If you have read my last few articles, you may be starting to understand the full value of Honest Money to society and to you and ME… but we have barely scratched the surface. The well hidden ‘magic’ of Gold money emerges only once Gold is in free circulation.
If you have read my last three articles, you are starting to understand the true value of Honest Money to society and to you and ME… but we have barely scratched the surface. The well hidden ‘magic’ of Gold money emerges only once Gold is in free circulation.
However, we do have a slight problem… namely, how in heck do we transition from a paper world, in hock up to its ears, to a world of honest money… to a world of modest, honest debt… to a world where power lies with the people, not with banksters and G’men?
A tough question indeed… and another place where a Big Lie sneaks in… like ‘there is no way’ to go ‘back on Gold’… so don’t even try. If we believe this lie, we are damned to continue with the Chinese paper torture… and nature will take its own course… we will be dragged kicking and screaming back to honest money. Better we disbelieve the Big Lie, and find a rational, reasonable way out of our paper dilemma. I quote Hans Sennholz, well known Austrian economist;
“Sound money and free banking are not impossible, they are merely illegal. That is why money must be deregulated. The Gold standard will return as soon as people realize that honesty is the best policy.
As hope of ill gain is the beginning of the fiat standard, so is honesty the mother of the Gold standard. The Gold standard is as old as civilization. Throughout the ages, the Gold standard has emerged again and again because man needed a dependable medium of exchange.”
To find our way back, we must understand that a Gold Standard has more than one component; sure honest, real money, Gold and Silver, must be in circulation and in the hands of the people; but this is just the foundation. Once the stable, earthquake resistant Golden foundation is built, we must then build the rest of the edifice.
To create the Unadulterated Gold Standard that is our ultimate goal, we need to build an honest credit system. Credit breaks down into two distinct components; credit (in the form of debt) created by borrowing, and commercial credit, created by clearing urgently needed consumer goods… credit created without borrowing.
The idea of credit and debt are well understood… indeed too well! All the trillions of debt in existence today reflect this emphasis on borrowing… the very stuff we use as ‘money’, the Dollar bills, the Euros… all paper… are borrowed into existence.
Unfortunately, the other vital component, credit created WITHOUT borrowing, is pretty much unknown. I will be writing another article on this very issue… the third leg of the Gold Standard. The first leg is Gold (and Silver) in circulation. The second leg is Gold-bonded debt; the third leg is commercial credit created by clearing, not borrowing.
For now, we talk about Gold Bonds… the second component of the Unadulterated Gold Standard. Gold bonds will work to absorb and extinguish the enormous debt tower that is presently tottering, and threatening to take the world economy down with it. The situation here is simple; ‘if you have dug yourself into a deep hole, first stop digging’.
Even a child knows the truth of this; yet seemingly our ‘fearless leaders’ have no clue… the hole dug so far is approximately sixteen trillion Dollars deep… and instead of stopping the digging, they are encouraging, indeed forcing us to Dig Deeper! What total insanity is this?
We can stop the digging by turning to Gold and Silver as our currency… no more borrowing endless quantities of paper into existence. Then, once we have stopped digging, once we have stabilized the situation, we can think of how to repair the problem… how to fill up that sixteen trillion Dollar hole.
The thought of filling this hole is daunting; it is bigger than the Grand Canyon, and will take an awful lot of filling to heal… but given a stable situation, that is no more digging, even a slow and methodical method will eventually fill the hole; instead of digging, start filling.
Bit by bit, day by day, the wound can be healed… and the economic situation also improve day by day instead of staggering from crisis to ever deeper crisis. After all, it took more than a century of digging to make the debt hole as big as it is… don’t expect to fill it overnight.
So how do we start? The plan is simple… start to issue Gold Bonds, instead of paper bonds. Gold bonds are the second major component of a Gold Standard; Gold Bonds are denominated in Gold units, are payable in Gold units at maturity, and pay interest in Gold units… actual, physical Gold, not paper promises.
The key difference between current bonds and Gold bonds is that no paper is involved… only physical Gold. This means that once a Gold Bond is paid, the debt it represents is extinguished… whereas this is not true of paper bonds. Paper bonds issued by the Treasury are never paid off, cannot be paid off… else the Dollars they ‘back’ are themselves extinguished.
Simply put, by issuing Gold bonds we separate money (Gold coin) from debt… (Gold bond). Once this is done, once Gold bonds are issued, the holders of paper bonds will face a choice; continue to hold paper bonds that mature into worthless paper currency… if they ever mature at all… or trade their paper bonds for Gold Bonds, bonds that not only mature into Gold… but pay interest in the form of Gold.
