Fixing the Monetary System: Market Driven or Gold Based?
There is a growing belief that the Federal Reserve Board is one of the larger scams perpetrated on the American people, propping up government schemes both right and left with tax dollars and debt. Below are excerpts of a recent exchange I had on the topic. Read through it and let me know in a comment if you think a gold standard or market standard would be a superior replacement for the Federal Reserve system.
Gordon: The Fed helped cause the depression in the 1930s because it failed to act responsibly in a way that would correct the run on banks, etc.–the reason for which it was ostensively created. It creates concentrated economic power. Any form of concentrated power is dangerous, political or economic.
The current round of bubbles indicate that American consumers have been milked for everything they have. There is a parasitic class of bankers that have been relying on lending money to consumers to buy products. This class gets rich on the interest on these loans, and the manipulation of money. It all worked fine as long as there was full employment to prop up the system. However, the flow of jobs in the production of real goods from the US to Asia, undercut the existence of such consumers to fund the credit system. The destruction of the middle class that propped up the banking class, ultimately means the end of this banking class. The TARP bailout was an attempt to use fictitious money and it was followed by an attempt to create fictitious jobs (non-productive government jobs) to prop up consumerism and a credit based economy. But those strategies are dead in the water because they only further destroy the producer class that creates the goods that underpin the value of the dollar. They only hasten the collapse of the money system.
The only things that will turn this around are (1) laws that once again protect ownership of private property, which includes reduction of the taxes and frivolous lawsuits that create a form of theft of private property, and (2) after the protection of property is assured, the revival of the traditional work ethic that relied on savings and delayed gratification and leads to the production of goods and services that create a middle class.
Peter: Precisely, Gordon, why I recently speculated in an article that in six months to a year, we should be seeing some of the unfortunate effects of the bailouts, tarp,etc., accompanied by a huge accumulation of assets by the moneyed class to whom all this money shifted. They will buy tangible goods with their surplus cash now, so when the dollar plummets, they will be sitting pretty. That’s what’s happening right now, a massive transfer of wealth, which is why we are seeing an uptick of gold prices. They know the writing on the wall.
Gordon: They are buying gold and silver today, but they will also be buying up real estate that is priced low due the credit crisis they created. I would not be surprised if US tax dollars are used to help the wealthy class buy up all the property on which they can build apartments to house their serfs.
Peter: Just one more comment on this interesting topic. The constitution pretty much spells out what kind of monetary system we will have. The federal government coins gold and silver, and the states must use that coinage. The government is not allowed to create money. They can coin it, which is to merely put it in a convenient form for commercial transactions, savings, etc. The money was actually created with the big bang–gold and silver. The states are told they cannot make anything a tender in payment of debts but gold and silver coin. That is the constitution. And the monetary system that results is a good one, as best as we can have. The banks should not have a role in it. This type of system functioned quite well for much of US history. The use of bank notes for money is an opportunity, an invitation, for abuse. Right now, I dare say our monetary system is unconstitutional. The founding fathers understood all about this question, and thus spelled out the Federal government’s role, and the role of the states in very simple terms.
John: Although I agree in general with what is said by Gordon and Peter above, I’m not so sure if going back to the gold standard is the best solution. Money has the meaning of token. Basically, it stands for something created or produced. As more goods are produced in the world, more money will be needed. Also, gold and silver are raw materials used for various technologies. The value of gold and silver is influenced by the value they have for such technologies. Mining gold gets more and more expensive. This means that using gold as monetary standard can be confusing in many ways.
When the Spaniards brought shiploads of gold from America to Europe, that caused inflation. So the gold standard is not a simple solution for the problems in the monetary system.
I don’t see anything inherently wrong with using paper money as long as there is a way to guarantee the value of these tokens. It’s clear that the FED hasn’t done a good job for that.
Gordon: I agree with John on this point. We had paper money in the colonies called colonial script. As Ben Franklin argued, as long as it represented the value of the goods and services in the economy, there was not problem. The problem came when England forced unsound money on the colonies and banned the colonial script.
