Hey, been a long time since last post.

I use Explornet internet, and it is full of flaws. Cannot log in to my blog unless I go somewhere else. Any user who is thinking of using Explornet better check this out. Their service is nonexistent… have same issues for months, no remedy.

Anyways, here is next article;

 

Gold Standard, ‘ey? So, what’s in it for ME?

Really, I’m serious. I have published a lot of heavy articles dealing with important issues regarding Gold and the Unadulterated Gold Standard; articles about the big picture, about the mechanisms of the Gold Standard, about the history of Gold, about the economic impact of Gold circulation, etc. etc… but no articles about the effects of an actual Gold Standard on an actual, average person.

Well, this series of articles tackles this very issue. Why indeed should the average Joe or Jane, someone in the middle of the earnings range; the wage earner, the retiree, the new graduate starting their economic life… why should they be interested in Gold or a Gold Standard?

After all, Gold is for the rich, right? And isn’t Gold in the Central Banker’s vaults just a ‘tradition’? Isn’t Gold a ‘Barbarous Relic’? And surely, there is not nearly enough Gold in the world to replace the trillions of Fiat paper currency in circulation? And, if there was a Gold Standard, how would that affect ‘ME’…? The average ‘ME’ in the world has very little if any Gold… so introducing a Gold standard would not be fair to ‘ME’… would it?

Any time I start musing about the Gold Standard, I see a powerful, emotionally charged (for me) image. It is an image of my long departed father. Whenever my father recalled his youth, telling me about his adventures… and misadventures… as a young man in Hungary, he would inevitably end up reminiscing about the ‘peaceable days’… and every time he did, his eyes would take on a soft, far away glow; his features would become gentle, relaxed, indeed he looked like he was reminiscing about the Garden of Eden.

Well, as a young boy I was not sure what he meant, but the emotional impact stayed with me… understand that my father was not generally ‘soft’ or ‘relaxed’. Even so, I eventually came to understand that by ‘peaceable times’ he meant the times before the madness of ‘The Great War’, WWI.

Much later, after I studied Austrian economics and met Professor Fekete and attended his Gold Standard University Live, I came to understand even more; namely WHY pre WWI days were of such a magical quality, a magical quality never to be seen again… I learned that it was because before WWI the world economy ran on the Classical Gold Standard.

Imagine a world where your wages are paid in real, actual Gold and Silver coins… not scraps of paper subject to bankster and G’man whims ( G’man is American slang for all government… including corrupt, power seeking politicos, entrenched, uncaring bureaucrats, torturing secret service apparatchik…all of them ); but solid, real stuff that cannot be ‘printed’ at some crooked politician’s whim, real stuff that actually gains purchasing power over the years. Imagine that if you simply stash some of your wages in a pillow, and do nothing else… you will become richer every year.

Because that is what happens under a system of honest money; as the economy grows, as more productive technologies are created, the cost of producing, transporting, and retailing falls… so the price of everything slowly, gradually falls as well… and your wages and savings are worth more every year… without the need for a raise or a promotion… and without the need for some risky ‘investment’.

Imagine a world where you get to actually keep your hard earned money… instead of having it confiscated by G’man, by bankster interest charges, and most insidiously by so called ‘inflation’… more precisely, by ‘monetary debasement’.

Because that is our world under Fiat paper; prices of everything rise instead of falling, wages never keep up with price increases, and any savings you may be able to scrape up will be destroyed by the evil of ‘inflation’… but Mr. Bankster says ‘some inflation is good for us’… yeah, good for him and his bankster buddies… certainly not for the rest of us. He has a printing press… we don’t.

Imagine a world where war is very rare, because no G’man can afford a major war under Gold. Indeed, as the war clouds gathered before WWI, the pundits predicted that no major war could last more than a few months, because the combatants would run out of money… run out of Gold, that is. War is extremely expensive, both in wealth and in blood. The Gold Standard was sabotaged so the G’man could print endless paper currency to pay for the evil slaughter of WWI.

Because that is our world under Fiat paper; the G’man can afford war… so he thinks… because their bedfellows the banksters will simply ‘print up’ some more paper currency and lend it to the G’man… and of course hit ‘ME’ and you for the interest payments.

Indeed, if you look around, you see insane spending on the military, and wars on everything, everywhere. Our world is about as far from ‘peaceable times’ as you can possibly get. Destruction of humanity is but a button push away… and a psychopath has his finger on the button.

So, dear ‘ME’… would you prefer a world where you can accumulate real wealth just by earning regular wages, and saving some… or this Fiat world where you must run ever faster, work ever harder, ever longer just to ‘keep up’? Would you prefer a world where one wage earner can keep his family well fed, housed, clothed… or this Fiat world, where both man and wife must work ever harder just to ‘keep up’… while the children get indoctrinated in G’man youth gulag… er public school?

Would you prefer to live at peace with your neighbors, ‘live and let live’, while trading with them for mutual benefit; ‘let’s make a deal’… or would you prefer to keep our Fiat world, a world full of war, terrorism, tyranny, neighbor killing neighbor… a world where you should ‘kill your neighbor because if you don’t they may kill you first’? And vice versa?

If any of this gets your attention, I am glad. People must wake up, must see the truth instead of believing all the Big Lies they are told… and bring change to the world by living the change themselves.

In the next few articles, we will look more closely at some of the Big Lies that have been spread about Gold. We will address the concerns you may have about how a Gold Standard would affect you… and ‘ME’.

Rudy J. Fritsch

 

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Human Action or Human Folly?

It seems the ‘race to the bottom’ is picking up speed; the ‘race to the bottom’ in value of fiat currencies, that is. Conventional wisdom calls for a reduction of the (relative) value of a currency, in order to ‘support export industry’. The new government of Japan, headed by Mr. Shinzo Abe, was elected on that very ‘platform’; the intention to deliberately devalue the Japanese Yen, supposedly to ‘support’ Japanese export industries.

Indeed, this theme is very common; all countries on fiat currency… that is, all countries… are using devaluation to ‘support their export industries’, and their economies… indeed, conventional wisdom says that Greece is in trouble because it has no currency it can devalue, as it uses the Euro… and power to devaluate the Euro is not in the hands of the Greek government, but in the hands of the EU… and Germany.

It is obvious that devaluation eventually fails, as any currency being devaluated against… like the Yen vs. the USD… will lead to a counter devaluation; the USD vs. the Yen… and so if the race to the bottom continues, it must eventually lead to zero currency value… of all fiat currency. If you are on the road to Hades, and you keep walking, guess where you end up.

Nevertheless, this insanity continues, in the belief that devaluation gives an edge… if only temporary… to the country devaluating. Politicians never consider the future, only the next election… and a temporary devaluation is a typical ‘kick the can’ into the future action so loved by politicians.

The real question is this; does devaluation actually do what it promises to do, that is ‘support the economy’ by ‘supporting export industries’? This deserves a closer look… and a look at the causes, not the symptoms of loss of export competitiveness and economic decline… and the true consequences of devaluation.

