In Government We Trust?

Many who agree with me on a lot of other issues, do not understand my enthusiasm for gold and sound money or why I spend so much time studying and talking about monetary policy.  It’s true that I talk about money differently than most, but the fact is sound money offers many benefits.  For example – peace.

Can sound money really bring about peace?  Actually, it plays a big part in peaceful international relationships.  Money based on commodities, rather than paper, is not subject to government manipulation, and is a key component to free and honest trade.  History shows that if countries engage in trade with each other, their governments tend to find ways to get along for the same reason you do not kill your customers at your place of business, even if they occasionally annoy you.  If someone outright cheats you, however, you may engage in “war” by taking them to court, for example, and the relationship will sour.  Governments and central banks with unfettered power to manipulate currency also have the ability to cheat their creditors.  One way they do this is to simply create enough currency to pay off debts.  This devalues the currency and “cheats” the recipient out of what they are owed.  It would not be fair if you watered down your product the way our government waters down its currency, so it is not hard to understand, in these simplified terms, why loose monetary policy contributes so much to ill will and war around the world.

Sound money, on the other hand, simply is what it is.  Removing governmental power to manipulate money, removes the temptation for government to spend, print and cheat.  Sound money ensures that our government’s spending priorities would be brought into sharp focus and reduced to only what we can afford.

Sound money also limits the ability to wage wars of aggression.  Imagine how much more careful Washington would have to be about starting a war if they did not have this financial sleight of hand at their disposal!  Fiat currency allows government do expensive things they should not be doing while paying the bills with cheap money.  The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden.  The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world.  As a consequence, there is therefore more talk of economic isolation and war.

This vicious cycle of spending, fighting and inflating is not what Americans want.  It is what the government wants, and it has had to deceive the citizens into allowing and supporting it.  Sound money curbs the government’s ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight.  So in these ways, sound money is very conducive to peace.

Another benefit of sound money is financial security.

Can sound money give you financial security?  There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come.  Indeed, the same silver dime that bought a loaf of bread in the 1960’s can still buy a loaf of bread with its precious metal content – which is worth about $1.00 today.  An ounce of gold has always been about evenly exchangeable for a finely tailored men’s suit, which these days is roughly $800.  And in these days of fluctuating gas prices, when priced in gold, oil has been stable.  Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94 percent of its purchasing power.  The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971.  This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin.  Trusting in government for financial security in retirement is not a safe option.  Indeed, a recent study by the Consumer Bankruptcy Project shows that bankruptcies among those 75 and older has more than quadrupled since 1991.  This represents wealth and savings that have been eroded by inflation, and trust in entitlement promises that were more fantasy than reality.  Even with the pittance that social security pays to seniors, it is bankrupt and bringing the economy to its knees.  It is no wonder that many in the younger generations want no part of it, and they should not be forced into a failed system.

On the other hand, holding physical gold can defend against aggressive government monetary policies that threaten to inflate away the value of your life savings.  During the hyperinflation in post WWI Germany, what used to be a comfortable nest egg was suddenly the value of a postage stamp.  If one held just a portion of their savings in precious metals, the crisis was greatly softened.   Gold will never be worth nothing, even if the exact price fluctuates.  There is a famous photograph, however, of a German woman during this time period burning piles of tightly bound banknotes to keep warm.

Imagine if the money you earned had honest, stable value, or even appreciated like an investment!  No such special measures, like converting dollars to gold, would be required to ensure that your savings would sustain you in your golden years.  That is the way it could be and is supposed to be.  However, the government’s thirst for power will not be easily, or cheaply, quenched.  Fiat currency is one tool governments have to extract wealth quietly from the working class.  It is time for the people to wake up to this ruse and look to the Constitution to restore sound currency.

Sound money keeps government spending in check, keeps trade fair and honest, which reduces the temptations, and many underlying causes, for governments to wage wars.  It also gives you the peace of mind of knowing that your savings will be able to sustain you in your retirement.

So if sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver?  Why are you still being paid in fiat dollars, and why can’t you pay for gas in gold?  The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions.

One of the main stumbling blocks is Federal legal tender laws, which state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions.  In light of this, Gresham’s Law takes effect.  Gresham’s Law states that bad money drives out good money.  Meaning, if someone is forced to accept your bad money, it is to your advantage to pass it off, like a hot potato, in exchange for something of value.  Any good money you have, you will hoard.  Eventually, real money is driven out of circulation and under people’s mattresses, so to speak.  In the absence of legal tender laws, people are free to accept the medium of exchange of their choice, and are likely to insist on payment in something of real value.

Related to legal tender laws, contracts in gold are not enforced.  Meaning if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes. While gold clauses have been legally enforceable since the late 1970’s the fact remains that disputes over gold clauses might well be resolved in court with a dollar figure calculated in terms of Federal Reserve Notes.  In the recently decided case of 216 Jamaica Ave v. S&R Playhouse, which reversed a district court decision, the court upheld the enforceability of a gold clause, but sent the case back to the district court to decide what obligations the gold clause imposed on the defendant.  It is not inconceivable that this will result in a decision that the value of the “gold coin” referred to could be valued by the court in terms of Federal Reserve Notes, not in terms of ounces of gold.  Furthermore, given the federal government’s actions against Robert Kahre (the Nevada businessman who paid his employees at the legal tender face value of gold bullion coins) it is obvious that the government is still waging a war on gold.  Whether either of these cases establishes a precedent remains to be seen.  Additionally, because 31 USC 5103 establishes Federal Reserve Notes as legal tender, it would likely take a court challenge to determine whether a gold clause or legal tender law takes precedence.

Governments should do very little, in my estimation, but it should enforce contracts and property rights through the courts.  But in this instance it shirks this basic duty, when it comes to gold, as one way to keep control of our economy and the medium of exchange.  One is also expected to pay sales tax on the purchase of gold.  This is as ludicrous as if you paid sales tax at the bank when you converted dollars into quarters!  The IRS also expects you to pay capital gains tax on gold, which is so backwards, since gains on gold really represent decline in the value of the dollar!

Legal tender laws should be repealed at the Federal level.  Congress has the Constitutional duty to protect the integrity of our money.  However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter.  Free people should be free to associate and do business in ways that benefit them.  Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government.

The Daily Reckoning