Tuesday, November 30, 2010

Renaissance of the Gold Standard?

Discusses how the gold standard might effectively revive, from the private sector.
Global opposition to Fed Chairman Ben Bernanke's policy, World Bank President Robert Zoellick's "trial balloon" and statements by some of the new Republican Congressional caucus have caused a modest revival in consideration of the Gold Standard. In my view, the chances of its revival by official means in the next 10 years remain infinitesimal, but there is an increasing probability of private sector activity in that direction. Not only politically, the bombed-out Gold Standard stock may have reached bottom and be beginning a modest revival.
The Gold Standard did not disappear because it caused the Great Depression (it had only modest fingerprints on that disaster) nor because Maynard Keynes called gold a "barbarous relic." In reality, its demise had a much simpler cause: the rising rate of global population growth, which caused it to become damagingly deflationary...

One advantage of commodity-based money over fiat currency, however, is that it does not require official sanction to come into existence. Whereas paper money requires a central bank and a national credit rating behind it to attain credibility (and even with this sometimes fails to do so, as in Zimbabwe, Weimar Germany or Latin America for much of the 20th century), gold-based money can come into existence through private activity.

There is some evidence that this is happening. Austria's Raiffesen Zentralbank now offers its clients gold-based accounts, and other banks are likely to follow. The SWIFT international payments system now allows payment in gold, an essential element in a currency's infrastructure in today's markets. Governments worldwide are competing to depreciate their currencies (or, like the hapless EU, watching their currencies come under fire as the weaker members of their union get into difficulties). At some point, a major exporter with a good competitive position—if you asked me to guess, from China or Germany—could start invoicing its customers in gold.

When that happens, a very important barrier will have been crossed. Once gold-denominated trade paper comes into existence, it will form the nucleus of a short-term money market, in the same way as the eurodollar market for assets and liabilities outside the United States arose in Europe after 1957 or so. Within a few years, gold bonds will be issued—once a company has gold-denominated receivables, it will have a natural hedge for such financing, which will remain cheap in interest terms even after conventional currency interest rates rise. It has happened before, in the formation of the eurodollar and eurobond markets in 1957-65. This time, once gold invoicing happens, the gold money and bond markets are likely to spring up quite quickly.

Banks, even outside Austria and Switzerland, will quickly get up the curve of offering gold-denominated accounts once their corporate customers demand them. They will find that a substantial demand exists at the retail level also. Here, modern technology will be very helpful. An ordinary citizen will be able to use a gold-denominated account for day-to-day transactions by means of a debit card, without the need to carry round expensive sovereigns or double eagles. A payment of $9.50 for a sandwich will be satisfied by the debit card, which will pay dollars (say) to the sandwich bar while debiting the account about 0.007 ounces of gold, using that day's gold price.

The card holder will pay perhaps 1% extra for everything, to cover the cost of the gold/dollar exchange transactions; but on the other hand, since his cash holdings are in gold, he will very likely gain much more than that percentage in dollar terms each month. His wealth will be expressed as so many ounces of gold (or kilos, if he is European), but he will never need to hold physical gold at all—or any other currency, though probably he will get a few dollars from the bank's cash machine each month for expenditures for which his debit card is not accepted.

In this way, both corporate and individual users will be able to move their transactions and holdings to gold, with the banks adapting to meet their needs. The banks will remain regulated by national authorities, and will have to manage their gold assets, liabilities and capital in such a way as to avoid breaching the authorities' leverage ratios, based on the gold price at the end of each reporting period...

(original link here - now broken)

Silver money for Americans

I don't agree with this article's solution in its entirety (it's too Fed-based; obviously, implementing the Constitutional Tender Act at the State level would be the best solution!). However, I am happy to see more and more solutions being proposed in order to take us away from fiat funny money, and back to sound money.
I think that my readers will agree that there is a desperate need for some fresh thinking about money in the U.S.