You can have seashells or paper money that will work fine as a medium of exchange, so long as the aggregate money supply represents the actual value of the goods and service in the economy.
It is wrong to expect that this determination of value can be made by either a government or a private institution like the Federal Reserve. Hayek and Friedman suggested that it would be superior to let the market determine the value. Thus whoever manages the money supply must take the market as his ultimate authority, and he simply adjusts the supply to match the volume of goods and services in the market.
John: Well, we have clever economists. Should they not be able to adequately measure the volume of goods and services in the market and adapt the money supply based on that?
There’s a hook here however for the ‘services’ part. Services in a society can only be delivered on the basis of goods that are produced. For example, a medicine man in a primitive society can only provide full-time service to the tribe if the tribe can feed and nurture him well. The goods produced generate value that can be represented by tokens of money. Services are dependent on these but don’t produce new external value. They produce higher internal value for a society.
If many services are given well, that will result in higher production, because healthy people produce more than sick or dead people. Eventually the services will become visible in the production of more and better goods.
Gordon: You have hit the nub of the problem. Therefore you need a system that prevents “clever economists” from manipulating the money supply in a way that does not represent the actual value of the economy.
One possibility would be to have something similar to the Dow Industrial Average, where you take 300 of the top goods and commodities (and perhaps some services) and let them represent the entire economy. For example, the price of gold, oil, wheat, televisions and 296 other items. You would pint money so this composite average remained constant.
Some goods in this average might grow scare and their value increase relative to the other 299. For example, if the entire amount of gold was mined and no new reserves were found, the price would increase due to scarcity. In this case, gold might be taken out of the 300 because it was known not to be stable. It would be replaced by another item that have a recent history of price stability.
The reverse would be the oversupply of items, like excessive numbers of televisions, dropping their price. In this case televisions would be dropped from the 300 indicators and another more stable item added in their place.
In this case the “clever economist” could try to fudge the rise or decline of an item like gold or televisions, like the climate gate scientists, but I would think a transparent system that other people could verify would catch such attempts to manipulate the data early on, never getting us to the point of a serious monetary bubble.
John: Sounds like a very good idea, Gordon.
I imagine that if a government is responsible for this measuring and issuing of new money, and an economy grows, then the government is justified and even obliged to print more money. Where should this new money go?
If a government really is for the people and can be trusted, then there are various ways that the money could be made available. For example by paying government servants and officials (who serve the people, not bully them), or by improving the infrastructure of a country, or for medical aid etc. It all would be based on the real economy and if a country does well, there would be no need for income tax either.
Gordon: There would need to be a transparent way to both introduce and recall money from the money supply. I imagine that you could make it available through a central bank to state banks through a banking system constrained by the ability to print the way we have discussed above.
Peter: Unfortunately, IMHO, society will have to come to the realization that resources must be dedicated to the money supply, and there is no way around it. An automobile needs oil to run, and that will cost you, no matter how annoying it may seem. The idea that one may print money and expect to avoid dedicating real resources to the monetary regime (gold, or silver, or tobacco, or eggs, or whatever you want to use as money) is, I believe, misguided. One must dedicate resources to the monetary system. Those resources are “tied up,” but that’s life.
Tokens cannot retain value. Coins, when they were made of metals of value, were not “tokens.” Money is not a token, but a commodity with a marketable value that is formed into coins. What we have now are “tokens,” but before the 1960s, they were coined monetary metal, with the quantity of metal in each coin reflecting its face value. Not sure whether pennies and nickels were tokens or not, but it would depend upon the amount of metal they contained, and the market value with respect to gold or silver. But the silver coins were coined monetary metals, and not tokens.
Gordon: This piece does not explain what is wrong with the Federal Reserve System, is that dealt with elsewhere? Of the two options considered here, market-based is more sensible. Gold-based appeals to our sense of stability, yet tends to gloss over the fact that gold is itself a commodity with fluctuating market value. In the long run, genuine stability depends more upon public confidence in the system and those who run it, than it does on the external aspects that form the system. Greater concern should be accorded to the moral and ethical bases of the system and how well those morals and ethics are put into practice.
