The Never Ending Story

If you read my last article, you have some idea of how I came to be involved with the work of Professor Fekete, with Gold Standard University Live, with The Gold Standard Institute, with Fekete Research, and with the New Austrian School of Economics. I hope you also understand the importance of all this; how knowledge of money, credit, and the Gold Standard is the road to economic salvation for humanity.
It is one thing to understand a concept intellectually, quite another to have a visceral, gut feeling… a true knowing. So with Gold; reading and studying is fine, but nothing sets the reality of a concept like a traumatic experience. Meeting armed border guards at night, after walking for hours across frozen plowed fields while escaping from Hungary was traumatic for a nine year old… and set the reality of Gold vs paper deep into my psyche.
Freedom and life itself depended on Gold; without Gold, we would never have passed from Hungary to Austria, we would never have been able to start a new life in Canada… and my father’s life in Hungary would not have been worth a plugged nickel. I received a visceral knowing of Gold early; it took much study to fill the intellectual gaps, but the knowing was there.
So it goes with another concept; the concept that life is a journey, a journey with no beginning and no end… a never ending story. A story with waypoints, highlights, lowlights… but with no beginning, with no end. Our personal part of the story may start with our birth and end with our death, but the story goes forever on.
I am learning this concept not so much through a traumatic experience… like leaving Hungary under duress… but through constant repetition. After all, ‘repetition is the mother of learning’, is it not? Ongoing repetition is the equivalent of one traumatic incident in the way of learning life lessons.
I thought I had completed my journey in economics when I studied Mises… till I learned of Professor Fekete… then my journey really began. I thought I had completed my journey when I made the commitment to help preserve and disseminate the Professor’s knowledge… but then my journey really began.
I thought I had completed my journey with the declaration that Fekete Research will not only preserve and disseminate the Professor’s knowledge, but will work to carry it forward… but now I see that my journey is about to begin.
I am an engineer by trade… and engineers put scientific principles to work in the real world. They do this by designing things and processes that make life easier; like bridges that cross obdurate obstacles, like ships and trains that conquer distance… and so forth. I feel challenged to put the principles discovered by Professor Fekete to work in the real world. This is my next chapter of the never ending story.
One of the biggest concerns of students of Gold is how to transition from the current Fiat fiasco, to honest money… to an Unadulterated Gold Coin standard… without having to go through economic collapse and bloody revolution. In other words, how to put the theories of Gold and Real Bills into effect, in our world, right here right now.
As I write this article, Professor Fekete, now an octogenarian, is traveling the world in his ongoing efforts to kick start the process; he is currently in Bermuda, having discussions with His Majesty’s Loyal Opposition, to persuade them to embrace the concept of opening their Mint to Gold; to accept unlimited quantities of Gold and fabricate the Gold into coins of the realm.
This is one of the keys to Gold money; unlimited minting guarantees that there will be a plentiful supply of coins to support Gold circulation… without circulation, the Gold standard will never get off the ground. No long term planning such as issuing Gold bonds or Gold insurance policies is possible unless a future supply of Gold Coins, indeed Gold income, is assured.
NASoE is pursuing the same goal with a slightly different twist… a market driven rather than a sovereign driven approach to creating coins capable of circulation in unlimited numbers. What drives this effort is the premium of Gold coin over Gold bar; if you investigate the Fiat price of Gold, you will find that coins always carry a premium vs. bars.
This is simple; a coin is more valuable, has a larger purchasing power than the equivalent Gold in bar form. A coin is more liquid, easier to spend than a bar… thus the premium. The Mengerian theory of marketability (liquidity) predicts this effect, and market action shows the theory to be true; coins sell at a premium to bars, period.
We are organizing a company with the mandate to do just this; accept Gold bars, and return Gold coins to all comers. The coins could be one ounce coins, like the Maple Leaf or the Krugerrand, but for many good reasons will be Sovereigns.
One ounce coins are large; with current evaluation at around $1,200 one ounce coins will have difficulty circulating. The Sovereign is only about ¼ ounce and much more suitable for common, modest value monetary transactions.
Furthermore the Sovereign was the basic coin of the Classical Gold Standard; history and tradition are important. Coinage of the Sovereign has been uninterrupted since its inception in 1816, unlike most other monetary coins. The Royal Mint of England has been coining, is coining, and will continue coining Sovereigns. Negotiations with the Royal Mint have already born fruit; they are eager to continue their business of coining Sovereigns… and so is the Royal Canadian Mint.
The Sovereign has no face value stamped on it, unlike the Maple and other current bullion coins. Face value is a sham, and needs to be eliminated. Indeed, the Sovereign class coin was the standard coin of the Classical Gold Standard; the Gold Frank, the Gold Napoleon etc. all have the same Gold content, and are exchangeable with the Sovereign.
This mint operation is a no brainer; the premium of the Sovereign over Gold bars is substantial, and is much more than the cost of fabrication (brassage cost) so a risk free profit is available to any Gold bar holder. Hoarders, investors, miners… whoever has Gold will be able to take advantage of this opportunity; turn Gold bars into God coins, and earn a Gold profit.
However, the implications of this process go beyond direct profit; once a bar is delivered, the really interesting aspect kicks in. In accepting bar to be coined, there is a time lag… we are not talking about trading bar for existing coin, but actually processing bar to produce brand new coin.
Depending on quantities, a delay of 30, 60, or 90 days is to be expected before the new coins are delivered. The royal mint will accept the bars, and accept a bill, payable in sovereigns on the due date up to 90 days in the future. Think about this; these bills will be Gold bills, payable on maturity in Sovereigns by the Royal Mint! These are Real Bills of the highest caliber, the most desirable Real Bills of all.
Goldsmith Bills that morphed into bank notes are being reintroduced to the world. Indeed, this is the key to the new operation; auctioning freshly accepted Gold Bills, to establish a Gold rate of discount. Like this; you deliver a Kilo bar of fine Gold to the Royal Mint, and are issued a signed and accepted ( by the Royal Mint ) bill guaranteeing Gold Sovereigns in ninety days.
You may simply wait for the due date, and collect your Sovereigns; or, you may put your bills up for auction… and receive Sovereigns right now. Furthermore, you may also bid in these ongoing auctions; exchange your cash Gold for a Gold Bill, and wait for delivery. By choosing to do this, you will obtain Gold Sovereigns at a discount. At a discount to the Sovereign count; pay fewer Sovereigns for the bill now than you will receive on maturity of the bill.
Is this not a no brainer? Real Bills are market driven, and offer benefits to both the writer and the acceptor. Both have potential to gain; profit, at the cost of time, or time to pay (credit) at minimum cost. This is the current chapter in the never ending story; the creation of a market for Gold Bills… and a taste of things to come.
The next paragraph of the story is already clear; to facilitate the creation of Silver Bills, in a similar manner. Bring Silver bars to the Mint, and receive Silver Bills. The premium on Silver coin vs. Silver bar is even higher than on Gold, as the specific value of Silver is less… and the brassage is therefore a higher percentage of value. More profit is possible in the coining of Silver coins than the coining of Gold.
And what about the next chapter? Who knows, life deals and we play the cards we are dealt. Perhaps once the Gold and Silver bills are in play, other metal bills can be addressed; copper and other base metals. Perhaps we will have an opportunity to tackle the thorny problem of sovereign (Fiat) debt through the mechanisms of Gold bonds, Gold insurance policies, and Gold annuities.
As far as more specific details about this new venture, I am not at liberty to name the company being formed, as the charter is presently being written, and the company is being registered. The exact terms and details of the Bar/Sovereign transaction will soon be available, as well as information about Bill auctions. I will have more to say about all this as the never ending story continues.

