The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 1

The Gold Standard

The journal of The Gold Standard Institute Editor Philip Barton Regular contributors Louis Boulanger Rudy Fritsch Keith Weiner Occasional contributors Thomas Allen Publius Opheus Peter van Coppenolle

The Gold Standard Institute The purpose of the Institute is to promote an unadulterated Gold Standard www.goldstandardinstitute.net President Philip Barton President – Europe Thomas Bachheimer President – USA Keith Weiner President – Australia Sebastian Younan Editor-in-Chief Rudy Fritsch Webmaster Jason Keys Membership Levels Annual Member US$100 per year

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Annual Corporate Member US$2,000

Contents

Editorial ........................................................................... 1 News ................................................................................. 2 Fiscal Cliffs, Debt Ceilings and Fiat Money............... 3 The Unadulterated Gold Standard Part III - Features ........................................................................................... 5 Returning to the Gold Standard .................................. 9 Orphans of the Sky ...................................................... 11 Who says... ..................................................................... 12 The American Corner: Secession ............................... 13 Past failed recipes will …. fail again .......................... 14

Editorial

Financial Cliff, or Lemming Leap?

We keep hearing that the US economy is heading for

a ‘financial cliff; the confluence of a congressional

mandate to cut spending and raise taxes. This ‘cliff’

was created… or at least promoted from financial

‘hurdle’ to financial ‘cliff’… by the last, desperate

attempt of the US Congress to ‘kick the can’ of fiscal

responsibility down the road one more time. In

other words, this is strictly a man-made ‘cliff’; and

‘going over’ the cliff is simply a euphemism for going

‘cold turkey’ on deficit spending.

Of course, the very same Congress can now annul

these ‘laws’, pass new ones, and attempt to ‘kick the

can’ just one more time. Can the ‘can’ withstand

another ‘kick’ or is this when the can, that is, the real

US economy, shatters? Time will tell. Von Mises

called this situation the ‘crack up boom’… the boom

will come to an end, sooner or later, voluntarily or

not. What cannot continue will not continue.

The question to be answered is whether to ‘go over’

the cliff, that is face financial responsibility now, or

avoid responsibility and grow the cliff ever higher by

continuing the ‘borrow and spend’ madness. The

subject of madness brings us to lemmings. Do they

actually go mad, and hurl themselves over cliffs in a

suicidal frenzy, or is this just anthropomorphism?

Another, more materialistic take on lemmings is the

recognition that lemmings are simple creatures, with

a low eye level, and as they run in packs they do not,

cannot see very far ahead. Indeed, those back in the

pack see only lemmings directly in front of them;

and if the pack leaders inadvertently run over the

edge of the cliff, the rest of the pack simply follows

them over, unawares, to their collective doom.

Do we as humans go collectively mad, and hurl

ourselves over the ‘cliff’ in a suicidal frenzy, or are

we simply, blindly following our ‘leaders’ to our

collective doom? Indeed, does the reason why we

seem to go over the cliff actually matter? The answer

in either case is the same; abandon collective

madness, and retrieve sanity one by one, on an

individual basis… look ahead, with wide open eyes,

see the looming cliff… and step out of the mad,

collective rush to destruction.

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 2

The salvation of humanity resides in individual

decisions, made in a rational, thoughtful manner…

not in a collective, emotional frenzy. As more people

get conscious and individually take measures to

avoid the cliff, fewer will remain to collectively barrel

over the edge. Indeed, if somehow we could all wake

up and see what’s coming and all take action to avoid

destruction, there would be no one left to actually

take the plunge!

The action each individual must take to avoid the

cliff will depend on the circumstances of that very

individual, but the crux of the matter is the same;

avoid dependence on the collective, as the collective

is mad. The collective is rushing, seemingly

unawares, ever faster, towards the cliff…

Specifically, each individual must take responsibility

for themself by avoiding the Fiat world as much as

possible. Instead of accumulating more debt in the

form of Fiat paper, thereby growing the cliff taller,

accumulate more real wealth; Gold and Silver easily

come to mind, but so does a lot of other real stuff;

barter goods, land, food supplies, fuel, clothing, etc.

The kind of stuff any Boy Scout would understand

to hold in preparation for a survival scenario.

Above all, avoid the collective madness of borrow

and spend. Borrow and spend is the very process

that built the cliff in the first place, and continues to

build it ever higher and more lethal.

Rudy J. Fritsch

Editor in Chief

News

Quote from Porter Stansberry:

“It's the poor who suffer the most from these aspects of

American life. It is their children who are sent to foreign wars.

It is their children who get sent to prison.

Likewise, as with all socialist experiments, it is the poor who

suffer the worst economic outcomes, too. It is their cash savings

that get wiped out by inflation. It is their jobs that disappear

when regulations reduce capital investment or government debt

crowds out private capital in the markets.

If the poor knew the first thing about economics, they wouldn't

keep voting for socialist politicians and their programs. Alas,

they don't even know the basics.”

GoldCore: Brazil buys fixed term gold deposits with

bullion banks rather than Allocated gold

≈≈≈

Reuters: US Senate seeks to end Turkey’s trade with

Iran of gold for natural gas (from Goldcore)

≈≈≈

NY Times: Canadian to lead Bank of England

≈≈≈

Goldseek.com: Custody arrangements reduce

security for GLD and SLV shareholders

≈≈≈

PR Web: More gold in British gold coins

≈≈≈

Central Bank of Malaysia: More on Malaysian gold

Ponzi scheme

≈≈≈

WSJ: $86.8 trillion of unfunded liabilities

≈≈≈

Fox: The End of Community Banks?

≈≈≈

CNS News: Geithner – Lift Debt Limit to Infinity!

≈≈≈

MineWeb: India’s 2 trillion Rupee Gold Market

≈≈≈

Hindustan Times: Gold Bonds – Paper Interest

≈≈≈

India Times: The Indian Solution to gold imports

≈≈≈

Indian Express: Being tough on gold imports won’t

work

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 3

Fiscal Cliffs, Debt Ceilings and Fiat

Money

“There is tragedy in the world because men contrive, out of

nothings, tragedies that are totally unnecessary – which means

that men are frivolous.”

