Gold Investment

Zion, IL
By A.B. Dada
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Ron Paul, Presidential candidate for the Republican party, wants to do away with the Federal Reserve, fiat currency (meaning money that is backed by nothing), and return to a currency backed by something.

GC, a reader, posted the following reply to a recent article I posted:

I read these comments all the time about the federal reserve system with its extended tentacles worldwide, but NO ONE even the worlds leading economists have come up with an alternate solution
that could be implimented without causing a worldwide collapse of the financial markets.

Maby that is what it is going to take- to make people stand up and be counted to vote for a more equitable sustem, free from autocratic control and mass worldwide manipulation.

Come on you outstanding economists, I challenge you to bring forward a new system or even starty a debate on a new system- Everything evolves- but the FRS has evolved causing the world to a point of
absolute collapse. Its 5 minutes to midnight- you havn’t much time left. good luck

It’s a great response, and one that MOST Austrian economists have no real answer to. He’s right, an end to fiat currency would have horrific repercussions immediately. Even Dr. Paul himself says that we’d have great poverty initially under his system, but long term success would be quick. It’s a concern for many, though, because few of us actually think long term, and would rather have short term success even if it meant long term failure. We believe we can weather any downturn, as long as the short term seems safe.

I don’t have a “quick” solution to the problem, but I do have a reasonable one. My answer gels well with Dr. Paul’s 30-year history of providing solutions. It is also an area where Paul detractors ignore his words, and instead base their opinions on what they THINK he says. Dr. Paul will NOT return us to a gold standard, nor has he even promoted such an idea. Instead, Paul has recommended introducing competing currencies, and letting the market decide.

Based on the Constitution, only the States are required to pay their debts in gold and silver. The U.S. government doesn’t really have a preferred, Constitutional process to paying their debts. In this case, I see no reason why the U.S. government can’t pay their debts in fiat currency — the Constitutional problem comes up when that same government also RESTRICTS what the market can provide in terms of competing currencies. For now, only fiat Federal Reserve Notes are legal tender, and nothing else can be. As we saw in the recent Liberty Dollar theft by the Treasury and the FBI, even bartering currencies may be considered illegal if they compete with the fiat standard.

If I was President, the first thing I would do is work with Congress, through the bully pulpit, to overturn any laws that restrict what the market can use as currency. Immediately. This would be a key aspect of my Presidency — not war, not civil liberties, not taxes, not education nor abortion nor health care.

By providing the market with a chance to offer its own currencies, maybe dozens or hundreds, the system would be in place to see what demand there would be for alternative means of barter. I believe we’d see an immediate market open up to gauge the value of currencies against each other: basically a Forex for all the new currencies out there. This would be the system used to see if a currency was worthless, or worth something. Because we’re talking about a truly unregulated, competitive market, no business would have to accept any currency that they wouldn’t want to. This would give the U.S. dollar the prime position, since almost every system is open to the dollar. It would also allow the U.S. government to pay in U.S. dollars, and also collect taxes and debts based on U.S. dollar transactions.

Yet by providing the entry to alternative currencies, you can believe that we WOULD see some competitive ventures. Some people may be defrauded by alternative currencies that say they are backed by something of value, but really aren’t, but the long term would show us competitive currencies that are backed, audited, and redeemable by something of value. Maybe we’d see McBucks that are only good for redemption at McDonalds, maybe we’d see Wal*Backs which are only good for Wal*Mart. Who knows?

It sounds terrible complicated, but in reality it would be a fairly simple navigating in terms of redeeming currencies for products or services. Just like the Forex (which shows you a real-time trade value for any currency) aids in international travel, we’d have a real-time assistant for seeing what 10 Wal*Backs might buy you at McDonalds. On a given day, we may see that 10 Wal*Backs is equa to 100 McBucks. While that number may fluctuate, over time we’d see the strongest currencies rise to the top in popularity. Since people would only pay taxes based on their income in U.S. dollars, we’d likely see the U.S. dollar quickly lose favor as a top currency.

This could have an immediate effect on war, welfare, and other government-subsidized “services.” Would you accept your paycheck in U.S. dollars, knowing you’d have to pay 20-50% taxes on that income? Would you stick to government welfare if they only paid you in U.S. dollars, which were quickly becoming worthless in the market? The system would be fine for those who believe in the U.S. dollar and government taxes, welfare, and warfare. They’d still be part of the program, and the rest of us would be able to withdraw from supporting, and being supported by, fiat currency. It is fiat currency that brings us warfare, welfare, and excessive taxation and regulation.

You may see people who accept paychecks in their employer’s currency, or the currency of their employer’s bank, but utilize a “Direct Deposit Conversion” bank that takes in the money digitally and converts it to the currency of their choice. Maybe you’d accept CitiCash from your employer, since that is where your employer banks, but have it digitally transfered to your bank who would immediately convert it to gold certificates and deposit it into your account. Or it could be vice versa: your employer would pay you in gold certificates, but your bank (say, CitiBank) would offer you a commission if you deposited them into CitiBucks. You’ have the freedom to save your money, and spend it, in the form you’d desire.

Some people may save their money in dollars backed by energy, or green manufacturing, or even diamonds. It’s a choice of freedom, not force.