Let’s do some simple numbers; simple like 2 + 2 = 4… and see where the truth is. Is truth found in ‘conventional wisdom’, or in the position taken by New Austrian economists? The New Austrians’ position is simple; currency devaluation is like soldiers heading into battle, but first throwing their bullets and ammunition away, because its ‘too heavy’…!

In the modern world, all economies are intertwined; a car manufactured in the US for example, is really mostly assembled from components manufactured off shore; components like the engine, gearbox, accessories, etc… Not more than 20% to 30% of the final value of a car ‘made in USA’ is created locally, that is around 70 % to 80% of the value is imported.

Some industries have more local value added; but even something as apparently local as farming has much value added from offshore sources; diesel fuel, chemical fertilizers, capital equipment like tractors and combines, etc.

For the sake of keeping the numbers easy, let’s assume that 50% of all value is local, and the balance is imports… and get on with it. Suppose that we consider 100 Monetary Units (MU) of an export product; these MU’s could be thousands of dollars, millions of Euros… whatever, the results are the same.

If 50% of 100 MU export is local value, then 50 MU worth must be imported. So, the sale of 100 MU of goods results in 50 MU of imports, and 50 MU of local salaries and wages. Remember, all costs are salaries and wages; the raw materials, whether ore for mining, tress for lumber, grains or whatever are freely given… all cost is in extraction, production, transportation… and parasitism like taxes, regulatory expenses, overhead, bureaucracy etc.

So, assume the export industry is becoming less competitive… for whatever reason; less stuff gets sold, less salaries are paid out… the economy is shrinking. What to do? Well, the first idea is to simply lower the selling price; this is the typical knee jerk reaction to falling sales. Discount it, put it on sale, give a special… this should restore sales and competitiveness, no?

Suppose we discount by 10%; this should give sales… or ‘competitiveness’ a kick. The problem is, if we discount our exports by 10%, even if sales return to previous levels, we will sell the same quantity of stuff as before, but will only get paid 90 MU… and our costs to buy the 50% imports stays the same, at 50 MU; we end up with local value added of only 40MU… a 20% discount. Ouch.

Other things being equal, local wages and salaries must decline by 10 MU… that is, by 20%. This is very painful; labor unions, employees, worse yet voters will be outraged… why, they may even vote the rascals out… can’t have that now, can we?

Let’s try plan B; instead of discounting, let’s devalue. If we devalue the local currency by 10%, our export product will in effect be 10% cheaper, (for offshore buyers) just like with the discount; our sales should rise, just like before. So far, so good… but what are the ‘unintended consequences’?

Why, first, the import component will now cost 55 NMU (New monetary unit) which has the same value as 50 old MU’s had. If we sell the same product for 100 NMU (rather than 90 OMU), then we need to spend 55 NMU (rather than 50 OMU) for imports, and we only have 45 NMU (the equivalent of 40.5 OMU) for local value added.

Wow; for the same sales as before, instead of getting 50 MU like before the evaluation, we only get to keep 40.5 NMU; we are about as badly off as if we simply discounted 10%. Under a 10% discount, our local value added is 40 OMU… well, at least we are 0.5 ahead… or are we?

What if the locals buy offshore stuff, like say Taiwanese TV’s with their ‘NMU currency’; remember, all imports are now 10% more expensive, as measured in old monetary units. In effect, the local standard of living took a dive. Or, ‘inflation’ took an uptick.

By golly, if this is the case, why do we devalue? Is it possible that our ‘leaders’ don’t give a rat’s ass about how much the real economy suffers… or about the standard of living of citizens, as long as they can keep their power, their perks, and their legal immunities?

Of course, this is the bottom line… devaluation is a sneaky way to hide a loss of productivity, to hide a drop in standard of living… and to find ready scapegoats to blame the ‘inflation’ on; greedy capitalists, speculators, the usual suspects.

New Austrians understand this situation clearly; that is why we consider devaluation to be sheer insanity… and the equivalent of throwing away your bullets before the battle. After all, if devaluation actually did some good, then Zimbabwe should be the most competitive, highest standard of living country in the world… and not the total economic disaster it in reality is.

If devaluation is not the way, what is? Simple; increase productivity, and achieve real competitiveness. Cut ‘overhead’ by cutting the parasites… and accumulate real capital. Real capital means more efficient machinery, more efficient infrastructure, inexpensive energy and a more productive, better educated work force.

Germany has some of the highest hourly wages in the world, yet their unit labor costs are the lowest… because of high capital investment. This is the way it must be, this is the law of economics; savings must come before investment. Debt does not replace real capital; in fact, excessive debt simply leads to capital erosion, and if carried farther, to capital destruction.

Fiat currency is indeed subject to devaluation… and thus capital destruction… but Gold and Silver are not; hence the term ‘honest money’. This is why the world must put Gold and Silver to use as honest money. With the fraudulent practice of devaluation eliminated, capital destruction can be replaced by capital accumulation, and the ongoing drop in standards of living reversed.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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Financial Cliff, or Lemming Leap?

We keep hearing that the US economy is heading for a ‘financial cliff;’ the confluence of a congressional mandate to cut spending and raise taxes. This ‘cliff’ was created… or at least promoted from financial ‘hurdle’ to financial ‘cliff’… by the last, desperate attempt of the US Congress to ‘kick the can’ of fiscal responsibility down the road one more time. In other words, this is strictly a man-made ‘cliff’; and ‘going over’ the cliff is simply a euphemism for going ‘cold turkey’ on deficit spending.

Of course, the very same Congress can now annul these ‘laws’, pass new ones, and attempt to ‘kick the can’ just one more time. Can the ‘can’ withstand another ‘kick’… or is this when the can… that is, the real US economy, shatters? Time will tell, but clearly what cannot continue will not. Von Mises called this situation the ‘crack up boom’… the boom will come to an end, sooner or later, voluntarily or not. What cannot continue will not continue.

The question to be answered is whether to ‘go over’ the cliff, that is face financial responsibility now, or avoid responsibility and grow the cliff ever higher by continuing the ‘borrow and spend’ madness. The subject of madness brings us to lemmings… do lemmings actually go mad, and hurl themselves over cliffs in a suicidal frenzy, or is this just anthropomorphism?

Another, more materialistic take on lemmings is the recognition that lemmings are simple creatures, with a low eye level, and as they run in packs they do not, cannot see very far ahead. Indeed, those back in the pack see only lemmings directly in front of them; and if the pack leaders inadvertently run over the edge of the cliff, the rest of the pack simply follows them over, unawares, to their collective doom.

Do we as humans go collectively mad, and hurl ourselves over the ‘cliff’ in a suicidal frenzy, or are we simply, blindly following our ‘leaders’ to our collective doom? Indeed, does the reason why we seem to go over the cliff actually matter? The answer in either case is the same; abandon collective madness, and retrieve sanity one by one, on an individual basis… look ahead, with wide open eyes, see the looming cliff… and step out of the mad, collective rush to destruction.