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Bitcoin… Monetary Nirvana?

If you don’t know what Bitcoin is, do a bit of research on the internet, and you will get plenty… but the short story is that Bitcoin was created as a medium of exchange, without a central bank or bank of issue being involved. Furthermore, Bitcoin transactions are supposed to be private, that is anonymous. Most interestingly, Bitcoins have no real world existence; they exist only in computer software, as a kind of virtual reality.
The general idea is that Bitcoins are ‘mined’… interesting term here… by solving an increasingly difficult mathematical formula –more difficult as more Bitcoins are ‘mined’ into existence; again interesting- on a computer. Once created, the new Bitcoin is put into an electronic ’wallet’. It is then possible to trade real goods or Fiat currency for Bitcoins… and vice versa. Furthermore, as there is no central issuer of Bitcoins, it is all highly distributed, thus resistant to being ‘managed’ by authority.
Naturally proponents of Bitcoin, those who benefit from the growth of Bitcoin, insist rather loudly that ‘for sure, Bitcoin is money’… and not only that, but ‘it is the best money ever, the money of the future’, etc… Well, the proponents of Fiat shout just as loudly that paper currency is money… and we all know that Fiat paper is not money by any means, as it lacks the most important attributes of real money. The question then is does Bitcoin even qualify as money… never mind it being the money of the future, or the best money ever.
To find out, let’s look at the attributes that define money, and see if Bitcoin qualifies. The three essential attributes of money are;
1) money is a stable store of value; the most essential attribute, as without stability of value the function of numeraire, or unit of measure of value, fails.
2) money is the numeraire, the unit of account.
3) money is a medium of exchange… but other things can also fulfill this function ie direct barter, the ‘netting out’ of goods exchanged. Also ‘trade goods’ (chits) that hold value temporarily; and finally exchange of mutual credit; ie netting out the value of promises fulfilled by exchanging bills or IOU’s.
Compared to Fiat, Bitcoin does not do too badly as a medium of exchange. Fiat is only accepted in the geographic domain of its issuer. Dollars are no good in Europe etc. Bitcoin is accepted internationally. On the other hand, very few retailers currently accept payment in Bitcoin. Unless the acceptance grows geometrically, Fiat wins… although at the cost of exchange between countries.
The first condition is a lot tougher; money must be a stable store of value… now Bitcoins have gone from a ‘value’ of $3.00 to around $1,000, in just a few years. This is about as far from being a ‘stable store of value’; as you can get! Indeed, such gains are a perfect example of a speculative boom… like Dutch tulip bulbs, or junior mining companies, or Nortel stocks.
Of course, Fiat fails here as well; for example, the US Dollar, the ‘main’ Fiat, has lost over 95% of its value in a few decades… neither fiat nor Bitcoin qualify in the most important measure of money; the capacity to store value and preserve value through time. Real money, that is Gold, has shown the ability to hold value not just for centuries, but for eons. Neither Fiat nor Bitcoin has this crucial capacity… both fail as money.
Finally, we come to the second attribute; that of being the numeraire. Now this is really interesting, and we can see why both Bitcoin and Fiat fail as money, by looking closely at the question of the ‘numeraire’. Numeraire refers to the use of money to not only store value, but to in a sense measure, or compare value. In Austrian economics, it is considered impossible to actually measure value; after all, value resides only in human consciousness… and how can anything in consciousness actually be measured? Nevertheless, through the principle of Mengerian market action, that is interaction between bid and offer, market prices can be established… if only momentarily… and this market price is expressed in terms of the numeraire, the most marketable good, that is money.
So how do we establish the value of Fiat…? Through the concept of ‘purchasing power’… that is, the value of Fiat is determined by what it can be traded for… a so called ‘basket of goods’. But his clearly implies that Fiat has no value of its own, rather value flows from the value of the goods and services it may be traded for. Causality flows from the goods ‘bought’ to the Fiat number. After all, what difference is there between a one Dollar bill and a hundred Dollar bill, except the number printed on it… and the purchasing power of the number?
Gold, on the other hand, is not measured by what it trades for; rather, uniquely, it is measured by another physical standard; by its weight, or mass. A gram of Gold is a gram of gold, and an ounce of Gold is an ounce of Gold… no matter what number is engraved on its surface, ‘face value’ or otherwise. Causality is the opposite to that of Fiat; Gold is measured by weight, an intrinsic quality… not by purchasing power. Now, have you any idea of the value of an ounce of Dollars? No such thing. Fiat is only ‘measured’ by an ephemeral quantity… the number printed on it, the ‘face value’.
Bitcoin is farther away from being the numeraire; not only is it simply a number, much as Fiat… but its value is measured in Fiat! Even if Bitcoin becomes internationally accepted as a medium of exchange, and even if it manages to replace the Dollar as the accepted ‘numeraire’, it can never have an intrinsic measure like Gold has. Gold is unique in being measured by a true, unchanging physical quantity. Gold is unique in storing value for thousands of years. Nothing else in reach of humanity has this unique combination of qualities.
In conclusion, while Bitcoin has some advantages over Fiat, namely anonymity and decentralization, it fails in its claim to being money. Its advantages are also questionable; the intent is to limit the ‘mining’ of Bitcoins to 26,000,000 units; that is, the ‘mining’ algorithm gets harder and harder to solve, then impossible after the 26 million Bitcoins are mined. Unfortunately, this announcement could very well be the death knell of Bitcoin; already, some central banks have announced that Bitcoins may become a ‘reservable’ currency.
Wow, sounds like a major step for Bitcoin, does it not? After all, the ‘big banks’ seem to be accepting the true value of the Bitcoin, no? What this actually means is banks recognize that they could trade Fiat for Bitcoins… and to actually buy up the 26 million Bitcoins planned would cost a meagre 26 Billion Fiat Dollars. Twenty six billion Dollars is not even small change to the Fiat printers; it is about a week’s worth of printing by the US Fed alone. And, once the Bitcoins bought up and locked up in the Fed’s ‘wallet’… what useful purpose could they serve?
There would be no Bitcoins left in circulation; a perfect corner. If there are no Bitcoins in circulation, how on Earth could they be used as a medium of exchange? And, what could the issuers of Bitcoin possibly do to defend against such a fate? Change the algorithm and increase the 26 million to… 52 million? To 104 million? Join the Fiat printing parade? But then, by the quantity theory of money, Bitcoin would start to lose value, just as Fiat supposedly loses value through ‘over-printing’…
We come to the key issue; why search for a ‘new money’ when we already have the very best money, Gold? Fear of Gold confiscation? Lack of anonymity from an intrusive government? Brutal taxation? Fiat money legal tender laws? All of the above. The answer is not in a new form of money, but in a new social structure, one without Fiat, without Government spying, without drones and swat teams… without IRS, border guards, TSA thugs… on and on. A world of liberty not tyranny. Once this is accomplished, Gold will resume its ancient and vital role as honest money… and not a moment before.
Rudy J. Fritsch