The choice will be a no brainer… and paper bonds will be gradually replaced by Gold bonds. The Gold bonds will eventually mature, and the debt they represent will be extinguished. Gold income, needed to pay interest on the Gold bond, is assured by the circulation of Gold coin.
As paper bonds are retired, the deep hole will continue to be filled… and financial sanity will return to the planet. It may take years if not decades to make this transition… but that is incomparably better than an outright debt default… see Greece or Cyprus for examples of the destruction caused by default. Imagine a default by a major nation, rather than economically invisible entities like Greece or Cyprus.
The idea of ‘inflating away’ the debt is another Big Lie; not only is inflation just as destructive as an outright default, inflating the debt away is actually impossible. The idea that inflation is the consequence of ‘more money chasing less goods’ is false.
In order to create more ‘money’ to chase the goods, more debt must be created to back the new ‘money’… indeed, for every new Dollar created, new debt of exactly one Dollar must also be created. On the other hand, no debt new or old is needed for Gold; Gold IS money, Gold stands on its own, Gold is not ‘backed’ by anything.
Let’s get started. The sooner we stop digging and start filling the better. If we don’t stop soon, the tower of debt will indubitably collapse, and take the world economy… and you and ‘ME’ with it.
Is Gold, and a ‘Gold Standard’ really for the benefit of the rich… or is Gold and a Gold Standard actually of benefit to the average person? The short answer is; remember the Golden Rule… no, not the Golden Rule that says ‘Do onto others as you wish others do onto you’… but the other Golden Rule, the one that says ‘He Who Has the Gold Makes the Rules’.
Today, the American G’man and his top bankster boast over 8,000 Tons of Gold in their vaults. The German bankster has over 3,000 tons, the Italian near 3,000 T… and on and on. The final numbers are a bit vague, but the world’s central banksters collectively ‘own’… or hoard, or control or whatever you want to call it… tens of thousands of tons of Gold.
In the meantime, average people have almost no Gold… the world population is estimated to hold less than ½ OZ per capita… and the total amount of Gold in (legal) circulation is Zero. Guess who makes the rules?
One example of ‘making rules’ is setting the rate of interest. Mr. Bankster has decreed that he will set a ‘ZIRP’ policy… that is, a Zero Interest Rate Policy… supposedly to ‘stimulate the economy’… and to bring about ‘full employment’. By the expedient of buying bonds with newly created Fiat paper, Mr. Bankster keeps the price of bonds artificially, fraudulently high… which is the same as keeping interest rates artificially, fraudulently low.
Explaining exactly how and why high bond prices equal low interest rates is beyond the scope of this article. If you are interested, Google ‘bond equation’ and you will see the answer for yourself.
Getting on with it, the claim that ‘low interest rates stimulate the economy’ is a Big Lie. Really? Let’s ask our average persons; like our retired couples who live off their life’s savings… does ZIRP benefit their ‘economy’…? With their hard earned cash bringing a miniscule income, far less than the ongoing destruction of purchasing power… so called ‘inflation’… having to live off their rapidly disappearing capital… ZIRP is hardly of benefit to them, is it?
How about our middle aged couples, saving to pay for their children’s education… does ZIRP help their economy? With their savings earning negative real income, with their accumulated wealth being robbed by monetary depreciation… when prices grow far faster than whatever their savings earn… and their wages never even match the rate of monetary depreciation? Hardly. ZIRP is destroying their ‘economy’ as well.
But surely, the young graduate about to embark on his career, who has borrowed a bunch of money to pay for his education… surely HE must benefit? What? He says “no, man… I borrowed a bunch of money for my schooling, and I can’t possibly pay the loan back. I am doomed to live as a debt slave…
I can’t get a job in my field of studies… the best I can do is flip hamburgers part time for a pittance. I am not even allowed to declare bankruptcy… I am Doomed.”
But didn’t Mr. Bankster tell us that he was introducing a ZIRP to ‘stimulate the economy’? If this were true, if the economy were really ‘stimulated’, how come our new grad can’t find a job? If even he doesn’t benefit, then who does? Maybe a businessman? That is another claim by the G’man. That the ZIRP will stimulate business investment, by making ‘money cheap’… and surely more business investment will reduce unemployment? Just another Big Lie, I am afraid.
I ran a business, manufacturing metal forming machinery in Canada, for over thirty years… still run the business in fact, but now the work is all being done in China… and the prevailing rate of interest never had a noticeable effect on our business. The only thing that moved our business, either up or down, was demand for our products.
