GOLD AS FIAT'S AUTOPILOT?
Alex Wallenwein
Gold-bugs always say we should return to "honest money." Paper-tigers and normal people just want efficient money. Politicians want your money, banks want to loan money (into existence), and central banks just print money and then loan it to the government. It's downright insane.
Let's face it: in a world where everybody is dishonest, at least to some degree (we all lie sometimes, don't we?), can there truly be such a thing as "honest money"? Sure there can. The day there are honest politicians, there
will be honest money.
But jokes aside, in this insane world, is there any chance at all for a sound, efficient, self-regulating monetary system that doesn't depend in its viability on competing with the price of gold?
Since we know that we are all less than totally honest some of the time, what's the use of wanting "honest" money, anyway? Many say: "why not just go with the flow and let fraud rule the day? In other words, why fight the current system? Just take advantage of it!"
Is that the solution, though? Maybe it is for them. Maybe it is for a lot of people. It sure seems, sometimes, like those who are the most dishonest get ahead the most. But on a long term, societal scale, rampant and institutionalized dishonesty is simply too costly. It introduces inefficiencies into the system that very soon destroy the system itself, and that is not even in the interest of the dishonest politicians and other power brokers.
So what's the solution?
Let's just go to fantasy-land for a moment and see if we can design an "ideal" money system. What characteristics would it have?
Why do we want "honest money" anyhow? We want it because we don't want price-inflation to rob us of the purchasing power of the money we worked for so long and hard. That means, we want a system that does not favor inflation, unlike the current one. We want money that keeps its value.
What's next?
We do want money that is efficient. That means our "new money" needs to be able to be transferred electronically, and we need to be able to write checks and carry paper receipts for wealth with us without lugging gold and silver pieces around.
Next, we want this money to be universally accepted, or at least to be easily exchangeable into other accepted money, depending on geography, etc.
As to the inflation problem, we know from history that the gold standard alone was not enough to prevent over-lending, over-printing, and over-borrowing of money. If it had been enough, FDR would have never had to
outlaw the private "hoarding" of gold. Back then in the 1930s, it was the banks' over-lending of money, far beyond the reserves of physical gold they had in their vaults, that led to the necessity of FDR's bank holidays
and ultimate gold confiscation.
We also know that money without any connection to gold (i.e., money, the issuance of which is in no way restrained by the amount or lack of gold owned by a country's central bank) is invariably over-issued, which is by definition inflationary.
So what's the answer, then? Is there a "happy medium" that we should strive for? Or is there something totally outside this frame of thinking that will yield the desired result?
First, let's just realize that a "happy medium" would essentially be a compromise between two wrongs, for we already know that each of the two prior choices are wrong, or else we wouldn't be searching for the right one. So the middle between two wrongs can't make a right. It seems that, if there is a "solution" at all, it will most likely be outside the tried and trampled path.
All right. We know that we like gold on the one hand because it tends to enforce some degree of financial discipline on politicians, banks and people, and we like fiat on the other because it's convenient and therefore
efficient - unless it's abused, of course.
We also know that reintroducing a gold standard will not really solve the problem of over-lending and over-borrowing, and that a pure fractional reserve fiat currency will never beat the problem of inflation because it
is inherently inflationary.
Add to that the fact that politicians always want to make us think that "everything is OK" so we will reelect them when the time comes (or to build a legacy). That creates a temptation for them to misreport official figures and manipulate the mechanics of the free market. And that problem is compounded by the fact that we are often stupid enough to reelect them anyway, because we don't check their fast-moving fingers closely enough and allow them to make us believe that "everything is OK",
Could we then develop a system that uses the best attributes of each of the alternatives without being just a mediocre compromise between two bad choices? Can there be a system that lets each type of money perform its
best-use function without being subject to abuse, and without interfering with the function of the other? And could we possibly get our politicians to support such a system?
Maybe. (Remember, we're still in fantasy-land here.) So let's find out first what each asset's "best use function" actually is.
