As Editor-in-Chief of the Gold Standard Institute, I have written many articles explaining and expounding on the Unadulterated Gold Standard, on how the world economy is doomed to collapse unless an ultimate extinguisher of debt… Gold… is re-introduced into the system.
I have written about the technical aspects, the moral aspects, the historical aspects… yet people still resist, still don’t want to know. They hope that hope alone will keep them out of trouble… and at best, most want a quick and easy explanation of why we should bother with Gold; in effect, they ask for a sound bite.
Well, that is easy enough… here is the sound bite; “Gold, the Real Thing!”… end of sound bite.
Of course, without the megabuck ad campaign to spread and hammer it home world wide, like the better known ‘It’s the Real Thing’ sound bite, the ‘Gold, the Real Thing!’ sound bite is of little use. People will have to figure out the need for honest money for themselves; no economic or monetary revolution will be started from above; changes must start from grass roots.
Only a widespread understanding of money and credit will change the system. Only popular, overwhelming demand for Gold (and Silver) money can save the world from economic chaos. Instead of fiddling with sound bites, let’s look at the core issues; why is Gold essential for economic survival.
Some people, in good faith, suggest that ‘Gold should be money… look at how it’s kept its purchasing power for thousands of years’. This is a good sentiment, but it has cause and effect mixed up; Gold should not ‘be money’ because it has kept purchasing power… rather, Gold has kept purchasing power because it IS money.
We must understand this both intellectually and viscerally. That ‘Gold IS money’ is not just another sound bite but a hard fact. We must understand what money actually is… and why Gold is money. As J. P. Morgan famously stated, ‘Gold is money… everything else is credit’. To put it bluntly, bank notes, Dollar bills, all forms of Fiat currency are IOU’s; that is, credit (debt)… and circulating debt notes cannot extinguish debt, they simply shuffle debt around.
Money and debt are polar opposites, like water and fire. Just as water extinguishes fire, so money extinguishes debt… real money that is, not debt notes masquerading as money. Bank notes are assets in the hands of the holder… that is, a Dollar bill is an asset in the wallet of the consumer… but the very same Dollar bill is a liability of the Bank of Issue, called the Central Bank.
The liabilities of the Bank of Issue… that is, bank notes… Dollar bills… are balanced by assets. This is the very definition of a balance sheet; liabilities and assets must balance. And what assets does the Bank keep on the asset side of its balance sheet? Why, Treasury bonds… and Treasury bonds are also IOU’s. Indeed, the very same bonds that are assets of the Bank are liabilities of the Treasury.
It is crucial to understand how Fiat currency is created. The creation of paper currency is not simply a question of ‘printing’ more and more; that is not how the system works. Currency is borrowed into existence. More specifically, the Treasury prints a bond… a promise of future payment, with interest, and the Bank of Issue buys this bond… with freshly created bank notes. The Bank indeed ‘prints’ new currency… but only as a match for the bond it purchases… no more, no less… or its books would no longer balance.
So you say, what does all this mean? Why is this method of creating Fiat currency a problem? Well, there are several problems, any one of which is lethal by itself. First, don’t just blame ‘profligate politicians’ for our daunting debt tower… rather blame the system. Remember, every Dollar bill in existence has to be balanced by a Dollar of bonded debt; so, as more currency is created more debt is created simultaneously.
There is a one to one correspondence between currency in circulation, and debt. For example, if there are one hundred monetary units of Dollars… say each monetary unit is a trillion… then there must be one hundred monetary units (trillions) of debt. If the ‘profligate politicians’ were to actually pay down the debt, say reduce debt by half; from one hundred monetary units to fifty… then bank notes would also be reduced by half. A devastating deflation would result from the disappearance of half the circulating currency… the disappearance of fifty trillion Dollars.
Just as new bank notes are created by the bank of issue to buy new treasure bonds, if any existing bonds were repaid, the bank notes balanced by the bonds would go back to cyberspace, where they come from. Such a drastic reduction of the money supply would cause a devastating economic collapse… a Greater Great Depression.
Under our Fiat system no debt can ever be retired. Any talk to the contrary is but a smoke screen. Unfortunately it gets worse; bonds command interest either in the form of periodic payments from the borrower to the bond holder, or in the form of a discounted purchase price and a higher pay back at maturity.
For example, if there are one hundred units of currency that is balanced by one hundred units of bonded debt, and the rate of interest is five percent, then the borrower (treasury) needs to pay five monetary units of interest yearly… or something like fifty monetary units at maturity. But wait… where exactly will notes to make this payment come from? Remember, the currency in circulation is exactly equal to the sum of the bonds in the balance sheet… new currency must be created to pay interest due.
To create new currency under the Fiat system, bonds need to be written… new currency must be borrowed into existence. The debt must grow year by year to avoid interest payment default. This is the real reason that banks of issue like the Federal Reserve are fighting desperately to keep interest rates low, regardless of damage done to the economy. A low interest rate reduces… but does not eliminate… the need for new money/debt creation. The debt tower must continue to grow, without limit, or face default.