The salvation of humanity resides in individual decisions, made in a rational, thoughtful manner… not in a collective, emotional frenzy. As more people get conscious and individually take measures to avoid the cliff, fewer will remain to collectively barrel over the edge. Indeed, if somehow we could all wake up and see what’s coming and all take action to avoid destruction, there would be no one left to actually take the plunge!

The action each individual must take to avoid the cliff will depend on the circumstances of that very individual, but the crux of the matter is the same; avoid dependence on the collective, as the collective is mad. The collective is rushing, seemingly unawares, ever faster, towards the cliff…

Specifically, each individual must take responsibility for themselves… by avoiding the Fiat world as much as possible. Instead of accumulating more debt in the form of Fiat paper… thereby growing the cliff taller… accumulate more real wealth; Gold and Silver easily come to mind, but so does a lot of other real stuff; barter goods, land, food supplies, fuel, clothing, etc. The kind of stuff any Boy Scout would understand to hold in preparation for a survival scenario.

Above all, avoid the collective madness of borrow and spend. Borrow and spend is the very process that built the cliff in the first place, and continues to build it ever higher and more lethal.

Rudy J. Fritsch

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Economic Stability

To paraphrase F. A. Hayek; an economic system based on central planning cannot possibly work, because any central planner would need to have information about all transactions going on in the economy… as well as ‘intelligence’ to use this torrent of information to make economic decisions… and such knowledge and such ‘intelligence’ is impossible.

Unfortunately, the connotation here is that if only a central planner did have sufficient (all!) information, and endless ‘intelligence’ (computing power) then perhaps central planning could work… at least in principle. This leads to ever more ‘information mining’ in the (utopian) belief that central planning could work if only…

Ludwig von Mises went beyond this in his thinking. Mises believed that central planning is impossible, even in principle; because no matter how perfect the planner’s information or intelligence may be, no planner can account for human action based in free will. Or, to put it simply, no one can predict how humans will react… therefore no central plan can possibly work.

I must agree with Mises on this; even I do not know what I will do tomorrow… never mind a central planner trying to figure this out for all Earth inhabitants! But I suggest that the reality we live in today goes beyond Mises; that is, even if a central planner could know everything about all transactions, and even predict with 100% accuracy what each and every one of the ~7 Billion economic ‘actors’ on this planet will do, central planning would still not work.

The reason is simple; there is no mechanism in existence to transmit the central planner’s intent to the markets in a timely manner. Suppose Bernanke and Draghi were truly honest, and had the best interest of all Earthly inhabitants at heart, and knew exactly what policy is best for all… (OK, I know am asking for a lot… but just assume this for arguments sake) they still could not implement any such policy.

In the last articles on Real Bills and Interest vs. discount, we saw how the discount rate differs from the interest rate, and how fundamentally different forces determine interest rates and discount rates. We saw how shortages can be resolved through the mechanism of the discount rate, without involving the price structure. This understanding is of fundamental importance.

The key is that the discount rate responds virtually instantly to any disturbance of the dynamics of the economy… while interest rates respond much more slowly. Furthermore, a change in interest rates will only take effect in about 18 months.

This makes sense; interest rates are tied to mostly long term debt, like mortgages, bonds, etc… and these markets do not, indeed cannot respond quickly. Debt contracted at previously existing rates has to be retired, and this takes time. By contrast, the discount rate can change on the proverbial dime. Indeed, all Real Bills will be retired in not more than 91 days; the half-life of the bill markets as it were is only 45 days. The half-life of the bond markets is measured in years.

So, why is this a problem? Why can’t control of interest rates be used to control the economy? Quite simply, the economy is a dynamic system… this is true without any doubt. To control a dynamic system of any description, the control mechanism or feedback loop must respond significantly faster than the natural response time of the system being controlled. This is servo engineering 101.

To see how this works, consider a simple, familiar servo system… a house thermostat connected to a furnace and an AC unit. The system being controlled… the temperature of the house… has a response time measured in hours. The house tends to cool off at night, and to warm up with the rising sun.

The thermostat and the heating/cooling unit responds in a matter of minutes; at night, as the house starts to cool off, and before much change of temperature takes place, the furnace starts to produce heat and restores the temperature to the set point… whereupon the furnace shuts off, and the input of heat tapers off in a few minutes… stability is achieved.

Same thing during the day; if the temperature starts to rise, the AC kicks in, and again stability is achieved. The key is that the furnace and AC respond quickly… much faster than the speed with which the house temperature changes.

Now, suppose we have a much slower responding heat source or sink; say this source takes hours to respond. Now the situation is much different; the house starts to cool off, the thermostat kicks the heat source in… but nothing happens for hours. The house keeps getting colder and colder.

Finally, just before sunrise, the heat source finally starts to deliver heat. The house starts to warm up… just as the sun also starts to heat the house up. Soon the thermostat shuts off the heat source… but the delay of several hours means that heat keeps being added… the house gets hotter and hotter…

No need to talk about the cooling effect, the same problem arises; heat is added when it is no longer needed, and cooling comes on when heat is needed… the system is out of phase, and unstable. Not a good way to try to manage the house temperature.

What applies to the heating system also applies to all dynamic servo systems, say like the power steering in your car… What if there was a several second delay from the moment you started to turn the wheel, to when the servo ‘kicked in’… and another several second delay before it would ‘kick out’? A crash about to happen, no?

Same principle applies to robotic arms, or any other servo system… the control circuit must respond fast enough, or the system will be unstable… basically out of control. Well, guess what? Our economy is out of control!

The interest rate mechanism simply cannot respond fast enough to control the dynamics of the economy. It responds slowly, leading to out of phase response, and consequent instability. In contrast, the discount rate does respond quickly… fast enough to avoid causing instability in the economy.

Furthermore, the discount rate is set by market participants… not by a central planner, whose plan is certainly not in the best interest of the world population… but is in the best interest of the planner and his bosses.

So, does this mean the Hayek was wrong? Does it mean the von Mises was wrong? Not at all… just that their thinking did not go far enough. It should be clear that central planning cannot work… and that only a system that incorporates the discount rate mechanism can work. In order for the discount mechanism to exist, Real Bills must be in free, unhampered circulation… and for that to happen, Gold money must also be in free circulation. Real Bills will not, can not circulate without Gold money.

To restore dynamic stability to the world economy, Gold must be in circulation… and Real Bills must also be in circulation, as the vital clearing mechanism of the Unadulterated Gold Standard.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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Chinese Paper Torture

The latest folly from the ‘powers that be’ can be surmised from two recently floated ‘trial balloons’. The first balloon is a quote from The Economist; “The idea that central banks might cancel their government debt, or restructure them into zero coupon debt, is gaining traction.”