As we said, we like a gold-linked currency because of gold's capacity to restrain the excessive creation of paper-wealth, and because gold is a reliable store of value that doesn't depend on the fulfillment of anyone's
promises. Simultaneously, we like fiat currencies because they are convenient, adaptable, and efficient in their use as a medium of exchange..
According to the criteria just developed then, gold's best use function may not really be that of a currency, as the medium of exchange itself, but that of a store of value and as a restraining influence on money-creation.. That means gold's best-use function is NOT NECESSARILY that of "money," but rather that of a supporter and controller of money. At least it will be far better in fulfilling that function than politicians or bankers are.
Conversely, the best-use function of fiat is obviously not as a store of value, because it is so very much subject to over-issuance and manipulation by pols and bankers. And we know already that it is totally worthless as a
restrainer on money creation.
So again, the question: is it possible to create a system wherein each component can operate and fulfill its function perfectly (or as nearly perfect as possible in an imperfect world) without interfering with the other's
function?
And the corollary to that: is it possible to get support for such a system from politicians and bankers, who normally hate not being able to put their grubby little fingers all over the controls?
We know that politicians like fiat, because it gives them the power to create any amount of it at will, and they hate gold, because it tends to deny them that power.
Regular people, on the other hand, like gold (to the extent they know or remember its function) because it keeps the politicians from expropriating their wealth through wanton inflation. So fiat and gold are normally in
competition.
In the recent past (from 1971 at least until the late eighties), when the price of gold rose, people perceived that the security of their paper-money wealth was threatened, and they tended to move to gold. That was bad for the politicians because they lost power in the same degree as people moved away from "their" fiat currency.
In the more distant past, in the days of the domestic gold standard, people had an illusion of security because they "knew" that their paper money was exchangeable into something of intrinsic worth. That this was an illusion became painfully clear when FDR confiscated all of their gold. Gold had failed to fulfill its function of an "inflation restrainer." Banks had been issuing more gold-receipts (dollars) than there was gold despite the gold
standard.
To avoid this situation in the future, what would need to be done is to create a situation where bankers (who, like politicians are innately irresponsible since they are dealing with other people's money) are on the one hand allowed to inflate (which is necessary because people demand it since they want and need to borrow lots of money) but on the other hand don't need to hide their misdeeds by controlling gold downward because the system is somehow self-correcting.
But how? What would such a system look like?
There are those who advance the idea that, under the current euro system, where gold on reserve is valued at market prices quarterly and where the reserve position of the central bank therefore improves with a rising gold
price, gold would be completely freed of any need by politicians/bankers to control it - since it helps them support their beloved fiat currency.
It is said that such a system would be self-correcting in that any currency over-inflation would "discount" the currency against gold, similar to the way the US stock market discounted the excess dollar creation of the nineties. What is meant by "discounting" here is simply a "soaking up" process.
In that system, excess currency units flow into gold as a wealth-asset, which keeps the units from driving up prices in the regular economy, just as it happened with stocks in the nineties. And gold then would actually be
allowed to be the perfect wealth asset, used by everyone, with no serious downside risk. That's because politicians would no longer need to control its price downward.
As fiat money flows into existing gold supplies, the fiat-price of these supplies goes up, soaking up the excess money and keeping it from competing for other stuff in the economy. That reduces the threat of currency
price-inflation.
Because of the support that higher gold prices lend to the currency's reserve position, the currency-issuing central bank's reserves effectively increase, which allows for more money-creation, if needed, without
necessarily causing prices to go up.(similar to the way foreign central banks can currently print more of their own currency when their dollar-reserves increase as a result of selling natural resources, for example.)
If this system really works as flawlessly as it is thought to work by the euro-strategists, then politicians can effectively do what they love most (other then stealing people's wealth through taxation) which is inflating the
money supply to pay for their government expenses.
At the same time, people won't lose buying-power from such inflation because they can use the excess dollars to buy gold, which is no longer price-controlled, and can therefore freely rise in currency terms. And the rising gold price, in turn, won't hurt the value of the money because it improves the central bank's reserve position, so people never have any reason to completely abandon the currency, as its value stays at reasonable levels
relative to the gold price.