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Gold… Monetary Utopia?

I have written many articles about Gold, about the Unadulterated Gold Standard, about the components of a Gold based economy. Perhaps it’s time for a bit of a ‘reality check’. Is the very idea of Gold money, the very idea of honest money in an honest society Utopian? Especially in this day and age, an age of the big lie, of tyrannical governments, of crony capitalism, of loss of human vitality…
After all, families run and have always run without money, except as needed to deal with the outside world. Same with the extended family; work is done, responsibilities shared, but money never changes hands. Why does this kind of very human interaction have to be limited to families, or at best to small tribes; why can’t the whole world run this way? Why not a world without money, with only the best interest of all as the driver? Why a ‘profit driven’, money based economy?
Many attempts have been made in just such efforts; efforts to replace the money based economy with an economy based on altruism, on human understanding, on shared responsibilities… the classical Marxist cry ‘from all according to their ability, to all according to their need’. Indeed, communal living has been tried on many scales, many times, from small ‘hippie’ communes to the great socialist experiments of Soviet Russia, of Communist China. The very same socialist experiment is now being tried in the formerly capitalist USA.
All these attempts have failed dismally; more than dismally, have failed tragically and with lethal consequences for hundreds of millions of innocent human beings; in Stalin’s five year plans, Mao’s Cultural Revolution… and perhaps soon in the USA’s ObamaCare as well. Why do these social experiments fail… and why does Humanity keep trying them, in spite of repeated tragic failures?
Why these Utopian experiments fail is easy to see, if we but choose to look and see the truth; the idea that what works in a family or small tribe can be scaled up without limit is Utopian. It is a false belief, and a lethal belief. Sociologists have researched this very topic; money-free societies can exist, do exist, direct democracy can exist, does exist, in communities of up to about 250 people. Once this number is exceeded, the family based, altruism based system starts to break down.
No rocket science or brain surgery is needed to see why; in a small group, every one knows every one else; knows who to trust, knows who is a good leader, knows who is a dead-beat… and the family connection brings forgiveness to relationships. As the group grows, it becomes harder to know whom to trust, whom to vote for… and much less forgiveness is given to strangers than to ‘Aunt Mindy’ or ‘Uncle Joe’.
The effort to scale up small scale communities to thousands, indeed millions, is doomed to fail. The hard reality is that a different system must be used to enable society at large to survive; if we don’t know who is making a promise, if we don’t know whether the promise maker can be trusted or not, the system itself must generate trust. Without trust, society breaks down and civilizations collapse.
Fiat currency is always and everywhere a promise; we don’t know, indeed cannot know if the promise maker is to be trusted. After all, Ben Bernanke is not our intimately known ‘Uncle Joe’… and Janet Yellen is not our ‘Aunt Mindy’. We cannot trust them, as we do not know them… we only know stories that are spread about them… stories that are mainly ‘spin’… i.e. mainly lies.
We do not have an intimate knowledge of their personality, their mindset, their belief systems; we don’t have a long term history of direct interaction with them. If we do trust them, we are being naïve; and naivety generally leads to trouble… just as Utopian social experiments lead to trouble.
No system based on trust can work, unless there are solid grounds for giving trust; either intimate knowledge of the players based on living in close proximity, as in an extended family, or a strong case of common interest. The interests of Central Bankers bear very little commonality with the interests of the average wage earner; and I suggest very few people on this planet have lived as part of Bernanke’s or Yellen’s family… extended or otherwise.
So we come to it; the Fiat system cannot be trusted, as the purveyors of the system cannot be trusted. The very idea of trusting a Fiat system is Utopian, and therefore lethal. Only a system that is inherently trustworthy, and is not dependent on the promises of either Bernanke or Yellen or of any other power seeker can possibly work. Only a system that is not under the control of and cannot be controlled by any ‘special interest’ can be trusted.
Of course, there is such a trustworthy system, a system not controlled by any special interest; it’s called the Unadulterated Gold Standard. Gold is not a promise, but a present good, a ‘bird in the hand’ vs. a promise of ‘two birds in the bush’. Gold is the touchstone, the acid test of any promise ever made. Gold is the ultimate extinguisher of debt; that is Gold fulfills any economic promise made.
A bond is a promise; and if redeemed in Gold, a promise that proves itself to be true. A Real Bill is a promise; and if redeemed in Gold, a promise that proves itself to be true. A bank note is a promise; and if redeemed in Gold, a promise that proves itself to be true. A promise that is ‘redeemed’ in another promise is proven to be what? Proven to be nothing but a lie.
Fiat currency is a lie, Fiat bank notes are lies, Fiat denominated bonds are lies… an economy based on Fiat is an economy based on lies. That is where we are today, living under a system based on lies… and the results are starting to show. Just as the lies of the Utopian socialist experiments in the USSR and China showed up… in the form of war, famine, death… so the results of living under a Fiat system of lies are starting to show up.
Is war far away? Is famine far away? I suggest both are already upon us. Thousands are dying in wars at this very moment… hundreds of thousands have died in the last few years… and the death of millions is in sight. The push of a button by a power mad psychopath would ignite the conflagration.
One third of the world population is already hungry; and not just in the so called ‘underdeveloped nations’. In the UK thousands of retirees are facing a choice; freeze or starve. These poor innocents cannot afford both food and fuel. In the meantime, the power mad psychopath running the US government is busy shutting down power plants, pushing energy costs to the sky. How many American retirees already face the same choice; freeze or starve?
Why Humanity keeps trying Utopian experiments is a conundrum; the special interests, the power seekers, the parasites spread reams of propaganda promoting their Fiat system; the very heart of the ‘big lie’… but why do people swallow the lie? Is it as simple as Santayana’s famous ‘those who fail to learn the lessons of history are doomed to repeat them’… or is it more than that? Why do we fail to see the truth? Do we fear to see the truth?
The truth will set you free. Do right and fear not.
Rudy J. Fritsch