The second balloon was alluded to by Mr. Michael Snyder, who wrote a feature article titled What if there was a financial system that would eliminate the need for the federal government to go into debt, that would eliminate the need for the Federal Reserve, that would end the practice of fractional reserve banking and that would dethrone the big banks?”

This loaded question was inspired by an August 2012 IMF “working paper” titled “The Chicago Plan Revisited. The Chicago Plan envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan:

(1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.”

So, what does this mean in plain English? The crux of the matter is this; “In this context it is critical to realize that the stock of …money newly issued by the government is not a debt of the government. The reason is that fiat money is not redeemable, in that holders of money cannot claim repayment in something other than money. Money is therefore properly treated as government equity rather than government debt”

The government would no longer borrow ‘money’… but simply issue it directly. And, the ‘value’ of this ‘money’ would be treated as an asset…  an equity… rather than a debt the government owed to society, to the tax payer. The very pretense that government would ever pay back what it borrowed would be dropped; after all, if it doesn’t borrow anything, just outright steals it, then it no longer has to pay back what it stole… does it? And just what is the government stealing? Why, everything that it buys with its totally fraudulent bits of colored paper called ‘fiat money’!

Historically, as J. P. Morgan declared, “Gold is money … and nothing else”. Later on, paper promises pretended to being ‘money’… and for a while, the promises were kept… the paper promises were redeemable in Gold. Later this promise was reneged on; paper was no longer redeemable in Gold… but rather was ‘backed’ by Gold… at least some of it was backed.

Then paper was no longer backed by Gold… but only by the ‘full faith and credit’ of government. The implicit promise was that the paper would keep its value… of course, this promise was not kept either. Now, with this latest deceit, there is not even any ‘backing’… the government will simply print ‘money’ as it chooses, and that is the end of it.

To put it bluntly, the only thing backing this new form of deceit will be government power; thugs in jack boots with guns. The last illusion is stripped away; no more hiding the ‘money creation’ behind the curtains of the Fed… just a declaration of outright force.

So, why is this editorial called Chinese Paper Torture? Simple; Chinese governments have gone down this path many times before, declaring paper ‘chits’ to be money while gathering Silver… the real money of China for ages… into the current emperor’s  vault. This theft inevitably led to war and destruction, to the fall of dynasties. This destructive scenario played out so often throughout Chinese history that the Chinese passed laws outlawing the use of paper money altogether.

Of course, this Chinese law is presently not in effect… or is it? Is Chinese money… Silver, and lately Gold… simply kept hidden by the inscrutable Oriental? Simply kept hidden, while Western paper currencies and paper economies collapse? It would be sweet irony indeed.

When Marko Polo returned from his world girdling travels, he brought a gift from the Chinese; a bunch of paper money. The impact of this ‘gift’ was amazing; it was hardly conceivable that the Chinese actually believed that these bits of fancy paper were money. It was decided that this was the work of the Devil. The authorities turned around and burned the ‘gift’.

In China, power ruled over money; what the emperor decreed to be money, was money… backed by the emperor’s soldiers. In the West, at least till today, money rules over power; what the bankers decree to be money, is money… and the banker’s money pays the soldiers. Perhaps this is about to change; and perhaps we are going to be subject to Chinese Paper Torture.

Rudy J. Fritsch

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The Slippery Slope

With about 1.6 Billion US dollars of customer’s money ‘disappearing’ in the MF global bankruptcy, you may be wondering what is going on… and exactly where is the world heading. These are good questions, but to answer then we need more than a sound bite… we need to examine a particular bit of world history… the history of the destruction of the Classical Gold Standard.

The Classical Gold Standard as practiced during the nineteenth century, while less than perfect, was a thousand times better than the ‘system’ of fraud and theft that we are seemingly stuck with. The Classical Gold Standard helped to propel the world economy to unimagined heights, bringing unprecedented prosperity to millions, and helped to make the nineteenth century the most peaceful century mankind has ever experienced. It has taken the best part of a century to destroy this Gold Standard.

The most devastating blow… but not the first… was delivered on the eve of WWI… the Great War. As war clouds gathered, the future combatants called their loans, to fill their vaults with Gold… but even vaults bulging with Gold would not be enough to fund a protracted war. Indeed, pundits of the day were predicting that any possible war could not last more than a few months at worst, as the combatants would run out of money.

All governments knew this… and their choices were limited; raise funds through war taxes, borrow by issuing war bonds, or… or what? At the time, Gold was money, and bank notes were clearly recognized as just that; ‘notes’, that is IOUs redeemable into Gold money. They came up with a truly insidious plan.

New ‘legal tender’ laws were passed, decreeing that henceforth the IOUs themselves were money, legal for all payments. Think about this for a minute. Gold is a present good, just like an apple, or sugar, or oil, or any other real, physical commodity… with the only difference being that Gold is a monetary commodity, not a commodity that is directly consumed. Imagine passing a law that decrees that an IOU for an apple, an IOU for sugar, or an IOU for oil  is now the apple itself, or the sugar itself, or the oil itself. Is this insane or what?

Insane or not, the laws were were passed, first in France then quickly thereafter in England and Germany. To help mislead people of this grand larceny, Gold remained in circulation along with the new Bank Notes, the so called Legal Tender paper… but not for long.

To top this off, Real Bill circulation was shut down. There is no space here to give justice to the vital importance to the circulation of Real Bills to the viability of a Gold Standard, but appreciate that multilateral trade underpinned by Real Bills circulation is so efficient and productive that total volume of world trade before WWI was not surpassed until the nineteen seventies… nearly sixty five years later… three human generations; this in spite of enormous growth in the world economy. Simply, Real Bills are the commercial clearing system of the Gold Standard, and no Gold Standard can possible survive without a fully developed Bills market.

This double whammy was to prove to be fatal to the Classical Gold Standard. After the Great War ended, Britain ‘tried’ to get ‘back on Gold’… but without resuscitating the Real Bills market. Furthermore, the attempt at going ‘back  on Gold’ was made without devaluing the Pound… to account for the enormous number of Pound notes printed to finance the war.

Returning to the pre-war ratio was considered highly deflationary. This is more of a red herring than anything else, designed to draw attention away from the real cause; the failure to allow Real ill circulation to resume.

The effort was doomed to failure, and indeed it did fail. Great Britain went ‘Off Gold”. Soon the Us followed… and to rub salt into the wound, President Roosevelt confiscated all the Gold held by US citizens, then a few months later devalued the Dollar from $22 per once to $35 per ounce.

This was the death knell of the Gold Coin Standard, the Classical Gold standard of the nineteenth century. The world retreated to the so called Gold Bullion standard, where only large entities were entitled to hold or trade Gold. No ordinary citizen was allowed to do so. The power of Gold was concentrated into the hands of an ‘elite’ minority, while the large majority had to be content with irredeemable paper… IOU nothing bank notes.

