentials.  If a family raised cattle they may trade a cow, meat or milk for grain, tools, gold, or even a wife for the kid.

This system proved awkward, for many of the products exchanged had a low shelf life.  If you had an expensive chariot to sell you just couldn’t exchange it for a silo full of grain for several reasons.  First, you had no means of storing a large quantity and secondly it would rot before you could use even half of it.

What to do…  You could find ten other people who need grain, but then five out of the ten may not have anything you want so you may wind up with materials worthless to you that you have to spend days bartering away rather than spending time making more chariots.

In parts of the ancient world precious metals, particular gold and silver, became very useful in making the bartering process work.  They had the advantage in that they did not decay, did not take up much space and were recognized as having value.  This meant that our chariot maker could trade his vehicle for an agreed upon amount of gold and then divide it up and trade it to ten different individuals who had items he actually needed.

Some believe that gold was universally used as a medium of exchange since the beginning of civilization, but such has not been the case.  Some parts of the ancient world had very little gold so its use was not practical.  Other parts had gold but did not assign that much value to it.

The Aztecs are a prime example of this.  Gold didn’t have much value to them until it was made into something beautiful and even then only those of high rank could use it making it fairly useless to the common citizen.  In its raw form jade was more valuable.  Other items used in exchange were corn, amaranth, beans, cotton armor, obsidian knives, copper bells, sandals, shields, feathered capes, cacao, shells and feathers.  They just couldn’t understand why the Spaniards were so obsessed with gold and considered cheap glass beads to be just as valuable unless the gold were made into something beautiful. 1

The Mayans used gold less than the Aztecs and the closest thing they had to money was cocoa beans.

The Incas had a lot of gold but didn’t use it for money.  Most of these ancient American civilizations relied on trade and barter and had no standardized money.

In our past then gold has fallen into three categories.

(1) An interesting yellow metal that is useful for art and jewelry.

(2) A valuable metal useful in barter.

(3) Money.

So, what’s the difference between 1 and 2?

To understand this we must ask another question.  Exactly what is money?

The simplest answer to this is that it is a medium of exchange. This is a simplistic definition that is not complete.  For instance, most items used in barter and mediums of exchange are not considered money.  A plumber can exchange his labor for potatoes, but the potato farmer will not state he received money from the plumber.  He will merely say he received his services.

Similarly, there have been many times in our history, such as the British Isles after the fall of Rome, that gold was considered valuable, but used for barter instead of money.

So what makes pieces of metal, paper, shells or tally sticks money?

Now some argue that gold has always been money because it has intrinsic recognized value but so does food, shelter, fuel and tools.  What is the difference?

In a barter system there is none for they are all mediums of exchange.

So then a substance is not seen by society as money merely because it is can be used for exchange, but because of something else.  What is that something else?

Perhaps Aristotle was the first to identify this:

“All goods must therefore be measured by some one thing…now this unit is in truth, demand, which holds all things together…but money has become by convention a sort of representative of demand; and this is why it has the name nomisma – because it exists not by nature, but by law (nomos) and it is in our power to change it and make it useless.”

And he continues: “Now the same thing happens to money itself as to goods – it is not always worth the same; yet it tends to be steadier…money then acting as a measure makes goods commensurate and equates them… There must then be a unit, and that fixed by agreement” 2

Many years later Abraham Lincoln said it with greater simplicity: “Money is the creature of law.” 3

Gold did not just magically appear as money but some decree of law has always made it so.  For instance, the Coinage Act of 1792 decreed that gold as money would have its value based on the Spanish silver dollar, or 27 grams of silver. This made an ounce of gold valued at $19.44 at the time. 4

Then in 1834 a new coinage act set the value of an ounce of gold at $20.67 and it stayed there until it was again changed again by law. Through The Gold Reserve Act of 1934 FDR decreed the new value to be $35 an ounce.

So one day $20.67 was worth an ounce of gold and the next it was worth only worth .59 ounces, a loss of 41 cents on the dollar.

By law then gold remained at $35 an ounce until world demand forced changes in the Seventies.  Then in 1973 the value was rest to $44 and the following year it was decreed by law that the dollar would no longer be tied to gold at all.

Since that time gold has had a floating value established by the free market and has fluctuated greatly.  It can still be used as a medium of exchange.  Mt neighbor would sell me his car if I gave him enough gold, but it is not considered money for it is not currently defined as such by law.