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Multilateral Magic

If you have read my last three articles, you are starting to understand the true value of Honest Money to society and to you and ME… and the crucial importance of ‘trust based credit’, that is Real Bill circulation… but we have only scratched the surface. The well hidden ‘magic’ of Gold money emerges only once Gold is in free circulation, and a mature Bill market with free circulation of Bills of Exchange is established.

In Entrepreneurial Magic, we saw how trust based credit lets entrepreneurs start and run business without capital and without borrowing… business that serves the best interest of society. In Trust Your Neighbor-Tie Your Camel, we saw just as the rate of interest is driven by the consumer’s propensity to save, the discount rate is driven by the consumer’s propensity to consume. The discount rate is determined by the willingness of the bill acceptor to pre-pay his bill, and his willingness to pre-pay depends on the consumer’s spending.

In Breakthrough of Trust Based Credit, we saw how a reduction in the marginal productivity of labor… that is, a lower cost of doing business… will eliminate unemployment, and allow a virtuous circle of general prosperity to replace the current rat race of trying to keep ahead of monetary inflation. With a fully developed Bill market, and international trade based on the unhampered circulation of Bills of Exchange, multilateral magic emerges.

With a mature, fully developed Bill market in existence, the previously necessary one-on-one agreement between merchant (Bill acceptor) and wholesaler (Bill holder) is replaced by the action of the market. It is no longer necessary for each merchant to negotiate the pre-payment of his bill, just as with a fully developed Bond market, it is not necessary for each borrower to negotiate terms with a lender.

As a mature bond market consolidates the rate of interest by the ongoing market process of bid and ask for bonds, so a mature Bill market consolidates the discount rate by the ongoing process of Bill sales and purchases. The merchant need no longer negotiate with the bill holder to obtain a  discount; if he has cash Gold on hand, he simply buys Bills as desired from the discount house.

In other words, if his till is filling with cash due to consumers spending taking an uptick, he will buy Bills, and hold them (earning the discount) till his own Bills come due. The Bill market, just like the bond market, will consolidate all buy/hold decisions made by merchants… and thus develop the discount rate. More Bill buying tends to increase the price of Bills, which is the same as reducing the discount rate.  Exactly the same principle as in bonds; more bond buying leads to higher bond prices… and to lower interest rates.

The Bill market is a wonderful mechanism; not only do Bills improve profitability by reducing the cost of doing business, but they help to even out seasonality. An ice cream shop need not hold inventory over the winter season, but rather will hold bills; and as Bills are an appreciating asset, the ice cream merchant profits. When the ice cream season begins, the ice cream merchant will sell the bills, and buy new inventory… if the profit of selling ice cream is greater than the profit of holding bills.

So, from marginal ‘umbrella entrepreneur’, to all business, to full employment and improving standard of living, the Real Bills Doctrine of Adam Smith is shown to be a wonderful artifact of the free market, embodying the concept of nature’s principle of Least Action… but still… where is the Magic? How –really- did the pre WWI Gold Standard run on 150-200 Tons of Gold in the vault of the Bank of England?