~ Henry de Montherlant, (1895 – 1972), French essayist,

novelist and one of the leading French dramatists of the

twentieth century; above taken from his book La Rose de

Sable.

Here we are, perilously close to that fatidic date of

the Mayan calendar. How do you feel knowing that,

come 21 December, it could be the end of the world

as we know it? Uncertainty in all matters, not just

financial and monetary, seems to be peaking. Is

uncertainty the new bubble? Is that what is going to

burst come the end of 2012? Hummm...

When Jacques Rueff penned the following as part of

his prologue for The Monetary Sin of the West in

1972, it is clear he foresaw even then that the new

fiat dollar based global monetary system that had just

been born in sin may well enjoy a longer life than

anyone could envisage within reason:

“The art of monetary expedients has been refined to such a

point over the last ten years that no one can predict what

artificial devices can be generated by the fertile minds of

experts.”

Indeed, here we are 40 years later and we are still

operating globally under an unprecedented fiat only

monetary regime, thanks to the endless innovations

and refinements in the ‘art’ of deception by our high

priests of monetary trickery and thanks to the

collaboration of the investment industry in a

sustained state of collective cognitive dissonance.

There could not be, in my view, any greater human

tragedy than that which we must now experience as a

civilisation and this is all as a result of some men

having contrived money out of nothing and

humanity going along with it for so long!

The ‘art’ which Rueff refers to in the quote above

now passes for science. But in truth the field of

study called economics is more of the domain of

philosophy than that of science. Its transformation

into a dubious science may well have been our

demise as a civilisation. There is simply too much

uncertainty with respect to human actions to even

pretend to capture the aggregate economic effect of

all of those actions with measures like GDP. Worse

still, is the unbearably arrogant attitude that future

economic actions can be controlled by central

planning and measured elastically!

We’ve been living in Bubbleland for such a long time

that we can no longer remember what life was like

before Trustusweknowwhatwearedoingland arrived.

By now our society has become so addicted to the

sugar coated false reality painted for so long by all

these imposters pretending to be monetary scientists

and able to solve the problems they themselves

created, that the possibility that humanity has been

conned for so long by such ‘artists’ is simply too

hard to accept for too many who still depend on the

very survival of a system that is now clearly doomed

to fail.

Yes, I’m afraid that’s why we can expect

Yeswecanland and Nojailforthebankstersland to

prevail for quite some time to come and for as long

as the governors of this new reality can get away with

it by making sure that the punchbowl is never taken

away. Our salvation from this evil lies in consciously

exercising our free will: in other words, waking up!

Only once it is realised by a sufficient number of

market participants that the price discovery process

has been high jacked will we even begin to see the

emergence of a truer picture of the actual state of

our financial markets.

After all, all financial assets are simply claims on

future cash flows of varying degrees of certainty. As

such, their true value fundamentally depends on not

only uncertainty about the future, but also on the

time value of the fiat money or currencies in which

all these assets happen to be denominated. Their

price, on the other hand, is based on what are the

prevailing beliefs of market participants with respect

to those two fundamental concepts: uncertainty and

time value of money.

Quite correctly, John Butler points out in his book,

The Golden Revolution – How to Prepare for the

Coming Gold Standard, that: “Under a fiat currency

standard, with legal tender laws enforcing its use and central

banks setting interest rates, there is no free market in money.”

Well, as it happens, this is the crux of the problem

(leaving aside uncertainty for the moment). Today,

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 4

all financial assets are denominated in fiat money.

This conveniently leaves all market participants at

the mercy of central planners who are in a position

to dictate what the time value of that money (in

which the financial assets are denominated) is.

Time value of money, or interest, happens to be the

central concept in finance theory. So how it is

actually determined is not to be dismissed as trivial

or without consequences. Under the current fiat

currency standard we must all endure for the time

being, interest rates are artificially suppressed by

central banks by any means possible to ensure

sovereign governments can continue to service their

debt. This is because that debt (let us not be

distracted by all the unfunded debt or liabilities) is

fully securitised and has by now reached the

infamous category of too big to fail as a financial

asset.

You see, while there has not been a free market in

money itself for quite some time now, there are

millions of market participants who are still willing

to risk the purchasing power of their hard earned

savings in a financial system which is based on fiat

money whose value is in fact uncertain to say the

least. This includes at the core those very same

sovereign government debt securities which are

assumed to be ‘risk free’ or to have no risk of

financial loss. Henry de Montherlant was right: men

are frivolous!

As I write (4th of December), the US federal

government debt which is subject to the ‘debt

ceiling’ (you gotta love how they come up with these

names, which are in effect tools of deceit!) stands at

US$16.3 trillion. The debt ceiling itself is US$16.4

trillion, as was set back in August of last year when a

deal was finally struck in the House of

Representatives. By the time this gets published (the

15th of December), the US Congress will have closed

for business for the year. This leaves very little time

for much to do... or will it be early next year when

the political circus comes back to mainstream media?

Meanwhile, we are getting closer and closer to the

other man-made or contrived tragedy of the day, the

so-called ‘fiscal cliff’ in the US. It certainly looks like

the proverbial can may be kicked yet again down the

road at the last minute or, as Rueff might say: the art

of fiscal expedients has been refined to such a point

that politicians will come up with just the right

device or excuse to buy more time...

In any event, all this leaves us with uncertainty to

deal with; in fact, a very high level of uncertainty.

For sure, we cannot eliminate uncertainty from our

lives. But I would argue that much of today’s

uncertainty can be attributed to not having had a

reliable measure or standard of measure for the value

of money for quite some time. Indeed, how can we

be certain of anything financial if the unit of measure

used for all valuations is without definition?

To conclude, and remembering what insight into the

real world could be derived after Heisenberg

postulated the uncertainty principle – that the act of

observation itself determines what is and isn’t observed, I

would now like to posit the following: that as more

and more market participants choose to consciously

observe the market and act accordingly, the day will

come when fiat abuse will finally be seen for what it

is and end. The golden constant will rise from the

ashes and we will from then on only have those

other and inevitable uncertainties of life to deal with!