This system, if it's indeed viable, would eliminate the politicians/bankers' need to "control" the price of gold to hide their inflation. It would present the best of three worlds: Polit-bankers can inflate, people can retain their
wealth, and gold can freely rise in fiat-price terms without hurting the currency or the economy.
It is ironic that something this liberty-oriented would come out of a region as socialistic as Europe, and could end up being fought by a country as supposedly capitalistic and free-market oriented as the US is reputed to be..
This is not to say that the Europeans are so very liberty-oriented and can be "trusted" when it comes to their geo-political aims. But it sure serves as a wake-up call to Americans. It tells us we have allowed our politicians to
bastardize our formerly freedom-oriented system far too much.
It also serves as a great focus of the American public on one skimpy little law that trips up the US money powers
and prevents the dollar from keeping up with the momentum the euro has developed over the past few years.
That one "skimpy little law" is Title 31, United States Code, Section 5117 (abbreviated "31 USC Sec. 5117").
I have mentioned this law before. Under subsection (a), it provides that all federal reserve banks must turn over any gold held by them to the US Treasury Department. This entitles them under subsection (b) to "gold
certificates" from the Treasury, which in turn entitle the Fed to exactly $42.222 per ounce of gold so transferred.
This effectively limits and restricts the value of the Fed's gold reserves to $42.222 per ounce for as long as this statute is allowed to stand. And it is the Fed, as the US central bank, whose reserves count as such, not the
holdings of the Treasury.
Why should this be allowed to stand? It shouldn't.
Then why is it allowed to stand in the face of the threat to the US economy that arises from the euro's set-up?
The answer to that question is evident to anyone who has been following the gold price suppression scandal made known to the public largely by GATA. If that one law was taken off the books, the bullion banks (who have helped
at least two recent US administrations suppress the price of gold) would blow up sky-high.
The financial "craters" that explosion would leave could be enormous.
There are some indications out there that unofficial "policy" may be to let them off the hook slowly, let them try and unwind their dangerous derivatives playbooks, and then maybe put the dollar on some kind of "gold cover" clause that would tie future money creation to the stock of gold held by the US.
It would be the most common-sense solution, and probably the most practical one, but that is pure speculation, of course. No one who is not directly involved in the decision-making process knows whether that is what's actually being planned or not.
The only thing that can be said with certainty is that if the government does not abolish this statute, does not value US gold reserves at market prices, and thus fails to put the dollar on a par with the euro, the euro will
unavoidably win the battle for world-currency status. Eventually, the euro will drive out all international reserve-dollars and replace them, because as this process goes on, other foreign central banks will have less and less reason to hold dollars.
Allowing the bullion banks to lower their exposure and then valuing US gold reserves at physical market prices, would largely eliminate the problem. It would also eliminate the need to keep encumbering or squandering the US
gold reserves in a vain effort to control the price of gold.
The entire phony paper-gold/dollar pricing mechanism could then be allowed to collapse since it will have performed its useful function and is no longer needed. Gold could be bought and sold in physical form, and the price could be allowed to go to its natural equilibrium, wherever that may be, without hurting the value and attractiveness of the dollar.
That price equilibrium for physical gold could theoretically be extremely high, since no government would have any incentive left to artificially depress it. Instead, central banks (including the Fed) would have an incentive to hold on to and increase their holdings of gold to bolster their reserves. Gold leasing for sub-par interest would simply disappear. The ESF could be dissolved (and maybe we can get rid of the Fed in the process? Could we,
could we? Please, please, please?) Oh well, just a crazy wish.
And, most of all, gold would be officially and effectively free because any temptation by politicians to jack with it would be eliminated. In a word, gold would effectively put fiat money on "autopilot."
And the US economy would not have to implode under collapsing dollar values because the dollar could still compete with the euro for international reserve-currency status. But without marking US gold reserves to market
- forget it. No dice.
How about it? Does this make sense?
Copyright 2003 by Alex Wallenwein
Alex Wallenwein
Editor, Publisher
The EURO vs DOLLAR CURRENCY WAR MONITOR
www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
Moneypulation Watch (Free Ezine)
Email this Article to a Friend 
Printer Friendly Version