You guys are real close to smacking the nail on the head. I still feel it can be fixed but it will take a fight for sure–the banksters are not going to give up without one.
There is nothing in the constitution forbidding fiat currency per se. what the constitution fails to address is just as important as what it says. Fiat is not money, it is a simple commercial instrument of trade, or CIOTI-Coyote. It’s value is fixed by the King, it’s also incontrovertible, and backed only by the combined value of the commerce that it enables.
It should be neither be borrowed nor lent as it isn’t Money. Thus congress can create as much as it needs and spent it into the economy without violating the Constitution. No tax’s needed and no debt. Gold and Silver coin are still the lawful Money and if borrowed must be paid in gold and silver coin.. The federal reserve note is not Lawful money or scrip or fiat. It is an instrument of debt and a perversion and debauchery of every sound monetary policy. Thank you for listing to my Septigenarian rant. j.charles edwards@gmail.com
Charles: Your confusion about the Fed. are understandable. Even those whothink we understand it are operating in the dark. Someone has planed it that way. This may help a bit.
Gold and Silver are indeed comodities subject to the marketplace.
Gold and Silver Coin are altogether different. These are givin their value by Congress– this is set–solid.
Fed Reserve Notes are a debt creation. They have novalue of their own–it,s the biggist fraud in the history of money.
It kinda goes like this:
Fed: Such a deal I have for you today Congress USA. We will lend you what ever you desire at intrest, only you have to print it and pick up all the costs, you can only print or digitize the principle ammount- not the intrest. These notes are neither backed nor based on anything of value but they must be paid back acording to Art. 1 of the constitution USA so leave the treasury door open to us 24-7-365.
How about that? Did we the people have the slightest clue.
The fed has loaned us only what is ours already. They have no real investment.
So as the Good Book says “WAKE UP OH YOU SLEEPERS”. The bad news is that It’s a lot more complicated than that and the Devil realy is in the details!
please reply on this Blog and also to my email.
jcharlesedwards@gmail.com
Uh– Gordon: It appears I may have stumbled abord an abandoned ship here. This site should be humming but it appears to be moribund. Are you well?
We sorly need to promote this site. How can I help.
j. charles edwards
j.charlesedwardsgmail.com
Charles, I have not abandoned ship. I am well and busy and basically agree with what you have to say. The issue of printing money and the Fed is an extremely important one.
It is true that there is no reason that the Federal Reserve should charge interest rates. If they are functioning well, they should be able to provide money to member banks to lend out. Member banks should pay a fee for processing and they should pay a membership fee that includes insurance against failure. The Fed should simply be an independent agency, separate from any taxing authority, that processes the flow of money into the system.
I believe that it should be an open transparent organization that does not earn its money on interest. That opens the door for corruption.
Another serious problem is federal income tax. Basically the 16th amendment was created to fund the debt scheme through income tax. I believe the only clear check and balance on the problem is to let the states, who can’t print money and HAVE to balance their budgets by law, collect all income taxes from citizens and pay the federal government a constitutional apportioned tax to defend the country from attack. This would force the federal government to balance its own budget.
Gordon: Please pardon my absence, the storms here in north Alabama shut us down. We are dug out now and the I net is up. I enjoyed and learned some from your remarks. Thank you for the come back.
While I would like to get rid of the Fed altogether, that might be a disastrous thing to do. Chaos would be an understatement. However the creation of our Nations Commercial instruments of trade is the duty of congress and the US treasury and congress had no authority to contract it out in the first place.
I suppose they thought it best because at least four tines they tried to issued scrip and it failed. This caused a run on the Banks and looted the treasury. They made the same mistake every time.
It’s not rocket science; The solution comes from wise old King Solomon. 1 word, (incontrovertible). The value set by Congress based on the value of the nations coinage-declared incontrovertible, and backed solely by the commerce it enables. It also must be debt free. Created by Congress, spent into the Economy,not loaned , Debt free Fiat-not Notes.
