The Golden Triangle – Economic Nirvana?

My previous article, Golden Foot in the Door, suggested that if Gold coins and Gold bonds are in circulation, we are but one step away from Economic Nirvana;  the Unadulterated Gold Standard as the foundation of the world economy. Of course, the first two steps are not guaranteed; but if the new Gold Swiss Franc is adopted, and Gold Bonds are issued based on Sovereign Gold income, the third step to Nirvana is in reach.

So why is an Unadulterated Gold Standard ‘Nirvana’? Simply because all the abuses of the irredeemable paper money system are erased under the Unadulterated Gold Standard. This includes the original error… or was it original sin… whereby property rights to Money were curtailed by an early English law precedent. Set in the seventeenth century, around the same time the bank of England was chartered (big coincidence!) the ownership of money deposited in a bank demand deposit account was legally ceded to the bank.

The triangle analogy kicks in as the triangle is the most stable structural element; a three legged stool is stable and does not ‘rock’ or exhibit partial instability on uneven ground. If you add a fourth leg, it will become less stable. Of course, if you chop off one leg and try to make a two legged stool, stability will be lost in one plane… to say nothing of chopping off two legs.

The monetary ‘system’ in use today has only ONE leg! Talk about unstable, and talk about eternally ongoing, futile efforts to keep the balance of this poor damaged stool; constant manipulation of ‘money’ supply (printing), interest rate ‘twists’, bail outs, credit default ‘insurance’, etc. etc… ad infinitum. By contrast, a three legged stool is inherently stable; as is the unadulterated Gold Standard, the three legged stool of economics.

The one leg our monetary system rests on is the canard called ‘debt money’. In fact, even central bankers do not seem to know what money is; is it MZM, or M1, or M2, maybe M3…? Mr. Bernanke does not even admit that Gold is money… he calls it an ‘asset’. The truth of course is far simpler than he or his ilk make it out to be; Debt (or its flip side credit) is the exchange of a present good for a future good… and Money is that which extinguishes all debt (or credit)… period.

Truly it is a simple as this; money, that is Gold or Silver, is an item of positive value, a present good, which extinguishes all debt. Debt money is impossible… How could Debt possibly extinguish itself? A thing is either a debt note; a promise, a future good, two birds in the bush… or the thing is a present good;  Real money, a ‘bird in the hand’, something of positive value. There are no other possibilities; the concept of ‘debt money’ is just that, a concept… a nonsense concept that does not, cannot exist in reality… only in the fervid brains of Keynesian economists.

By clearly separating money and debt, we re-establish a two legged stool; a big step in the right direction, but still not quite there; we may have our Gold coin In circulation, real money, a present good item of positive value, and a Gold Bond, representing debt, that is future goods or promises of delivery of a present good in the future… but the third leg is still missing.

The way to reestablish the third leg is a bit more obscure, and hidden farther in the mists of time; after all, it was only about 41 years ago that money was finally removed from the system, and replaced by pure debt… under President Nixon’s default of the US international Gold obligations; the notorious ‘closing of the gold window’. The ‘third leg’ of the Classical Gold Standard was amputated just before WWI.

If you study history, the answer is easy enough to find; Adam Smith wrote about this many years ago… that is why this third leg is called ‘The Real Bills Doctrine of Adam Smith’… but the concept can be understood right here right now. All we have to do is look more closely at ‘Debt’… and we will see that there are in fact two distinct facets of debt; mixing up these two facets is just as deadly as confusing money with debt. The classical Gold Standard ‘failed’ and Great Britain went ‘off Gold’ after WWI mainly because of the failure to differentiate between the two facets of debt.

Close examination of credit shows that there are two aspects; there is credit applied towards fixed capital; for example machinery, farm land, orchards, oil wells, transportation equipment etc. There is also credit applied towards rapidly moving consumer goods in urgent demand; manufactured products, food stuffs, fuel, in fact anything that will be sold to the ultimate consumer in 91 days (one quarter of the year) or less.

Credit for financing long term fixed capital items comes from savings. The quintessential market for long term financing is the bond market. We are all pretty familiar with debt based on borrowing; the way the bond market works. The bond market is controlled by interest rates, and supported by collateral… bonded debt is NOT self-liquidating. This is a very important concept, and often misunderstood.

