Gold and Silver as Fiat Money

Gold and Silver as Fiat MoneyThomas Allen

Gold and silver can be used as fiat money and in fiat monetary regimes. How can this be? To understand how gold and silver can be used as fait money, one needs to understand what distinguishes fiat money from commodity money.

With commodity money, the value of the money equals the value of the material of which it is made. This equality of value can only be maintained with unrestricted importation and exportation of the monetary commodity and free coinage. With the true gold and silver standard, gold and silver are commodity money.

The true gold or silver standard requires free coinage. Under free coinage, any person can bring any quantity of gold or silver bullion to the mint and get it coined. Once the bullion is coined, the mint returns the coins to the presenter. The government does not buy the gold or silver with a check, certificate, or other paper money. The gold and silver remains the property of the person presenting it for coinage. Likewise, the minted coins are the property of the person who presents the metal. Furthermore, the government does not coin gold or silver on its own account.

With the true gold and silver standard, the market automatically determines the quantity of gold and silver coins. The people with each person acting in his individual capacity according to his economic contribution decides how much gold and silver to coin and how many gold and silver coins to melt for other uses. Thus, economics determines the quantity of money as gold and silver coins. The government’s monetary activity is limited to minting gold and silver coins and to certifying the weight and fineness of the metal content.

As Mises notes:

. . . it is the commodity in question that constitutes the money, and that the money is merely this commodity. The case of fiat money is quite different. Here the deciding factor is the stamp, and it is not the material bearing the stamp that constitutes the money, but the stamp itself. The nature of the material that bears the stamp is a matter of quite minor importance.[1]

With commodity money, the value of the currency equals the value of the material of which it is made or into which it is redeemable. The commodity makes the money. "The value of a coin has always been determined, not by the image and superscription it bears nor by the proclamation of the mint and market authorities, but by its metal content."[2] It derives its power from the material of which it is made.

With fiat money, the value of the currency equals what the government declares it to be. (Here value means nominal value and not purchasing power.) The stamp and force of government makes the money. Fiat money derives its power to make purchases and to pay debt solely from words printed on the currency, i.e., it derives its power from governmental fiat, the weapons of government.

Commodity money differs from fiat money in two important ways. First, under a commodity monetary system, the money supply adjusts automatically to meet monetary needs. "[T]he demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money."[3] The markets decide how much money to create and issue. They regulate the money supply. Under a fiat monetary system, the money supply is regulated artificially. The government or its central bank regulates the money supply. The government decides how much money to create and issue. Second, the value of commodity money is directly related to the material of which it is made. For fiat money, value is independent of its material and depends solely on the demand for and supply of money. Of these two differences, the most important lies in the method used to regulate the supply of money.

Thus, fiat money has two attributes that distinguishes it from commodity money. First and most important, the government or its agent, usually its central bank, arbitrarily determines the quantity of money. Second, the value of the material of which the money is made is usually less than its monetary value.

Commodity money is an economic currency. Needs of the economy determine its quantity. It is directly connected with the production of real goods and services.

Fiat money is a political currency. Needs of politics determine its quantity. It is directly connected with government debt even if the government issues the currency directly and interest free. (When the government issues a currency like U.S. notes, it is issuing interest free government debt that is used as money. Often such debt is never paid.) Politics and the fiscal needs of the government determines the quantity of fiat money. The quantity of money is independent of the market or economic needs or demand for money.

Three examples of gold and silver being used as fiat money or in connection with fiat money in the United States follow.

The first example involved the U.S. note or greenback. When President Lincoln first issued U.S. notes to finance his war to destroy the Constitution, they were pure paper fiat money.

U.S. notes were legal tender for public and private debts—except for the payment of tariffs. They could not be used to pay tariffs, which was a major source of revenue for the U.S. government.

The U.S. government did not fix the exchange rate between the U.S. note dollar and the gold dollar until 1879. In 1879, the U.S. government fixed the exchange rate of the U.S. note at 23.22 grains of pure gold per dollar. That is, a U.S. note dollar equaled a gold dollar. This exchange rate continued until President Roosevelt stole the people’s gold and ended the gold standard.

Obviously, U.S. notes were fiat money between 1862 and 1879 and after 1932. Congress arbitrarily fixed the quantity issued. Their monetary value far exceeded the material, paper, of which they were made.

Were they fiat money between 1879 and 1933 when Congress made them redeemable in gold at par? Yes. Congress decided the quantity issued. Also, as their gold backing was only about half or less[4] of the outstanding notes, they were not warehouse receipts like gold certificates. They represented at least twice as much gold as the gold backing them. Therefore, their monetary value was significantly more than their commodity value.

The second example is the silver dollar between 1873 and 1900. In 1873, Congress ended the silver standard, and by that action it ended the constitutional dollar. To appease the pro silver forces, Congress authorized the minting of silver dollars. However, it did not open the mint to the free coinage of silver. The U.S. government bought silver on its own account and coined it. Thus, Congress and the Secretary of the Treasury arbitrarily decided the quantity of silver dollars to mint and issue.

Furthermore, Congress declared the silver dollar to be money in its own right. It fixed the value of a silver dollar to equal the value of a gold dollar. Silver dollars could not be directly redeemed in gold on demand; therefore, it was not a subsidiary coin for gold as were silver halves, quarters, and dimes. Moreover, the value of silver in a silver dollar was worth less than a dollar. It varied between 40 cents and 97 cents in gold.[5] In 1900, Congress made the silver dollar a subsidiary coin for gold and by that ended its status as fiat money.

The third example is the federal reserve note after Roosevelt stole the people’s gold in 1933. Before his thief, federal reserve notes were not legal tender and were redeemable in gold on demand. They were not fiat money. They were merely a form of credit money.

After Roosevelt’s thief, American citizens could no longer redeem federal reserve notes in gold. Congress declared federal reserve notes to be legal tender for all public and private debts. Thus, federal reserve notes became fiat money. The Federal Reserve arbitrarily regulated the quantity of notes issued. The monetary value of a note far exceeded the value of the material of which it was made.

Nevertheless, Congress required a 40-percent-gold backing for federal reserve notes. It changed this requirement to 25 percent in 1945 and eliminated the backing entirely in 1968.

In summary, the United States has had fiat money redeemable in precious metal, fiat money made of precious metal, and fiat money backed by precious metal.

Another fiat monetary system using gold has been promoted by some economists. This system requires the Federal Reserve to expand and contract the money supply and credit to keep the price of gold within a specific range. It is a fiat monetary system where the price of gold becomes the index by which to adjust the money supply. This system has not been officially used in the United States.[6]

As shown above, fiat money is not necessarily paper money or its electronic equivalent although it usually is. Moreover, paper money is not necessarily fiat money. If the government, its central bank, or some other entity decides the quantity of paper money issued and regulates its supply, that money is fiat money. If the people with each person acting in his individual capacity decides how much

of their metallic money or commercial money[7] to convert to privately printed paper money, that paper money is not fiat money—especially if it can be converted back to gold or silver on demand.

The classical gold standard is an utter failure at accommodating the welfare-warfare state. It can accommodate world trade and commerce many times over, but it cannot support the welfare-warfare state. (One of the first casualties of war of any significant is the gold standard.) For this reason, governments hate the gold standard and seek ways to abandon it. They often replace it with a fiat monetary system that incorporates gold. Thus, they control the gold instead of the people or the markets. Whenever even this highly controlled gold begins to impede the welfare-warfare state, governments abandon it in favor of pure paper fiat money.

Because the quantity of gold and silver is limited, the quantity of fiat money using them is limited much more than fiat money using solely paper and electrons. For this reason, gold and silver seldom appear in fiat monetary regimes except as a ruse. The exception has been silver in subsidiary coins. However, even this silver must eventually be removed as the value of the silver in the coin approaches the value of the coin.

In summary, two types of monetary systems exists. One uses commodity money. The other uses fiat money. Using a commodity for the money does not make it commodity money. After all, paper is a commodity, and most fiat money is paper. What distinguish commodity money from fiat money is how the money is created and issued and how its quantity is regulated.

For a more detailed discussion of fiat money, commodity money, and the true gold and silver standard, see the author’s book Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money.
Endnotes

1. Ludwig von Mises, Theory of Money and Credit (new edition, 1971) p. 62.

2. Ibid., p. 65.

3. Richard H. Timberlake, "Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy," Econ Journal Watch, II (August 2005), 199.