After WWII, the carnage continued. The Bretton Woods system was brought into play, whereby only the US Treasury was entitled to hold Gold, supposedly to ‘back’ the US Dollar… and the US Dollar was used as a reserve to ‘back’ local currencies, such as the British Pound and the French Franck. Gold was still in the system, but farther and farther away from the people. The concentration of Gold… and of monetary power… continued unchecked.

The last nail in the coffin of the Classical Gold Standard was delivered in nineteen seventy three, by President Nixon. By ‘closing the Gold window’, or more accurately by reneging on the international Gold obligations of the US just as Roosevelt had defaulted on the national Gold obligations of the US government, the last official link to Gold was cut. The whole world was now officially ‘off Gold’… and ‘on Fiat’.

Mind you, WWI was not the first attack on the Gold Standard by any means. The demonetization of Silver, the change from a bimetallic standard to a Gold only standard was such an attack… although at first glance this seems contradictory. After all, should not removing ‘competition’ to Gold not make Gold supreme? The answer is not by any means. Demonetizing Silver meant that about half the money in circulation was suddenly removed. This blow to the monetary system was far more devastating than the attempt by Britain to return to Gold at pre war Pound parity… yet the system survived, although not without unnecessary stress.

The only reason it survived is that Real Bills circulation was not destroyed when Silver was demonetized. Real Bills continued to function unimpaired, fulfilling their role as the clearing system of the Gold Standard… and after a brief deflationary episode, the Gold standard continued to soldier on.

But this ‘crime of 1873’… the year that Silver was demonetized… was by no means the very first blow to the Gold Standard, the very first blow delivered against honest money. The first blow came early, before the Gold Standard was even fully established. The first blow was a legally sanctioned violation of money ownership; a violation of property rights.

Judgments were made in British jurisprudence, and legal precedents set, that money ‘deposited’ in a bank account was no longer the property of the depositor, but somehow became the property of the bank. This is another incredible farce of law; it is as if the furniture you take to a warehouse for safe keeping is deemed to suddenly become the property of the warehouse!

Of course, once the bank acquires ownership of the money, IT decides what to do with it… like using demand deposits to buy high yielding long term bonds… the notorious practice of borrowing short to lend long. As if the warehouse owner decides to lend out your furniture for his own profit, or trade it for some other stuff.

This is where the very first cracks appeared, the vulnerable spot where the shenanigans begin. The customer is disempowered, and the power over his money… and the power inherent in his Gold… is transferred to the banking system. The so called business cycle, in reality a credit cycle, is put into motion by the fraudulent credit thus made possible. If the depositor decides to withdraw his money, the money is simply not there… having been used to buy a high yielding long term bond… and the run on the bank begins.

So where are we today? The cancer of property rights invasion that first disturbed the inherent stability of an unadulterated Gold standard, a Gold standard where property rights and contract law are sacrosanct, is metastizing.

First came the perversion of declaring that the Bank owns and has rights to dispose of deposits as it sees fit, not as the rightful owner wishes. Next, the abomination of decreeing that an IOU for something is the thing itself… followed by outlawing citizens from even holding Gold…. and then, taking Gold completely out of the system.

Today, the speed of slippage down the slippery slope towards Hades is increasing rapidly. Mf global, the large international futures clearing house recently went bankrupt, and about 1.6 Billion dollars of customer property accounts in the form of futures contracts from ‘segregated’ customer accounts simply ‘disappeared’. The ‘furniture’ you took to the warehouse for safekeeping was not returned to you when the warehouse went bankrupt… but given to creditors, along with the warehouse itself. The creditor in this atrocity was… surprise… a ‘too big to fail’ bank, namely J.P Morgan.

Moreover, a US federal judge ruled that ‘yes, the value disappeared, but there was no criminal intent, just chaos’… and so Mr. Corzine, the CEO of JP Morgan, is innocent. Right. In a world of computerized audit trails, where every penny transaction is tracked with Argus eyes, $1,600,000,000 simply ‘disappears between the cracks’! If you believe that the ‘honorable judge’ made a fair and honest judgment, then I suggest you go out and make a fair and honest offer to buy the Brooklyn Bridge.

So what is next? Could it be that the rumors of the upcoming demise of Morgan Stanley are more than just rumors? Could Morgan Stanley be the next Mf Global? Is it be possible that after the violation of property rights to money, after the violation of property rights to futures contracts the violation of property rights to equities is next? Would anyone be shocked if this rumor comes true?

Bah. Before any honest money system becomes possible, the invasion of property rights must be reversed. The very first property rights invasion that started the slide towards Hades must be reversed. Only then will it become possible to resolve the Global Financial (Money) Crisis, instead of constantly making it worse.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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The ‘Remonetization’ of Gold

Much ado is being made of the so called ‘remonetization’ of Gold; the U.S. Republican Party even has a ‘plank’ in its ‘platform’ calling for an ‘investigation’ of a possible re-introduction of Gold to the U.S. monetary ‘system’… bah, humbug.

This so called ‘remonetization’ is a pack of lies; you can no more ‘remonetize’ Gold than you can ‘rehydrate’ water… nor ‘demonetize’ Gold or ‘dehydrate’ water. J.P Morgan knew exactly what he was saying; “Gold is money, everything else is credit.”

Reality is that various countries over the years ‘went off Gold’ and had to ‘go back on Gold’ after their economy was humiliated. Now the whole world has to start to ‘go back on Gold’… but there is a big difference between a single country inflating like mad… and the whole world doing so. There are no ‘rich cousins’ left to bail out the poor losers. The whole world is now a looser.

Mind you, enemies of Gold are fighting even this fake ‘remonetization’ tooth and nail; the first ‘tooth’ being that hoary old Gold myth, Gold Myth Number One… that there is not enough Gold to allow us to go ‘back to the Gold standard’.… This myth has resurfaced innumerable times, in the belief that if the lie is big enough and repeated often enough, people will start to believe it.

In reality, there is plenty of Gold, far more than needed to run a world wide Gold standard. Gold has the highest stock to flow ratio by far of any commodity, or any other precious metal, except Silver.

Stock to flows is a measure of how much exists in usable form, vs. how much new stock is acquired (mined) in one year. For Gold this is eighty years…! It would take eighty years of mining to double the current stock. Silver is a close second… but for all other metals, grains, crude oil etc. the stock to flows is measured in days or at best weeks, not years.

This is a fact… and the only reason that Gold and Silver have such huge stocks is because they are money, thus they are hoarded… and have been hoarded for thousands of years. Other commodities are simply used up, and accumulating a multi-year hoard is not only unnecessary, but would prove very expensive as well. Such huge supplies of any commodity -except money- would drive its price close to zero, making a huge hoard virtually worthless.

Another fact is that the British Empire ran the Gold standard during the nineteenth century on 150 to 200 tons of Gold. This number can be found in the records of the Bank of England. By comparison, there are at least 160,000 tons of Gold available today… far more than would be necessary to run a Gold standard.