Louis Boulanger

Louis holds a B.Sc. from Laval University in Canada; is a Fellow

of the Canadian Institute of Actuaries and the New Zealand

Society of Actuaries; and is a Chartered Financial Analyst.

Prior to coming to New Zealand in 1986, Louis worked for nine

years with a global consulting firm based in Montreal, Canada.

In New Zealand, Louis worked for another global consulting

firm for 18 years, including as Chief Executive of New Zealand

operations for five years. In 2006, he launched his private

practice.

Louis is also Founder & Director of LB Now Ltd, which

provides independent investment advice to private and

institutional clients, facilitates the purchase of bullion for private

and institutional clients as an authorized dealer for BMG

BullionBars and also helps firms comply with GIPS.

For more information of LB Now's services or to subscribed to

Louis' e-letter ‘Prosper!’ see the contact details below.

P.O. Box 25 676, St Heliers, Auckland 1740, New Zealand Ph: +64 9 528 3586 Mob: +64 275 665 095 Email: louis@lbnow.co.nz www.lbnow.co.nz

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 5

The Unadulterated Gold Standard

Part III - Features

In Part I, we looked at the period prior to and during

the time of what we now call the Classical Gold

Standard. It should be underscored that it worked

pretty darned well. Under this standard, the United

States produced more wealth at a faster pace than

any other country before, or since. There were

problems; such as laws to fix prices, and regulations

to force banks to buy government bonds, but they

were not an essential property of the gold standard.

In Part II, we went through the era of heavy-handed

intrusion by governments all over the world, central

planning by central banks, and some of the

destructive consequences of their actions including

the destabilized interest rate, foreign exchange rates,

the Triffin dilemma with an irredeemable paper

reserve currency, and the inevitable gold default by

the US government which occurred in 1971.

Part III is longer and more technical, as we consider

the key features of the unadulterated gold standard.

It could be briefly stated as a free market in money,

credit, interest, discount, and banking. Another way

of saying it is that there would be no confusion of

money (i.e. gold) and credit (i.e. paper). Both play

their role, and neither is banished from the monetary

system.

There would be no central bank with its “experts” to

dictate the rate of interest and no “lender of last

resort”. There would be no Securities Act, no

deposit insurance, no armies of banking regulators,

and definitely no bailouts or “too big to fail”. The

government would have little role in the monetary

system, save to catch criminals and enforce

contracts.

As mentioned in Part I, people would enjoy the right

to own gold coins, or deposit them in a bank if they

wish. We propose the radical idea that the

government should have no more involvement in

specifying the contents of the gold coin than it does

specifying the contents of the software that runs a

web server. And this is for the same reason: the

market is far better at determining what people need

and far better at adapting to changing needs.

In 1792, metallurgy was primitive. To accommodate

18th century gold refiners, the purity of the gold coin

was set at around 90% pure gold (interestingly the

Half Eagle had a slightly different purity than the

Eagle though exactly half the pure gold content).

Today, much higher purities can easily be produced,

along with much smaller coins (see here). We also

have plastic sleeves today, to eliminate wear and tear

on pure gold coins, which are quite soft.

If the government had fixed a mandatory computer

standard in the early 1980’s (some governments

considered it at the time), we would still be using

floppy disks, we would not have folders, and most of

us would not be using any kind of computer at all, as

they were not user friendly. When something is

fixed in law, it is no longer possible to innovate.

Instead, companies lobby the government for

changes in the law to benefit them at the expense of

everyone else. No good ever comes of this.

We propose the radical idea that one should not

need permission to walk down the street, to open a

bank, or to engage in any other activity. Without

banking permits, licenses, charters, and franchises,

the door is not open to the game played by many

states in the 19th century:

“To operate a bank in our state, you must use some of

your depositors’ funds to buy the bonds sold by our state.

In return, we will protect you from competition by not

allowing out-of-state banks to operate here.”

Most banks felt that was a good trade-off, at least

until they collapsed due to risk concentration and

defaults on state government bonds.

State and federal government bonds are an

important issue. We will leave the question of

whether and when government borrowing is

appropriate to a discussion of fiscal policy. There is

an important monetary policy that must be

addressed. Government bonds must not be treated

as money. They must not become the base of the

monetary system (as they are today). If a bank wants

to buy a bond, including a government bond, that is

a decision that should be made by the bank’s

management.

An important and related principle is that bonds

(private or government) must not be “paid off” by

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 6

the issuance of new bonds! Legitimate credit is

obtained to finance a productive project. The

financing should match the reasonable estimate of

the useful life of the project, and the full cost must

be amortized over this life. If the project continues

to generate returns after it is amortized, there is little

downside in such a conservative estimate (though it

obviously makes the investor case less attractive).

On the other hand, if the plant bought by the bond

is all used up before the bond is paid off, then the

entrepreneur made a grave error: he did not

adequately deduct depreciation from his cash flows

and now he is stuck with a remaining debt but no

cash flow with which to pay it off. Issuing another

bond to pay off the first just extends the time of

reckoning, and makes it worse. Fully paying debt

before incurring more debt enforces a kind of

integrity that is almost impossible to imagine today.

With few very limited and special exceptions, a bank

should never borrow short and lend long. This is

when a bank lends a demand deposit, or similarly

lends a time deposit for longer than its duration. A

bank should scrupulously match its assets to its

liabilities. If a bank wants to buy stocks, real estate,

or tulips, it should not be forcibly prevented, even

though these are bad assets with which to back

deposits. The same applies to duration mismatch.

Banks must use their best judgment in making

investment decisions. However, the job of monetary

scientists is to bellow from the rooftops that

borrowing short to lend long will inevitably collapse,

like all pyramid schemes (see the author’s paper).