Consumer debt (borrowing) is clearly not self-liquidating, as the borrower will need to earn money to repay the debt. Commercial debt for capital investment is not self-liquidating either. This is not quite as obvious as in case of consumer borrowing, but is true nonetheless; money borrowed for the purchase of a machine for example will not be self-liquidating; the machine may earn enough money to repay the debt, but this is not certain; that is why borrowing demands collateral. If the machine does not make sufficient profit, the borrower will have to find another way to pay the debt; just like the consumer. If the borrower cannot pay, the collateral will cover any losses to the lender.

By contrast, Real Bills represent a form of self-liquidating credit quite distinct from ‘borrowing’. In fact, it is not fully correct to call this ‘credit’, as the word can be confusing. Better to call it clearing, or simply terms. In a commercial transaction, very few payments are COD; terms are part of virtually all sales. Only the poorest credit risk firms will have to pay COD; all with reasonable credit ratings will get 30 or 60 or 90 days net; terms that imply credit.

Bills or ‘invoices’ drawn against sales of consumer goods in urgent demand are the ‘fuel’ of the Real Bills Doctrine. Bills drawn on items in urgent demand will spontaneously go into circulation; other bills will not. Bills are self-liquidating; the upcoming sale to the consumer of the very item the bill is drawn against assures payment. No need for profit or earnings; the very fact that Bills are only drawn against urgently needed goods is enough to assure payment… and self-liquidation.

Real Bills drawn on real goods on their way to the ultimate consumer do circulate, thereby assuming a temporary but vital monetary role; they finance or ‘fund’ the production of much needed consumer goods… Real Bills entail no borrowing, no collateral, no payment stream, and NO interest rate. Instead, Real Bills are discounted; that is, they are paid in full on maturity, but trade at a discount that decreases linearly from the date of drawing to the date of maturity. Real Bills are the least expensive thus most efficient way to fund the production of consumer goods.

Most importantly, since bills are drawn on consumer goods, the funding for Bills relies on consumer’s propensity to spend; by contrast, interest rates on borrowing are driven by the propensity to save. There is no link between the two forces. Anyone with Gold earnings has three choices; hoard the Gold… as it is constantly, gently appreciating in purchasing power. Spend Gold on needed consumer goods, thus giving rise to new Real Bills… or ‘save’ the Gold, that is put it to work… if the interest rate being offered is sufficient to overcome the instinct to hoard.

There are the three legs of our Golden Stool; leg one is Money; fixed quantity, hard, stable, 80 plus years of mine supply on hand… and slowly appreciating as the economy grows ever more efficient. Leg two is the Gold Bond; sure returns, long term, a vehicle for savings suitable even for orphans and widows; bonds for saving, NOT for speculation. Leg three is the Real Bill; flexible, responsive to consumer demands, liquid enough to back Bank Demand Notes if such notes are in circulation, limited by physical constrains of the real economy.

This is the ideal, the Unadulterated Gold Standard; the Golden Triangle. Gold (and Silver) as Money, Bonds and Bills as the two other legs. So stable is such a system, that historically it survived for centuries… and even survived the artificial Government sponsored ‘demonetization’ of Silver in 1873… a loss of about ½ of total money in circulation!

But what of the panics and such, the so called ‘business cycle’ that seemed to plague the Classical Gold Standard? The cause of these effects is easy to discern; there was a fourth, artificially attached ‘limb’ that allowed indeed forced these cyclical instabilities to arise; this leg is called the ‘Fiduciary Component’. Fiduciary means trust, or ‘promise’. This component was the vehicle whereby excess credit was pushed into the system, by greedy bankers… and compliant governments.

I will discuss this ‘fourth leg’ and the invasion of property rights necessary to implement it in more detail in my next article. Stay tuned.

Rudy Fritsch

Editor in Chief

The Gold Standard Institute

About Rudy Fritsch

I was born in Hungary in 1947, and fled Socialist tyranny during the Hungarian Revolution of 1956. My family had lived through WWII and the consequent Hungarian hyperinflation, thus I have intimate experience with financial destruction. My Dad used Gold to buy our way out of Hungary. Paper money was as good as toilet paper. Later in life, during my studies of Austrian economics, I came to realize that only Gold could solve the Global Financial Crisis (which should be called the Global Monetary Crisis), just as Gold solved our otherwise insoluble problem of getting out of Communist Hungary.
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