The next fact is that today Gold is valued far too low… vs. Fiat currencies… and market forces will quickly establish the true value –or more correctly purchasing power- of Gold, if market forces are allowed to act and not hindered by government interference.

Finally, be clear that the Gold Standard Institute does not suggest that we go back to the Gold Standard as it was practiced in the nineteenth century; while this Gold Standard was infinitely better than the monetary ‘system’ we have today, it was far from ideal. TGSI proposes that the world adopt an Unadulterated Gold Standard, one that does not have the (ultimately fatal) flaws of the Classical Gold Standard.

Rudy J. Fritsch, Editor in Chief

The Gold Standard Institute

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The Apotheosis of Real Bills

In Interest vs. Discount, we saw that the formation of the discount rate is radically different from the formation of the interest rate. To clarify this, and to examine the importance of this difference, we first follow a very simple, indeed embryonic example of a Real Bill used to clear credit; an example first given by Professor Fekete.

Consider the sequence of production of a highly marketable and desirable consumer good… bread. The production sequence involves four ‘protagonists’… or human ‘actors’; the grain farmer produces wheat, the miller turns wheat into flour, the baker makes bread from the flour… and the consumer buys bread… and consumes it.

In a C.O.D. or ‘100% Gold’ economy, money (Gold) has to change hands three times; once when the miller buys wheat, once when the baker buys flour… and one more time when the consumer buys bread. Thus, as Professor Fekete puts it, the Gold supply has to be ‘invaded’ three times, or to put it another way, the velocity of Gold… how many times Gold must change hands… increases as consumption picks up. Gold needs to be kept on hand to fund three transactions.

By contrast, once Real Bills are in use, only the baker-to-consumer transaction commands Gold; the other two transactions involve commercial credit, and are cleared by the Real Bill drawn on the baker. Instead of the miller having to use Gold to buy wheat, and the baker having to use Gold to buy flour, the Real Bill is used to make payment. The Baker’s bill pays both the miller and the farmer… only small change is used to account for mark up. On maturity of the Bill, the credit granted to the miller by the farmer, and the credit granted to the baker by the miller… are extinguished by the consumer’s Gold coins.

The Gold supply is only ‘invaded’ once instead of three times… a great increase in the efficient, economical use of a scarce and valuable resource, Gold. The velocity of money is reduced… whereas without Bills, the velocity of money must increase as consumption increases, unless there is an increase in the quantity of Gold available for consumption and production purposes.

The discount rate in this scenario is set by the desire of the baker to pre-pay his Bill… if offered a sufficient incentive; a sufficient discount… balanced by the desire of the Bill holder for cash Gold rather than Gold in the future. This is a question of liquidity preference; with booming sales, the baker has plenty of liquidity and will accept a small discount. With slower sales, he is less liquid, and will demand a larger discount before agreeing to pre-pay his Bill.

Notice this scenario assumes that the baker has no choices other than to hold cash Gold, or to pre-pay his Bill. Once there is a fully developed Bill market in existence, this assumption is no longer valid. Instead of having to hold cash Gold, the baker will be able to hold Bills… Bills of other trades, Bills of various maturities and denomination; whatever Bills he deems best suited to his purposes.

Under this new scenario, if consumers have an increasing propensity to spend, the baker… and retailers in general… will buy Bills with the incoming cash. This buying will tend to drive up the price of Bills… which is the same as driving the discount rate lower… just as in the bond market, buying pushes up prices and pushes interest rates down. If consumers spend less, retail merchants will buy fewer Bills, pushing Bill prices down… and the discount rate up. This is the same result as in the simple, embryonic state without a fully developed Bill market.

So, where does all this take us? So what if the discount rate is driven by spending? How does the economy benefit? To see the magic of the Bill market in operation, let’s take a typical market scenario and compare how it plays out under Bill circulation, vs. how it plays out today, with the Bill market moribund. Let’s take a scenario where local conditions, such as a drought or other natural disaster destroys grain crops in one region, while there is a bountiful harvest in other regions.

Today, the imbalances of supply and demand can only be met by the price mechanism… and the tendency will be for prices in the devastated region to rise vs. prices in the areas of bountiful supply. This affects the consumer, and soon enough cries of ‘price gouging’ fill the air… perhaps leading to government interference, price controls, quotas, corruption, inefficiencies, shortages… on and on.

By contrast, under a fully functional Bill market, prices are not affected at all. Rather, the discount rate mechanism kicks in to automatically, rapidly resolve the imbalances. Consider that in the area with shortages, there are consumers with plenty of cash… but no goods to purchase. This is ‘pent up demand’ waiting to be fulfilled.

Merchants compete to be the first to take advantage of this, knowing full well that the discount rates in the shortage region will be lower… as there is plenty of liquidity, leading to early payback of bills at a modest discount… or to increasing Bill buying, which gives the same result… lower discount rates. In the meantime, the discount rates in the areas of bounty are higher, as there is relatively less consumption… and less consumption leads to higher discount rates.

Suppose a wagon load of wheat is priced at 100 Silver units; and further, let’s suppose that the discount rate in areas of plenty is 2 units. Now, let’s further suppose that in the area of shortage, the discount rate drops to 1 unit… and see how a sharp wheat merchant can profit by this discrepancy… this ‘spread’.

By rushing to be the first to deliver his wheat to the shortage area, he will be able to acquire a wheat Bill with a face value of 100 units for a wagon load of wheat. However, the discounted value of this Bill is 99 units; remember the discount in the drought area is 1 unit.

SO, what can our eager merchant do with this Bill? Well, he can hold it to maturity, and collect the full 100 unit face value of the Bill; this is given. On the other hand, he can very well turn around, and sell (rediscount) the brand new Bill; he will sell it at its discounted value, that is for 99 Silver units. Turning around again, he will buy a bill from the bounty area… and these Bills are discounted by 2 units… so he gets a 100 unit face value bill, at the market price of 98 units… and ends up with the bill and a unit of silver.

Then, he simply waits till the bill he just bought matures. At maturity he will collect the face value… 100 units… plus he gets to keep the silver unit he earned by selling the draught area bill for 99 units, and buying the plenty area bill for 98 units! He just earned an extra silver unit on his wagon load of wheat, not by increasing the price… but by being first to deliver. As more and more wheat is delivered into the drought area, the difference in discount disappears…it is ‘arbitraged’ away… and the opportunity for extra profit disappears as well.

How magical is this? The natural, emergent phenomenon of Real Bill circulation allows ideal allocation of resources, matching supply and demand, without any response from the price mechanism. This is a wonderful example of the power of free, voluntary markets… and another grievous flaw of the current system of centralized control. The current monetary crisis will not resolve until the monopoly on money and credit creation held by banks and governments is broken, and power is returned to free markets… to the citizens of the world.