I have studied the Gold Standard and Real Bills for years… but my understanding of Real Magic, the ‘Earth Moving’ effect, only kicked in a few months ago. Strangely enough, what inspired my ‘Aha” experience was some Internet rumor about India buying Iranian oil with Gold.

At first, this sounded intriguing; but then, knowing how much Indians love their Gold, I kind of dismissed this as mere rumor. Then, came another rumor; that Iranians were buying Indian grain and tractor parts… with Gold. With the American pressure on Iran, and the desperate situation the Iranians were in…  I had to take this rumor more seriously. Trade Gold for Food? Yes… in extremis, for sure.

Then, thinking further, I thought; hmmm, if Iran sends Gold to India, would the Indians consider trading this new Gold for oil? After all, they did not have to give up any of their own precious Gold, simply return some of the Iranian’s Gold… so I could see this trade happening. Indian food for Iranian Gold, and Iranian oil for Indian Gold.

The scene is set; negotiations are done, the ships full of Indian grains and stuff leave harbor, on their way to Iran… while the oil laden tankers from Iran head off towards India. The ships unload, the trade is complete, and the due dates for the bills arrive; Iran needs to send Gold to India to make payment, and vice versa.

Say the trade was for a ton of Gold; a pallet full. Now visualize the armored cars and escorts arriving at the Indian airport, loading Gold into the waiting jet… and the same scenario in Iran. The planes take off, carrying their precious cargo to their destinations; from India to Iran, and from Iran to India… one Ton of Gold heading both ways.

And suddenly, the truth struck me; if those bullion laden airplanes simply turned around and went back to their departure points, instead of completing their journeys, it would make no difference! India would still get a ton of Gold, and so would Iran. Gold is Gold, whether of Iranian or Indian origin. There is no actual need for the Gold to change hands.

Wow. We see a big chunk of magic here; shiploads of stuff changing hands, paid for by Gold… but Gold need not ever leave the vault. Only the Bills must leave… traveling from India to Iran, and from Iran to India… and net out the transaction. A glimpse into the true magic of Bills circulation.

Well, I took this glimpse and ran with it. If the transaction, from signing the agreements to netting out the Bills takes three months, then a ton of Gold’s worth of trade can be carried out every month, as long as the Gold value of the goods being traded is equal… no? Hmmm…

Is it necessary for the ton of Gold to sit in the vault for ninety days, while guaranteeing the transaction? What if in thirty days, a new trade agreement is made? Could the same Gold guarantee this transaction as well? Without any fraud?

Suppose the partners want to trade a ton’s worth of stuff every thirty days? Well, yes… if the first transaction closes (is netted out) on January 1 2014, then there is no problem using the very same Gold to guarantee another transaction that comes due February 1 2014… and another one March 1 2014… and so on and so forth.

The very same Ton of gold, committed for ninety days, is available for trade every thirty days… as long as the trades balance, and Gold does not actually have to move to make payment. The volume of international trade supported by the same quantity of Gold just tripled. But wait; why wait a month? Why not net out the trades every week? Then, the volume of trade supported by the same Gold is increased by a factor of twelve.

Better yet, net the trades out every day… as trades in the future markets are netted out every day… and now, that single ton of Gold in Iran, and that single ton of Gold in India, can support ninety Gold tons worth of transactions. One Ton of Gold in each vault, used to guarantee Real Bills, does the work of ninety tons of Cash Gold. The magic of Bill circulation grows.

Still, we are talking bilateral trade; between two countries… and disadvantages are clear. Each transaction must balance, or ‘net out’… else Gold would need to flow. Each participant has to have sufficient Gold on hand… and if there is not enough trust, the Gold must actually be transported; those airplanes will have to make the seemingly silly trips to their destination, to prove that the promise of Gold is kept… till real ‘trust based credit’ kicks in, and the netting out of Bills is accepted.

The final steps to Multilateral Magic are now in sight; Instead of a ton of Gold in India and a ton of Gold in Iran, there is a single Ton of Gold at the trading house… and the Bill netting takes place at the trading house, or ‘discount house’ as it used to be called. Under the Classical Gold Standard, the discount houses were in London… the hub of world trade.

Now, true multilateral trade becomes easy; India need not keep a perfect trade balance with Iran… and Iran need not keep a perfect trade balance with India. With multiple participants, each country need only keep an over-all balance of trade; imbalances between trade partners are not detrimental… Gold will not flow unless the sum of all trades is out of balance… i.e. unless trade deficits or surpluses are run. Only then will Gold end up moving… and the very threat of losing their precious, print-proof Gold is incentive for all nations to keep their trade in balance.

Better yet, less total Gold is needed; a Ton of Gold at the discount house will substitute for a Ton of Gold in each participant’s vault. Best of all, the final excuse to dodge Gold is gone; no longer is it legitimate to whine, “We have no Gold, a Gold based system would not be fair to us”.

With the Gold in the vault of the discount house, there is no need for a trade participant to actually own a single ounce of Gold; all they have to do is avoid running a deficit, so no actual claim for Gold is served on them. And, if they want to actually own and hold Gold, but have none to start with, all they have to do is run a trade surplus, netting out more and more Gold; and at some point, ship some of this honestly earned Gold to their own vaults.

Simple, but not easy; spend less than you earn.

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Breakthrough of Trust Based Credit

In my recent article ‘Entrepreneurial Magic’, I discuss the topic of trust based credit… or how to make money without money. I discuss how trust based credit reduces the cost of doing business… any business. In today’s G’man dominated world, only fringe businesses can benefit from using trust based credit. These benefits should be available worldwide to all business. Indeed these benefits were available under the Classical Gold Standard; as observed by Natural Philosopher Adam Smith.

Adam Smith saw that the ‘heavy lifting’ in world trade was accomplished not by the circulation of money (Gold and Silver coin) but mainly by the circulation of Bills of Exchange. Indeed, some people call this observation ‘The Real Bills Doctrine of Adam Smith’… as if Adam Smith had invented this ‘doctrine’.