What about buying things
People often tell me my idea won’t work because there’d be too many currencies to navigate. This is totally untrue, since the current form of buying things at a store almost always includes a third party processor to handling collecting, converting, and depositing of funds. When you use a check, credit card or debit card, the merchant account processor of the store handles putting the money in the form they need, usually cash in the bank. The same would be true of an open currency system. You may go to Target to buy a lamp with your TreePlantingMoney card. Before going, you notice that 100 TreePlantingMoney credits is equal to 10 U.S. dollars, which Target prefers. You have 5000 TreePlantingMoney credits in your account, which is equivalent to about 500 U.S. dollars. You go to Target, get your US$20 lamp, and use your TreePlantingMoney card to make the purchase. 200 TPM credits are withdrawn from your account. Target’s merchant collects 2% (as it typical) and converts the TPM credits to US dollars instantly, depositing US dollars in Target’s account. It’s a simple transaction, no different than using your US dollar-denominated credit card in Europe. Your bank may also charge you a small transaction fee.

The positive aspect here is that you can also shop at your preferred retailers, who may accept your TPM credits instead of US dollars or gold certificates, etc — at a discount or without overhead. Some web retailers may be your preferred outlets to buy from since they’d save you around 3% per transaction.

The secondary benefit of an open currency system is the chance to pick the banking system you want. All banks today based on the U.S. dollar are fractional reserve banks. This means that they must keep only a fraction of deposits available for redemption. If you deposit $100 into your checking account, you end up with a $100 credit to redeem. Yet if the Federal Reserve only requires a 10% fractional reserve, the bank can take up to $90 of your dollars and loan them out to others. This means that you have a $100 credit with the bank, but the person borrowing the $90 has a $90 credit with the bank, too. This means the bank has basically promised $190 out for $100 actually deposited. It is a fraudulent system that I believe would quickly end based on an open currency market.

You may pick a bank that guarantees 100% of your deposit is in reserves. The downside would be that your immediately-withdrawable deposits would have a fee attached, for the bank’s profit. They may charge you 5% a year to have your money withdrawable on demand. Yet you could also provide time-deposits, where you accept that your money is NOT instantly withdrawable, but will return interest based on what the bank can loan it out for. You may get a 10 ounce of gold paycheck from your employer, put 2 ounces of gold into your “always available” account (and pay around 0.1 ounces a year fee), and put 8 ounces of gold into your “can’t be touched for 6 months” account. The bank will loan out the 8 ounces of gold, and share the interest collected with you. If you had an emergency and needed your 8 ounces, you could get a loan against the future value of the account, and access the money immediately. Upon redemption of the 6 months deposit, the bank would withhold the loaned amount from you, and transfer the difference into your “always available” account (or roll it back into another 6 month deposit).

By getting rid of the fractional banking system (for everything but the U.S. dollar), we’d see asset and investment bubbles all but disappear. Banks with full reserves would be preferred over banks with fractional reserves, since those currencies would not be as prone to inflation (through fractional reserve lending) that U.S. dollars do.

All these open and competitive market provisions would quickly end the U.S. dollar hegemony. Taxes would only be paid by those who stick with the government’s fiat currency. Government spending would be curtailed based on what they collected by those who utilize U.S. dollar transactions. State taxes, and payments, would be paid for in gold or silver certificates, providing a Constitutional structure to keep the States in check. Alternative currencies would give added pressure on fiat currency, but also be redeemable for products or services so inflation would be in check, as well.

The downside of an open market currency system is the changes that would need to be made by the average consumer. The banks and merchant processors and stores would instantly be ready, because they already handle hundreds of currencies from international travelers. The consumer, though, would need to be able to value their currency in alternative currencies, but we already have cell phones that can access Google Mobile, which tells you in seconds what your currency converts to. Try it: Go go google.com and type in 10 dollars in euros. It’ll tell you immediately what the current Euro-value of US$10 is. If we had TreePlantingMoney credits, you’d be able to look up your conversion value from your cell phone, or from a handy kiosk at the store you’re shopping at. Complexity may go up, slightly, but stability in currency would also happen. Gresham’s Law would work in reverse here (Gresham’s Law states that bad money drives out good money), as people would “hoard and use” good money and decline to accept bad money. Maybe in the long run the U.S. government would have few people who wanted their fiat, worthless currency, and people would quickly learn the lesson that believing in unbacked currency gives you long term poverty.

For those worried about saving in one currency, the banks may give you an account that saves in a barrel of goods, say 10% in gold, 10% in silver, 10% in U.S. dollars, 10% in Euros, 10% in oil, 10% in water, etc. The bank would allow for redemption, as possible, so you’d have the ability to “check” the bank in preventing illegal fractional reserve lending or malinvesting as the banks have done for decades.

Is it an easy solution? No, definitely not. But it is not a “gold standard” advocation either. Yes, I’d quickly convert to gold-backed, 100% reserved currency, immediately. But you’d be free to select the currency, and system, that you’d agree with most of all. You pro-government advocates can continue to use dollars, which would be in my best interest since I could hire you for cheaper and cheaper personal funds each year. I’d be free of government taxes, and you’d be free to pay what you want for the services you believe government should do.