Rudy J. Fritsch

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Interest vs. Discount

There are two broad approaches to the world of science; the traditional way, the way of Natural Philosophers is one. Galileo, Newton, Darwin, Adam Smith and many other greats of the past were considered ‘Natural Philosophers’. Natural Philosophers observe Nature, and formulate hypotheses and theories based on their observations. They may use mathematics to describe and clarify their observations and hypotheses, but for Natural Philosophers mathematics is simply a tool used to describe Nature.

A second approach, quite different, was first popularized by Einstein. He called this approach the ‘gedanken’ experiment… in other words, a ‘mental’ experiment. The hypotheses came first, followed by the experiment. The equations… the math… came first, then came the observation; Natural Philosophy was turned on its head.

Einstein was a good enough scientist to understand that experiment would prove or disprove his hypothesis and his theory and his math; unfortunately, many of Einstein’s followers have lost this important nuance. Today, there is a widespread belief that mathematics is science, that numbers are physics. Experimental evidence that does not support the prevailing paradigm is discarded, ignored, and vilified… all to the detriment of scientific progress.

This distortion of the scientific method has invaded economics; most main stream economists believe that economics is mathematics… and the only issue is to discover the right equations. This is wrong headed thinking, in economics no less than in physics… if not more so. People’s behavior, unlike the behavior of subatomic particles, cannot be described by equations; there are no equations to quantify free will.

So what has this to do with ‘interest vs. discount’? Plenty… it is easy to mathematically convert the discount on a Real Bill to a percentage; to annualize the discount, making it easy to compare the discount with interest paid by bonds or mortgages; but the math is not the economics. Converting the numbers does not change economic reality or the meaning behind the numbers.

Bonds carry an interest rate… and the forces that determine interest rates are completely divorced from the forces that determine the discount rate of Real Bills. Interest rates reflect the cost of borrowing… the cost of debt. Real Bills represent commercial credit, and have nothing to do with borrowing… or debt.

Interest rates are determined by two sets of forces; one sets the floor of interest rates and the other sets the ceiling. The floor is set by arbitrage between the bond and cash Gold markets… if rates are too low, the marginal bond holder will sell his now overpriced bonds and hold cash Gold instead. Bonds are overpriced because the price of a long bond varies inversely with current interest rates; low interest rates=high bond prices, and vice-versa.

This is the Austrian formula for interest rates; it is a reflection of time preference, expressed in technical terms. More simply, a person with wealth (money to lend) will not lend it… except perhaps to family… unless he is compensated (by sufficient interest payments) for giving up the immediate use of his Gold. This is time preference, and the floor is absolute; as interest rates approach zero, lending will approach zero.

Conversely, as interest rates climb, more and more Gold holders will choose to buy bonds; that is, lend their cash Gold in order to capture income. In fact, if rates go high enough… not likely under a proper Gold standard but theoretically possible… then all cash Gold available (disposable income) will be invested. If interest rates somehow still climb, there will be no more Gold available to buy bonds… Bonds are a paper instrument, with no definite limit… unlike a very definite limit to the amount of Gold in existence. This is where the other force that sets the interest rate ceiling kicks in.

This force is arbitrage between the equity markets and the bond markets. As interest rates climb, the marginal entrepreneur will sell his equity and buy risk free bonds at low prices. Once this arbitrage kicks in, bond buying picks up, forcing bond prices up and pushing interest rates down. Moreover, if entrepreneurs abandon productive enterprise for bonds, the demand for bonds also drops. In a real economy, vs a Fiat economy, entrepreneurs use borrowed funds to finance productive enterprise… there is no demand for new loans if enterprise is being shut down.

To clarify this, imagine an investor with 100,000 monetary units to invest. If bonds yield 5% and an enterprise can earn 10% net returns, the odds are that the investor will take the higher risk investment for the much higher returns. On the other hand, if interest rates climb to 9%, and enterprise cannot earn more than 10%, odds are he will choose the low risk bond… never mind if interest rates actually go higher than what enterprise can earn.

This ceiling is absolute, just as the floor is; the drop in the supply of bonds (less demand for borrowing) along with increased demand (buying by investors) will inevitably lower interest rates by raising bond prices. Notice that there are two sets of forces here, time preference as the floor and marginal productivity of capital as the ceiling; this diversity of forces sets up the spread… that is, the gap between floor and ceiling… as between bid and ask.

By contrast, Real Bills are in a different world. There is no borrowing, no ‘floor’ or ‘ceiling’, no spread, no buying or selling of Bills. There are only physical goods on their way to the consumer, and credit granted to the retailer. Bills arise from consumption; they are not offered to the market, nor issued like shares, nor ‘floated’ like bonds; real goods arriving at the retailer are the genesis of the Bill.

Real Bills enter circulation, assuming a monetary role, because they mature into Gold; consumers buy the urgently needed goods, paying Gold coin, and this buying allows the retailer to pay his bill. If the product against which a particular bill was drawn becomes less urgently wanted, then this particular bill will no longer circulate, and will lose its monetary role. It will be removed from the Social Circulating Capital, and revert to being an ordinary invoice, no longer considered a Real Bill.

So what is the exact mechanism that sets the discount rate? Remember, as the Real Bill circulates, the recipient of payment on maturity changes. The Bill is endorsed to the new holder, as a means of payment… but the ultimate payer, the retailer who accepted the goods and signed the Bill does not change. He will have to pay the Bill on maturity, come heck or high water… to the holder of the Bill, to whoever it was last endorsed to.

So, exactly why is there a discount? Well, the retailer will have to pay the bill on maturity, at full face value, without question… but does he have to pay it early? Will he be willing to Pre-Pay his bill? This is the heart of the matter… and the answer is a big maybe! Sure, he may pre-pay, before the due date… if he has the cash on hand… and if the discount being offered to him is attractive enough. Will he have the cash? Why, this depends on the propensity of consumers to spend. If the propensity to spend is high, if his products fly off the shelves, the retailer will be rolling in cash… and will be happy to pay his bills early, for a modest consideration… a ‘small’ discount.

On the other hand, if consumers are more reluctant to spend, the retailer’s cash position will be weaker; he will not be so eager to pay his bill early, and will demand a bigger discount to pre-pay. The concept of pre-payment is the driving force behind the discount rate; indeed, under the Classical Gold Standard of the nineteenth century, discount houses claimed they could ‘pull Gold from the Moon’ if they but offered a discount large enough.

Clearly this claim is true; with a big enough discount, the retailer will indeed redeem his bill, paying it early; why not… it is possible the discount being offered is higher than his net profit from sales… he may use cash other than what is in his till if he gets a good enough offer. Gold from the Moon indeed… if there is a retailer on the Moon, he has bills that are coming due… and the discount house (holder of his Bills) makes an offer too good to refuse.

