Monetary Reform: The Beginning of the Beginning
Fundamental reform of the world’s monetary system has begun. It is way too early and too amorphous to be front-page news. We are only at the beginning of the beginning of a popular effort to restore gold backed money to the center of economic activity.
The power of this incipient reform movement is its grounding in human nature and our propensity – in Adam Smith’s famous words – “to truck, barter and exchange one thing for another.” We forget money is a human invention, emerging from what Hayek calls the spontaneous order of the market, to make possible mutually beneficial exchanges over an ever-widening number of goods, across an expanding set of communities and through the keeping of promises of exchange, even over long periods of time.
The invention of money made possible an extraordinary increase in commercial activity by liberating us from a direct barter system where I have to have something you need in order to trade. By ancient times, gold and silver coins had become the money of choice because they were better than any other medium at maintaining their rate of exchange into goods and services, thereby favoring neither buyer nor seller.
Defining a dollar, or a British pound, as a fixed weight of gold was an innovation that further increased the usefulness of money. You could take currency and trade it for something you needed, or you could trade that money for a fixed weight of gold. As a general proposition, paying with paper money was no different than paying with gold, except paper money was more convenient to carry.
Forty years ago, that order was up-ended by President Richard Nixon’s decision to sever the final link between the dollar and gold. For the first time since Sir Isaac Newton established the British gold standard in 1717, all of the world’s major currencies during a time of peace were free to float against one another and to fall in value against precious metals. The consequence has been a debasement of the dollar and all other currencies, an ever more cyclical economy, a 40-year hiatus in real wage increases for American workers and a growing fear of yet more financial crises created by monetary instability.
As a consequence, support is growing to repeal tax and other legal barriers that effectively prevent people from using precious metals as money.
In March, Utah repealed its capital gains tax on gold and silver coins it will recognize as legal tender. Twelve other states are considering similar legislation.
Then, in June, Senators Jim DeMint (R-S.C.), Mike Lee (R-Utah) and Rand Paul (R-Ky.) introduced the Sound Money Promotion Act that would remove the 28% federal tax on gains realized in the use of gold or silver coins recognized as legal tender for use within a state.
Now, in Switzerland, efforts are underway to create an official Gold Swiss franc (GSF) with a set of coins, each with a fixed content of gold. The proposed constitutional change would permit private institutions to issue an unlimited number of coins whose appearance, content and weight of gold, and definition would be under the supervision of the Swiss government.
For example, the smallest coin would have a face value of 1 GSF and have 0.1 grams of gold in its center, similar to today’s bi-metallic euro coins, and be worth—at today’s price of gold, about $4.00.
Five, 10, 20 and 50 GSF coins would have 0.5, 1.0, 2.0 and 5.0 grams of gold and today would be worth approximately $20, $40, $80 and $200 respectively. Gold Swiss franc bank notes are conceivable, as are GSF bank deposits, but they would have to be 100% backed by gold held by the issuing institution. Credit transactions would be legal, but fractional reserve credit would be forbidden under Swiss law.
“The primary purpose is to make it easy for the Swiss people to use or hold gold as an alternative to the Swiss franc and all other currencies,” explains Thomas Jacob, the man behind the gold initiative who now heads the newly founded Goldfranc Association.
In addition, Jacob believes the free coinage of Gold Swiss francs may alleviate the upward pressure on the Swiss franc. In the past year, it has shot up 15% against the euro and about double that against the dollar as people all over the world sought refuge in the Swiss currency.
The importance of this initiative occurring in Switzerland goes beyond that country’s reputation as a center of financial stability and sound banking practices through the millennia. Such a change in its constitution must be approved by the Swiss people through a referendum, and thus would demonstrate in a language politicians understand the popularity of making money again as good as gold.
Within the next few weeks, signatures will be collected to launch an initial referendum that would require the Swiss National Bank to repatriate all of its gold holdings to within the borders of Switzerland, prohibit it from selling any more of its gold, and require a minimum 20% of its assets be gold.
This initiative is likely to be very popular. The Swiss remember that during World War II, the United States refused to provide access to their gold reserves. More important, since 2000, the SNB has sold 1550 tons of gold – more than a half of its total holdings – mostly at prices below $500 an ounce, and bought European government bonds that have plummeted in value by SF40 billion, compared to a total federal budget of SF60 billion.
This referendum will put the issue of gold as money on the political agenda. The next step is to offer a follow-on initiative permitting the free-coinage of GSF.
The creation of a Gold Swiss franc and the free coinage thereof, along with the repeal of taxation by the U.S. of gold and silver coins used as legal tender, would liberate market participants to generate spontaneously a new monetary order. With government barriers removed, people all over the world will find ways to use gold-backed money to facilitate the exchange of goods and services with their counterparts anywhere in the world, and to engage in saving and investing, lending and borrowing using monies whose value would be anchored in the remarkably stable and trustworthy purchasing power of gold.
Initially, such efforts would have little economic consequence. However, in a world of voluntary exchange, good money chases out bad money, turning Gresham’s law upside down. That is why when the dollar’s value was stable, it was the currency of choice throughout the world.
No one can forecast how this process will evolve. However, we can anticipate that the creation of a Gold Swiss franc and the repeal of tax and legal barriers to the use of gold and silver coins as legal tender will be the antecedent to the reform of today’s paper money system – in the U.S and throughout the world.