The Key Factors in a Sustainable Gold Standard for Money

Introduction

I have been keenly interested in the nature of money since 2009 and have read many books and articles about it, and have heard discussions from forums and conferences. I have studied its origins and changes. This revealed the broad array of different plans for monetary systems as to who creates and controls it, and the role of commodities such as gold. In this article I will review basic issues and comment on some of the recently proposed plans. I use the word ‘Sustainable’ in the title because ALL money in the past has eventually been abused and ruined by greedy and desperate politicians and bankers. Of course, this applies to today’s failing US Dollar (USD) which has lost over 95% of its value (purchasing power) since the Federal Reserve System was founded in 1913.

Money is just a step up from the cumbersome ‘barter’ method. It serves as an in-between ‘third party’ called a ‘medium of exchange’ that can then be used to buy from others, or kept as a store of value (savings). Money also serves as a ‘unit of account’ (weight of the commodity it is made of, or a ‘name’, such as ‘dollar’, representing a weight) for pricing and accounting.

Money is a product of users (buyers and sellers) in the marketplace, and the government need not (indeed should not) be involved, except to perform its proper function of protecting citizens from fraud and theft. Governments should not be allowed to choose the type of money, create it, or ‘manage’ the system because history shows that 99% of them abuse the monetary system to pay for their projects (mostly war, welfare and corruption).

Central Banks

For the same reasons as above, there should be no central bank which has special privileges to create and lend money, set interest rates, ‘manage the economy’, etc. Ours is the ‘Federal Reserve System’ (the ‘Fed’), which is a private firm controlled by the federal government. All major nations have one and they are all created by and for politicians and bankers to be sure they never run out of money. Ours and the others all do far more harm than good and should be abolished and replaced by private mints (‘Mints’ below). Many books and papers written by esteemed academics and think-tank scholars fall short of using weight of gold as the unit of account, and hold on to some functions of the Fed and government (just do a tune-up). It seems that self-serving peer-pressure and habits prevail!

Types of Money

Various materials of value (shells, hoes, tobacco) have been used as money, and all served the need for a medium of exchange, unit of account, and a store and measure of value, but gold always emerges as best, as described in Table 1 below.

A. Coins: Coins can be of two types;

1. ‘Commodity’, where they are partly or wholly made of a commodity such as gold or silver. Various coin values would have different amounts. For example, a small, round, gold disc could be forged into a hole in the center of a coin. This would allow testing to assure its purity and weight. The balance of the coin would be hard base metal or alloy, with the weight of precious metal the coin contains marked on it, or

2. ‘Representative’ (or ‘Token’), where they are made of base metals such as copper, aluminum, zinc, nickel, steel, and alloys thereof, and are marked as redeemable to a certain weight and purity of a commodity such as gold or silver. These are useful for lower value transactions.

Characteristics of good commodity coins

To achieve broad use, commodity coins must be made of, or contain, a material that has these ten characteristics:

Rare, with a low amount in existence now, and limited new supply,
Malleable; can be pressed/stamped into coins,
Stable physically and chemically; doesn’t break, rust, or rot; can be stored; lasts through much handling,
Easy to identify, and determine purity and weight,
Difficult or impossible to counterfeit,
Homogeneous; a piece is the same throughout,
Divisible into pieces; diamonds and pearls aren’t,
High value per ounce; not bulky to handle or store,
Acceptable to most Sellers; familiar and salable.
Has market value when not used as money (thus is; a) equal in value to the good or service in a transaction, and b) a store and measure of value.)

The ‘market’ (users of money) has decided that gold fits these requirements best, but silver and copper can have a role in parallel, with no fixed ratios set as to value per gram (i.e., no bi-metallic standard). The coins must be valued and marked by weight of their precious metal content (such as ‘milligrams’), or the amount they can be redeemed for. It is interesting to note that gold is not ‘consumed’ as other commodities, including silver and copper, are. Thus except for wear, over 90% of all gold mined in history still exists (even if buried in a tomb).

The term ‘sound money’ is often used to denote; 1) It is made of a material that has market value, even when not used as money, and 2) Is not just ‘fiat’, where the value of base-metal (not ‘precious’) coins or paper notes (such as the USD since ending gold redemption in 1971) is decreed (and enforced by legal tender laws) by the issuing government.

B. Paper Notes: Notes can be used as a convenience (compared to carrying or storing tiny or large pieces of gold), but must be redeemable, by the issuing mint or dealer, to any bearer on demand. Notes are not ‘money’, -linked, -backed, or -based on or to gold, but just a claim check to redeem for money (gold, etc.).