Like any true natural philosopher, Adam Smith observed reality, saw what was happening with clear, unbiased vision… and then proceeded to write up the observations and hypotheses based on his observations. Quite unlike today’s mainstream ‘science’; where observations are selected to support current dogmas.

In any case, Adam Smith saw the almost magical qualities of Real Bills… aka Bills of Exchange. If you missed the last couple of articles, Real Bills are commercial bills drawn against urgently needed consumer goods delivered to retailers, with terms… that is, the bills have an extended due date… unlike retail bills that need to be paid cash on the spot.

Until their due date when they must be paid in full, Real Bills carry the value of the merchandise they were drawn against, and will circulate as a means of payment… increasing the efficiency of Gold and Silver money virtually without bounds. They are called Bills of Exchange because they change hands in clearing payments.

They are also called Real Bills because they are drawn against real goods already delivered. These goods are in urgent demand by consumers… consumers who will pay for the merchandise in Gold coin, thus allowing the bill to be paid in time by the retailer… indeed, perhaps paid before due date if consumption is brisk; prepaid at a consideration. This ‘consideration’ for pre-payment is the origin of the discount rate. Unlike interest that originates as the cost of (borrowed) money, the discount originates as the consideration offered for early payment of Real Bills.

As discussed in my last article ‘Trust Your Neighbor-Tie Your Camel’, the cost of doing business by borrowing to pay for inventory is very high… around 50% of net realized profits go to pay the cost of funds…!  To see how detrimental this is to employment, consider the idea of the Marginal Productivity of Labor…oops, bit of economic jargon slipped in here… but the idea is simple once you look at it more closely.

Margin is the line dividing two things… like the border of two countries for example. The productivity of labor is simply how much value an hour of work creates… whether the labor is shoveling coal, doing brain surgery, or cutting the patron’s hair. All work is called ‘labor’. Margin is the line between labor that is profitable… and labor that is not profitable. This is the Marginal Productivity of Labor; the line dividing profitable from non-profitable (loss making) economic activity.

Suppose the work of digging up 100 Lbs. of potatoes creates value of $20.00. That is, from a hundred pounds of potatoes in the ground to one hundred pounds of potatoes in a sack ready to ship creates (adds) value of $20.00.  Now suppose an expert can dig 100 Lb. in one hour… ($20 worth) while a less experienced or less motivated picker digs 75 Lb. per hour ($15 worth), and a rooky, wimpy picker bags 50 Lb. ($10 worth).

Our expert creates value of $20.00 per hour, the journeyman creates value of $15.00, and the rooky creates $10.00. Assume the overhead cost of the potato digging business is $10.00 per hour, and the minimum wage is $5.00… Overhead is an indirect cost, wages are a direct cost. Overhead is the ‘cost of doing business’. It includes costs of capital, compliance costs, taxes, etc… Direct cost is the payment made to the worker; paid directly for the work of potato digging.

If we take $10.00 (overhead) and add $5.00 (wages) we can see that the net value created by the expert is $5.00 ($20.00 -$15.00 = $5.00). This net value pays profits… or bonuses, or expansion of the farm, or whatever. On the other hand, the journeyman digger creates net value of $15.00 – $15.00 = $0.00… Break even!

There is no room for profit, or bonuses, or growth of the farm… this is the margin… the ‘marginal productivity of labor’ in the potato digging business is $15.00 per hour. Finally, the rooky who produces $10 of value per hour, will not create any NET value; indeed, $10 – $15 = -$5.00 … a five dollar per hour loss. The farmer cannot afford to hire the rooky; he is ‘sub marginal’.

So what can we do to improve the situation? Clearly the liberal stance of ‘increasing the minimum wage’ will put more workers out of work… as an increase in the cost of doing business raises the marginal productivity of labor; more workers will become sub-marginal. If the minimum wage is pushed to $10.00, the expert will become marginal. This wage increase will put the expert out of a job, and force the farmer out of business… or cause an uptick in the cost of potatoes to compensate for the increase in costs.

On the other hand, the conservative stance of ‘getting rid of minimum wages’ may put more workers to work… but at starvation wages. Neither liberal nor conservative views are complete; the real answer is to reduce the cost of doing business… or, the same thing, to lower the marginal productivity of labor; make it profitable to hire less productive workers.

Suppose overhead costs are reduced from $10.00 to $5.00… by reducing the cost of capital (through the use of trust based credit instead of bank borrowing) and by reducing compliance costs and taxes; now the journeyman worker indeed produces a net positive value. $15 – $10.00 = $5.00 of net value. The expert picker would also produce more net value; $20.00- $10.00 = $10.00. Why, the expert may even get a raise.

And our rooky? He produces $10.00 value per hour; overhead costs are $5.00… so he may sneak in at wages of $5.00 per hour… The rooky is now the marginal labor, instead of the journeyman. A new, lower margin (break even) at $10.00 per hour has been established. If the minimum wage is reduced to $4.50, we can be pretty sure the rooky will be in a position to be hired… and be in a position to learn, to upgrade his skills, soon to become a journeyman who easily picks 75Lb per hour.

Now play this very same scenario out over ALL business, all jobs, and ALL workers worldwide… and it becomes very clear why there was no structural unemployment under Gold. Borrowing costs were replaced by Real Bill profits. Under a fully developed Bill market, there is no need for the retailer to pre-pay his bill to get a discount; he simply buys other merchant’s bills as his till fills with the consumer’s Gold coin… and earns profits on these Bills as they appreciate.

If you think this can be compared to the retailer using a savings deposit or a CD to earn income on surplus cash, you miss the point; the money the retailer gets for his CD or deposit is more than offset in the economy at large by other borrowers, who pay the banks a much higher interest rate. The money the retailer earns by buying Bills is never borrowed, does not reduce any other merchant’s profits… rather flows strictly from the propensity of consumers to spend.

Remember, both the retailer and wholesaler, that is both the acceptor and initiator of a Real Bill benefit; the retailer gets merchandise on consignment (at no cost) and the wholesaler gets to sell more merchandise. Both parties benefit… else they would not make the deal. Neither borrowing nor lending is involved.