4. In 1932, the U.S. Treasury held $156 million in gold to back $289 million in U.S. notes (Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1914-1941, pp. 409, 506.) In 1879, it held $133 million in gold (H. White, Money and Banking, p. 196) to back $347 million in U.S. notes (J. Johnson, Money and Currency, p. 283).

5. Joseph F. Johnson, Money and Currency (revised edition, 1905), p. 251.

6. A variant of this system has been unofficially tried in recent years. Instead of adjusting the supply of dollars to maintain the price of gold within a specific range, the Federal Reserve and the U.S. government in collaboration with other central banks and governments have attempted to adjust the gold supply to maintain its price below a certain level.

7. Commercial money is a real bill of exchange. A real bill of exchange is created when a supplier or manufacturer enters into a agreement with a retailer to allow the retailer time, 90 days or less, to sell the merchandise to collect money from the final consumer to pay the bill. The supplier can use the bill of exchange to pay his creditors or sell it to a bank. When a bank buys a real bill of exchange, it converts it to bank money (bank notes or checkbook money).

Copyright © 2009 by Thomas Coley Allen.

More articles on money. 

Analysis of Byron Dale’s Monetary Reforms

Analysis of Byron Dale’s Monetary Reforms as Presented in Bashed by the Bankers
Thomas Allen

This paper is my analysis of Byron Dale’s monetary reforms as presented in his book Bashed by the Bankers (Pro-American Educational Foundation, 1988). His words and my paraphrases or summaries of his words, I have italicized. My commentary is in Roman letters. I have provided references to pages in his book and have enclosed them in parentheses at the end of the line or lines.

More than half of his book is about the abuse that he personally received from a corrupt government. I do not question the abusive treatment that Dale received. That the system would treat him in the way described is certainly plausible. He provides an excellent description of governmental corruption. My focus is on his monetary proposal.

Dale does a good job describing the current monetary system, which the Keynesians, Friedmanites, and allied groups promote. On the monetary system, the major disagreements between the Keynesians and Friedmanites are the criteria for issuing the money and regulating its supply.

Dale offers two ways to replace the current monetary system. "We could return to using gold and silver coin issued into circulation without being loaned, or by simply having the U.S. Treasury issue paper money and spend it into circulation" (p, 51). His preference is for the U.S. Treasury to issue (print) paper money and spend it into circulation.

He proposes that the U.S. government print and spend paper money into circulation to build and maintain roads. It would not be issued for any other purpose. He writes, "The spending of the paper money would be limited to building roads which would be of equal benefit for all. Since roads can only be built by labor, in reality, all that would be done would be to monetize labor. As the money was spent, it would flow into circulation and we would all have debt-free money with which to meet our needs for a medium of exchange based on labor performed" (p. 51).

Dale’s major disagreement with the Keynesians and Friedmanites is the methodology used to create and issue money and to regulate its supply. Although Dale considers these differences of great importance, his proposal does not differ fundamentally from that of the Keynesians or Friedmanites. His proposal rests on the same fundamental principle as theirs. That is, the creation of money and the regulation of its supply is a political instead of an economic issue. Instead of allowing the markets to create and regulate the money automatically, the government or its central bank (Dale wants to abolish the central bank or Federal Reserve) should arbitrarily create and regulate the money.

Keynesians and Friedmanites accept the established methodology of lending new money into circulation. (Much of this lending occurs in the form of the Federal Reserve or banks buying U.S. government securities.) Friedmanites would lend money into circulation such that the money supply would grow at a constant rate. Keynesians would lend money into circulation such that a certain interest rate, unemployment rate, price level, or another target is maintained. Dale’s methodology is to have the U.S. government print and spend money into circulation to build and maintain roads. Although each has a different methodology for inserting new money into the economy, they agree on the fundamental principle of fiat money. They agree that some agency should arbitrarily create and manage the country’s money instead of allowing the markets to create and manage its money automatically. They agree that politicians, bureaucrats, and "experts" can manage the country’s money better than the people. In monetary matters, they distrust the people but trust politicians, bureaucrats, and "experts." Furthermore, they agree that paper money should be irredeemable.

In some respects, Dale’s system is inferior to that of Keynes and Friedman. They have a method of removing some excess money from the economy. Their removal is the payment of debt. Dale’s system seems to lack any method of removing excess money. The Keynesians and Friedmanites have measurable targets for which to strive. Dale’s system seems to lack any measurable target. At what rate are roads to be built and maintained? How many roads are enough?

His proposal is a fiat monetary system that does not differ much from that promoted by the Keynesians and Friedmanites. It merely cuts out the bankers—primarily the central bank, the Federal Reserve. The U.S. government assumes the role of regulating the money supply by the quantity of money that it prints and spends to build and maintain roads. Like theirs, it operates independently of the demand for money.

He also claims that interest and taxes cause inflation: "You see, the unpaid interest caused by our present debt-money system increases taxes. This ever increasing interest and taxes is the real cause of inflation" (p. 51).

Under the current monetary system, this claim is true to a certain degree. Debt is used as money. The U.S. government needs to borrow enough money each year to ensure that enough money is placed in circulation to pay interest on public and private loans. However, interest rates and taxes do not in and of themselves cause inflation. The last part of the nineteenth century was an era of deflation. Yet interest-bearing loans were made, and taxes were levied and collected.

He does not believe that his monetary system will be inflationary. Once "interest and excess taxes are removed from the price of goods and services, the value (buying power) of the dollar will return" (p. 99). He errors if he believes that his proposal is not inflationary. His methodology for money issuance has no relationship to new goods being offered for sale. Hazlitt defines inflation as "an increase in the supply of money that outruns the increase in the supply of goods."[1] Most economists agree with this definition.

Interest and taxes do not determine the value of money. The value of money depends on its quantity and quality. Dale’s system is designed to feed corruption. Under his system, the money supply will explode as graft will cause excessive road construction. His system all but guarantees that the money supply will grow rapidly without limits. Furthermore, his money lacks quality. It is merely an irredeemable paper promise. Although supposedly backed by labor, no one can redeem his money into labor. If it were redeemable, a person could take a stack of certificates to the Treasury and demand redemption in labor. The Treasury would give him an equivalent amount of labor (slaves?) for the certificates. Dale’s backing of his money with labor is as meaningless as the U.S. government’s backing of federal reserve notes with gold between 1933 and 1968. During that time, no U.S. citizen could take a stack of federal reserve notes to the Treasury or a Federal Reserve Bank and demand payment in gold.

Amazingly, he wants to entrust the government with the responsibility for issuing and regulating the country’s money. He uses more than half of his book to describe governmental corruption that he personally endured. Governmental corruption established the current monetary system. A corrupt government has maintained it. Yet these corrupted and easily corruptible politicians and officials are supposed to become virtuous when the government changes the criteria and methodology for creating and issuing money.

What Dale fails to realize is that the primary problem with the current monetary system is not who creates or issues the money or what criteria or methodology is used to issue it. The problem is fiat money itself. Fiat monetary systems are completely arbitrary. The supply of money is independent of the demand for money. Politics and not economics guide its issuance.

Dale correctly notes, ". . . the one’s holding the power to create that money have control over every person and every business" (p. 62). To protect the people from this control, the founding fathers left the creation of money directly in the hands of the people. Dale wants to place it in the hands of the U.S. government. Instead of lending money into circulation as it is currently done, the U.S. government would print and spend it into circulation. Governmentally issued paper money is as much debt money as the current federal reserve note, which is an obligation of the U.S. government. All paper money is a promise, an obligation, and is, therefore, a debt. Government notes (certificates as he calls his money) are merely noninterest-bearing and usually nonpayable forced loans on the people as a whole.

Dale states, "If we are to be free, our nation’s money must be put into circulation debt-free" (p. 66). This is true, but not in the sense that he means it. Commodity money, gold and silver, can be put into circulation debt-free. It is not true of paper money, which he promotes. Being a promise and an obligation, all paper money is debt. It may be interest-free debt, but it is still debt. It may be non payable debt, but it is still debt.

Dale claims that paper money and bank-issued debt money began with the establishment of the Bank of England (p 66). It did not. Banks issued banknotes before the Bank of England existed. Parliament gave the Bank of England a monopoly on issuing banknotes. Unlike federal reserve notes, which are legal tender, i.e., a debtor can force his creditor to accept them in payment of a debt, true banknotes are not. (Governments have made banknotes issued by their central bank legal tender when they planned to cheat the people by suspending redemption.) Furthermore, banks had to redeem banknotes in gold or silver unless the government suspended redemption. When banknotes are not legal tender, no bank has a monopoly on issuing banknotes, and banks must redeem them on demand; banks are greatly limited in the amount of money (banknotes and checkbook money) that they can "create out of nothing."