Mints

Private mints should be allowed to create all of the above forms of money, without a government license. As with any product, users in a free market will determine which is most popular. Competition works! The only law would be that mints must publish the percent of gold reserves they have for redemption of paper notes, but with no required percentage. The government, or private security firms, would perform ‘surprise‘ audits at least twice a year. I say surprise, so unscrupulous mints could not borrow gold just to improve their results in a scheduled audit.

Price of Gold

Gold has no price (in USD, etc.) when it is used as money, because it IS money, valued by weight and fineness. It only has an exchange rate with other money. Example; what is the price of a US Dollar (USD)? Gold’s value (purchasing power) varies by the rules of supply and demand, as with any commodity. This is a key error in plans where the goal is to manage a fixed price (in USD) of gold, such as in the May-2014 Forbes-Ames book Money.

My views are consistent with those presented by esteemed Prof. Joseph T. Salerno (pace.edu) in his two articles;

1) ‘A Substandard Golden Rule’, published in the ‘Mises Daily’ on May 29, 2013 (http://mises.org/daily/6442/A-Substandard-Golden-Rule). Salerno says;

The gold “price rule” denotes the monetary reform proposal put forth in various forms by a number of supply-siders, including Arthur Laffer, Robert Mundell, and Jude Wanniski. Laffer’s detailed formulation of the proposal also served as the basis of the Gold Reserve bill, introduced in the Senate by Jesse Helms in January 1981. The scheme has reared its head once again in H.R. 1576, the “Dollar Bill Act of 2013,” introduced by Congressman Ted Poe (poe.house.gov; R-TX-2) on April 16, 2013, and strongly supported by Steve Forbes.(Redick note; It was never passed by the House Financial Services Committee), and

2) ‘The Myth of the Unchanging Value of Gold’, published in the ‘Mises Daily’ on Aug. 29, 2014
(http://mises.org/daily/6858/The-Myth-of-the-Unchanging-Value-of-Gold}: He ends with this;

Proponents of gold-price targeting thus seem to ignore both theory and history in assuming that once the dollar price of gold has been fixed, the value of money itself becomes forever stable and immune to the influence of market forces of supply and demand. Inflation and deflation are, therefore, ipso facto banished from the economy. This implies that any changes occurring in the quantity of money under a fixed-gold price regime are to be construed as benign and stabilizing adjustments of the supply of money to changes in the demand for money. Steve Forbes writes: “The fact that a foot has 12 inches doesn’t restrict the number of square feet you have in a house. The fact that a pound has 16 ounces doesn’t restrict your weight, alas — it’s a simple measurement. … The virtue of a properly constructed gold standard is that it’s both stable and flexible—stable in value and flexible in meeting the marketplace’s natural need for money. If an economy is growing rapidly such a gold-based system would allow for rapid expansion of the money supply.

In other words Forbes’s “stable and flexible” gold standard would facilitate and camouflage an inflationary expansion of the money supply that would, according to Austrians, distort capital markets and lead to asset bubbles. The motto of our current gold-price fixers seems to be: “We want sound money — and plenty of it.”

Bravo for Prof. Salerno!

Again, I say the USD should be abolished, and use ‘weight of gold’ as the unit of account. Congress would include a conversion program from the USD to gold in a yet to be written ‘Monetary Act of 2015’. My plan is shown in Chapter 4 of my book Monetary Revolution USA, available on Amazon.com.

As with any commodity, gold value varies with market demand, even when used as money. When demand increases in a market area (region, nation) gold will APPRECIATE in value and cause price deflation (reduced prices; by weight). This is GOOD! It encourages saving and increases the standard of living. It is more important for money to retain value (purchasing power) than to stay the same. Gold money will flow between regions to seek equilibrium (but differences are OK). We have lived with inflation since the Fed started increasing the money supply in 1913 (to pay for WW1, then feed the ‘Roaring 20s’). Yes, sellers will need to adjust prices (and some contracts and insurance), but this is minor compared to the ravages of our present ‘monetary inflation’ (increasing the money supply, which causes ‘price inflation’

Conclusion

If my ideas sound good to you, contact your Representative or Senator in Congress to urge them to start or sponsor the ‘Monetary Act of 2015’ based on my ideas.

Thanks, and good luck as the USD falls in value! See investment ideas in my How to Protect and Grow Your Wealth book.

All of the above issues (and more) are covered in my book Monetary Revolution USA, and How to Protect and Grow Your Wealth, the text of which is posted (as a public service) at part 2 in the left margin of my ‘better government’ site www.Forward-USA.org, and on Amazon.com. See more articles about money in part 8, and my bio at part 6. Also visit my ‘business’ site at SaferInvesting.org.

By: David Redick (BS-Eng., MBA-Economics) is an activist for peace and prosperity via better (usually less) government, and free markets. Send comments to [email protected]. Read more at his web sites www.Forward-USA.org and SaferInvesting.org, and his five books listed on Amazon.com.