There should be no price-fixing laws. Just as the

price of a bushel of wheat or a laptop computer

needs to be set in the market, so should the price of

silver and the price of credit. If the market chooses

to employ silver as money in addition to gold, then

the price of silver must be free to move with the

needs of the markets. It was the attempt to fix the

price, starting in 1792 that caused many of the early

problems. While “de jure” the US was on a

bimetallic standard, we noted in Part I that “de

facto” it was on a silver standard. Undervalued gold

was either hoarded or exported. After 1834, silver

was undervalued and the situation reversed. Worse

yet, each time the price-fixing regime was altered,

there was an enormous transfer of wealth from one

class of people to another.

Similarly, if the market chooses to adopt rough

diamonds, copper, or “bitcoins” then there should

be no law and no regulation to prevent it (though we

do not expect any of these things to be monetized)

and no law or regulation to fix their prices either.

If a bank takes deposits and issues paper notes, then

those notes are subject to the constant due diligence

and validation of everyone in the market to whom

they are offered. If a spread opens up between Bank

A’s one-ounce silver note and the one-ounce silver

coin (i.e. the note trades at a discount to the coin)

then the market is trying to say something.

What if an electrical circuit keeps blowing its fuse?

It is dangerous to replace the fuse with a copper

penny. It masks the problem temporarily, and

encourages you to plug in more electrical appliances,

until the circuit overheats and set the house on fire.

It is similar with a government-set price of paper

credit.

A market price for notes and bills is the right idea.

Free participants in the markets can choose between

keeping their gold coin at home (hoarding) vs.

lending their gold coin to a bank (saving). It is

important to realize that credit begins with the saver,

and it must be voluntary, like everything else in a free

market. People have a need to extend credit as

explained below, but they will not do so if they do

not trust the creditworthiness of the bank.

Before banking, the only way to plan for retirement

was to directly convert 5% or 10% of one’s weekly

income into wealth by hoarding salt or silver.

Banking makes it much more efficient, because one

can indirectly exchange income for wealth while one

is working. Later, one can exchange the wealth for

income. This way, the wealth works for the saver his

whole life, and there is no danger of “outliving one’s

wealth”, if one spends only the interest. In contrast,

if one is spending one’s capital by dishoarding, one

could run out.

No discussion on banking would be complete

without addressing the issue of fractional reserves.

Many fundamental misunderstandings exist in this

area, including the belief that banks “create money”.

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 7

Savers extend credit to the banks who then extend

credit to businesses. The banks can no more be said

to be creating money than an electrical wire can be

said to be creating energy.

Another error is the idea that two or more people

own the same gold coin at the same time. When one

puts gold on deposit, one gives up ownership of the

gold. The depositor does not own the gold any

longer. He owns a credit instrument, a piece of

paper with a promise to pay in the future. So long as

the bank does not mismatch the duration of this

deposit with the duration of the asset it buys, there is

no conflict.

If people want to vault their gold only, perhaps with

some payment transfer mechanism, there would be

such a warehousing service offered in the market.

But this is not banking. It’s just vaulting, and most

people prefer the convenience of fungibility. Who

wants the problems of a

particular vault location and a

delay to transfer it elsewhere?

And who wants a negative

yield on money just sitting

there?

A related error is the claim,

often repeated on the Internet,

is that a bank takes 1,000

ounces in deposit and then

lends 10,000 out.1 Poof!

Money has been created—and to add insult to injury,

the banks charge interest! The error here is that of

confusing the result of a market process (of many

actors) with a single bank action. If Joe deposits

1,000 ounces of gold, the bank will lend not 10,000

ounces but 900 ounces (assuming a 10% reserve

ratio).

Mary the borrower may spend the money to build a

new factory. Jim the contractor who builds it may

deposit the 900 ounces in a bank. The bank may

then lend 810 ounces, and so on. This process

works if and only if each borrower spends 100% of

the money and if the vendors who earned their

money deposit 100% of it, in a time deposit.

1 http://www.lewrockwell.com/rothbard/frb.html

Otherwise, the credit (this is credit, not money)

simply does not multiply as Rothbard asserts.

This view of money multiplication does not consider

time as a variable. Gold payable on demand is not

the same as gold payable in 30 years. It will not

trade the same in the markets. The 30-year time

deposit or bond will pay interest, have a wide bid-ask

spread, and therefore not be accepted in trade for

goods or services.

This process involving the decisions of innumerable

actors in the free market may have a result that is

10X credit expansion. But one cannot make a

shortcut, presume that it will happen, and then assert

that the banks are “swindling.”

If one confuses credit (paper) with money (gold),

and one believes that inflation is an “increase in the

money supply” (see here for this author’s definition)

then one is opposed to any

credit expansion and hence any

banking. Without realizing it,

one finds oneself advocating

for the stagnation of the

medieval village, with a

blacksmith, cobbler, cooper,

and group of subsistence

farmers. Anything larger than

a family workshop requires

credit.

Credit and credit expansion is a process that has a

natural brake in the gold standard when people are

free to deposit or withdraw their gold coin. Each

depositor must be satisfied with the return he is

getting in exchange for the risk and lack of liquidity

for the duration. If the depositor is unhappy with

the bank’s (or bond market’s) offer, he can withdraw

his gold.

This trade-off between hoarding the gold coin and

depositing it in the bank sets the floor under the rate

of interest. Every depositor has his threshold. If the

rate falls (or credit risk rises) sufficiently, and enough

depositors at the margin withdraw their gold, then

the banking system is deprived of deposits, which

drives down the price of the bond which forces the

rate of interest up. This is one half of the mechanism

that acts to keep the rate of interest stable.

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 8

The ceiling above the interest rate is set by the

marginal business. No business can borrow at a rate

higher than its rate of profit. If the rate ticks above

this, the marginal business is the first to buy back its

outstanding bonds and sell capital stock (or at least

not sell a bond to expand). Ultimately, the marginal

businessman may liquidate and put his money into

the bonds of a more productive enterprise.

A stable interest rate is vitally important. If the rate

of interest rises, it is like a wrecking ball swinging

into defenseless buildings. As noted above, each

uptick forces marginal businesses to close their

operations. If the rise is protracted, it could really

cause the affected country’s industry to be hollowed

out. On the other hand, if the rate falls, the

wrecking ball swings to the other side of the street.