The structural unemployment we suffer from will not go away on it’s own. Dole payments are no substitute for wages and profits honestly earned. The World economy will never turn around as a result of more borrowing, more spending… but it will indeed turn on a Dime… if the Dime is real Silver, and if Real Bills that mature into Silver and Gold circulate freely once again.

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Trust Your Neighbor- Tie Your Camel

In my last article, I introduced the topic of trust based credit… or how to make money without money. In today’s G’man dominated world, only fringe economic activities like street vending of umbrellas escape the all-smothering regulatory blanket. But imagine if the whole world economy could run on ‘trust based credit’… and escape the ‘vampire squid’ actions of the Bankster and the G’man… impossible you say? Just a pipe dream?

Well, the historic reality is that prior to the madness of WWI… the ‘War to End All Wars’… the world economy did indeed run on such a credit system, with the reality check of ‘trust your neighbor but tie your camel’ in full effect. So effective and efficient was this system of credit, that world trade volume seen before WWI was not matched till the nineteen seventies; almost three quarters of a century later, despite huge growth in population and wealth.

To fully understand the trust based credit system and the enormous and deadly ramifications of its destruction during WWI, we need to understand how the principles employed by the street vendor and umbrella wholesaler apply in the whole world economy.

We all know what a bill is; a paper record of what we purchase… in restaurants the bill is called a check, in bars a tab… but the idea is always the same. We buy some merchandise; a meal, an umbrella (in a retail store) or a pint of brew, get presented with the bill or check or tab, verify the bill… by confirming that what it claims we bought is true… then we accept the bill, and pay it.

The only difference between a retail bill and a commercial bill is the term; retail bills are COD… to be paid immediately. Commercial bills are almost never COD, but give terms; time to pay. Terms are like 30 days net, 60 days, 90 days etc. Thus, while a retail bill is paid immediately, and is ‘retired’… i.e. paid in full and only kept for bookkeeping purposes… the commercial bill stays ‘open’ or in effect until the due date, when it is paid… and only then retired.

A big trailer truck carrying 30,000 Liters of gasoline backs up to the gas station, fills the underground storage tank… and the driver heads to the gas station office to complete the paperwork. Suppose gasoline costs $1 per Liter… do you imagine the station attendant will pay $30,000 in cash? Not likely! Nor can the attendant write a check… he simply signs (accepts) the bill or commercial invoice. The invoice specifies that 30,000 L of gasoline have been delivered, and that payment will be due in say 60 days from the signing date.

Until paid in full, this bill represents value; the value of the 30,000 L of gasoline delivered, and the value of the payment that will be made in not more than 60 days. The holder of the bill, the gasoline wholesaler, may simply hold the bill till it is paid… in his ‘accounts receivable’… or may use it to pay the refinery that produced the gasoline. If he does this, he will assign the bill to the refinery, so that when the gasoline retailer makes payment, the payment will be made to the refinery, not the wholesaler.

This is the crux of the commercial credit system; goods are placed on consignment, a bill written and accepted, and payment made as per the terms of the contract… the bill. Notice credit is granted, goods change hands, but there is no borrowing involved. No borrowing, no interest charges, no collateral… simply trust that the retail gas station will indeed sell the gasoline delivered, and use the proceeds of retail gas sales to pay the bill when due. The bill thus created can circulate, that is clear credit… make payments. Such a bill, one that circulates, is called a Bill of Exchange.

Suppose the retail gas-bar makes a profit of 8% on gasoline sales, and the prevailing interest rates are 4%… reasonable enough assumptions under normal economic circumstances. The retail gas-bar owner has three choices to fund inventory; use bank credit i.e. borrow the funds; use his own capital; or work with ‘trust based’ credit. Today, most retailers except fringe operations like street vendors, and ‘vertical’ transactions within one industry like petroleum products, have only the first two choices available to them.

To make an 8% annualized profit, the gas bar owner will make a 2% profit by re-selling the gasoline in ninety days; he then  buys another batch of 30,000 L… makes another 2% profit in the next 90 days… and repeats this four times a year. Four times 2% is 8%, the annualized profit. Now consider this; if the interest rate is 4% per annum that translates to 1% per quarter… the 90 day period that the 30,000 L must be funded. Isn’t this incredible; net profit is 2%, and cost of interest is 1%… half the profits go to pay the Bankster!

The second alternative is to fund the purchase with cash, the retailer’s own capital; this plays up the ‘you need money to make money’ rule spread by the Bankster… and yes, if the retailer has the cash, he can indeed fund the purchase… but then he falls prey to opportunity costs. The cash invested in gasoline inventory could have been invested in a bond that pays 4% annual interest income; so, the retailer is still hit.

With borrowed funds, he pays ½ his profit to the Bankster. With cash payment, the retailer loses 1/3 of the profit he could have made using the third option, trust based credit to fund the gasoline… and investing his own capital in something else. If he makes 8% on gas sales, and 4% on interest earned on his capital, that is a 12% per annum income on the $30,000; not bad at all, is it?

Now we start to see the benefit of ‘trust based credit’… cost of doing business drops drastically. Indeed, there are many enterprises… and job opportunities… that remain ‘in potentia’; they never materialize because the cost of doing business on a cash or borrowed funds basis is too high. These ‘phantom’ enterprises actually did exist under Gold, when all retail business not just the fringe ones took advantage of trust based credit. This is one major reason there was no structural unemployment under the Classical Gold Standard.

But really, we have just scratched the surface of the magical benefits of ‘trust based credit’, often called the Bills of Exchange system… or the Real Bills Doctrine of Adam Smith. The full vertical and horizontal circulation of Bills, the international BiIl market, the discount rate… these all depend on the free circulation of Gold and Silver coin. Much G’man and Bankster effort goes into suppressing Gold and Silver money, in order to suppress the Bill market… and to keep the world economy hooked up to the ‘vampire squid’.

