Let us be clear up front, Pulse 02DA does not favor a gold standard, but we do favor allowing the free market to choose its own currency.
Therefore, in order to give honest money (voluntary trade) a fair shake, and to give people an idea of what alternative currency is capable of when it is not being manipulated by banksters or the state - and in order to offset much of the current disinformation coming from the MSM - we give you the below article as well as the additional resources at the bottom of this blog.
The accompanying photos, corresponding texts, and recommended reading material (at the bottom of the article) are not in the original, these are supplements provided by W&C for our readers. After all, one can not be a good Warrior nor Capitalist without understanding what money is and what its proper function in society is.
By, Alan Greenspan (1966)
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
*Please note the photo above (click to enlarge) states: "This Certifies That There Have Been Deposited In The Treasury Of The United States of America Ten Dollars In Gold Coin Payable To The Bearer On Demand." The idea is that one could take a Gold Certificate and exchange it for the 10 Dollar gold coin that you see at the beginning of this article. Please also note that your current "dollar" (Federal Reserve Note) has no such promise on it. What many people don't know today is that a U.S. "Dollar" is actually supposed to be a unit of measure, much like a pint, pound, or gallon. In the case of the U.S. Dollar, we are talking about a unit of measure for precious metals (the troy ounce). According to the definitions set by Congress before 1933, a dollar was either .77 ounces of fine silver, or 1/20th of an ounce of fine gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
*Please note the photo above (click to enlarge) also states: "This Certifies That There Has Been Deposited In The Treasury Of The United States of America One Silver Dollar Payable To The Bearer On Demand." At that time, one could take the Silver Certificate above and exchange it for the One Dollar silver coin that you see below. Again, observe that your current Federal Reserve Note has no such promise on it. Remember: A U.S. Dollar is supposed to be a unit of measure; either .77 ounces of fine silver (in this case), or 1/20th of an ounce of fine gold (see above section).
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
* In 1922 one silver quarter would purchase you one gallon of gasoline (source: U.S. Department of Energy - Energy Efficiency and Renewable Energy Vehicle Technologies Program, click here to see the DoE's website and get the PDF). If you calculated the value of that same quarter today (worth it's weight in silver at the date of this blog post) you could sell this quarter for $6.49 Federal Reserve notes. Therefore, this silver quarter will still purchase you more than a gallon of gasoline today. When prices go down and your money’s value increases (like in the above example), this is what is know as price deflation, which is a boon to savers and the elderly living on fixed incomes. Contrarry to what you may here, price deflation is a good thing because it favors the consumer and protects savings. This is one of the many reasons why the free market should be allowed to chose its medium of exchange without government interference.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
The original essay was titled Gold and Economic Freedom, which was first published in The Objectivist (1966). The essay was later reprinted in Ayn Rand’s book, Capitalism: The Unknown Ideal in 1967.
Immediately after the publishing of this article, Mr. Michael McKay was kind enough to send in the following comments to my office.
A couple of things should be noted in particular:
1. No gold 'standard' is needed to be set by 'countries'. It is not a Gold Standard that is needed, but freely competing currencies.
2. It is the Legal Tender Laws imposed by countries that are the largest obstacle to this happening; therefore the elimination of LTL is of paramount importance.
3. Next, Fractional Reserve Banking would not work as described in the article in a truly Free Market/Free Banking society - because it would not work at all.
Checking Account Money would be, as it is properly called 'Demand Accounts' for which the client pays the bank for the safekeeping of their money and the processing of 'checks' which therefore allow paper claims on the gold-money-on-deposit to move about in the economy.
The SAVINGS ACCOUNTS where gold would be deposited would be where from the Bank could lend out but would not necessarily have to fractionally inflate the money. If they chose to lend out they would pay the depositor an 'interest' for exposing their money to risk.
However, in a gold-based money system (which would ultimately occur in a free market of competing currencies), fractionally inflated 'bank notes' would QUICKLY cause that bank to become insolvent because OTHER banks would quickly demand settlement in gold in higher amounts than the bank could deliver - which would swamp their scheme to create money out of thin air. Thus FRB would collapse. No need to outlaw FRB, it would not work in a true Free Banking environment.
(also, the statement in the article about the banking system being 'free' before the Federal Reserve is not accurate; government was in it creating mischief all along).
For your interest, there is one bank in Estonia that I have found that does not engage in FRB but only lends out the money on deposit. It is called LHV Bank and it's website is here. I have a friend there through which I tried to open account. However, because I am an American I was rejected.....no damn Yankees allowed! Their rules specifically exclude 'US Persons' which is a shame. I ran into the same problem in trying to set up an account with a Canadian Bank. Certainly you can open up an account with a "Canadian-or-other-so-called-foreign-Banks" that have offices in the US (which many of them are in the process of closing now), but that does not afford a US Person anonymity to the US Overlords. OUR money is essentially trapped by BigBro. Such is the world created by our IRS/SEC and US Treasury that WE are given the same treatment around the world as we extend to North Korea, Iran, and other 'rogue' states. In my business, I cannot open up an account for a person from such countries.
I know first hand how innocent people feel who merely want to get away from tyranny.
We have to change the thinking. People are not their 'country' or their 'government'. People are IN a country, but they are just people and should be able to move, invest, migrate, flee, visit, enter, exit, ignore, live in ANYWHERE they want. It is the person that must have the freedom, always the person. My recent study of Hoppe and visit with him in Turkey has made me even more a Radical for Peace and Freedom.
His works "Democracy the God that Failed" and "The Economics and Ethics of Private Property" have changed my life. I invite you to review them.
Thank you for spreading monetary sanity around the world."
Michael J. McKay - Secrets About Money that Put You at Risk (free PDF here)
Llewellyn H. Rockwell - Everything You Love You Owe to Capitalism
Thomas DiLorenzo - The Truth About the "Robber Barons"
Vin Suprynowicz - Gas Prices Continue to Fall
Robert Murphy - The Gold Standard: Myths and Lies
Murray N. Rothbard - What has the Government Done to Our Money? (free PDF here)
Ron Paul - Gold, Peace, and Prosperity (free PDF here)