The pundits will suggest fine, then let’s just ‘inflate the debt away’… by ‘printing’ money to reduce the real value of debt outstanding. Of course, if you understand the need for every new dollar in circulation to be borrowed into existence, you see that this is impossible. By the flawed and over simplistic quantity of money theory, if we double the currency in circulation then we reduce purchasing power by half; twice as much ‘money’ chasing the same quantity of goods.
Clearly, even if we ignore the flaws of the quantity theory, a theory that ignores velocity of circulation, this scenario cannot work. If we wish to double the currency in circulation from one hundred units to two hundred… hopefully reducing the purchasing power of currency by half… then we must also simultaneously double the debt. Debt grows with the growth in currency. Halving purchasing power is matched by doubling of debt. We are stymied.
No payback of debt is possible, growth of the debt tower is built into the system, and inflating the debt away cannot work. The Fiat system has no escape; the world economy is doomed to ever growing debt and is doomed to destruction. The only viable alternative is to change the system. Replace debt ‘money’ by real money, money that will actually extinguish debt.
Then the question may arise, why Gold? Why not platinum, or some other valuable commodity… perhaps even commodities that are consumed, like grains or crude? Why indeed… aside from the historical fact that God has been and is money, the reality is that Gold is the most plentiful substance on earth… measured by its stock to flow ratio. That is, the stock of Gold officially known to exist above ground in refined form represents at least eighty years of mine supply. To double the existing Gold stock would take, at the current rate of extraction, at least eighty years.
This is crucial, and is the heart of why Gold is money; platinum for example has a few months of supply on hand; same for crude, grains, copper… indeed all other commodities except Silver; and Silver is the only monetary metal on Earth other than Gold. The enormous, order of magnitude greater stocks of Gold and Silver on hand ensure that any fluctuation in supply… like a mine closure, or the discovery of a new ‘bonanza’ will have negligible effect on the quantity and value (purchasing power) of existing stocks.
In contrast, all other commodities are subject to extreme volatility due to growth/decline in consumption, and growth/decline in supplies. Gold and Silver are immune to such effects; this is why Gold has held its purchasing power for over two thousand years. We need bother with no other commodity; Gold and Silver are money, nothing else is.
This is the bottom line; Fiat cannot continue indefinitely, Gold and Silver are the only monetary metals that can rescue the economy from collapse. How do we get from here to there? This is the key question, and unless we have a reasonable method of transition, we will inevitably go through the wringer. Chaos will arrive either in the form of an enormous deflationary collapse, the ‘Greater Great Depression’, or in the form of runaway hyperinflation like Weimar on steroids… or both!
If the transition is planned and done systematically, most of the pain can be avoided. We must start by rescinding the legal tender laws that force Fiat currency into its monetary role. Gold and Silver must be allowed free circulation, as an alternative to existing Fiat paper. Gold and Silver in circulation must be in the form of physical coins with only a mass and fineness embossed on the coins; no ‘face value’ denominated in Fiat. It is ludicrous that one ounce Gold coins have an embossed face value of fifty or a hundred Dollars… while an ounce of Gold trades for over one thousand dollars.
Once Gold and Silver are again understood to be money, the real job can begin; the reduction of the enormous debt tower, without a devastating debt collapse. This will be accomplished by the introduction of Gold Bonds. Bonds denominated in Gold units, bonds that mature into physical Gold, bonds that pay interest in physical Gold… Gold Bonds that can be exchanged over time for existing Fiat bonds, Fiat bonds that otherwise can never be repaid.
Once a Gold bond matures, it is paid in full; the debt represented by the Gold bond is finally, fully extinguished. The value of Fiat bonds will indubitably decrease (in Gold terms) once real bonds are available as an alternative. The value of Fiat currency will indubitably decrease (in Gold terms) once real money is in circulation once again. Thus can the transition from Fiat to honest money be accomplished with minimum pain and without economic disaster.
The availability of God bonds requires an income (by the issuer, the treasury) in Gold; a country like Australia, as well as other countries with a Gold mining industry appear to have an inside track here; a natural supply of Gold is at hand. In reality, mine supply is unnecessary. It is easy enough for any country to obtain Gold, by trading for it.
Trading value for value is the fundamental reality of world trade; Gold is simply the guarantor of honest dealing. The discipline of Gold overcomes any temptation to run a trade deficit. Gold focuses attention on the real economy, on wealth creation rather than on speculation.
Time is running out; how much longer can we continue to ‘kick the can’ into the future, passing our self-created problems on to our children and grandchildren? I suggest not much longer. The fuse is lit, and the economy is well on its way to blowing up. I suggest we start the transition now, before it’s too late.
