Monetary Reform: Fiat vs. Market
Remnant Review
What is fiat money? It comes from "fiat," which means a formal authorization or proposition or a decree. Synonyms are these: edict, order, command, commandment, injunction, proclamation, mandate, dictum, diktat. It is an arbitrary order.
The phrase "fiat lux" comes from Genesis 1:2: "Let there be light."
Fiat money is the money issued by a self-proclaimed divine state. It rests on the premise of divine right: no higher appeal. It is the court of final appeal. In short, it is divine.
A free market money system is an operational system to which people can appeal to because it is not statist money. People use gold coins or silver coins to buy what they want. Or they use legal claims to such coins. The state is not in the "money business."
No nation-state ever allows this. Every nation-state wants to be the highest court of appeal, especially in monetary affairs. Every nation-state claims legal sovereignty over money.
Any gold standard in which civil government is the defining agency is a pseudo-gold standard. It is a counterfeit. When you think "government-guaranteed gold standard," think "counterfeit."
WHEN MONEY DIES
In times of great crisis, money dies. The things that money could buy in normal times are not available at any price close to that which prevailed in normal times.
The Bible's most famous example was the famine in Egypt under Joseph's administration. We read that the money failed (Gen. 47:15). But there was another case.
And there was a great famine in Samaria: and, behold, they besieged it, until an ass's head was sold for fourscore pieces of silver, and the fourth part of a cab of doves' dung for five pieces of silver (II Kings 6:25).
So revelatory are prices of the underlying social conditions that Elisha prophesied the end of a siege by forecasting a dramatic fall in prices: "Then Elisha said. Hear ye the word of the LORD; Thus saith the LORD, Tomorrow about this time shall a measure of tine flour be sold for a shekel, and two measures of barley for a shekel, in the gate of Samaria" (II Ki. 7:1). Before it ended, silver did not count for much. Or put differently, they had to count out a lot of silver to buy anything worth owning. What was worth owning was food.
Normal pricing reveals normal times. When prices today are close to what they were yesterday, we can be confident that society tomorrow will be pretty much what it is today unless something totally unforeseen happens. Rarely does it happen.
Money prices are indicators of broad social trends. Gold reached its highest price, denominated in U.S. dollars, the week before Gettysburg. On July 3. 1863, Lee's army was defeated. On July 4, Vicksburg fell to Grant's forces. The dollar price of gold fell the following business day and did not reach these heights for a century. The world believed that the Union would win the war, no matter what the South's politicians and generals said in public.
What was the South's leadership to say? "Well, that does it. It's all over but the shouting. The North's shouting. We might as well surrender now. Why continue this bloodbath? The Yankee dollar is up. Gold is down. Gold says we're beaten. We might as well face it." Had any politician said this, he would not have served out his term. Yet this was exactly what the South's leaders should have said. They continued the bloodbath, yet the outcome was what the price of gold had projected.
All of this is to say that the price of gold, back in the days when governments tied their currencies to it, was a better indicator of social conditions than the speeches of politicians.
No matter what politicians want people to believe, if they preach good times while the price of gold is rising, the public would be wise to discount the politicians words. Free men make evaluations of the state of the world, and the price of gold reflects their judgment. So do interest rates. They can be wrong in their forecasts, but their forecasts are best reflected in these two market prices.
THE FOCUS OF ATTENTION
Why should gold be the focus of attention, the ultimate indicator? One reason is because it usually has been. When gold is not widely used as currency, silver has served the same function. These two precious metals are the most familiar indicators of underlying economic trends. People have learned after millennia that the purchasing power of gold and silver also reveals a great deal about social stability. When the price of either or both keeps rising, the world is alerted to a nations underlying crisis. When the prices of basic commodities rise faster than the price of gold and silver, that society is becoming desperate.
Ludwig von Mises defined money as the most marketable commodity. For most of the last century, beginning in the early months of World War I, gold was legally severed from currencies. National fiat currencies have served as money. Also, bank deposits serving in lieu of paper money have become money. These deposits have multiplied. Today, economists are not sure exactly what constitutes money or how to measure it. There are numerous competing measures. Gold and silver rarely serve as money. But Mises' definition remains accurate: money is the most marketable commodity. You can buy what you want: (1) immediately, (2) without offering a discount, and (3) without advertising. In this sense, money is said to be liquid. It is the supreme measure of liquidity. Inside a national border, gold and silver are no longer as liquid as what a solvent national government calls money. We must pay a commission to buy a gold coin or a silver coin. In this sense, gold and silver are not money. They are not the most marketable commodities.
This raises an interesting question: ls our era an anomaly? Are we living in a monetary new world order? Is this situation likely to persist? Or will we see a return of gold and silver as the most marketable commodities?