Many respected analysts worry that the expected action by the Fed to apply a new bout of QE after the coming elections is fraught with danger.

Fiat money in the US is in an advanced stage of decomposition and when money rots, the whole social, economic and political structure of the nation rots with it. A return to sound money is urgent. More and more people are aware of the perilous road ahead if nothing is done.

The problems facing the US are so gigantic in nature, that an all-round solution to them is impossible when analyzed in practical terms. A return to sound money is a return to gold and silver as currency. Gold is outstanding as money – but how to realize that goal? Silver is great for popular use – but again, how to regain it?

The only way open to regain a sound footing of real money for the US economy must be by establishing a process through which there will be a gradual and natural return to sound money. It is impossible to reform or improve the present monetary system of the US any other way.

The US abandoned sound money in a series of gradual steps; the first metal out of the monetary system was gold, in 1933; the second metal out of the system was silver, in 1965. The return to sound money would follow those steps, in inverse order: silver would return first, because silver has always been the money of the people; gold would return last, silver having opened the way.


Silver money for China

This comes from the "Asociación Cívica Mexicana Pro Plata A.C." It's an interesting approach to solving that country's rising inflation woes...
The most interesting section is here:

The silver coins that go into circulation will be money, but will hardly be used for purchases. It will be difficult to find these coins, as they will all be treasured up by the Chinese population. Their velocity of circulation will be close to zero and thus they will have no inflationary effect upon the economy. Paper Yuan are withdrawn and replaced with silver money which goes into savings; this is a correct way to fight inflation.

Saving these coins will amount to voluntary austerity for the Chinese. Saving is the postponement of consumption. Voluntary austerity is always more effective and sounder from an economic point of view than the forced savings beloved of Statists, who have dictated taxes and scarcity for consumer goods so that the Statists can build factories.

The monetization of a silver coin will be a free-market decision that prompts people to save, spontaneously, of their own accord, and which does not require raising interest rates to draw the people’s money out of the economy into savings.
We have been proposing the monetization of a silver coin in Mexico since 2001. According to our proposal a one-ounce coin of pure silver, with no engraved value, would be given a monetary value by the Mexican Central Bank. This coin would exist and circulate as money, in parallel with the paper money system of Mexico.

The monetary value would be superior to the bullion value of the silver ounce by about 15%. This margin would allow a profit, called “seigniorage”, for the Central Bank. Since the coin would not have an engraved value, rises in the price of silver (which would tend to eliminate the seigniorage of the Central Bank) would be met with new, higher, Central Bank quotes for the monetary value of the coin.

The rises in the value of silver in the silver markets of the world would no longer cause the disappearance of the monetized silver ounce. As soon as a rise in the price of silver would begin to affect the seigniorage of the Central Bank, it would produce a new and higher quote.

In order for the silver coin to become money and cease to be a commodity, the last quote of the Central Bank would have to remain stable and not diminish if and when the price of silver were to fall, which of course it does from time to time. Granted such immunity from falls in the price of silver, the coin would become legal tender money and could be used for any commercial transaction.

Now we read that China is having problems with inflation of its money supply. We think that if China were to monetize a silver coin, its Central Bank would have an effective instrument to assist in dealing with inflation.

China used silver exclusively as money for many centuries and restoring it to circulation in China would seem appropriate for China, as it aspires to recover its former glory as the richest country in the world.


Tuesday, November 16, 2010

Constitutional Tender Act RE-Introduced in Georgia!

The "Constitutional Tender Act" has been re-introduced in the Georgia House of Representatives by Rep. Bobby Franklin (R-43), a member of the Georgia House Banks & Banking Committee, for the 2011 Session of the Georgia Legislature. The bill number is HB 3.

It will take a strong dose of involvement from citizens across the country to get our States back on track using Constitutionally-mandated money, so we'll need YOUR help!