Rudy J. Fritsch
Editor in Chief
“Do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?” was the famous question that Steve Jobs asked PepsiCo’s vice president John Sculley to win him for his company. We ask you the same question to win you for the Swiss Gold Coin Initiative. It is a project with historic potential, fully developed and ready for one or several visionary investors to make it happen.
Let’s get to the point:
Switzerland is in a unique position, thanks to its direct democratic rights, to legalize, via a popular initiative, the introduction of constitutionally protected private gold coins. The constitution shall be amended as follows:
Article 99bis (new)
Swiss Gold Coins
1. The Federal government shall define the rules for the issuance of a set of quickly and easily tradable gold coins with a solid, clearly recognizable gold content starting at 0.1 grams.
2. The issuance of the coins (production, coinage, placing on the market) is provided by Swiss companies. The coins bear a unified symbol of Swiss origin, indicate the gold content in grams and a freely designed identification of the issuer.
3. The issuance, acquisition and trading of the gold coins are tax and duty free.
I spare the distinguished readers of this journal the arguments of why gold is the best known hedge against the dangers in today’s paper money regime.
Less well known are the obstacles in today’s gold market. In Switzerland, for example, the federal government has the monopoly for minting coins which means the private production of gold coins is illegal. The last government made gold coins, the “Vrenelis”, were manufactured in 1949. They cost about 220 Dollars per coin and their buying generally requires professional advice.
Even more serious is that the tax exemption for gold as an investment is regulated in an ordinance and ordinances can be changed relatively easily. As long as the ownership of gold is, according to ProAurorum, limited to 13% of the Swiss population, a sudden tax on gold would leave 87% of the population unaffected and therefore likely unconcerned. At the same time the tax exemption for gold is an essential precondition for gold to serve as an investment hedge.
The Gold Coin Initiative will remove these obstacles and allow the private production of simple and practical gold coins.
The smallest size will be regular metal coins with 0.1 gram gold in their center, available for about 5 Dollars, which will open up a new dimension in accessibility to the gold market. The new coins will be standardized, suited for daily use and readily available, even from ATM’s. With their introduction it may be expected that ownership of gold increases from 13% of the population to 99%. This is decisive because only when the great majority of the population has an interest in it is the taxfree status of gold guaranteed in a democracy!
The initiative not only has advantages but at the same time no disadvantages. The reason ultimately lies in the fact that technically we are just facilitating the already existing gold trade and anchoring the also already existing tax exemption in the constitution. There are no costs and no risks to the public and the taxpayer.
To illustrate the potential benefits let’s take a look into the future, let’s say three years after the acceptance of the initiative.
Today, that is, three years after adoption of the initiative, gold coins are as familiar to the Swiss as Euros and Dollars. Small savers diversify their investments with gold as easily as only specialists and big savers used to. Gold coins serve as part of investment plans, as presents and kids once again love to save in piggy banks. Pension fund clients may choose to save up to 10% in physical gold coins, in life insurance contracts up to 20% can be selected.
On the international level large scale investors value the constitutionally protected tax exemption for gold coins. Insurance companies offer life insurance policies with gold coin annuities and their VIP clients can tour the gold storage facilities. Banks plan to issue debit cards, gold bonds and international commercial contracts in gold.
Swiss Gold Coins are produced for the whole world and foreign gold producers are building Swiss subsidiaries. A new high tech industry is developing around the technology to prevent forgery through new alloys, holograms and even microchips for large coins, in cooperation with the jewelry and watch industry.
Marketing departments and artists love to issue coins with innovative designs, tourist regions and hotels use gold coins sold exclusively on site as an additional unique selling point.
The highly visible and popular gold coin souvenirs are appearing all over the world and are causing grass root “bottom up” political pressure in other countries to introduce Gold Coins as well, while the manufacturing and financial industries there are putting on pressure “top down”.
The Swiss experience has shown that Gold coins are used not as a medium of exchange, but as an additional “safe haven” alternative for investors. Gold coins will therefore not be monetary competition for the Central Bank’s independence. In the special Swiss case the National bank was even helped in its fight for a less volatile exchange rate by the gold coins function as a safe haven alternative to the Swiss Franc.
These are only rough sketches of already foreseeable developments while we may expect that reality will far surpass them. Who would have thought, for example, that the opening up of the airwaves for personal communication, the “democratization of the walkie-talkie” so to speak by the mobile telephone would simultaneously lead to SMS to mobile Skype apps, and Twitter? Reality has in that case far surpassed even the imagination of science fiction writers and it is quite possible that the “democratization of Gold” will lead to similarly surprising innovations.
Conclusion: The Swiss Gold Coin Initiative is a unique, politically realistic and potentially far reaching reformation of the monetary system. The next step is the collection of 100 000 signatures in Switzerland. To get started requires about the same number Dollars Considering the dangers in today’s paper money system and in view of the anticipated benefits of the initiative its realization is not only a urgent opportunity, but a moral obligation for whoever can contribute to it.
More information under www.goldfranc.org
President Gold Franc Association
Graphics by Robert Ruggiero