The ruins on the first side are not rebuilt. But now,

capital is destroyed through a different and very

pernicious process: the burden of each dollar of

existing debt rises at the same time that the lower

rate encourages more borrowing (see: here). From

1947 to 1981, the US was afflicted with the rising

interest rate disorder. From 1981 until present, the

second stage of the disease has plagued us.

Today, under the paper standard, the rate of interest

is volatile. The need to hedge interest rate risks (and

foreign exchange rate risk, something else that does

not exist under the gold standard) is the main reason

for the massive derivatives market. In this market for

derivatives, which is estimated to be approaching

one quadrillion dollars (one one million billion)2,

market participants including businesses and

governments seek to buy financial instruments to

protect them against adverse changes. Those who

sell such instruments need to hedge as well.

Derivatives are an endless circle of futures, options

on futures, options on options, “swaptions”, etc.

The risk cannot be hedged, but it does lead to a

small group of large and highly co-dependant banks,

who each sell one another exotic derivative products.

Each deems itself perfectly hedged, and yet the

system becomes ever more fragile and susceptible to

“black swans”.

These big banks are deemed “too big to fail.” And

the label is accurate. The monetary system would

2 http://en.wikipedia.org/wiki/Derivatives_market

not survive the collapse of JP Morgan, for example.

A default by JPM on tens or perhaps a few hundred

trillion of dollars of liabilities would cause many

other banks, insurers, pensions, annuities, and

employers to become insolvent. Consequently,

second-worst problem is that the government and

the central bank will always provide bailouts when

necessary. This, of course, is called “moral hazard”

because it encourages JPM management to take ever

more risk in pursuit of profits. Gains belong to

JPM, but losses go to the public.

There is something even worse. Central planners

must increasingly plan around the portfolios of these

banks. Any policy that would cause them big losses

is non-viable because it would risk a cascade of

failures through the financial system, as one

“domino” topples another. This is one reason why

the rate of interest keeps falling. The banks (and the

central bank) are “all in” buying long-duration

bonds, and if the interest rate started moving up they

would all be insolvent. Also, they are borrowing

short to lend long so the central bank accommodates

their endless need to “roll” their liabilities when due

and give them the benefit of a lower interest

payment.

The problems of the irredeemable dollar system are

intractable. Halfway measures, such as proposed by

Robert Zoelick of the Bank for International

Settlements that the central banks “watch” the gold

price will not do.3 Ill-considered notions such as

turning the IMF into the issuer of a new

irredeemable currency won’t work. Well-meaning

gestures such as a gold “backed” currency (price

fixing?) might have worked in another era, but with

the secular decline in trust, why shouldn’t people just

redeem their paper for gold? One cannot reverse

cause and effect, trust and credit. And that’s what a

paper note is based on: trust.

The world needs the unadulterated gold standard, as

outlined in this paper, Part III of a series.

Keith Weiner

In Part IV, we will look at one other key characteristic of the

Unadulterated Gold Standard: The Real Bill…

3 http://www.ft.com/intl/cms/s/0/54a44c3e-ec7c-11df-ac70-00144feab49a.html#axzz2E5yPbbUQ

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 9

Returning to the Gold Standard

The following is written for the United States. With

minor modifications, it could be applied to most

countries.

Several recommendations have been proposed for

returning to a gold standard or a monetary system

that incorporates gold. One is returning to the true

gold standard. Nearly all of these recommendations

require fixing or defining gold at a specific price,

generally between $1000 and $10,000 per ounce.

Because of falsely perceived problems with returning

to the true gold standard, several pseudo gold

standards have been proposed. One is backing the

currency by some arbitrary amount of gold, usually

between 5-25%. Another is to use the price of gold

as an index. The central bank expands and contracts

the money supply to keep the price of gold within a

specific, but arbitrary, range. Related is making gold

part of a commodity basket index. Then the central

bank expands and contracts the money supply to

keep this arbitrary index within an arbitrary range.

Although the gold exchange standard fell quickly the

two times that it was tried, it is still popular in some

circles. Presumably, its proponents will make it work

this time.

The following recommendations can return the

country to the true gold and silver standards without

the problems of the aforementioned ideas. They take

the control of the money from the government and

its central banks, the Federal Reserve, and return it

to the people where the U.S. constitution originally

placed it. These recommendations call for phasing in

the gold and silver standards. Many pertain to

reforming banking as poor banking practices cause

many of today’s economic problems.

1. All U.S. debt securities held by the Federal

Reserve are voided and the Federal Reserve is

abolished. The Federal Reserve returns the gold

certificates that it holds to the U.S. government.

Federal reserve notes are no longer printed unless

the U.S. government needs to print more federal

reserve notes to pay its existing debts made in terms

of federal reserve dollars.

2. As part of abolishing the Federal Reserve, the U.S.

government buys all the stock of the Federal Reserve

banks owned by member banks and pays for the

stock with federal reserve notes. All member banks

receive in federal reserve notes all their reserves held

by the Federal Reserve.

3. All gold held by the U.S. government or the

Federal Reserve is distributed equitably among the

people who lived in the United States in 1933 or

their descendants if they have died. The distribution

is in gold coins minted in denominations 5, 10, and

20 pennyweights (20 pennyweights = 1 ounce).

4. The Federal Deposit Insurance Corporation

(FDIC) is phased out. Its coverage could be reduced

by one-fifth per year for five years after which it

ceases to exist. Any bank could opt out of the FDIC

and cease being subject to its regulations.

5. The U.S. government immediately opens the mint

to gratuitous free coinage of gold and silver. Private

mints may also coin gold and silver provided the

minter and the content of gold and silver of the coin

are identified on the coin.

6. Gold and silver coins replace the federal reserve

dollar. The coins are denominated in troy penny-

weights of gold or silver. The pennyweight value is

stamped on the coin. Also stamped on the coin are

the grains of gold or silver that the coin contains.

7. No fixed exchange rate or legal ratio exists

between gold and silver or between federal reserve

dollars and gold or silver.