Dale also errors when he claims that the Bank of England does not belong to the English government (p. 66). True, it was chartered as a private bank. However, the British government nationalized it in 1946.[2] Thus, it became part of the British government.[3]

Dale declares, "Freedom dictates that money, the medium of exchange, must get into circulation among all the people by a method that will benefit all equally, and which will not incur debts to anyone in getting it into circulation" (p. 67).

A return to constitutional money will achieve his goal much better than his proposal. His proposal makes the creation of money a political issue. The U.S. government owns the money and is responsible for its creation. Under the constitutional monetary system, the people individually own the money. They, and not the government or banks, are responsible for its creation. The constitutional monetary system is the true classical gold and silver standard accompanied by the real bills doctrine or commercial money principle.

Under the constitutional system, the people acting in their individual capacity decide how many gold and silver coins are needed by the gold and silver that they have coined and by the quantity of coins that they melt for other uses. The people decide how much commercial money to create through their productivity and business activity. They, not the banks, decide how much commercial money (real bills of exchange) to convert to bank money (banknotes and checkbook money). With their consumption, they remove commercial money and bank money into which it has been converted from the economy. Thus, the supply of money automatically equals the demand for money.

Under the monetary system set out in the Constitution, economics governs the creation and supply of money. Under fiat monetary systems, including the one that Dale promotes, politics governs the creation and supply of money.

The silver certificate illustrates an interest-free form of fiat money issued by the U.S. government. It was fiat money because the U.S. government arbitrarily decided the quantity to issue and because the monetary value of the silver into which it could be redeemed exceeded the nonmonetary value of that silver. That is the market value of the silver in a silver dollar was less than a dollar at that time. Although interest-free, the paper certificate itself was a promise, an obligation, and, therefore, a debt. It promises to pay the holder on demand 371.25 grains of pure silver in the form of a silver dollar for each dollar noted on the certificate. Thus, it was a debt of silver owed by the U.S. government payable on demand to the bearer of the certificates.

Dale asserts that in the pre-Federal Reserve days when banks issued paper money, i.e., banknotes, they did so via lending at interest (p. 68). Not all banknotes were issued through a lending process. Some were issued through a conversion process. A person may have deposited gold or silver coins and have withdrawn money as banknotes. Thus, banks converted gold and silver coins to banknotes. The bank could have used bank notes to buy real bills of exchange (commercial money).[4] Thus, it converted commercial money into banknotes. Nevertheless, like all forms of credit money, including the fiat money that Dale wants the U.S. government to issue, bank notes are promises and obligations.

Dale quotes Mayer Amschel Rothschild’s frequently quoted statement: "Permit me to issue and control the money of a nation and I care not who makes its laws" (p. 84). I do not question the authenticity of this statement. However, if taken literally, it cannot be true. Rothschild would definitely have to be concerned about who makes the laws. He could never gain a monopoly to issue and control the money unless the government gave it to him and protected his monopoly from competition. His bank, like all banks, exists at the pleasure of the government. A tyrannical government can always destroy all banks and execute all bankers on a whim. In any scheme to loot the people, banks and bankers, including central banks and bankers, are always the junior partners. Those who really control the government are the senior partners. For these reasons, bankers must control the government to protect their monetary monopoly.

Dale paraphrases Rothschild’s statement: "Whoever controls the volume of money in any country is absolute master of all industry and commerce" (p. 84). This statement is true. So why does Dale want to give the U.S. government control of the money and make it the "absolute master of all industry and commerce?" Many fiat money reformers correctly consider politicians among the most corruptible of humans and the easiest to corrupt. How long would it take the bankers or their equivalent in road construction to own the political leaders? Once they own the political leaders, they have acquired control of the money and by that the economy. Why does Dale want to give them such power? Instead of giving the government control of the money, would it not be better to place the control of the money where the Constitution places it: in the hands of the people?

Dale shows that America has been conquered by war, albeit indirectly, by religion, and by economic conquest (p. 85).

The first (war) was achieved with the Cold War (pp.85-86). This war has now been replaced with the War on Terrorism. The Cold War was a hoax and so is the War on Terrorism.

The second (religion) was accomplished by the deterioration of Christianity (pp. 85, 86-87). This was achieved by gaining control of schools and seminaries and subverting the education of students. The primary purpose of this conquest is to end opposition to interest on money.

The third (economic conquest) has been accomplished by removing gold and silver from coins, eliminating redemption of paper money in specie, and introducing federal reserve notes (pp. 85, 87ff). Once gold and silver money was removed only federal reserve notes remained, that is, debt became the money of the country. Money could only be created by creating debt (p. 94).

Dale argues that the current federal reserve note is unlawful (p. 93). I agree with him about its unlawfulness. I consider it unlawful because it is not redeemable on demand in gold or silver and because Congress has no authority to create a central bank or give it or any entity a monopoly to issue paper money. With the latter, Dale qualifiedly agrees; he would not only allow the U.S. government to have such a monopoly but would give it such a monopoly. With the former, I am not sure that he agrees.

He quotes Marx’s and Keynes’ claim that debauching a country’s currency is the surest way to overturn a society (p. 94). This is true. That is why the founding fathers declared gold and silver money under the Constitution. Gold and silver are extremely difficult, if not impossible, to corrupt without quick detection. Paper money, especially if the government or its central bank issues it, is easy to corrupt without detection until much of its destructive work is done. Dale asserts that money is corrupted "by changing it from wealth to debt, and loaning it to the people at interest, which is impossible to repay" (p. 95).

At least Dale, unlike most fiat money reformers, wants to amend the Constitution to make his monetary system constitutional (p. 97). However, he still wants to force his money on the people through legal tender laws. He knows, at least subconsciously, that people will not accept fiat money for long unless the government forces it on them.

Dale calls his money "United States certificates" (p. 97). Historically, in the United States, when "certificate" is used in connection with money, it means a warehouse receipt that is redeemable on demand. For example, for each dollar in silver certificates that it issued, the U.S. government claimed to hold 371.25 grains of pure silver or 412.5 grains of a standard silver coin (silver 90 percent fine) into which it could redeem its silver certificates. It held enough silver to redeem all silver certificates. When the U.S. government issued gold certificates, it held enough gold coins or bullion to redeem all gold certificates.

Dale claims that his money monetizes labor (p. 51). He states that "all money (medium of exchange) will be spent into circulation, backed by or based on labor performed or needed services rendered" (p. 99). If his money is truly in the form of certificates, then they must be redeemable on demand in labor. As the U.S. government owns and controls these certificates, it must maintain enough labor (slaves?) out of circulation to redeem all its outstanding certificates. I do not believe that this is Dale’s intent.

Instead of calling his currency "certificates," he should be honest and call it "notes." When the U.S. government issues notes, those notes may be irredeemable and backed by the weapons of the government as where U.S. notes between 1862 and 1879 and after Roosevelt’s thief to the people’s gold in 1933. They may be redeemable as were U.S. notes between 1879 and 1933. However, the U.S. government held only enough gold to redeem about half its notes. As Dale’s money is irredeemable and is backed by the weapons of the government (if it were not, it would not be enforced via legal tender laws), he should be honest and call his currency "notes." Does he avoid using "notes" because thinking people could easily see that his money is debt, which "note" signifies?

Moreover, labor as money or backing for money results in poor quality money. It lacks most of the attributes that make something capable of serving as money. These attributes are portability (relatively high value per unit of weight), homogeneity (uniformity), durability, divisibility, recognizability, high marketability (high liquidity, universally acceptability), and stability in value. Labor is not homogenous. One person’s labor can vary greatly from another person’s. Also, an individual’s labor can vary over time. That labor is divisible is questionable and is highly limited. Its marketability as is its stability is highly variable. How long can a labor unit last? In a market economy, labor is not generally acceptable in exchange for all goods offered for sale. Furthermore, how much labor does the monetary unit equal?

Dale’s money would be denominated in dollars (p. 98). However, he does not define his dollar. Like all fiat money adherents, he leaves the dollar undefined. He leaves it a vague abstraction.

The founding fathers understood the dollar to be the weight of silver in a Spanish milled dollar. Where "dollar" is used in the Constitution, it has this meaning.