No Need for taxes.
Charles, the nation-state of France was begun in the 1460s by King Louis XI, who set up a banking system with the House of Medici. By law, money entered the economy without interest. I haven’t studied the effects, but France prospered under his reign.
As I said above, I think money can enter the economy with a participating bank creating a loan for a sound productive purpose. For example, for a machine shop to buy a milling machine. In this case the manufacturer produces more wealth than the interest being paid. Also, in this case the Fed should merely provide the money to the lending bank for some processing fee, and not charge any interest on the money–that is true usury.
You are probably familiar with the term “the creature from Jekyll Island,” which was really the product of a banking cartel. The real evil in the present system, as I see it, is that the Fed itself is like a mafia collecting interest on the money it lends to other banks.
The other problem, of course, is government debt, which I believe ought to be illegal, except perhaps during a defensive war. It is probably a violation of sound economic law to bring non-productive money into an economy, e.g., stimulus checks, debt for welfare, etc. A sound society has to pay for welfare out if its wealth, and it creates wealth by building a productive economy. I don’t think that in the grand scheme of things borrowing for such purposes is much different than what Bernard Madoff did. On some level, debt for non-production is nothing more than a ponzi scheme.
I suppose some people might make a case for a government borrowing money for a bridge, which serves the wealth production of an economy. The problem there is that governments do not operate on market principles, but on lines of legal authority. Therefore motivations become improper for economic activities. It is probably best to build bridges with gasoline or other transportation taxes so that users pay for them. That way a government isn’t stealing from people that don’t use the bridge.
Gordon: France was not the first to use that economic model however. I believe it was King Solomon. It worked so well that the Nations were bringing him Gold and Silver coin deposits in exchange for his incontravertable scrip in part to avoid the fees of the money changers.
And yes, glad you mentioned the Jekyll Island Monster. It would be nice if we could confirm the guest list and could see the minutes of the meeting, but then as now Evil lurks in the cover of darkness and secrecy.
Those Jekyll Island Style meetings never cease. The Fed Reserve Board has no real say in the Fed. They make suggestions and then return and report the decision of their Masters whose faces they never see, and then Timmy G. is enthroned in our Treasury–God forbid– we have placed an enemy spy at the head of our treasury????!!!
I think you said something about OPENESS TRANSPARANCY.
Those cannot exist in a world of darkness. Oh how I would that the world could see things as cleary as you do. A great teacher you are. And Me; Well I’m Just a learner and a slow learner at best.
Please keep the good stuff comming and Thanks for all you do. Say, where the heck are all those we elected?
Dont they read any of this stuff? Surely they have Staffers that do. Dont you think?
Charles, I agree with you that many lessons of ancient history can be cited for the articulation of sound principles of economic governance. All that I meant referring to France and the Medicis is the development of the modern banking system and the modern nation-state.
While I said earlier that I do not think we can successfully rely on a gold standard, I do agree with you that Ron Paul’s call to “Audit the Fed” is correct. Transparency is necessary, and almost everyone knows that people who do not want to reveal transparency have something to hide. In my mind, the resistance of the Fed to an audit indicates a high probability of guilt. The more public and the higher level an institution is, the more transparent it should be. Since the Fed is at the pinnacle, it should be completely transparent.
Right you are Gordon, My remark was not intended as a jibe simply a further confirmation. Annother I didnt mention due to the Madman the turned out to be is Adolph Hitler. He turned Germanys monetary system to the point that a certain British P.M. remarked,(If England ever found it’s self in that Germany did after WW1 I would to God that he would send us a Man such as Adolf Hitler.) fo course he later regretted that statment. Anyhow it was much the same model I I think.
Gordon; just annother post script. Remember the Tally Stick? and how long were those used? Also the Native American Wampum– it took the white man a short time to totaly debauch what had worked so well for centuries. So could it be our ( pay back time)?
Yes, it is payback for trying to defy natural economic laws.