8. Legal tender laws are repealed; people are required

to accept the type of money (gold, silver, or federal

reserve dollars) for which they have contracted.

9. Sound banking needs to be restored as quickly as

possible. Banks issuing banknotes for real bills of

exchange need to be physically separated from other

types of banking.

10. Banks issue only gold and silver banknotes and

checkbook money to buy real bills. Banks do not

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 10

issue banknotes or create checkable deposits for any

purpose but to buy real bills.

11. Other banks do not issue banknotes and do not

create checkable deposits. They make loans by

transferring money from savings and bank capital.

Borrowing short and lending long is prohibited.

12. Banks and others may issue gold and silver

certificates provided such certificates are fully backed

by gold and silver. The government should not issue

certificates.

13. All banknotes and certificates clearly identify the

issuer and whether it is in gold or silver.

14. The smallest denomination of banknotes and

certificates is 50 pennyweights of gold and 100

pennyweights of silver.

15. The States penalize the issuer of banknotes and

certificates that refuses or fails to redeem its

banknotes or certificates on demand.

16. Within 12 months, no new checkable deposits

are created in dollars; they are in silver or gold.

Within 12 months, no new loans are made in federal

reserve dollars; they are in silver or gold.

17. Federal reserve dollars are withdrawn from

circulations as debts made with federal reserve

dollars are paid off. Debts contracted in federal

reserve dollars are paid with federal reserve dollars

although the debtor may pay with gold or silver if he

so chooses and the creditor willingly accepts.

18. Banks maintain 100% reserves in gold and silver

for primary gold and silver demand deposits. Banks

that buy real bills maintain 100% reserves for

derivative demand deposits in real bills and maintain

adequate reserves of gold and silver to redeem in

gold and silver checks drawn on derivative demand

deposits. All other banks maintain 100% reserves for

derivative demand deposits by transferring money

from savings or bank capital to them.

19. Banks are prohibited from buying government

securities, using government securities as reserves,

lending money to buy government securities, or

accepting government securities as collateral for

loans.

20. Banks do not pay out banknotes or certificates of

other banks.

21. No bank keeps any of its reserves in another

bank.

22. The U.S. government and States keep their

money in their own vaults and write checks against

money in their vaults. They do not deposit money in

banks. The U.S. government and States belong to

clearing houses to clear quickly checks, banknotes,

and certificates that they receive and checks written

on their accounts.

23. Within 12 months, the U.S. government and

States begin paying their employees in physical silver

coins and continue to pay them in physical silver

coins for at least five years. After five years, they may

pay their employees with silver checks or silver

transfers to the employees’ checking accounts.

24. The U.S. governments and the States start

collecting taxes in gold and silver within six months.

They should continue to collect enough taxes in

federal reserve notes to pay their debt obligations

made with federal reserve dollars.

25. Within 30 days, the U.S. government and States

cease contracting and issuing securities in terms of

federal reserve dollars and start contracting and

issuing securities in terms of gold or silver.

26. All capital gains taxes, sales taxes, and other taxes

on the exchange, sell, or purchase of gold and silver

in any form that is at least 18 carats or on any other

currency are eliminated.

27. People may make contracts in gold and silver or

any other commodity, good, or service, that they

choose. Contracts are paid as specified in the

contract. If the value of the contract when

completed has risen in terms of federal reserve

dollars, no taxes are paid on the increase. Tax laws in

general are revised so as not to penalize using gold

or silver as money.

Thomas Allen

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 11

Orphans of the Sky

Some of my previous articles touched on a major

obstacle to the return of gold as money. I suggested

that many of the people best able to aid gold’s fight

are also smart enough to make an easy living off the

fiat system. This topic deserves additional treatment.

There is more going on than meets the eye.

The subject came to mind recently when I was

thinking about one of my favorite Heinlein novels,

Orphans of the Sky. The book raises fascinating

questions particularly relevant to gold supporters.

Set onboard an ancient starship, the story’s

protagonists confront problems well known to true

monetary scientists. Although written in 1941, it

foreshadows our current plight and offers valuable

insights for our cause.

Heinlein imagined far-sighted men conceiving and

launching a massive expedition to colonize another

star. Given the immense journey length, they

intended the crew to found a sustainable society on

the ship. Only after many generations would

descendents of the original “colonists” complete

their ancestors’ mission.

Designers compensated for the anticipated

inexperience and artificiality of upbringing in those

born aboard, but tragedy struck regardless.

Crewmen mutinied and killed the officers, thereby

initiating a dark age in the midst of mankind’s

highest technological achievements. Although critical

equipment still functioned and surviving inhabitants

retained a stable civilized order, their offspring grew

increasingly ignorant.

With no readily accessible windows to view the deep

space outside, future generations came to regard the

ship itself as the entire universe. Eventually, even the

smartest people on board never understood their

environment was a ship at all.

Does this sound depressingly like the evolution of

prevailing views on the nature of money and

banking? That money is paper or binary code

memory rather than gold? That central banks always

existed, and must survive lest our economy implode?

That inflation is unavoidable, and actually beneficial

in small amounts? And that illiteracy and innumeracy

hinder most people’s critical analysis of such

orthodoxy?

What useful ideas can we take from the story? The

leadership of the book’s closed society maintained

control by hoarding surviving knowledge and

burying the ship’s origins. With the passage of time,

the rulers themselves came to be born ignorant.

Heinlein’s heroes pieced together the true story and

sought to regain their birthright.

But they faced difficulties in explaining it to potential

allies. For example, the ship’s hull being impervious

to available tools, how could someone imagine what

was on the other side, or why the mental exercise

was worth the effort? And if a prospect could grapple

with such ideas, would he simultaneously overcome

the fear naturally accompanying this line of inquiry?

Similarly, today few people have the inclination or

courage to imagine a world without the Federal

Reserve or fiat money.

And this is a big part of our problem. We are asking

people to become real pioneers, when for

generations they have not had to think hard on new

ideas or solve life-and-death problems. Those rare

remaining elders who experienced the Great

Depression are ignored or ridiculed when they talk

of prudence and restraint.