According to the Bible, money has three components: quantity, measurement, and substance. Genesis 23:16 illustrates this concept. Abraham bought a burial plot. He paid 400 (quantity) shekels (measurement of weight) of silver (substance). In pre-1933 money, if a person bought something with a $20 gold coin, he paid with money that had quantity (20), measurement (dollar, a unit of weight equal to 23.22 grains), and substance (gold). If he paid with a $20 gold certificate, his currency promised to deliver money containing these three components on demand.

Dale’s money, like the current federal reserve note, lacks two of these three components. For example, his $20 certificate has quantity (20). The dollar appears to be its measurement. But what is it measuring; is it weight, volume, distance, energy, power, or time? What is its substance? It has to be more than paper as paper is merely the representation of something else.

Dale would cancel all governmental debt securities held by the Federal Reserve. Governmental debt securities "held by natural born persons . . . would be honored and paid out of the Treasury with United States Certificates" (p. 98). When Dale speaks of government debt, I am not sure if he limits it to the debts of the U.S. government or if he intends to include debts of States and local governments. He seems to include their debts. If he means to include their debts, his proposal is unconstitutional. The Constitution does not authorize the U.S. government to pay the debts of States and local governments. Furthermore, such an act would reward imprudent action.

He also wants the U.S. government to bail out with direct interest-free loans "any person who could show they [sic] had lost, or were about to lose their home, farm, or business because of defects in the present Federal Reserve money system" (p. 98). Thus, the prudent and good money managers would be penalized, and the imprudent and poor money managers would be rewarded.

He would cease issuing federal reserve notes but would allow them to continue to circulate. As federal reserve notes wore out, they would be removed from circulation (p. 98).

Dale opposes charging interest on loans. He cites several Bible verses to support his opposition. He cites Exodus 22:25, Leviticus 25: 35-37, and Nehemiah 5:1-13 (p. 68).

His references do not prohibit usury per se. The reference to Exodus and Leviticus prohibits charging a poor person of one’s nationality (in the true sense of the word), ethnic group, or racial kinsman interest on loans. His reference to Nehemiah does seem more general. However, the people paying the interest seem to be living in poverty. Whether general or specific, the prohibition is not against charging interest per se. Deuteronomy 23:20[5] allows lending with interest to people outside one’s ethnic group or race.[6] The prohibition is against charging people of one’s nationality, ethnic group, or race interest. Because of this restriction, Jews have gained control of banking. Church law prohibited White Europeans from lending at interest to other White Europeans. Thus, Europeans seldom lent. If they did, it was with convoluted contracts with fees, insurance, and other requirements that were tantamount to interest in everything but name. Thus, if a merchant or king needed to borrow money, he usually borrowed from Jews, and he often had to if he needed money.

To put this usury prohibition in terms of modern America, a White banker could not make interest-bearing loans to Whites. However, he could make interest-bearing loans to Blacks, Latinos (mestizos), Indians, Asians, and other non-Whites. If a White American needed to borrow money, he would have to use a Black, Asian, Indian, or Latino banker or loan company.

As Dale would prohibit interest-bearing loans (p. 98), why would banks lend? As money deposited in a savings account is an interest-bearing loan to the bank, why would people want to save money in a bank if they are not going to be paid for it?

Dale demands that banks and bankers disguise their interest as "sharing the risk and the sharing of profits" (p. 98). Lenders always share the risk when they make loans. They risk the borrower defaulting on the loan. Even if the loan is collateralized, the amount due on a defaulted loan may exceed the value of the collateral. (The housing market of 2008 illustrates this possibility.) Furthermore, if the collateral is adequate to repay the loan, the lender pays the cost and time of converting the collateral to cash. If lending is truly risk-free, lenders would always be repaid on time and would never go bankrupt. Contrary to the claims of the anti-usury folks, lending is not without risk.

One thing that has always puzzled me about the anti-usury people is why they never set up a loan company and make interest-free loans. (Most do not really want to make truly interest-free loans. They want to disguise interest as fees, share of profits, etc. A truly interest-free loan occurs when a person lends money to another for a stated time. When that period ends, the borrower pays the lender the sum of money borrowed. He does not pay fees, buy any insurance, etc. The total cost of the loan is the amount borrowed.) If their interest-free loans were cheaper than interest-bearing loans, they should soon drive those who made interest-bearing loans out of business.

Also, the anti-usury people never explain why they want to outlaw savings accounts other than prohibiting anyone, including widows and orphans, from receiving any kind of interest payment.

Dale proposes to outlaw fractional reserve banking. Banks would not be allowed to create checkbook money. Only money that has been deposited may be lent (p. 97). If a bank is allowing two or more people to use the same money simultaneously, has it really created any new money? Whether it has or not, many economists consider this action to be fractional reserve banking. If Dale wants to accomplish his goal, he needs to make clear that banks may not lend money deposited in checking accounts. He does hint at such prohibition (p. 98), but he should be more emphatic. Banks may only lend bank capital and money deposited in savings accounts.

Dale gives a good synopsis of the history of money in the United States. He shows a good understanding of constitutional money (pp. 65-66, 67, 68). He is aware that gold and silver are constitutional money. His understanding of free coinage is greater than that of many advocates of the gold standard.

However, he errors in claiming that gold and silver need to be coined to be money, i.e., coining monetizes them (p. 65). It does not. Bullion bars were often used to make large payments. In less advanced societies, shavings from a block of precious metal were often used. Even gold dust has been used as money. Coining makes the monetary use of gold and silver more convenient. When gold and silver are the money, the important thing is the weight and purity and not shape or stamp. (The only value of the government’s stamp is its certification of weight and purity.)

He describes a possible problem with the use of gold and silver money (p. 66). That problem is giving banks a monopoly over the gold and silver money and letting them lend it into circulation. This problem would exist even if the government retained the monopoly for itself and spent the gold and silver money into circulation. What he is describing is a fiat monetary system using gold and silver. Instead of letting the markets automatically decide how much gold and silver is needed as money, the government or its agent, usually its central bank, decides.

Dale quotes Section 14 of the Coinage Act of 1792: "It shall be lawful for any person or persons to bring to the said mint gold and silver bullion, in order to their being coined; and that the bullion so brought there shall be assayed and coined as speedily as may be after the receipt thereof, and that free of expenses to the person or persons by whom the same shall have been brought" (p. 74). He comments, "In other words, have the metal monetized—turned into money" (p. 74).

Dale errors if he believes that the Coinage Act of 1792 turned gold and silver into money. It did not. Gold and silver were money before this Act was adopted. This Act did not make gold and silver money; the people had already done that through their market acts centuries before—long before any government got involved in coining gold or silver. This Act acknowledged what the people had already decided in their economic activities. If gold and silver were not money before this Act was adopted, the people would have had to conduct their business with barter as there would have been no money before the adoption of this Act.

Dale praises President Jackson, who prevented the renewal of the Second Bank of the United States. He remarks that America needs more "statesmen with the honesty, courage and intelligence of men like Andrew Jackson (p. 73)." We do need such men. He castigates "politicians who sell out to the highest bidder" (p. 73). These easily bought politicians, whom the money interest has owned since before the establishment of the Federal Reserve, are the ones who control the U.S. government today. Yet Dale is willing to give such corrupt and corruptible men absolute control of the country’s money. The easily corruptible more often rises to power than noble statesmen. Their ease of corruption is the asset that the power brokers value most because it makes the agent-client easier to control. Consequently, the founding fathers denied the U.S. government and State governments the authority to create, issue, and control the country’s money. They wisely left its creation, issuance, and control directly in the hands of the people.

Dale claims that the hoarding of gold by banking conspirators caused the failure of most state-chartered banks during the nineteenth century. Because of this hoarded gold, banks could not redeem their bank notes (p. 70). Actually, monetization of state bonds with bank notes caused most of these banks to fall.[7] If gold were being hoarded, soundly operated banks would have made fewer loans because they would have had less to lend. They would have discounted fewer bills of exchanges because they would have had fewer gold reserves with which to redeem their notes that may have been presented for redemption before the bill was paid. Hoarding did not cause bank failures. Unsound banking practices did.

Dale praises Lincoln, who hated the Constitution so much that he went to war to destroy it, and his issuance of paper money (pp. 74-75). Rational people were saving (hoarding) their gold as insurance against uncertain times. As Lincoln was unwilling to raise taxes high enough or to pay high enough interest to dishoard this gold, he resorted to noninterest-bearing and nonpayable forced loans called U.S. notes or greenbacks. He resorted to unconstitutional money to finance his war to destroy the Constitution.