Now we see why there is no spread on Bills; Bills are not bought or sold… there is no bid or offer. They are simply re-discounted. To see how this works in practice, suppose there is a particular Bill drawn against Christmas turkeys… a product the flies off the shelves. A Bill drawn against Christmas turkeys will certainly circulate. Suppose this Bill has a face value of 1,000 Silver ounces, a maturity of 90 days, and the discount is 3 Oz for ninety days.

Now if the turkey wholesaler who holds the bill decides to pay one of his creditors with this Bill, the question is what will the market value of the Bill be… how much is it worth? This depends on three factors; the Bill’s face value, it’s time to maturity, and the discount rate. If the wholesaler decides to endorse the Bill to the turkey slaughterhouse, and the day it changes hands is 60 days from maturity, the market value will be 998 Oz.; 3 Oz for 90 days is the same discount rate as 2 Oz. for 60 days.

If the slaughter house operator then uses the very same bill to pay the turkey farmer, and the day it changes hands again is 30 days from maturity, the bill will now be worth 999 Oz… the day the Bill is paid by the retailer, it will command its face value, 1,000 Oz… and expire.

Indeed Real Bills are an almost magical creation of human ingenuity; there is little doubt that as the Fiat money regime collapses, Real Bills circulation will emerge spontaneously as it did historically. We can only hope that this time it will take but a few years, not centuries. Once Gold money and Real Bills circulation resume their vital roles in the world economy, capital destruction will turn to capital accumulation, and the standard of living of all inhabitants of Planet Earth will begin to climb.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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Crusoe Economics

Einstein said it best; for a model of reality to be useful, it must be as simple as possible… but no simpler. The very simplest possible model of economics comprises one person… because one human actor is the smallest and simplest possible means of looking at economic reality.

Chopping the person into parts to simplify the model further won’t work, and adding more people to the mix makes the model more complex than needed to study the fundamentals… the gist of economics. Of course, mainstream economists scoff at this idea; ‘our modern economy is much too complex to worry about Crusoe economics’… snicker.

This is about as intelligent as the design engineers responsible for the Boeing 747-800 snickering at Newton’s apple; ‘our modern engineering is much too complex to worry about Newton’s law of gravity’! Any engineer guilty of this type of insane thinking would be summarily dismissed… if not, the 747 would never get off the ground… or if it did, the wings would likely depart at the most inopportune time.

Robinson Crusoe on his deserted island has no need –or use- for money, or credit, or barter; but the three fundamental laws of economics show up with stark clarity, un-muddied by any extraneous complications. The very first law is; ‘production must precede consumption’.

If Crusoe does not first catch fish, he will not eat fish… nor he will not eat apples unless he first picks apples, nor have a fire unless he first gathers wood, kindling, etc. Nevertheless, we hear every day in our ‘new economy’ that ‘demand drives production’… and if we ‘stimulate’ demand, all will be fine with the economy. This is strike one; claiming that demand precedes production.

The second law is; ‘saving must precede investment’. Crusoe cannot invest in financial products, only in real capital; that is, tools and such items that help him live better, more productively. For example he may decide to weave a basket, so he no longer has to carry the berries he gathers in his bare hands; but to do so, he will have to first save the vines, and he will have to put time into this work; he must not consume everything he gathers, but must put some aside… ie save… so that he can invest in his new tool.

Or, he may decide to make a fish net, to catch fish a lot easier than by ‘tickling’ them… same thing, he needs to put aside string, and food to sustain him while he attends to this tedious but important chore. Nevertheless, the arrogant and ignorant sociopaths of the Washington economics establishment claim that there is a ‘glut’ of saving, particularly  in the East; and they claim that this is the problem with the world economy… never mind that the East is prospering, while Washington is sinking quickly. This is strike two; claiming that consumption precedes saving.

The third law is not only fundamental to humankind, but is even obvious in the animal kingdom; hoarding is essential for survival. Even squirrels have enough brains… or perhaps enough ‘instinct’… to save nuts during summer, to tide them over the coming winter. According to geniuses like Mr. Munger, hoarding is for ‘uncivilized people’. Bah; if Crusoe does not hoard the essentials of life, like food or water or fuel, he will not survive the next dry spell, or the next winter.

Of course, in a more advanced economy it is not necessary for every person to hoard everything; it is only necessary to hoard money; honest money will serve to buy all the essentials of life. Just as money allows indirect exchange to take the place of barter, so money allows indirect hoarding to take the place of hoarding many necessities. Specialization is far more efficient in ‘hoarding’… like grain elevators, cold storage, etc… just as specialization through the division of labor is far more efficient than autarky.

But what does all this have to do with Bills and Bonds? In a sophisticated economy, one that has outgrown the Crusoe stage, and outgrown the tribal barter stage, and has progressed to a monetary system with developed markets, Real Bills are the very best means of funding production… and production comes before consumption. The very act of consumption is what brings Real Bills into existence; and the implicit value of the Real Bill is what enables production to be funded. In a modern economy with much division of labor, consumer goods go through many stages of production before reaching the ultimate consumer… and each stage has to be funded somehow.

Think of something simple, like bread; we start with wheat from the farmers, the wheat goes to the mill to be ground into flour, then to the bakery where the bread is made, then it is sold to the customer. If Real Bills do not circulate, then money (Gold) must be used to fund each transaction; the economy must work on a COD basis… this means Gold must change hands many times. By comparison, if Real Bills are in circulation, NO Gold changes hands until the ultimate purchase is made; no money is invested in the production cycle… the credit inherent in the Real Bills Doctrine funds the production process most efficiently and naturally.

Bills follow and support the first law, the law that production precedes consumption. In the very same fashion, Bonds follow and support the second law; saving precedes investment. Any fixed capital in the economy is financed through the bond markets; the farm used to grow wheat, the mill used to grind flour, and the ovens used to bake bread are all examples of fixed capital… and they are all financed through the bond market… from savings. No savings means no (real) capital available for investment purposes.

Finally, we come to the third law; ‘hoarding is essential for human survival’. The recipient of a salary or of wages faces three choices; hoard the Gold coin, spend the Gold coin, or invest the Gold coin… there is no other choice possible. Some coin simply must be spent, else the wage earner will starve or freeze in the cold; thus the bill market has a hard floor, it can never go to zero.

Some coin may be saved, or invested; this is not a ‘must’ but depends on risk and returns. If the return being offered is too low, then hoarding is a natural choice; the only reason one would invest is to obtain a reasonable gain for giving up the use of one’s Gold… for whatever length of time. This return is called interest… and the desire to earn interest is called time preference. Zero interest rates mean that there is NO capital available for investment; all money earned will be spent or hoarded.

Today we have a ‘zero interest rate policy’… strike three, we are out. The economy is dying, like the 747 with the wings departing. The so called Global Financial Crisis is in reality a monetary crisis. The world needs real money; the world needs Gold. The world also needs the clearing system that is the indispensable companion of God money, the circulation of Real Bills. Once this reality is accepted and acted upon, the GFC can be resolved… not before.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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