Demand depends on the financial health of our customers, and of the economy. If ZIRP impoverishes most people, it does not do anything but destroy the economy… and this destruction takes most business with it. Believe me, I know… ZIRP took my business into bankruptcy!
Does anyone benefit from ZIRP… fraudulently low interest rates? Come on, it’s obvious… big time debtors benefit big time. Can you guess who is the biggest ‘big time’ debtor of all? Why, surprise surprise… it’s the G’man. Uncle Sam owes… wait, I will check usdebtclock.org… geez, hard to read, the numbers keep flashing higher and higher… every second the G’man’s debt grows…but as I write this, the official US debt is over $16,800,000,000.
Savor that number for a second or two; it is beyond astronomical… 16 trillion, 800 billion Dollars. Mind numbing. No human mind can imagine even a trillion, never mind multiple trillions… but there it is. The truth is out; Uncle Sam can’t afford higher interest rates, so he tells his bedfellow bankster to push interest rates down… regardless of the economic destruction this causes. This is the true reason behind ZIRP… ignore the Big Lie… and just follow the money; Cui Bono… to whose benefit… The G’man is the big beneficiary of ZIRP.
Thus dies the Fiat world economy… but a Gold Standard economy goes in exactly the other direction; not towards death, but towards prosperity. Remember the Golden Rule; he who has the Gold makes the Rules…
During the nineteenth century, the heyday of the Classical Gold Standard… and of the British Empire… England ruled nearly 85 percent of the ‘civilized’ world… and the Bank of England ran the whole show under the graces of Gold. Care to guess how much Gold the Bank of England had in its vaults during the nineteenth century? During the ‘peacable days’? It was not the 8,000 Tons that Uncle Sam has… not the 3,000 Tons that Germany has… no, it was an incredibly tiny 150 to 250 Tons…
This number is in the public records of the Bank of England… if you doubt me, check it your self. The commerce of practically the whole world was well conducted on the basis of a few hundred Tons of gold. Where was the rest of the Gold? Where were the thousands of Tons that were in existence? Why, in the hands of average people; Gold was in circulation as money. Guess Who Made the Rules?
It was every man who made the rules, not a handful of banksters and G’men. But how… how could hundreds of millions of men, nay billions of men make any rules? The answer is laughably simple, once you see the truth. The rule for setting interest rates works like this;
When I earn money, there are only three things I can do with it; spend it, hoard it, or put it to work to earn more money… somehow. There is no other possibility… if you concede that giving money away as a gift is spending. Some spending is mandatory… as I need to buy food, fuel, shelter, clothing… the essentials. Hoarding and ‘saving’ are optional.
Hoarding has some less unpleasant connotations; we are constantly being told that hoarding is somehow wrong, anti-social, ‘primitive’… like a Gold standard is called ‘primitive’… but even squirrels have enough brains to hoard, saving food in balmy summer days to last them through the tough winter days to come. Are humans as smart as squirrels?
As far as putting money to work, only entrepreneurs and businessmen truly put their money to work. Average, ordinary people are far too busy earning a living to go into business for themselves. Instead, they look for ‘yield’ with ‘safety’.
This is impossible under Fiat paper… as we already saw. There are no real returns possible without all-out gambling, er speculation. Under Gold, the story is very different. After all, simply hoarding Gold is profitable. The purchasing power of a Gold hoard increases as prices decline. Any earnings from lending money at interest are a bonus.
I would not lend my Gold money… unless I was absolutely certain of getting it back, and was offered sufficient interest income. If you get Gold money, would you not think the same way? Spend some, hoard some… but only lend some if the interest being offered was sufficient to make it worth your while?
I believe you think the same way, although what you consider ‘worth your while’ may not be the same as what I consider ‘worth my while’. Nevertheless, this is the crux of the matter; this is where the rubber meets the road.
If hundreds of millions of people think the same way… that is, choose NOT to lend their money unless they believe it ‘worth their while’… then anyone who wants to borrow must offer more interest. The ones who hold the Gold make the rules. Borrowers must follow the rules set by the Gold holders, or they luck out.
With paper this does not work; the ‘powers that be’ will simply print up more paper, and force rates down… regardless of what I, or what you, or what a hundred million others wish for.