Dale states, "Abraham Lincoln evidently understood that it did not make much difference what was used for money, as it did how that money was used" (pp. 74-75). Where or what is the relationship between "what was used for money" and "how that money is used?" Money can be used for good or evil—the "how money is used." Lincoln used it to kill more than 550,000 men in his successful endeavor to destroy the Constitution. Money can be made of material that has value in and of itself like gold or silver that people voluntarily accept. Money can be made of material that has little value in and of itself like U.S. notes and federal reserve notes that the government must force the people to use. (One exception to the use of governmental force to get people to use paper money was the Confederacy. Confederate money, unlike U.S. notes, circulated without the backing of legal tender laws.[8] However, Confederate money circulated for less than five years and died like all governmentally issued paper money with its issuing government.)

Presumably, gold disks minted and spent by a gold mining company to pay its employees and suppliers would have no monetary value as a private concern issue them. However, if the government prints and spends paper money, then that paper has monetary value—presumably without the necessity of legal tender laws—because the government has issued it. How this money gets its value, no one can adequately explain without tying it to earlier commodity money that it or its ancestor paper money replaced.

In support of his action to issue irredeemable paper money, Lincoln said, "Money will cease to be a master and become a servant of humanity" (p. 75). Like many Presidents, Lincoln was a proficient liar. Money is the servant of those who create and control it. Consequently, the founding fathers left the creation and control of money directly in the hands of the people. They denied the U.S. and State governments any power to create and control the country’s money. Lincoln usurped this power. He stole it from the people and gave it to the U.S. government. By so doing, the U.S. government ceased being the servant of the people and became their master. Later, the U.S. government made a few big bankers partners when it transferred control of the country’s money to the Federal Reserve. Dale acknowledges the power of the Federal Reserve and wants to remove it from the Federal Reserve and reassign it to the U.S. government, but apparently not to the people.

Dale quotes a paragraph from an editorial printed in the London Times after Lincoln issued his greenbacks. The writer of the editorial expressed his fear that Lincoln had discovered a way to pay off debts and provide the country with all the money that it needed for commerce and to make the United States a great and prosperous country. With his paper money, Lincoln would draw all the wealth and brains of the world to America (p. 80).

This editorialist obviously knew very little history. Irredeemable paper money is more dangerous to the issuing government than it is to anyone else. If a country fails to extinguish its irredeemable paper money, the paper money will destroy it—at least that has always happened historically.

Although Lincoln’s greenback did destroy the heart and soul of the Constitution, it did not completely destroy the United States. The reason that they did not do so is that Congress froze the quantity in circulation, and Congress authorized their redemption in gold in 1879.

Dale gives a good brief description of the end of the silver standard in the United States with the Coinage Act of 1873 (pp. 81-84). He illustrates the importance of Congressmen reading and understanding a bill before they vote on it instead of relying on their colleagues with nefarious agendas. According to Dale’s description of the skulduggery with that Act (p. 84), Congressmen need to check bills after passage to ensure that it was the bill voted on. Apparently, some Congressmen who voted for the bill did not realize that the bill ended the free coinage of silver and by that the silver standard and the constitutional dollar. (The "dollar" mentioned in the Constitution is the weight of silver in the Spanish milled dollar. No other dollar can be a constitutional dollar.)

Dale gives a good review of the changes in the redemption promise wording on U.S. paper money. He shows how the paper money went from promising redemption in gold to containing no promise of redemption (pp. 89-93).

In summary, Dale’s proposed monetary system is not lawful under the current Constitution. First, his paper money is not redeemable in gold or silver, the only money recognized by the Constitution, on demand. Second, and more importantly, the Constitution does not authorize the U.S. government to print or issue paper money of any kind. Dale seems to recognize this problem. He is one of the few fiat money reformers who seeks to make his paper money constitutional via a constitutional amendment.

Dale opposes using gold and silver as money and prefers that the government issue paper money necessary to build roads. His opposition to precious metal money, he fails to explain. He acknowledges that gold and silver are the moneys of the Constitution (p. 65). Also, he acknowledges that, unlike paper money, gold and silver are no one’s obligation. Although he knows about the virtues of gold and silver as money, he opposes them. Why? He does not explain.

Furthermore, he does not explain what will prevent Congress from turning road construction into one gigantic vote-buying machine and paving over the country. His plan will change the whole economy and center it around road construction and maintenance. His proposal seems to contain no brakes to prevent runaway inflation.

When given a choice between printing money and raising taxes, most Presidents and Congressmen will choose printing money. How long will it take before the U.S. government begins using printing-press-road-construction money to fund other activities in the name of building and maintaining roads? In the name of protecting roads and road builders from terrorists, it could fund the Department of Defense and wars with printing-press-road-construction money. Likewise, to educate the next generation of road builders, it could fund education with printing-press-road-construction money. Congress and the President would soon find a way to connect all their pet projects to road construction and fund it with printing-press-road-construction money.

Dale and I can agree, I believe, on at least two issues. One, the Federal Reserve needs to be abolished, except for its check-clearing operation, which private associations can assume. Two, the current monetary system is dysfunctional, unconstitutional, and needs reconstruction. Our major disagreement is that he wants to continue the current fiat monetary system although managed differently. I want to return to the constitutional commodity monetary system.

Dale is an intelligent man. He understands the problems with the current monetary system better than most. He also has a good understanding of the history of America’s monetary system. What I do not understand is why he does not see that the underlying problem with today’s monetary system is not who issues the money or what mythology is used to issue it. Moreover, it is not interest-bearing loans. The fundamental problem is that a central authority arbitrarily controls the monetary system. Dale does not object to this arbitrary control over the money and by that the control of the economy and by that the control of the people. His objections to the current system concern who does the controlling and the methodology used for the controlling. He prefers having politicians and their bureaucrats in the U.S. government controlling the money instead of the bureaucrats of the Federal Reserve. He prefers the U.S. government printing and spending the money directly into circulation for road projects instead of the convoluted methodology used by the Federal Reserve.

Actually, he could achieve his goal using the Federal Reserve. Congress could require the Federal Reserve to buy all U.S. securities. The money that the Federal Reserves creates to buy these securities would function like the money that Dale wants the U.S. government to create and spend. As the law requires the Federal Reserve to rebate to the Treasury all interest earned above its operating costs, this money would be interest-free. Now all Dale would need to do is get a law enacted that restricts Congress from spending all this new money on road projects.

Dale does offer a return to gold and silver coinage. It would occur after his system increases the value of the dollar (p. 99). Unfortunately, the monetary reforms that he is proposing will continue the destruction of the value of the dollar instead of restoring it. If it does restore the value of the dollar as he claims, his proposal is highly deflationary.[9]

Furthermore, why go through the convoluted process that he proposes? If the objective is to return to the use of gold and silver as money in everyday transactions, his system is not only unnecessary; it will not achieve that goal.

If the objective is to return to full-bodied gold and silver coins as the founding fathers set forth, it can be achieved with an easier approach. First, all legal tender laws need to be repealed. Federal reserve dollars would no longer be legal tender. No debtor could force his creditor to accept federal reserve dollars in payment unless he had contracted the debt in federal reserve dollars. Second, the mint needs to be reopened to free coinage of gold and silver. The coins would be denominated in pennyweights and have the grains of gold or silver stamped on them. Third, no fixed exchange rate would exist among gold, silver, or federal reserve dollars. They would exchange against each other at the rate that the markets decided. Fourth, as debts made in federal reserve dollars are paid, these federal reserve dollars are removed from circulation and permanently retired. Fifth, the Federal Reserve should be abolished and the regulation of banking returned to the States where it constitutionally belongs. Other reforms are needed, but these are the key ones that parallel Dale’s proposal.

As for interest-bearing loans, people who oppose them need to establish companies that make noninterest-bearing loans. If their loans cost less money than the traditional interest-bearing loans, they will soon drive the traditional lenders out of business.

Endnotes

1. Henry Hazlitt, The ABC of Inflation, p. 6.

2. "Bank of England," Funk & Wagnalls New Encyclopedia (1983), 257. William Bridgwater and Seymour Kurtz, ed., The Columbia Encyclopedia, 3rd ed. (New York, 1963), p. 162.