If men are at long last trustworthy, if politicians tell the truth, if central bankers can be trusted not to inflate whenever there is a recession, and if things continue to operate smoothly, then the modern world will have escaped the unsentimental constraints of gold. Gold will not again become money, except as an accounting device for settling international payments among central banks.
Yet this raises another question: Why do central banks stubbornly refuse to abandon the "barbarous relic," as John Maynard Keynes derisively called it? If gold is not good for us little people to use as money, why is it good for central bankers to use in order to settle their accounts? If gold is just another commodity, why don't central banks sell all of it that is stored in their vaults and invest the money in U.S. Treasury bills or some other nation's interest-paying debt? What do they know that the public doesn't know, and gold-hating economists don't know?
There is an answer: central bankers do not trust other central bankers. They do not trust the reliability of civil governments. They know that when push comes to shove in the business cycle, other central bankers will crank up the printing presses. When this happens, they all want to be in gold. So should the rest of us. To keep their credit worthiness in a crisis, they have to own gold. So do the rest of us.
WE ARE NOT OMNISCIENT
If I knew what is going to happen tomorrow, next week, and next year, I could plan my life to minimize the use of cash. I could put my money into a savings account and earn interest. Why keep cash when you don't need it? The better your forecasting skills, the less you need it.
Today, we have money substitutes. We can deposit money in a bank or a money-market fund. We can also write a check, or use a credit card, at any time to buy what we want. We can do this because of the remarkable fiction known as fractional reserve banking. We lend the bank money short-term -- withdrawal allowed at any time -- yet the bank loans it out for months or years. The bank is in the condition of being "borrowed short and lent long." As long as deposits come close to equaling withdrawals, this wonderful condition can go on without problems. It is a profitable system most of the time. We stop carrying much cash. We carry plastic cards instead. It is safer. It is easier. And it leaves us convenient records for our computerized personal finance programs (and also the income tax collector's finance programs).
But then comes some unforeseen development. You are in some small town, your car has broken down, and Bubba the car repairman deals only in cash. Bubba, you see, has figured out the system: the tax collector's computer doesn't trace what a credit card company or check doesn't register. Bubba looks dumb, but Bubba is really pretty clever. Meanwhile, your car is not running. You ask: "How much will it cost to get this fixed?" Bubba, being pretty smart, answers: "How much cash have you got?" You tell him. He starts laughing. He shouts back toward the garage: "Hey, Sam, get a load of this!" All of a sudden, you would like some extra cash, since your alternatives are limited and your forecasting skills have been shown to be not all that you had imagined.
Let us pursue this. What if, because of some unforeseen event, such as a meltdown of the stock market, a lot of people start thinking like Bubba? They think to themselves: "My bank may go bankrupt in this mess. Bankrupt, after all, comes from 'bank' and 'ruptured.' I'm getting nervous. I don't know what's coming. You never know these days. I think I would like to have cash. I think I'll go down to my bank and get cash." All of a sudden, deposits do not equal withdrawals. People who lent the bank short-term money want it back today. How is the bank going to get the cash?
It can sell off assets. So, asset prices start falling. The rush for cash means that interest rates start rising. Borrowers start panicking. Employers start firing. Fired people, filled with a new level of uncertainty, go down to the bank and demand cash. Cash is a substitute for knowledge about the future. When people are really scared about their economic futures, they want cash.
In such a downward spiral of fear, uncertainty, and the rush for cash, the central bank will print up currency and deliver it to the banks. There is no other way to stop the panic and keep it from becoming a depression in which payments slow down, businesses cannot collect their money, and the economy collapses. This is called a break in the payments system. It does not happen often, but when it does, the result is an economic crisis of monumental proportions.
A BREAK IN THE PAYMENTS SYSTEM
There is no economic event more terrifying than this one. This takes place when a society with a high division of labor, which relies on a predictable system of payments, ceases to trust the system of payments. People start looking for other, safer ways to buy and sell. They move from one monetary unit to another. In the meantime, prior forecasts are shown to have been wrong. Businesses fail, stock markets crash, and banks close their doors. As people abandon one form of money -- checks, for example -- in their quest for another form of money -- cash, for example -- those individuals who had previously relied on sales to people who write checks find themselves hard-pressed to find buyers for their products. Their buyers no longer write checks.
No problem! Just start selling for cash. Problem: How do you send cash to your suppliers? In the mail? How can you prove that you sent it? You have to go to your bank. Your bank will wire the money to your supplier's bank. But your bank is closed. The demand for cash has wiped it out. Maybe your supplier's bank is also closed. So, how do you get shipments of goods so that you can sell them? You probably don't. You go out of business.
Now, let us consider technology. Your local bank has your money stored in its computer. Well, of course, it really does not store money in a computer. Or does it? Are those blips really money? They are for as long as you can write a check, or use a credit card, that can subtract from that computer entry. But if the check no longer works, or the credit card no longer works, or the bank's ATM cash machine no longer works, your computer entries cease to function as money. If the banking systems computer system does not allow additions and subtractions from those digital entries we call money, most people no longer have any money.