This is why only a true Gold Coin standard can work; actual Gold must be in circulation, in the hands of all… else the teeth are not there. No monetary system with Gold ‘backed’ (paper) money can ever work. If fraudulent paper is in circulation, and if fraudulent paper is accepted as money, more fraudulent paper will be printed… regardless of promises of ‘backing’ Indeed, Mr. Bankster may open the door to his vault, show us the Gold sitting there ‘backing’ our paper… and then print as much paper as he wishes… but he cannot print Gold.
Mr. Blumen starts his latest tirade against Professor Fekete by apologizing, admitting that he was guilty of calling Professor Fekete a ‘monetary crank’… then goes on to insult the Professor again.
Interestingly, he seemingly agrees with most of what the Professor says, but based on his (erroneous) belief in equilibrium theory, he then goes on to describe the Professor’s work as ‘piling a lot of nonsense on top of his rotting foundations’.
This is clearly emotional rhetoric, so let us get past it and get to the gist of Mr. Blumen’s argument. He attempts to refute the need for Real Bills by claiming that the economic system ‘equilibrates’. He claims that cash used in clearing would indeed stay out of savings, but the end result would simply mean an increase in demand for money. He assumes (erroneously) that cash used in clearing… vs. savings… would have no long term negative effect on the economy.
He claims that, under equilibrium conditions, the price structure would end up absorbing the extra demand for cash money, and once this adjustment is finished, the economy would function just as well as before the adjustment was made… albeit with new prices.
The process of reaching equilibrium would, according to Mr. Blumen, mean an adjustment in prices driven by a change in the allocation of money. Money that could be used as savings under Real Bills would by necessity have to be used to support the clearing function… Mr. Blumen does not consider this to be controversial. Unfortunately, equilibrium theory is controversial; it does not stand up to the test of reality.
The problem with equilibrium theory is simple, and is clear to anyone who took the trouble to listen to Professor Fekete; the demand for product is not steady… the ‘equilibrating’ process is impossible, as there is no fixed ‘target’ toward which the economy could ‘equilibrate’! In fact, as Professor Fekete has stated, a 100% Gold Standard would fail at the first Christmas shopping season.
The reason is perfectly clear; much more merchandise is sold in high season, therefore much more cash would be needed to support the clearing function… and where would this cash come from? Then, as the shopping season winds down, demand for cash drops… and there would be an excess of cash on hand. What to do with this excess cash?
Enemies of Gold have used this very argument in their demand for a ‘flexible’ currency! Of course, paper money is as flexible as desired… so much the worse for paper’s use as money, as a store of value, or as a numeraire; how can a meter stick with a flexible length be of any use to anyone? Gold is not flexible. The flexibility needed to accommodate swings in demand is provided by Real Bills in circulation.
Furthermore, the price structure responds much too slowly to cope with seasonal variations, never mind variations caused by crop failures, natural disasters, or simply changes in technology and consumer preferences. Only a mature Real Bills market and the instantly changing Bills discount rate have the rapid response required to deal with sudden variations in demand for goods… and money.
It is impossible for Gold unaided by Real Bills to accommodate rapid swings in demand, whether seasonal or otherwise; the Gold supply is fixed. Indeed, the huge stocks to flows ratio of Gold, around 80, ensures the stability of Gold as money, as a store of value, as the numeraire par excellence.
To accommodate swings in demand, there needs to be a flexible component in the monetary system; and Real Bills are this very component. More bills are drawn as more merchandise is delivered, and the newly drawn bills fund the clearing process. Once demand drops, fewer new bills are drawn, and existing Bills are extinguished by Gold on maturity… never more than 91 days. Any sudden change in demand for product is met by Bills, not by cash Gold.
Furthermore, all other things being equal, if more of the total stock of money is available for investment, aka savings, then interest rates experience downward pressure. If less cash (relative to the total stock) is available, because it is used for clearing, interest rates tend to rise. This effect cannot be ‘equlibrated’ at all… relatively more (or less) cash money would indeed change the long term price structure, but interest rates are driven by the ratio of savings to cash, not by total cash..
Low, steady interest rates are clearly conducive to production; projects that would be sub marginal at higher rates of interest become profitable if rates are low and steady. Real Bills thus free Gold for longer term investment. Real Bills circulation is essential to a workable Gold Standard.
Without the flexibility of Bills in responding to consumer demand, without the rapidity of response of the discount rate, and without the resultant lower general interest rates that prevail under Real Bills, production indeed suffers. No economy can run at maximum efficiency without unhindered Real Bills circulation.