3. The nationalization of the Bank of England did not noticeably change the British fiat monetary system. Thus, the problem lies not with the ownership structure of the central bank; it lies with centralized banking and fiat money.

4. When a bank buys a real bill of exchange, it does not buy a debt instrument. It buys a clearing instrument. When it buys a bill at a discount, it does not receive interest. The discount rate is not an interest rate. Whereas the rate of interest relates to the propensity to save, the discount rate relates to the propensity to consume.

5. "Unto a stranger [foreigner, nonrelative, racial alien] thou mayest lend upon usury. . . ."

6. Richard Kelly Hoskins, War Cycles—Peace Cycles (Lynchburg, 1985), pp. 3, 31.

7. Arthur J. Rolnick and Warren E. Weber, "Free Banking, Wildcat Banking, and Shinplasters." Arthur J. Rolnick and Warren E. Weber, "Banking Instability and Regulation in the U.S. Free Banking Era," 1985.

8. Hoarse White, Money and Banking (Boston, 1896), p. 166.

9. Many haters of gold claim that we can never return to the gold standard because such a return would be highly deflationary.
 
Copyright © 2009 by Thomas Coley Allen.

More articles on money. 

Stranger in the Old Testament

Stranger in the Old Testament
Thomas Allen

In the Old Testament, several words are translated as "stranger." These words are also occasionally translated as "alien," "foreigner," and "sojourner." Some of them identify people of the same race from the perspective of the Israelite writer. Others are used to identify people of a different race. "Ger" (ger, Strong #1616), "gur" (guwr, Strong #1481), and "toshab" (tôwshâd, Strong #8453) are used to identify people of the same race. Nekar (nekâr, Strong #5236), nokri (nokrîy, Strong #5237), noker (neker, Strong #5235), and zar (zuwr, Strong #2114) are used to identify people of another race.

Ger refers to a person of the same race residing permanently in a country of which he is not a citizen. It also refers to a fellow national who is in a foreign country. Toshab generally refers to a person of the same race who is temporarily in the country.

For example, from a French perspective, a ger is a German living in France. A Frenchman living or traveling outside France is a ger. A German passing through France or temporarily in France on vacation or business is a toshab.

Zar typically refers to a racial alien more distantly removed than a nekar, nokri, and noker (nekar, nokri, and noker are synonyms). For example, from a French perspective, an Egyptian or Ethiopian may be a nekar, nokri, or noker. A Zulu or Ibo may be a zar.

Occasionally nokri is used metaphorically to express one’s lowliness in comparison to another. For example, in Ruth 2:10, Ruth calls herself a nokri. She is displaying her humility by debasing herself in comparison to the high esteem that she has for Boaz. (Ruth was a ger. She was of the same race as Boaz. For proof that Ruth and Boaz were of the same race, see The Truth About Ruth: Ruth the Israelite by Robert Alan Balaicius.)

As the following passages show, racial kinsmen, ger, have most of the rights, privileges, and duties of a native-born citizen. Nonracial people, nokri and zar, do not enjoy these rights and privileges.

Along with the poor, widows, and orphans, a ger has the right of gleaning (Lev. 19:10, 23:22). Gers are subject to the same civil laws and justice and have many rights and privileges of a citizen (Lev. 19:33, 34; 24:22; Num. 15:15,16, 29; 35:15; Deut. 1;16; 24:14, 17; 27:19; Judg. 20:9). They are subject to the same religious prohibitions (Lev. 20:2, 24:16) and Sabbath requirements (Deut. 5:14). Their children are to become citizens (Ezek. 47:22, 23). If circumcised, a ger may partake in the Passover (Exod. 12:48). He may enter into the covenant with God (Deut. 29:11) and be part of the congregation of Israel (Josh. 8:35).

Deuteronomy 14:21 shows a difference between a citizen, ger, and nokri. Citizens are not to eat anything that dies naturally. Nevertheless, they could give it to a ger to eat or sell it to a nokri. Thus, a ger is given the carcass; a nokri has to buy it.

A toshab has similar civil rights and justice as a citizen (Num.35:15). They observed the Sabbath year (Lev. 25:23). A slave who is a toshab is freed in the year of jubilee (Lev. 25:40). However, a toshab is not to eat of the Passover (Exod. 12:45). Like a zar, a toshab is not to eat holy gifts (Lev. 22:10).

A nekar is not to eat of the Passover (Exod. 12:43). Citizens are not to socialize with them (Deut. 31:16). People are not to marry a nekar (Neh. 9:2, 13:30, Mal. 2:11). A nekar is not to enter God’s sanctuary (Ezek. 44:7, 9). Nekar is also used to identify alien gods and foreign lands.

A person is not to sell a female slave of his race to a nokri (Exod. 21:8). Although a creditor is to release a debtor of his race of his debts every seven years, he is not required to release a nokri of the obligation to pay his debts (Deut. 15:3). Furthermore, a person may not charge his racial kinsman usury on loans, but he may charge a nokri usury (Deut. 23:20). A country is not to make a nokri their ruler (Deut. 17:15). One is not to marry a nokri (Ezra 10:2, 14, 17, 18, 44, Neh. 13:27). Proverbs instruct men to avoid nokri and zar women (Prov. 2:16; 5:3, 10, 17, 20; 6:1, 24; 7:5; 22:14; 23:33; 26:27; 27:2).

A zar is not to eat holy things (Exod. 29:33, Lev. 22:10). Anyone who puts anointing oil on a zar is cut off from his people (Exod. 30:33). If a zar comes near the tabernacle, he is to be executed (Num. 1:51, 3:38). Furthermore, if a zar comes near to a priest, he is to be executed (Num. 18:7). One is not to marry a zar (Deut. 25:5).

A commentary is needed on the use of "stranger" in the prophets. Such a commentary is not presented here because it goes beyond the scope of this paper.

The following are verses showing the different uses of words translated as "stranger," "alien," "foreigner," or "sojourner." These passages show that the above racial explanation is correct. They are written from the perspective of the Israelites. Ger, gur, and toshab are people of the same race as the Israelites. Nekar, nokri, noker, and zar, are people of races other than the race of the Israelites.

[Editor’s Note: The original contains the verses that use the words cited above and shows which of the Hebrew word is used. To save space, the text of these verses has been omitted and only the verses are referenced.]

ger

Genesis 15:13; 23:4; Exodus 2:22; 12:19; 12:48; 12:49; 18:3; 20:10; 22:21; 23:9; 23:12; Leviticus 16:29; 17:8; 17:10; 17:12; 17:13; 17:15; 18:26; 19:10; 19:33; 19:34; 20:2; 22:18; 23:22; 24:16; 24:22; 25:23; 25:35; 25:47; Numbers 9:14; 15:14; 15:15; 15:16; 15:26; 15:29; 15:30; 19:10; 35:15; Deuteronomy 1:16; 5:14; 10:18; 10:19; 14:21; 14:29; 16:11; 16:14; 23:7; 24:14; 24:17; 24:19; 24:20; 24:21; 26:11; 26:12; 26:13; 27:19; 28:43; 29:11; 31:12; Joshua 8:33; 8:35; 20:9; 2 Samuel 1:13; 1 Chronicles 22:2; 29:15; 2 Chronicles 2:17; 30:25; Job 31:32; Psalms 39:12; 94:6; 119:19; 146:9; Isaiah 14:1; Jeremiah 7:6; 14:8; 22:3; Ezekiel 14:7; 22:7; 47:22; 47:23; Zechariah 7:10; Malachi 3:5.

gur

Exodus 6:4; 2 Samuel 4:3; 1 Chronicles 16:19; 2 Chronicles 15:9; Psalms 105:12; Isaiah 5:17; Jeremiah 35:7.

toshab

Genesis 23:4; Exodus 12:45; Leviticus 22:10; 25:6; 25:23; 25:35; 25:40; 25:45; 25:47; Numbers 35:15; 1 Chronicles 29:15; Psalms 39:12.

nekar

Genesis 17:12; 17:27; 35:2; 35:4; Exodus 12:27; 12:43; Leviticus 22:25; Deuteronomy 31:16; 32:12; Joshua 24:20; 25:23; Judges 10:16; 1 Samuel 7:3; 2 Samuel 22:45; 22:46; 2 Chronicles 14:3; 33:15; Nehemiah 9:2; 13:30; Psalms 18:44; 18:45; 81:9; 137:4; 144:7; 144:11; Ezekiel 44:7; 44:9; Isaiah 56:3; 56:6; 60:10; 61:5; 62:8; Jeremiah 5:19; 8:19; Malachi 2:11.