It is a daunting task for someone to face reality

squarely when neither they nor their parents ever had

to do so. Much easier, unfortunately, to decide to

aim for personal security through the artificial

intervention of government, either as a recipient of

state favors or as a successful player of the political

power game.

On the other hand, we are not too far along the road

to a medieval society. And the internet helps our

cause greatly. Windows to the true, wider reality of

our world are mere seconds away from someone

with even a moderate determination to learn.

This is why we gain the best odds of success by

making the idea of gold money less frightening

through education. Unfortunately the typical man

today fears the unknown more than his familiar, sad

existence under fiat money. Nevertheless, showing

him how greater choice and self-reliance lead to a

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 12

better life in the long-run is our winning approach.

Education is our best weapon.

Orphans’ heroes eventually succeed, though not

exactly in the way their ship’s designers intended.

The book’s final scenes are incredibly moving, as the

characters experience viscerally just what it means to

confront the bewildering, dizzying unknown and

struggle to gain a psychological foothold.

As gold’s standard-bearers our obstacle course is

different, but it also can be completed, especially

since we have the advantage of history as our guide.

Let us keep up the fight. Following in Heinlein’s

footsteps, Spider Robinson had one of his characters

sing some memorable lines about encouraging

oneself in a great undertaking:

It would not be so lonely to die if I knew

I had died on the way to the stars.

May each of us, long-time hard money booster or

new student, not only maintain our optimism, but

also, more importantly, fear nothing.

Publius

Who says...

According to established facts as summarised by a

paper written by A. Rolnick, F. Velde and A. Weber

and entitled "The Debasement Puzzle of the Middle

Ages" first published in the Journal of Economic

History of December 1996, vol. 56, no. 4, pp. 789-

808, the monetary debasement in the mediaeval

period of Western Europe poses a challenge to

monetary theory. The challenge is to explain why, in

the face of increased seigniorage, people would

voluntarily bring unusual large volumes of precious

metal to the Mints. The same unusual volume

occurred even after the inverse operation of a

reinforcement of the coin. How to explain the

unusual volume in the absence of a logical incentive?

In solving the puzzle, I posit that there clearly was an

incentive. But it cannot be explained by modern

monetary theory. To solve it, one has to fall back on

the workings of the bill discounting practise. A bill

originates with the payee as it is drawn on the payer,

who accepts it in order to give it legal standing in the

mercantile circles in which it originated. Contrast this

with a note or loan which originates with the payer.

A bill is therefore evidence of value added, whereas a

note or loan is evidence of debt.

It is a well-established fact that bills were the

preferred instruments of exchange between

merchants at e.g. the fairs of Champagne or later in

merchant cities like Bruges. The bill, as an

instrumentum of value added, has little problem in

circulating. Contrast this with an instrumentum of

debt, such as present day irredeemable currency,

which only circulates due to the force of law.

It is also established fact that the going rate in

discounting a bill is lower than the rate on notes or

loans. It is commonly argued that the risk factor is

different. The latter is entirely true in that it is clear

that bills are drawn on existing goods which will hit

the markets within a season or 90 days. The

underlying consumer goods were real and rolling a

bill would harm if not ruin the merchant's

reputation.

Discount rates are therefore a function of the

propensity to consume, while interest rates are a

function of saving. Both rates are as distinct as chalk

and cheese and may even go in opposite directions.

Despite this important distinction, not very well

understood by modern monetary theory, the

discount rate is commonly referred to as a "short

commercial loan" in some textbooks. I deplore the

use of the word "loan".

Merchants engaging in bill discounting are more

comparable to business venture partners then to

debtors and creditors, precisely because of the

different nature of their relationship. The face value

of the bill does not relate to debt and the discount

rate does not relate to interest.

Bill trading across borders had the tendency to

equalise discount rates across different territories.

Precious metal import and export points are largely a

function of transportation and related insurance

costs. These points are also related as a special case

to the well-known phenomenon of Gresham's Law.

The discounting practice across jurisdictions tended

to exploit discount rate differentials, the trade in

precious metals tended to exploit debasement

practices.

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 13

The unusual flows of metal to the Mint were, in

conclusion, independent of the debasement. They

were a reflection of the discounting opportunities,

still being profitable, despite debasement 'tax'.

In today's world, we have done away with the

difference between discount and interest, much

deplored by older writers such as Fullarton or Rist.

We have even contemporary economists proposing

ways to overcome the zero lower bound. On

analysis, this means that interest is zero or negative,

but so is discount.

Zero or negative interest rates imply infinite

deflation or hyperdeflation, defined as the utmost

capital drain out of fixed capital, productive or not,

as well as the utmost drain of capital out of the bond

market into the most marketable goods possible,

starting with gold and silver. And even gold and

silver will refuse to circulate, as a limiting case, any

further. Irredeemable currency on the other hand,

will circulate with infinite speed, as it will try to find

shelter in other, lesser marketable goods. And prices

will be bid up.

So who says, we can't have inflation and deflation at

the same time? The 'thermodynamics' involve a flow

from less marketable to more marketable and in

economics should be called 'devolution' instead of

referring to physics. Bad money will spin like mad

and good money will lay hidden, not making a

sound.

Peter Van Coppenolle

Peter graduated in law and economics from Johannesburg

University in 1986 and in 2010 in Tax with Leuven and Tilburg

University, Brussels. After graduating, he worked as a researcher

for the South African Foreign Trade Organisation and from

1989 to 1992 for Panasonic in the finance dept. In Brussels,

Peter served for a number of Belgian public and private

companies either as director or advisor. He is currently a co-

owner of Pintax cvba, a tax advisory service and chairman of

Pelord SA/NV, a property holding company. Peter has been a

precious metals investor for more than 10 years. His expertise is

predominantly in the tax treatment of precious metals

investments as hybrid instruments and as a means for succession

planning.

The American Corner: Secession

Many people are angry about the outcome of the

election. While there is some soul searching, there is

also a large and growing disgust, not just with

President Obama but with the electoral process and

the country itself. Out of anger and frustration,

some people are calling for secession, though it’s

unclear how many.