One of the devastating consequences of this inefficiency is the tragedy of unemployment. Even the concept of unemployment did not exist under the Gold Standard and the Real Bills system as practiced in the nineteenth century. Unemployment became endemic with the failure of the Allies to restore Real Bills circulation after the end of the Great War… the failure to revive Bills circulation led directly to the Great Depression.
I have not even touched on the Moral superiority of Real Bills, such as their truly democratic aspect. The volume of Bills in circulation and the discount and interest rates are strictly market driven, and are not dictated by corrupt politicians and greedy bankers.
The equilibrium theory of economics is wrong, it is incomplete, and it does not reflect reality. It is too simple to account for the working of the real economy. Disequilibrium theory, that is non-linear analysis, on the other hand, can account for the vagaries of the real world. I suggest Mr. Blumen should study this aspect of economics, before ridiculing the work of others.
For readers of this article, you may be interested in my new book, Beyond Mises. The book is based on the work of Professor Antal Fekete… and on my own insights into New Austrian Economics. It is an easy read, without any prerequisite knowledge of economics. The book gives much more information about Money, Credit, Real Bills, etc. It is available at;
The Gold Standard Institute
My last article, Golden Foot in the Door, suggested that if Gold coins and Gold bonds are in circulation, we are but one step away from Economic Nirvana; the Unadulterated Gold Standard as the foundation of the world economy. Of course, the first two steps are not guaranteed; but if the new Gold Swiss Franc is adopted, and Gold Bonds are issued based on Sovereign Gold income, the third step to Nirvana is in reach.
So why is an Unadulterated Gold Standard ‘Nirvana’? Simply because all the abuses of the irredeemable paper money system are erased under the Unadulterated Gold Standard. This includes the original error… or was it original sin… whereby property rights to Money were curtailed by an early English law precedent. Set in the seventeenth century, around the same time the bank of England was chartered (big coincidence!) the ownership of money deposited in a bank demand deposit account was legally ceded to the bank.
The triangle analogy kicks in as the triangle is the most stable structural element; a three legged stool is stable and does not ‘rock’ or exhibit partial instability on uneven ground. If you add a fourth leg, it will become less stable. Of course, if you chop off one leg and try to make a two legged stool, stability will be lost in one plane… to say nothing of chopping off two legs.
The monetary ‘system’ in use today has only ONE leg! Talk about unstable, and talk about eternally ongoing, futile efforts to keep the balance of this poor damaged stool; constant manipulation of ‘money’ supply (printing), interest rate ‘twists’, bail outs, credit default ‘insurance’, etc. etc… ad infinitum. By contrast, a three legged stool is inherently stable; as is the unadulterated Gold Standard, the three legged stool of economics.
The one leg our monetary system rests on is the canard called ‘debt money’. In fact, even central bankers do not seem to know what money is; is it MZM, or M1, or M2, maybe M3…? Mr. Bernanke does not even admit that Gold is money… he calls it an ‘asset’. The truth of course is far simpler than he or his ilk make it out to be; Debt (or its flip side credit) is the exchange of a present good for a future good… and Money is that which extinguishes all debt (or credit)… period.
Truly it is a simple as this; money, that is Gold or Silver, is an item of positive value, a present good, which extinguishes all debt. Debt money is impossible… How could Debt possibly extinguish itself? A thing is either a debt note; a promise, a future good, two birds in the bush… or the thing is a present good; Real money, a ‘bird in the hand’, something of positive value. There are no other possibilities; the concept of ‘debt money’ is just that, a concept… a nonsense concept that does not, cannot exist in reality… only in the fervid brains of Keynesian economists.
By clearly separating money and debt, we re-establish a two legged stool; a big step in the right direction, but still not quite there; we may have our Gold coin In circulation, real money, a present good item of positive value, and a Gold Bond, representing debt, that is future goods or promises of delivery of a present good in the future… but the third leg is still missing.
The way to reestablish the third leg is a bit more obscure, and hidden farther in the mists of time; after all, it was only about 41 years ago that money was finally removed from the system, and replaced by pure debt… under President Nixon’s default of the US international Gold obligations; the notorious ‘closing of the gold window’. The ‘third leg’ of the Classical Gold Standard was amputated just before WWI.
If you study history, the answer is easy enough to find; Adam Smith wrote about this many years ago… that is why this third leg is called ‘The Real Bills Doctrine of Adam Smith’… but the concept can be understood right here right now. All we have to do is look more closely at ‘Debt’… and we will see that there are in fact two distinct facets of debt; mixing up these two facets is just as deadly as confusing money with debt. The classical Gold Standard ‘failed’ and Great Britain went ‘off Gold’ after WWI mainly because of the failure to differentiate between the two facets of debt.
