- Alan Greenspan Gold and Economic Freedom 1966

What is the underlying problem that causes economic poverty and unsustainable growth in the free-market? For any economy to succeed it requires only 4 important bases on which to build the foundation of growth upon:

(1) Rational and logical monetary policy
(2) Minimal taxation/regulation levels
(3) Private property ownership rights
(4) Enforcement of legal contracts

The issue is not right wing or left wing politics; both have become a pawn of the fiat money supply and fractional reserve banking in conjunction with the notion of floating exchange rates used by altruistic statist advocates. Conservative/Liberal Keynesian economic theory and Friedmanite monetarism policy is where the manipulation was founded.

Fractional reserve banking combined with fiat money is where the current banking system comes from. It is nothing more than the ability to artificially inflate the market place. No other business is allowed to operate in this manner because it is viewed as being criminal, yet because of the statist altar at which many worship, it is considered acceptable simply because some individuals involved in government have a direct benefit from the continuation of the current system. Wow, what an honest argument to keep the floating money supply in circulation!
Fiat money is nothing more than the stuff that we commonly find in our wallets and bank accounts. It is a state sponsored project that always involves an “official” central bank. The paper that we call money is nothing more than credit, which supposedly represents something of intrinsic value. The catch however is that credit can only represent something of value if you have something of intrinsic value to back it up, otherwise credit means absolutely nothing.

Austrian school economist Ludwig von Mises in his "Theory of Money and Credit (1912)” points out that the business cycle of monetary inflation is dangerous. When government inflates the money supply, it does so by lowering the interest rate for lending, this is set by an “official” central bank. The problem is, central banks intentionally set the lending interest rate below the proper free-market level that depends on saving.

The artificially low interest rate misleads businesses into making unsound investments by spending money that it would not otherwise do and this creates an inflationary boom. It also misleads families and individuals into spending money in a way that they would not normally do under free-market conditions. As the lending interest rate is lowered, central banks simply print more money to make up for the demand. In essence they dump large quantities of fiat money into the market place. This makes money that you have saved for future investment or retirement less valuable, in essence the state is debasing the money supply, the inherently short sighted goals of getting politicians re-elected is the goal. Fiat money credits are only worth something if they represent something of intrinsic value, so the question is what are the banks using to back up this paper credit? Gold as a representative of hard currency was eliminated for all intents and purposes in North America some 80 years ago. Now we are basing money and it’s value with the mistaken belief of trust in our elected representatives.

The rest of the population is harmed as well with fiat money and its interest rates while investments are liquidated and reinvested in places that people truly want them, instead of the places that the skewed market signals falsely indicated where they should have been placed. People go without work and wealth is not created as fast as it could be under normal free-market conditions.

When the credit expansion slows and stops because debt levels that are being carried have reached a ceiling or because the central bank raises the interest rate and thus pulling fiat money out of circulation, investment errors are revealed and bankruptcies and unemployment result.

Central banks like the Bank of Canada or the US Federal Reserve will inevitably create the business cycle because of the very nature of floating money if you will. They are after all a cartel, Mises student and Noble prize-winning economist Friedrich Hayek makes this point bluntly with the following statement: “There is no justification in history for the existing position of a government monopoly of issuing money.”

Also of major concern, state run central banking systems throughout the Western World are accountable to no one, and yet they virtually control the entire Western monetary system. Generally they have no budget limits, they are not subject to audits, and no Parliament or Congress can supervise their operations. Furthermore it isn’t even fractional reserve banking either, since money is just printed without any notion of gold reserves.

Prices can increase or decrease faster or slower than the printing of the money supply, the amount and speed of which prices can increase or decrease depends on people's desire to hold cash or save to spend another day. Ludwig Von Mises points out that because prices increase only relative to one another, bank inflation brings about redistribution of wealth, from savers and earners to banks and government and its connected interest groups. It is a form of stealth taxation and confiscation of ones savings.

When governments decide that they are going to interfere in the free-market it causes distortions in the market place, because they wish to build massive institutions or create giant welfare state programs for the so-called “betterment of society.” Where does the money come from which is needed to build these projects? It comes from the printing off of more money; it is backed by nothing for all intents and purposes. Furthermore the elimination of the gold standard paved the way for states of all political persuasions to play the deficit and debt games to disastrous ends, where future generations are forced to pay for past and current mistakes simply because past and current people feel the state owes them something immediately no matter what the cost for whatever reasons.

Most universities in the world that have economic departments which are either wholly funded or partially funded by the state only teach economic theory at the macroeconomic level based on the failed concept of fiat money (self interest being the main reason so as to sustain continuing education funds) and floating exchange rates unless of course you are lucky enough to learn on your own the Austrian school theory or to a lesser extent some Chicago school theories prior to being tainted by Friedmanite monetarism. Both of these lines of thought point out how the fiat standard works in contrast to the gold standard.