How can you get out of digital money? In other words, what other form of can you buy with it? Today, you can buy gold and silver coins, real estate in the country, and bulk food. But if all money except cash today is digital money, then only fiat money serves as money. You get your choice: digits or paper.
To get out of a lot of digital money and into paper money is difficult. Basically, most people cannot move into non-digital money from their pension funds. They can buy only non-money items. Gold and silver coins are non-money items. They are highly salable, but they are not money. They require a network of specialized dealers to create a market for them.
Think about the number of institutions that do not rely at all on digital money. It is a very short list. Now think of institutions that are likely to survive a transition from digital money to gold and silver coins, but without fractional reserves. There will not be many of them.
The national governments of this world survive because they get those under their jurisdiction to send them digital money. This means that they rely on the banking system. The alliance between central governments and central banks has been operating since the establishment of the privately owned Bank of England in 1694. That model spread throughout the world in the twentieth century. Today, it is the basis of the international order. If the banking system collapses in a sea of bad debt or hyperinflation, the humanists' New World Order collapses with it.
The NWO must defend the banks. This is why hyperinflation is a threat to it; it undermines banks. But so is a collapse of bad debt. What's a central planning agency to do? In short, what's a central bank to do? Exactly what politicians do: delay making a decision. Meanwhile, hold press conferences in gibberish. The all-time model is Alan Greenspan.
THE FALL OF JERUSALEM
With this in mind, it is time to review some ancient history: the fall of Jerusalem in A.D. 70. It is worth noting that the time frame was one hour. In fact, it took many months for the city to fall. John prophesied regarding this event:
And the merchants of the earth shall weep and mourn over her; for no man buyeth their merchandise any more: The merchandise of gold, and silver, and precious stones, and of pearls, and line linen, and purple, and silk. and scarlet, and all thine wood, and all manner vessels of ivory, and all manner vessels of most precious wood, and of brass, and iron, and marble, And cinnamon, and odours, and ointments, and frankincense, and wine, and oil, and fine flour, and wheat, and beasts, and sheep, and horses, and chariots, and slaves, and souls of men. And the fruits that thy soul lusted after are departed from thee, and all things which were dainty and goodly are departed from thee, and thou shalt find them no more at all. The merchants of these things, which were made rich by her, shall stand afar off for the fear of her torment, weeping and wailing, And saying, Alas, alas, that great city, that was clothed in fine linen, and purple, and scarlet, and decked with gold, and precious stones, and pearls! For in one hour so great riches is come to nought. And every shipmaster, and all the company in ships, and sailors, and as many as trade by sea, stood afar off. And cried when they saw the smoke of her burning, saying, What city is like unto this great city! And they cast dust on their heads, and cried, weeping and wailing, saying, Alas, alas, that great city, wherein were made rich all that had ships in the sea by reason of her costliness! for in one hour is she made desolate (Rev. 18:11-19).
What is described here can be applied to any city in which the means of payment breaks down. Why would merchants bring goods into a city if those dwelling in it cannot pay? It is the prospect of payment that keeps every delivery system operating. It is this prospect that puts a newspaper on a front lawn, electrical power in a line, water in a pipe, takes used water out of a receptacle and down a pipe, and so on. In short, if the means of payment should ever break down, there will be fewer and fewer deliveries until those inside the city can begin to produce something of value for which they can obtain the new money.
Problem: the productivity of a person who lives in a high division of labor economy is dependent on the existence of a universal means of payment. The value of his productivity collapses overnight -- "in one hour" -- if the traditional means of payment is not replaced immediately by a new means of payment.
This is why there must be continuity from fiat money to money based on precious metals if we are ever to bring national governments under control -- control of the masses, who buy and sell.
This must not be another government scheme to fleece the public with a golden fleece. It must not be another government-guaranteed gold standard. We have seen how reliable such pseudo-gold standards are. They lure people to hand over their gold to a local bank. Then the local bank joins a central bank. Then the government authorizes the central bank to keep the gold. That happened in 1914. Most Europeans never got their gold back.
CONCLUSION
For a gold coin standard to be reliable, it must be the product of voluntary exchange. It must not be just another fiat currency. It must not be "spoken into existence" by a national government: "Let there be monetary liberty!" Civil governments have never declared monetary liberty. They hate monetary liberty. Monetary liberty is a restraint on civil government. That is why we need it.
There was been a worldwide break in the payments system in 1914: from gold coins to iat money. To restore monetary liberty, there must be a vast monetary reform that is the product of human action, not human design.
Anyone who comes with a monetary reform plan engineered by a national government is operating under a delusion: the doctrine of the nation-state's legal sovereignty over money. Ignore him . . . or her (e.g., Ellen Brown).
Accept no substitutes!