Close examination of credit shows that there are two aspects; there is credit applied towards fixed capital; for example machinery, farm land, orchards, oil wells, transportation equipment etc. There is also credit applied towards rapidly moving consumer goods in urgent demand; manufactured products, food stuffs, fuel, in fact anything that will be sold to the ultimate consumer in 91 days (one quarter of the year) or less.
Credit for financing long term fixed capital items comes from savings. The quintessential market for long term financing is the bond market. We are all pretty familiar with debt based on borrowing; the way the bond market works. The bond market is controlled by interest rates, and supported by collateral… bonded debt, is NOT self-liquidating. This is a very important concept, and often misunderstood.
Consumer debt (borrowing) is clearly not self-liquidating, as the borrower will need to earn money to repay the debt. Commercial debt for capital investment is not self-liquidating either. This is not quite as obvious as in case of consumer borrowing, but is true nonetheless; money borrowed for the purchase of a machine for example will not be self-liquidating; the machine may earn enough money to repay the debt, but this is not certain; that is why borrowing demands collateral. If the machine does not make sufficient profit, the borrower will have to find another way to pay the debt; just like the consumer. If the borrower cannot pay, the collateral will cover any losses to the lender.
By contrast, Real Bills represent a form of self-liquidating credit quite distinct from ‘borrowing’. In fact, it is not fully correct to call this ‘credit’, as the word can be confusing. Better to call it clearing, or simply terms. In a commercial transaction, very few payments are COD; terms are part of virtually all sales. Only the poorest credit risk firms will have to pay COD; all with reasonable credit ratings will get 30 or 60 or 90 days net; terms that imply credit.
Bills or ‘invoices’ drawn against sales of consumer goods in urgent demand are the ‘fuel’ of the Real Bills Doctrine. Bills drawn on items in urgent demand will spontaneously go into circulation; other bills will not. Bills are self-liquidating; the upcoming sale to the consumer of the very item the bill is drawn against assures payment. No need for profit or earnings; the very fact that Bills are only drawn against urgently needed goods is enough to assure payment… and self-liquidation.
Real Bills drawn on real goods on their way to the ultimate consumer do circulate, thereby assuming a temporary but vital monetary role; they finance or ‘fund’ the production of much needed consumer goods… Real Bills entail no borrowing, no collateral, no payment stream, and NO interest rate. Instead, Real Bills are discounted; that is, they are paid in full on maturity, but trade at a discount that decreases linearly from the date of drawing to the date of maturity. Real Bills are the least expensive thus most efficient way to fund the production of consumer goods.
Most importantly, since bills are drawn on consumer goods, the funding for Bills relies on consumer’s propensity to spend; by contrast, interest rates on borrowing are driven by the propensity to save. There is no link between the two forces. Anyone with Gold earnings has three choices; hoard the Gold… as it is constantly, gently appreciating in purchasing power. Spend Gold on needed consumer goods, thus giving rise to new Real Bills… or ‘save’ the Gold, that is put it to work… if the interest rate being offered is sufficient to overcome the instinct to hoard.
There are the three legs of our Golden Stool; leg one is Money; fixed quantity, hard, stable, 80 plus years of mine supply on hand… and slowly appreciating as the economy grows ever more efficient. Leg two is the Gold Bond; sure returns, long term, a vehicle for savings suitable even for orphans and widows; bonds for saving, NOT for speculation. Leg three is the Real Bill; flexible, responsive to consumer demands, liquid enough to back Bank Demand Notes if such notes are in circulation, limited by physical constrains of the real economy.
This is the ideal, the Unadulterated Gold Standard; the Golden Triangle. Gold (and Silver) as Money, Bonds and Bills as the two other legs. So stable is such a system, that historically it survived for centuries… and even survived the artificial Government sponsored ‘demonetization’ of Silver in 1873… a loss of about ½ of total money in circulation!
But what of the panics and such, the so called ‘business cycle’ that seemed to plague the Classical Gold Standard? The cause of these effects is easy to discern; there was a fourth, artificially attached ‘limb’ that allowed indeed forced these cyclical instabilities to arise; this leg is called the ‘Fiduciary Component’. Fiduciary means trust, or ‘promise’. This component was the vehicle whereby excess credit was pushed into the system, by greedy bankers… and compliant governments.
I will discuss this ‘fourth leg’ and the invasion of property rights necessary to implement it in more detail in my next article. Stay tuned.