The trouble with our economy is not hard to discover. Since money was removed from our monetary system in June 1968, and replaced with bank "credit" which is borrowed into existence, the burden of debt has grown, and will continue to grow, inexorably and fatally. This is because in a system where money is an entity (a psychological one, to be sure) which comes into existence as a loan, as 95% of our money does, repayment becomes impossible. Principle is loaned, but principles plus interest must be repaid, and the interest was not created, only the principle. Therefore, no matter how much money enters the economy, the amount due for repayment is always greater. Our system has no provisions for the ultimate payment of debt, although debts can be "settled."
This fact may not be obvious because everyone knows that he can "pay" his own debts. People do it all the time, and there is nothing remarkable about it. They accomplish this by incorporating "debt-service" into their charges or fees. Thus, Peter robs Paul--or at least increases his charges to Paul--to enable him to pay his interest debt to his banker. Paul shakes his head and mutters something about price gouging, and inflation, and then adds a little more to the bills he is sending out to his customers. This scenario is repeated ad infinitum. At some point, someone needs to go to the bank for a loan. If this did not happen, and all debts were paid, the supply of money would become extinguished, since principle is loaned from thin air, and when repaid, disappears as easily as it was created. (Only the interest remains, as the profit to the banker.) Inexorable market forces, therefore, generate more borrowing until the point is reached where it isn't worth the trouble. Then a business fails, shuts down, or is sold. So while individual debts can be settled, the economy as a whole is attempting to borrow itself out of debt, and it will fail, as it always has in various times and places when credit replaced money partially or entirely. That our economy is still going, and is even regarded as vigorous by some, is tribute to the skill of its managers, not to any inherent soundness.
Well, what to do about it? That is the question, and it is a good one. The answer, in brief, is to return to the Constitution, which established a precious metal monetary standard. "But wait," you say. "We were on a gold standard when the market collapsed in 1929." Sure we were, but we were only on a partial gold standard. In other words, bankers were using fractional reserve banking, as they still are. If you deposited a dollar (of gold) in the bank, the bank could lend that dollar, and another, imaginary one, as well. And the ratio quickly moved from two to one, to four to one. One dollar of gold in the bank's vaults justified the lending of four dollars, three of which, of course, were counterfeit, or imaginary, depending upon your point of view. Thus, when the economy collapsed, it was not the gold standard which had failed, but the honesty standard. If you bought a ticket to a concert, only to find that you had no seat because the theater owner had sold more tickets than he had seats, would you believe that the seat standard had failed? You would, I think, simply regard the manager of the theater as a crook. A prime change necessary to save the economy, therefore, would be a return to a gold standard, plus the banning of fractional reserve banking. There needn't be an actual law banning it; the common law provides for punishment of theft, by whatever means. If your wife, as summer approached, left her fur with the furrier for storage, would she be satisfied, when she went to reclaim the coat, if she were told that her receipt for the coat, marked ONE FUR COAT, was, in fact, the coat? Or if you left your prize Ferrari for storage at a garage while you were out of the country, would you regard your receipt for the car as being the car itself upon your return? Yet people who left gold with the banker were apparently willing to regard his receipt as the actual money. But in fact, the banker is, or should be, merely the operator of a warehouse for money, and as culpable as any other warehouse operator for the disappearance of the goods he was to store.
"Ok," you reply, "but doesn't borrowed gold have to be repaid with interest also?" Sure it does, but it doesn't need to be returned to its SOURCE with interest! Would anyone bother wresting precious metals from the ground if they had to return them at a future date with interest? Borrowing modern "money" from your brother, and repaying him with interest, is acceptable, because your brother had to work to get that money, and he cannot use it as long as he has loaned it to you. But the banker, the SOURCE of the money, obtained it from thin air, and wasn't deprived of anything when he loaned it to its first user.
In addition to an end to the dishonest practice of fractional reserve banking, modern legal tender laws should be abolished. If you can be forced, in effect, to accept a legal tender note, you have no way of knowing if you have been paid. You can take the note to the bank and discover that there is nothing there for its redemption, but if you are then reassured that you can, legally, tender this fraudulent note without fear of legal repercussion, you become an accomplice to the counterfeiter, and pave the way for a return to the very system which we are trying to avoid. Counterfeiting, or issuing false notes, is a form of theft, whether practiced privately or by the government. Yes, we had legal tender laws when we used gold and silver as money, but they were different. They stated the amount of gold or silver which could be legally tendered for a dollar. When the dollar was a quantity of silver, for example, it weighed 416 grains when it left the mint. When, through wear and tear, the weight of the coin fell to 409 grains, it was no longer legal to tender as a dollar, though it could be offered for a fraction thereof, depending upon its weight. Those laws did not, however, force you to either take the coin, or do without payment. It's a crucial difference.
A prime change necessary to save the economy, therefore, would be a return to a gold standard, plus the banning of fractional reserve banking.
Finally, it would be desirable to do away with terms such as "dollar," "yen," "mark," or "pound." Why not label money for what it actually is? Thus, a gold coin could be labeled One Ounce Fine Gold, or Five Hundred Grains of .999 Silver, or whatever. There would be no need for conversion tables from one country's currency to another's. Commerce would be simplified, and precious metals would prove to be a truly universal currency. If Truth in Advertising is good for cereal, why shouldn't it be good for money? If you use a term such as "dollar" to represent an amount of money, you open the door to abuse, even if that money is gold. For a profligate government to pay its debts, it need merely re-define the term "dollar" as half as much gold, and presto!---the government's money supply has doubled, while you receive half as much money (gold) when you cash your next paycheck. If the government tried, however, to re-define "gram," or "ounce," it would have a real problem on its hands.
Common sense and common law should suffice for the money business as for any other business!
Dr. Paul Hein
25 February 1998phein@inlink.com
Also by Dr. Hein:
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