It is easy to see the attraction. Let each “side” go its

own way. Red states can be “conservative” and blue

states can be “liberal” (those terms have different

meanings in America than elsewhere). No more

strife at the ballot box; let each side be governed as it

chooses.

There are two problems. First, there is not much

difference between the “liberal” and “conservative”

positions. Both believe in paper money, public

education, regulations and permits, transfer pay-

ments, progressive taxation, government-provided

retirement and healthcare, massive taxes on inherited

wealth, government-provided transportation, and

many other statist ideas.

Second, these two groups are not neatly sorted out

with one group on one side of a line and one group

on the other side. Even in the “liberal” state of

California, the “liberals” are in Los Angeles and San

Francisco and the rest of the state is “conservative”

for the most part.

The situation today is totally unlike the situation in

1860 (the only time secession was attempted), in

which there were distinct ideological groups and they

were geographically separated.

Today the majority is unhappy with the

consequences of ideas they themselves believe in.

We can see this with the “conservatives” saying that

if they were elected, they would repeal Obama’s

version of socialized medicine and replace it with a

“common sense program to provide universal health

care access.” As if their version would somehow

incorporate “common sense”. As if there could

possibly be “common sense” in taking money from

some people and using it to give free benefits to

others.

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 14

Secession is no solution for the any of the problems

that plague us today. Let’s look at what it would

mean in reality.

The original idea behind Southern secession was that

states have a “right” to allow whites to impose

slavery on blacks. Of course, states do not have

“rights”. Rights are by definition and by nature

individual. But many today hold the idea that states

should have a “right” to impose the laws that the

local voters desire, such as imposing religion on the

population, or group-based welfare. These ideas will

fail at the local level for the same reason they fail at

the national level.

Now think of what secession would mean, especially

if it really picked up momentum. Ultimately, there

would be 50 countries (or more—why can’t

Northern California secede from Southern

California, if California can secede from the US?),

each with its own diplomats and armies. There

would be innumerable borders, across which the

flow of people, goods, and money would be

restricted and/or taxed.

What would happen if people in each region were

forced by circumstance to eat only what could be

produced locally? Once the flow of oil stopped, the

people in arid western states like Arizona would

perish, as there is little water without pumps

powered by diesel or electricity. And how would oil

pass through so many borders between mutually

distrusting (if not hostile, envious, or trade-warring)

countries?

What if other consumer goods had to be produced

locally? There could be no such thing as a computer,

as the chips in computers require a worldwide

market. There could not be 50 local Intel

corporations. Nor motor manufacturing, phar-

maceuticals, pumps, power plants, lighting, etc.

Even if there were no wars—started because one of

these little countries thought to plunder another—

there would be large-scale death and a huge decline

in the quality of life.

Could law enforcement exist this way, and what of

respect for law and order? It would be an

environment of strained public budgets combined

with mass anger. Those who feel entitled to be given

free stuff could form gangs to take it from anyone

they find.

And think of your money. You wake up one day,

and the US dollars in your bank account are replaced

with Texas “Stollars” or “MontanaBucks”. North

Dakota already has a state-run bank, and other states

could follow suit. The only thing worse than the

current system where money is borrowed into

existence, is one in which the legislature can print it

at will. Could “Dakotars” hold any value?

Breaking this once-great country into 50 remnants

will guarantee that we collapse. And this is why I am

writing about secession. The theme is the same as

with the gold standard.

We must work to prevent collapse.

I don’t know if some Romans in 465AD thought

that collapse would help them restore a more honest

form of government. We do know now that their

civilization did not bounce back for over 1000 years

after it collapsed.

The fight for the gold standard is the fight to

preserve civilization and prevent collapse. Opposing

secession is part of the same fight.

Keith Weiner

President of the Gold Standard Institute USA

Past failed recipes will …. fail again

It has been recently announced that the IMF, the

ECB and the EC have finally agreed on all

outstanding issues-prerequisites, so that a

humongous loan of about 40 billion Euros will be

released to Greece. The money is intended primarily

to recapitalize Greek banks. A big chunk will be used

to pay back outstanding public debt and some will be

diverted to businesses in the form of stimulus and

subsidies. For the latter to be achieved, a new “for

growth” legislative framework has been voted.

It seems that those governing Greece during the

present critical times have learned nothing from past

similar mistakes. If the road is full of traps, mud-

holes and all kind of hurdles, no one is able to run

no matter the stimulus and subsidies you promise.

You have to clean the road first. Maybe this is all you

The Gold Standard The Gold Standard Institute Issue #24 ● 15 December 2012 15

have to do without the need for additional state

meddling which is applied by state bureaucrats

deciding who will be subsidized and what kind of

new state companies will be formed. All in the name

of growth while feeding corruption once more.

State corporatism, public money speculators, close

“buddies” with access to the way the funds are

allocated. All those, will “prepare” the necessary

documents, grease the state machine, overestimate

the investments to be done, pocket the subsidy and

finally disappear while the new state companies will

accommodate some party lazybones with the

minister boasting victory against unemployment.

At the same time, every serious entrepreneur will

continue struggling against the monsters of

corruption, bureaucracy and institutionalized anomie

while being regarded as an enemy by the state’s

wicked machine. On top of all, he will be uncertain

of the kind of tax laws and regulations of tomorrow.

There are a small number of initiatives to be

employed if the present rulers really wish to help

growth, fight unemployment and avoid tax evasion.

A simple, steady and fair tax law unchanged

for at least the next 10 years.

Computerize all procedures and transactions.

Lower and keep steady all kind of taxes to a

maximum of 15%.

Introduce transparency and accountability to

state auditing authorities.

Fast moving judiciary system.

Repeal all regulations of privileged

professional classes.

Abolish all state companies involved in

business.

There is no need for new laws and regulations. All it

takes is the courage to divorce the party friends and

all kind of political protégés.

No need for new stimulus and subsidies. Just

elimination of the existing anti-incentives. Have the

politicians and our EU partners thought of it or are

they deliberately dismissing the notion?

Orpheus