Once the Fiat paper regime collapses and real money makes its comeback, circulation of Real Bills will again arise. Monetary debasement will be replaced by constantly increasing purchasing power of money. Structural unemployment and the dole will be replaced by full employment. Financial speculation will be replaced by real wealth generation.

I can hardly wait.

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Entrepreneurial Magic

If you have read my last few articles, you may be starting to understand the full value of Honest Money to society and to you and ME… but we have barely scratched the surface. The well hidden ‘magic’ of Gold money emerges only once Gold is in free circulation.

To understand this ‘magic’ and its effects on society, we need to look at a bit of history. Under the classical Gold standard, during ‘Peaceable Times’, major war was impossible. Not only that, but there was no such thing now known as ‘structural unemployment’.

Remember, the mandate of the Central Bank of the USA (the Fed) is to ‘fight inflation’ and to ‘fight unemployment’… but both inflation and unemployment do NOT exist under a Gold standard. The nineteenth century had neither inflation nor structural unemployment.

Both inflation (monetary debasement) and structural unemployment first have to be created… and then be seen as being ‘fought’ by our ‘Heroic Bankster’. Gradually dropping prices and full employment were the reality experienced under Gold. Inflation is the direct result of monetary debasement… and unemployment is the direct result of the destruction of the Gold Standard and its accompanying credit systems.

The Big Lie operating here is well entrenched in the collective; ‘it takes money to make money’. This statement is one that Mr. G’man and his corporate supporters want you to believe. After all, if it were true, then no one without any money could ever hope to make money… or could ever hope to compete with existing corporate players.

Furthermore, if it were true, then someone with no money but a desire to make money would be obliged to borrow… to the loud cheers of Mr. Bankster. If we choose to NOT believe this ‘Big Lie’, then we can easily see examples of people who make money… without money to start with.

Seemingly magically, it takes NO money to make money. Does this sound too good to be true? Sound like another Ponzi scheme? Well, no… in fact, using trust based ‘commercial credit’, it is laughably simple to make money with no money… small entrepreneurs in poorly ‘regulated’ i.e. uncontrolled, free and voluntary markets do so even today.

To bring this home, suppose you lose your job as the economy crashes, but you are ambitious and instead of begging for handouts, either on street corner or from the G’man ‘welfare’, you want to start a business and make a living without having a traditional ‘job’. If you believe the Big Lie… ‘It Takes Money to Make Money’… you will never even start. If you see through the lie, you can start a small business and succeed.

During the last session of the New Austrian School of Economics in Madrid, Spain, I was eye witness to just such entrepreneurial ‘magic’. With the financial crisis at hand, the streets of Madrid had many beggars clinking their cups for handouts, many homeless people sleeping on the streets, and many other signs of poverty. However, primal entrepreneurship also showed up.

Rain started to fall, and in a matter of seconds there were street vendors crying out, shouting ‘umbrellas for sale’… to an appreciative clientele. Now where did these entrepreneurs come from, and where did the umbrellas come from? Street vendors do not have money to buy and hold a stock of umbrellas; nor are they employees of conventional retail outlets; they are simply entrepreneurs, who disdain the dole… and who are eager to earn a profit.

How do they get inventory, if they have no money and are not store employees? Simple; through credit based in trust. The umbrellas are on consignment from the wholesaler; the street merchant will sell what he can, return the unsold units… and pay for what he sold. He will make a profit on umbrellas he sells. After all, his overhead and his costs are zero… except perhaps for some wear on his shoe soles!

Who benefits? Of course, the street vendor benefits; if he manages to sell umbrellas, and make a profit. Also the wholesaler benefits; he could not have made these sales without giving his umbrellas out on consignment… without giving his trust to the vendors. Finally, customers benefit; caught in a sudden rainfall, many people are glad to buy an umbrella just when they need one… without having to hunt for a retail store in the rain.

But what about our G’man and Bankster? Do they benefit? Mr. G’man does not; the vendor is not ‘licensed’ or ‘authorized’ to sell umbrellas… and thus pays no protection fees. Mr. Bankster does not; the vendor never borrows money, so pays no interest.

If selling umbrellas was not such a fringe activity, Mr. G’man would undoubtedly have set up the framework for ‘regulating’ the sale of umbrellas… and tapping into the value created by the vendors like the true parasites they are.

Can you not taste the propaganda? ‘Studies’ released by mainstream media showing that umbrellas are dangerous; hundreds of people get hurt by an umbrella every year… ‘Studies’ showing that umbrellas are ‘unsound’… hundreds of umbrellas collapse in the wind every year. Safety standards, testing laboratories, bureaucracy, umbrella police… just like in virtually all ‘non fringe’ economic activity today.

Compliance costs would drive the vendors out of business… and perhaps force them to join the other beggars, clinking their cups for a handout. Consumers could run around trying to find an over-priced ‘regulated’, ‘authorized’ umbrella in the pouring rain. And who would foot the bill for supporting the newly created beggars?

The idea that credit can be based on trust seems incredible to us. But trust based credit is potentially enormous; before WWI, all consumer trade was funded by exactly such a trust based system of credit. No loans, no interest payments, no collateral… just free credit that benefits all commerce, all consumers, all entrepreneurs.

As the World economy falters, in the rest of the world like in Spain, Greece, Ireland, and on and on, we will all make a choice. Will we choose to be beggars, holding out our cups in the hope that someone puts a ‘dime’ in it… or will we choose to be entrepreneurs, who see opportunity to provide value to the markets… and proceed to do so? The future of the world economy depends on us making the right choice; trust based credit, vs. endless debt.

It was the destruction of the trust based credit system and its replacement by bank loans, by debt with interest payments to Mr. Bankster that led to structural unemployment… and to the dole. We will not solve our debt problems or our unemployment problems until we recognize this truth… and act on it. Just as the world needs Gold money, it needs Gold based credit… Gold is synonymous with Trust.

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