Every citizen TODAY needs to contact the Leaders of the Georgia House of Representatives and ask them to support this bill -- CLICK HERE to take action NOW!

Monday, November 15, 2010

"Gold ATMs" Reinforce the Constitutional Tender Act

The technology is available NOW!

Back in October, we mentioned that ATMs that sell gold bars - that is, they convert fiat money into real money - are now operating in luxury hotels in Abu Dhabi, Bergamo and Madrid as well as around Germany.

I just noticed that a few months before that, in May, Joseph Salerno wrote on the Mises Economics Blog about the start of this enterprise:
It appears technology has moved the world one small step closer to a sound money. On Wednesday, a hotel in Abu Dhabi unveiled the GOLD To Go ATM, a gold dispensing vending machine created by a German firm. The machine dispenses 24-carat gold bars in 1, 5, and 10 gram sizes as well as gold coins. A computer inside the machine keeps track of the gold price in real time and updates it every ten seconds but maintains the price for a given buyer for ten minutes. The machine itself sports a gold leaf finish. There are plans to install 200 more machines in Austria, Germany, and Switzerland. It is noteworthy that the technology of tracking the gold price in real time could be adapted to tracking the gold-silver exchange rate thus reducing the transactions costs and facilitating the development of gold and silver parallel standards. Silver coins would be much more convenient than gold coins for everyday transactions. At current prices, a 1 gram silver bar would have a purchasing power of about $.70 and a 5 gram bar of about $3.50. “Small change” would be provided by bearer vouchers printed on base metal or on paper notes issued by nationnwide merchants like Walmart, McDonald’s, Best Buy etc. which would not be claims directly redeemable in gold or silver money but redeemable in their merchandise (like mall or store gift certificates). As long as these vouchers were not issued in excess they would be readily acceptable as small change in exchange.
This is exactly what we're saying can and would happen after passage of the Constitutional Tender Act: businesses and consumers, who would now be required to use gold and silver coins to pay taxes to, or receive payment from, the State, would find themselves in need of converting their fiat Federal Reserve Notes into real money, that is, gold and silver coins. They would still be using FRNs in non-State transactions, of course; but as businesses start posting their prices in dual currencies (FRNs and Gold or Silver Eagles) in order to take in coins to pay taxes, consumers would start seeing that the prices of goods are rising in FRNs, but they're remaining fairly level in Eagles. (For example, that digital camera at Wal-Mart is priced today at 1 Silver Eagle, or $29 FRN; next month, its price has risen in FRNs to $32, but is still priced in silver at 1 Silver Eagle, because that one-ounce silver coin retains its actual value in relation to the amount of products it can buy.) In a kind of "reverse Gresham's Law" effect, the use of money that keeps its value - gold and silver coins - would increase, and the use of money that loses its value - FRNs - would decrease: good money would chase out bad money.

Even simpler will be the use of ATM Cards, Debit Accounts OR "Secure Credit Cards" backed by gold and silver: you've got 20 Silver Eagles in your account from your recent State income tax refund; the cashier runs the camera you want over the scanner, you swipe your card and choose from, say, "FRN credit", "FRN debit", "Silver/Gold credit" or "Silver/Gold debit" on the little touch screen; you select "Silver/Gold debit", pay a Silver Eagle out of your account and into Wal-Mart's, and voila, the camera is yours... and Wal-Mart has another ounce of silver it can use to pay its own State sales taxes.

What if you don't have enough silver in your bank accounts to pay for the camera, but you do have enough fiat money? Then pay with FRNs... or whip out your iPhone, fire up your banking app, and transfer some FRNs into your Silver account by using your friendly bank's automatic conversion service which keeps track of the silver and gold price in real time - just like those "gold ATMs" above do.

It's simple. It's easy. It's already being done. And it would save the monetary system of the State and, ultimately, of these United States.

So get your State legislators to introduce the Constitutional Tender Act bill - and then rally everyone to make sure it's passed into law... before it's too late.