nokri

Genesis 31:15; Exodus 2:22; 18:3; 21:8; Deuteronomy 14:21; 15:3; 17:15; 23:20; 29:22; Judges 19:12; Ruth 2:10; 2 Samuel 15:19; 1 Kings 8:41; 8:43; 11:1; 11:8; 2 Chronicles 6:32; 6:33; Ezra 10:2; 10:11; 10:14; 10:17; 10:18; 10:44; Nehemiah 13:27; Job 19:15; Psalms 69:8; Proverbs 2:16; 5:10; 5:20; 6:24; 7:5; 20:16; 26:27; 27:2; 27:13; Ecclesiastes 6:2; Isaiah 2:6; 28:21; Jeremiah 2:21; Lamentations 5:2; Obadiah 11; Zephaniah 1:8.

noker

Obadiah 12.

zar

Exodus 29:33; 30:9; 30:33; Leviticus 22:10; 22:12; 22:13; Numbers 1:51; 3:10; 3:38; 16:40; 18:4; 18:7; Deuteronomy 25:5; 32:16; 1 Kings 3:18; 2 Kings 19:24; Job 15:19; 19:15; Psalms 44:20; 54:3; 81:9; 109:11; Proverbs 2:16; 5:3; 5:10; 5:17; 5:20; 6:1; 7:5; 11:15; 14:10; 20:16; 21:8; 22:14; 23:33; 27:13; Isaiah 1:7; 17:10; 25:2; 25:5; 29:5; 43:12; 61:5; Jeremiah 2:25; 3:13; 5:19; 30:8; 51:51; Lamentations 5:2; Ezekiel 7:21; 11:9; 16:32; 28:7; 28:10; 30:12; 31:12; Hosea
5:7; 7:9; 8:7; 8:12; Joel 3:17; Obadiah 11.

References

Balaicius, Robert Alan. The Truth About Ruth: Ruth the Israelite. Mountain City, Tennessee: Sacred Truth Ministries, 2004.
Blanchard, Lawrence. Standing on the Premises: A Presentation of 30 Biblical Propositions of Christian-Israel Identity Theology. Port Orchard, Washington: New Covenant Bible Church, 1998.

Fausset, A.R. Fausset’s Bible Dictionary. Grand Rapids, Michigan: Zondervan Publishing House. 1949.

Hopkins, Richard Kelly. War Cycles Peace Cycles. Lynchburg, Virginia: The Virginia Publishing Company, 1985.

Jacobus, Melancthon W., Edward E. Nourse, and Andrew C. Zenos, editors. A New Standard Bible Dictionary. New York, New York: Funk & Wagnalls Co., 1926.

Strong, James. Stong’s Exhaustive Concordance of the Bible.

Young, Robert. Analytical Concordance to the Bible. Grand Rapids, Michigan: Wm. B. Eerdman’s Publishing Co., 1970. 

Copyright © 2009 by Thomas Coley Allen. 

 More articles on religion.

Is Gold Too Easy to Manipulate?

Is Gold Too Easy to Manipulate?Thomas Allen

Many people who claim to favor the gold standard fear returning to the true classical gold standard because they believe that gold is easily manipulated—as though fiat money is difficult to manipulate. Contrary to what these people claim to believe, a major reason that governments abandon the gold standard and adopt fiat money is that fiat money is easy to manipulate and gold is difficult to manipulate.

They advocate replacing the current fiat monetary system with another fiat monetary system. Some would make gold a part of their fiat money. Others would not. Nearly all would have the U.S. government issue the new money.

If a cabal set out to manipulate gold under the true gold standard, with what would it buy the gold? Would it buy gold with gold? If so, it accomplishes nothing.

If silver were also money in its own right, as it should be,[1] but without any legal exchange rate, the cabal could buy gold with silver. If it buys gold with silver, an equivalent unit of purchasing power of silver replaces each unit of purchasing power of gold removed from the economy. The primary economic affect is that fewer things are bought with and sold for gold and more things bought with and sold for silver.

It could possibly buy gold with paper money. However, under the true gold standard, all paper money is immediately redeemable in gold on demand. Any holder of paper money could convert it instantly to gold. The cabal could not corner the gold market using paper money unless the government suspended redemption. This action is not a problem with the gold standard; it is a problem with the legal system failing to require contracts to be honored.

As the cabal buys more gold, the remaining gold becomes more valuable. Thus, its attempt to manipulate gold can affect its value, purchasing power. This increase in value brings more scrap onto the market for the cabal to buy.

When the cabal owns most of the world’s gold, what has it accomplished? Other than replacing most monetary gold with silver, it has not accomplished much. It has imposed an enormous cost on itself by foregoing the income that it could have earned from the money that it has used to corner the world’s market in gold. (Under the true gold standard, it could not corner the gold in one country. Part of the true gold standard is the free importation and exportation of gold. Thus, as it bought the gold within the country and drove up its value, gold from across the planet would flow into this artificially high-price market. Consequently, it would have to corner the world’s market in gold.)

Once the cabal has acquired all this gold, what will it do with the gold? Will it hoard the gold and lose the income that it could have earned? It could lend the gold, which will put it back into the economy in an orderly manner. If lending were its objective, it could have earned more by lending the money that it used to buy the gold instead of foregoing this income while cornering the world’s gold.

Is it going to try to disrupt the economy by quickly dumping its gold? If so, it will have to absorb enormous losses. Furthermore, if it dumps its gold as coins, all coins beyond that needed by the markets will be melted for other uses. If it dumps it as bullion, enough of this bullion will be converted to coins to satisfy the demand for gold coins. Dumping will drive down the value of gold to about the level it was before the cabal began its hoarding. Besides greatly reducing its estate, what does the cabal gain from driving down the value of gold and disturbing the gold markets? It certainly will not increase its wealth by such action. Nor will it increase its power.

The manipulation of gold under the gold standard should not be confused with the manipulation of its price under the current fiat-federal-reserve-dollar standard. Under the gold standard, the price of gold cannot be manipulated as gold is priced in terms of itself. The price of a pennyweight of gold is a pennyweight of gold. Its purchasing power can be manipulated, but not its price. (Its price could be manipulated in terms of silver. However, this manipulation accomplishes little as the purchasing power of one metal is being replaced by the purchasing power of another metal. People who held large quantities of one metal may lose or gain purchasing power in terms of the other metal.)

Gold under the true gold standard is like the dollar under the federal-reserve-dollar standard. Under the federal-reserve-dollar standard, the price of the dollar is a dollar. Its value can change relative to other things, but its price does not change.

Under the federal-reserve-dollar standard, the price of gold can be manipulated in terms of federal reserve dollars by changing the supply of gold or dollars. Gold is being bought and sold with and in terms of federal reserve dollars.

If people oppose the true classical gold standard because gold is manipulable, why do they want to use a fiat currency, which is infinitely more manipulable? Why do they prefer letting politics instead of economics determine the issuance and quantity of the money? With fiat money, politics regulates its issuance and quantity. With the true gold standard, economics controls the issuance and quantity of money. Thus, these people in effect are saying that they trust politicians and distrust the people with the control of the country’s money. Politicians or their bureaucrats and "experts" regulate the issuance and quantity of fiat money. Under the true gold standard, the people directly control the issuance and quantity of money.

Fiat money is much easier to manipulate than gold under the true gold standard. This ease of manipulation is why governments, international financiers, statists, and other controllers prefer fiat money to gold money.

Countries do not abandon the gold standard because it is easily manipulated. They abandon it because it is extremely difficult to manipulate. On the other hand, the government, that is, the cabal that controls the government, can easily manipulate fiat money. It can change the quantity of money on a whim and at will. Under the gold standard, the quantity of money is a dependent, not an independent, variable. It depends on the demand for money and is not subject to governmental manipulation. With fiat money, the quantity of money is an independent variable. The government maintains control of the money and can change the money supply to suit political considerations. Thus, any cabal inside or outside of the government prefers fait money to the gold standard, for fiat money is much easier to manipulate.

People who claim to oppose the gold standard because gold is easily manipulable are using this argument as a ruse to conceal their desire for a currency that is highly manipulable. They know that the gold standard greatly limits the power of the government and its control of the economy and the people. Gold stands in the way of unlimited credit expansion. It prevents the government from attempting to create wealth by printing numbers and words on paper. Gold forces the government to abide by the discipline of the markets. It makes the purchasing power of money independent of politics and arbitrary manipulation. The gold standard places external and automatic restraints on the government.