So, during the 142 years that gold was valued at about $20 an ounce was it’s value consistent just because the law said it was?

No.  During this period one ounce of gold or the $20 fluctuated in value and the amount of goods and services it could buy varied considerably.  California during the gold rush was a prime example.

Then from 1934-1970 when the value of an ounce of gold was decreed to be $35, was the value of that ounce always the same during this period?  No.  The amount of goods and services you could buy for $35 again varied considerably, especially during World War II.

Conclusion:  Money is a medium of exchange which is established by law.  Law forces acceptance but the value of that medium will vary according to its supply, velocity of circulation, stability of the government, supply and demand for products and services and other factors.


1. The History of Money; Crown Publishers, Inc., 1997 by Jack Weatherford, Page 18

2. From Aristoltle (Ethics 1133), Quoted in The Lost Science of Money By Stephen Zarlenga; Page 34

3. Abraham Lincoln, Senate document 23, p. 91, 1865


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Creating Sound Money

This entry is part 8 of 50 in the series 2011A

Part 2 in this Series

An increasing number of people, including economists, politicians, pundits, bloggers etc are coming to the realization that something needs done to create a sounder dollar and money system.

Here are some of the steps that are put forward.

(1) Put us back on the gold standard. Those who support this are far from being united as there are several camps on this:

(A) A purist gold standard with no fiat money.

This was the standard through parts of ancient history, the Dark Ages and attempts were made toward this goal on and off up to about 100 years ago.

(B) A gold standard with fiat money, but with redemption. This usually consists of fiat money created on a 10:1 basis.  That is for every once of gold on deposit there would be ten ounces worth of money in circulation.  Under this system the consumer can redeem his money for gold, unless there is a run on the system that depletes the gold supply.

(C) A gold standard with fiat money, but with no redemption. This is basically what we had from FDR to Nixon. The value of the dollar was set at an arbitrary value assigned to gold which was $35 an ounce, but a citizen could not possess monetary gold with the exception of rare coins.  Other nations and some banks were allowed to exchange money for gold.

(2) Eliminate the Federal Reserve. These advocates may or may not want a return to the gold standard.

(3) A balanced budget amendment. This sounds like it should be a no-brainer, but is it?  Why hasn’t Congress ever taken this seriously?

(4) If we do not have a balanced budget amendment then something needs put in place where borrowing and spending is kept within reasonable boundaries.

(5) Grow the economy through low taxes and business incentives.  A healthy economy strengthens the dollar.

(6) Reduce the trade deficit. We have had a trade deficit since 1975.  Should we be worried?  Some are more concerned than others.

(7) Secure energy independence.  This is another no-brainer but the problem occurs in execution.  The Left and the Right have conflicting ideas of how to achieve this.

(8) Expand alternative currencies.  These are already in play to a degree.  Examples are Time Dollars and Ithaca Hours which are community currencies.  Then companies are issuing their own form of monetary credits that are used like money. Many want the monetary laws changed to allow for the creation of private currencies that directly compete with the dollar. The belief is this would strengthen our currency as a whole.

(9) Barter. Barter has been sold as an alternative to authorized currency. Some claim barter strengthens the financial position of the individual. Barter companies became popular in the Sixties and Seventies.  One reason for this was that many were under the illusion that they didn’t have to pay taxes on items gained through Barter. However, the IRS had different ideas and went after many of them and now there are few bartering companies left.

Here is the IRS rule on Barter: “Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter–barter for another’s products or services–you will have to report the fair market value of the products or services you received on your tax return.”,,id=187920,00.html

If you have to treat gain through barter as regular income then one might as well deal with cash and get more leverage with currency.

Even so Barter is far from dead thanks to Crag’s list and other internet sources.  Many are now doing barter on a one-to-one basis through classified ads.  Participants must be warned, however, that they are still not beyond the reach of the taxman as they comb through internet sources to find barterers who may be trying to escape taxes and do go after them.

Even though small businesses and individuals are limited today in their use of barter big business and even countries are using it on grand scale.  These two entities exchange goods and services on a scale of which the average person is completely unaware.

(10) Restoring the power to create money to our elected representatives, as specified in the Constitution, instead of farming this out to private enterprise.

Next we’ll expand on some of these points and see if any of them offer hope to take us out of this financial malaise.

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Copyright 2011 by J J Dewey

Copyright by J J Dewey

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