If one asks the overwhelming majority of state funded or stated educated economics professors about the Gold Standard, you will usually hear he or she mutter under there breath, as they quickly walk away from you with a brush of there hand that ‘the gold standard is far to rigid and inflexible and it requires sovereign individual private property ownership rights to succeed.’

Immediately when one hears the words “inflexible” one wonders what that has to do with economics? Economics for all intents and purposes is nothing more than using the mathematical skill of adding and subtracting numbers. Economic theory should be logically rational and mathematically “inflexible,” this ensures that the numbers are adding up correctly, unless of course one is interested in the voodoo black magic arts that we call politics where being “flexible” ensures that you are elected.

Canadian Nobel prize-winning economist Robert Mundell at one time rationally pointed out the demise of the gold standard could be traced to the rise of majority rule (or mob rule some might argue) and the resultant expansion of the role of the state, which is why private property ownership rights are incompatible with the current fiat floating money supply. So now we see why gold is “inflexible," it doesn’t suit the purposes of our elected masters.

When one combines private property ownerships with the gold standard it almost immediately limits the abilities of politicians to interfere with your savings and retirement funds by preventing a manipulation of the money supply for political reasons.

Currency or money has its origins as a market commodity, this is an undisputed fact, hence the gold standard, not by state edict or some social welfare collective communitarian straightjacket legislation. It should return to the free-market. Banking should be treated as any other segment of the economy in a capitalist system, and face competition (something which we don't have in Canada).

An alternative to the fiat money supply of the printing press would be a decentralized private system of commodity-backed credits. These credits would go into mass circulation as fiat money is used today, however it would actually represent something of value. We would build our country stronger through sound economic policy where people are able to save for investment or retirement.

The reserve ratio in banks with a gold standard would be 100% for every dollar with a commodity-backed credit system deposited in a bank, this would be kept in reserve to satisfy a call on that deposit. The bank could not lend out any of its deposits, only the equity in the bank. It would still make money however by charging a storage fee of some sort. The fee collected from storage could be lent out for borrowing purposes by the bank if the bank felt it was making a wise financial business choice for its shareholder interest; this eliminates fractional reserve banking, which is where the “inflexible” argument also comes from in regards to the gold standard. Plus, it prevents a bank run as witnessed by the tragic events of 1985 when numerous regional banks in the United States faced bankruptcy due to a run on credit when individuals demanded a call on deposits. Many current bankers didn’t believe a run on banks similar to what was witnessed in the 1930’s would repeat itself again, yet once again in 1985 a run was witnessed which was contained by the taxpayer.

Anyone who might be interested in purchasing Gold on a regular basis as I do might want to check out the following link:

http://www.e-gold.com/

Tangible wealth is universally tradable and insulated from inflation and deflation, which is the reason the gold standard, appeals to the libertarian of the Austrian or early Chicago school. Political interference has no real power with the gold standard.

When the gold standard is used as the only form of exchange, backed of course by commodity based credits by a majority of nations, something interesting would happen in global markets. Having 100% reserves would destroy a significant portion of the current banking system, but not the financial markets, they would be forced to accept change just as it happens everyday in the free-market.

A truly free international gold standard would boost a global division of labour in both the Western World and the developed world. The currency name, or unit of exchange would obviously be different from one nation to the next especially outside of North America, however the gold standard would create a truly equal global economy because all individual economies in different states would act as one as gold savings leave one nation for another.

The danger of bankruptcy and unemployment is what forces the market place to adhere to sound economic and monetary policies, with central banking in place you create an almost “lender of last resort” where the individual taxpayer is fooled into paying for the mistakes of state intrusion into the market place. When a bank run happens with the current system the only way to momentarily prevent an additional run is for the government to step in a take over the bank, thus the taxpayer is always left on the hook.

In the words of Alan Greenspan, “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.”

Removing central banking interference through a 100% decentralized and private banking system would give the free market steady growth by ensuring that business is not harmed by recessions created from the expanding money supply. Skewing market signals only creates bad investments.

Canadian Nobel prize winning economist Robert Mundell on the error of moving away from the gold standard, “After 1971, when the Golden Anchor was lifted, inflation control had to depend on the slender reed of Federal Reserve discipline. The result was pandemic inflation that has all the characteristics of becoming a permanent feature that future generations will have to cope with.” Interestingly enough Mundell has become a Friedmanite monetarist as a way to manage the existing system from the inevitable collapse that will happen at some point. Now I understand that inflation may not be what it was in 1983 but it should be noted that the Bank of Canada under its new governor (Dodge) has actually raised the inflation rate standard for Canada in conjunction with discussions from the Department of Finance during the last 4 years. Why would banking policy even discuss anything with the Department of Finance in regards to “inflation targets” if sound economic measures instead of political measures are called for?