Mises remarks, "The eminence of the gold standard is . . . that the gold standard alone makes the determination of the monetary unit’s purchasing power independent of the ambitions and activities of dictators, political parties and pressure groups."[2]

Because gold is difficult to manipulate, statists and their kindred oppose it. The irony is that they argue that gold can be easily manipulated, and, therefore, the gold standard cannot be used. Fiat money, which becomes nearly impossible to manipulate under their system, so they assert, must be used instead. Amazingly, statists can actually use this absurd claim to get their opponents, people who want small, limited government, to abandon the gold standard in favor of fiat money.

Joseph Schumpeter explains why statists hate gold:

An "automatic" gold currency is part and parcel of a laissez-faire and free-trade economy. It links every nation's money rates and price levels with the money rates and price levels of all other nations that are on gold. It is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditure directly, for example, to foreign policy, to certain policies of taxation, and, in general, to precisely all those policies that violate the principles of economic liberalism. This is the reason why gold is so unpopular now and also why it was so popular in a bourgeois era. It imposes restrictions upon governments and bureaucracies that are much more powerful than is parliamentary criticism. It is both the badge and the guarantee of bourgeois freedom—of freedom not simply of the bourgeois interest, but of freedom in the bourgeois sense. From this standpoint a man might quite rationally fight for it, even if fully convinced of the validity of all that has ever been urged against it on economic grounds. From the standpoint of statism and planning, a man may not less rationally condemn it, even if fully convinced of the validity of all that has ever been urged for it on economic grounds.[3]

Thus, people who claim that they are convinced of the gold standard’s virtues but cannot support it because it is so easily manipulable are statists at heart. If a person who truly believes in freedom and limited government, he would support the gold standard even if he were convinced that it was easily manipulable.


As Hans Sennholz remarks:

The gold-coin standard means sound money; it makes the value of money independent of government . . . [and] protects the monetary system from the influence of government. . . . As the quantity of gold in existence is utterly independent of the wishes and manipulations of government officials, parties, and pressure groups . . ., it is a social institution that is controlled by inexorable economic law.[4]

He also notes, "The gold-coin standard cannot be manipulated by government and, therefore, presents an insurmountable obstacle to all attempts at credit expansion and regulation through monetary policy. . . ."[5]

For a more detailed discussion of fiat money and the true gold and silver standard, see the author’s book Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money.

Appendix

The following is part of the discussion on the myth of gold being easily manipulable from Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money.[6]

The fourth major argument against the gold standard is that gold is too easy for bankers to manipulate—as though fiat money is difficult to manipulate. Bankers can cause all sorts of havoc by withholding and hoarding gold or transporting gold into or out of the country. True bankers, and others for that matter, can withhold vast quantities of gold from the markets. But they do so at an enormous cost. For them to withhold enough gold to influence the markets means a significant loss in profit. For most, it probably means not making less profit, but losing significant income.

Even if a cabal could control vast quantities of gold, that control would have only minimal impact on general prices. Most of the impact would appear in the discount rate.

Furthermore, as the conspirators removed gold from the markets, the value of the remaining gold would rise to compensate for the removal. They in effect would increase the value of gold domestically. This increase in value would cause gold to be imported. Thus, to corner the market in gold, they would have to buy vast quantities of gold globally. Even then, the remaining gold would rise in value to compensate for the removal.

On the other hand, the government or its central bank can depress the purchasing power of gold by undertaking credit expansion. The government can carry out policies to induce people to hold less cash and thereby lower the purchasing power of gold. Such policies contributed to the rise in general prices between 1896 and 1914. Nevertheless, unlike fiat money, gold does limit governmental action to lower its purchasing power.

Some claim that exporting gold caused the Great Depression in the United States. Not only did the country lose monetary gold, which had a deflationary effect; more important, the credit based on that gold contracted. This contraction of credit greatly magnified the deflation.

From 1920 through 1933 the gold stocks of the United States rose in most years, and overall a net increase occurred.[7] Fremling remarks, "Gold flows generally do not equal changes in gold reserves, because gold flows measure movements of gold between countries not only of reserves, but also of private gold stocks."[8]

If exporting gold exacerbated the Great Depression, then the importation should have ameliorated the deflation. Great Britain was the primary recipient of the gold exported from the United States, but it seems not to have benefitted from the importation of gold. A global credit contraction caused the Great Depression, and not exporting gold. Credit contracted in countries that imported gold as it did in exporting countries. Furthermore, the quantity of gold increased during this era.

Under the classical gold-coin standard, the export of gold would not have caused general prices to fall. It would cause the discount rate for bills of exchange to rise. . . .

Another form of manipulation occurs when international banks export gold from their banking system and thereby contract their gold reserves. When bank reserves are contracted, banks must cease lending and call in loans to increase reserves. This action contracts the money supply and leads to a recession or depression. (The same thing occurs if the public unexpectedly starts removing their money from banks in gold coins.)

This problem has more to do with improper lending than with the gold standard. If banks do not borrow short and lend long, i.e., do not use demand deposits for loans (or allow two people to have access to the same money simultaneously), and if the government does not require a minimum reserve, much of this problem would cease. Then the effect of international bankers exporting gold from the banking system would be the same as any other manipulator removing gold from the markets.

When the government decrees an arbitrary minimum gold reserve, banks are compelled to contract lending and call in loans to maintain their reserves. Legal reserves increase the demand for gold, which increases its value, which intensifies deflationary effects.[9] (Deflation occurs when gold’s purchasing power increases.) . . .

As the above remarks show, the gold standard is incompatible with centralized banking. Central banks (or governments if they are the monetary authority) accumulate most of the world’s monetary gold stock. With such a large hoard, they can manipulate the value of gold and cause sharp fluctuations. This manipulation can be deliberate or inadvertent. Nevertheless, the gold standard does limit such manipulation. To affect the prices of internationally traded commodities domestically requires changing their prices globally, which requires changing the value of gold globally.

The purpose of a fiat monetary system is to have money that is easily manipulated. Gold is much more easily manipulated under a fiat monetary system where gold is consolidated under the ownership of the government or its central bank. Gold is difficult to manipulate when paper money is redeemable in gold on demand.

Some opponents of the gold standard argue that international financiers profit by artificially shipping gold between countries to drive their currencies up and down. Gold naturally moves from countries where it is over valued to countries where it is under valued. International financiers could ship large quantities of gold from one country to another to manipulate the value of their money. When the physical difficulties and cost are considered along with the quick disappearance of any advantages that they created, they could make more money in other ventures. With fiat money, they can easily manipulate the value of money of various countries through their control of political leaders and central banks and make enormous profits just by moving electrons through computer circuits. International financiers could easily accomplish this goal even if all central banks were abolished and money issuance became a governmental function. They could still control (own) the political leaders, most of whom are among the easiest people in the world to corrupt.

The gold standard was not abandoned because it is easy to manipulate. It was abandoned because it is nearly impossible to manipulate. The government can increase the supply of fiat money at will and without limits, but it cannot increase the supply of gold at will. Increasing the supply of gold depends on the profitability of mining gold.

As Spahr notes, "Only a currency of unsound quality lends itself to manipulation."[10] Gold and silver are the highest quality money and, therefore, difficult to manipulate. Fiat paper money is low quality money, and is, therefore, easy to manipulate—especially if the government spends it into circulation.

Endnotes

1. Thomas Coley Allen, Reconstruction of America’s Monetary Banking System: A Return to Constitutional Money, pp. 136-138.

2. Percy L. Greaves, Jr., On Current Monetary Problems: An Interview with Professor Ludwig von Mises, p. 30.

3. Richard M. Salsman, Gold and Liberty, p. 58.

4. Martin A. Larson, The Federal Reserve and Our Manipulated Dollar, p. 237.

5. Ibid., p. 238.

6. Allen, pp. 124-128.

7. Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1914-1941, p. 536.

8. Gertrud M. Fremling, "Did the United States Transmit the Great Depression to the Rest of the World?", The American Economic Review, LXXV (December 1985), 1181.

9. David Glasner, Free Banking and Monetary Reform, p. 105.

10. James Washington Bell and Walter Earl Spahr, ed., A Proper Monetary and Banking System for the United States, p. 32.


Copyright © 2009 by Thomas Coley Allen.

More articles on money.