Since 1971 it has in fact been left to the elders of the Chicago and Austrian school economists to simply manage the fiat standard as best as possible, even though they know full well they are unable prevent the damage caused by political intervention as witnessed by all of their previous statements. Keynesian spending, fractional reserve, and a floating fiat standard are driving the banking and money markets, which make zero rational economic sense.

The common man/woman who is saving money becomes a fool with the fiat standard, because the purchasing power of money drops every year. People have an incentive to spend now, and not save for the future because the central bank will simply steal their savings by devaluing them, they do this by printing money at the “Official Central Bank.”

That money was once yours, but by increasing the supply, the central banks decrease the worth of our remaining supply. This process is also what causes the business cycle. It also is the reason why we have dangerous, unsustainable booms, and then terrible recessions.

The only other form of honest trade other then the gold standard is barter, which is an absolute joke and unworkable in real world conditions. Sound money such as a gold standard or some other commodity based system prevents the state’s ability to debase the money supply and allows sovereign individuals to save money which is gaining in value for one' s long term security. If you were happy with money losing its value over the long run, then you would be happy with the present system. If you want your money to increase its value, you want a gold standard. As a medium of exchange, gold represents something, which pieces of printed money do not.

At what point are we unable to continue with the present system? Australia and Canada as examples had their currencies fall almost in half from 1997/1998 through to 2002, real people were losing their abilities to buy almost anything that was imported and facing a wipe-out of existing savings through no fault of their own. Although it should be pointed out that their savings didn’t consist of a gold backed currency, this was the problem because the fiat standard had been chopped in half, and while this is happening we have the markets being flooded with money. Ever wonder why some people are a little worried about the current banking system? It is so easy to manipulate and built on a deck of cards compared to the gold standard.

What happens when we have another South Korean or Japanese economic problem, like the one that existed in 1998? Only what happens when we are unable to slide the exchange rate any lower because you would eliminate buying power completely and eliminate all personal savings?

Nobel prize winning economist Milton Friedman stated: “The blind, un-designed, and quasi-automatic working of the gold standard turned out to produce a greater measure of predictability and regularity - perhaps because its discipline was impersonal and inescapable -than did deliberate and conscious control exercised within institutional arrangements intended to promote monetary stability.”

Austrian school economist Murray N. Rothbard pointed out that while not perfect (what is?) the gold standard of the 19th century "allowed for relatively minor booms and busts, it still provided us with by far the best monetary order the world has ever known, an order which worked, which kept business cycles from getting out of hand, and which enabled the development of free international trade, exchange, and investment.”

Gary Huskins a conservative Nova Scotia author with some libertarian leanings currently shopping his latest novel points out that “the current floating fiat standard is as fictitious as my writings.”

I understand the fear some people may have towards change. The current system allows for greater involvement in the market place by the state, Keynesian spending cycles, floating exchange rates, which sometimes have no rational behind them at all. People taking part in the discussion of promoting the Gold Standard lack trust in their elected politicians, these are the very same politicians who created this mess to begin with. Need I remind people of the great Depression, price and wage controls, stagflation, 1981’s 21% interest rates, bank runs of 1985, stock market crash of 1987, and the Asian financial meltdown of 1998? Everyone of the crisis can be traced back to the manipulation of the money supply by political intervention through central banking.

Case in point, even though Nobel prize winning economist Milton Friedman was against the shutting of the gold window in 1972, and provided that advise to Richard Nixon, it happened anyway, proving that politics ALWAYS trumps economics. The Gold Standard represents stability, value, and individual wealth generation.

For some additional interesting information about the gold standard and the cost of a gold standard check out this link which include former members of the US Federal Reserve:

http://mm.mises.org/?//mp3/capital/Garrison.mp3

This second link, has an interesting Nova Scotia Canada connection on how paper money came into being:

http://mm.mises.org/?//mp3/Rothbard/Gold.mp3

If anyone is interested in currency, where money comes from, and how it is created and exactly how fractional reserve fiat banking came into being you might be interested in checking out this 42-minute video at the following link:

http://mm.mises.org/?/video/Fed.wmv

U2 wrote and sang back in 1988, “If you want a way out, silver and gold” unfortunately U2 like many others, are under the mistaken belief that we have been using Gold all along when in fact we have been using an illusion. Murray N. Rothbard stated in regards to the Gold Standard, “so long as these reforms are effected as soon as possible and the country returns to sound money," I will add the following to Rothbard:

Private human action making economic sense and getting us off the road to serfdom!