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Source link: http://archive.mises.org/4355/our-money-madness/

Our Money Madness

November 21, 2005 by

Here is my latest speech on money old and new, and the absurd notion of monetary central planning. We flatter ourselves in this technological age driven by financial innovation and mind-boggling efficiencies, that we know more than any previous generation. But there is lost knowledge, among which is the knowledge of what sound money feels and looks like, what it does, who makes it and why, and how it holds its value. As for central banking, if Wal-Mart’s slogan is “Always Low Prices,” the slogan of the Fed and the government should be “Always Higher Prices.” FULL ARTICLE


David White November 28, 2005 at 7:16 am

P.M. Lawrence writes: “Right now, most holdings of gold are in governmental or quasi-governmental physical possession.”

Not so. As Michael J. Kosares writes in “The ABCs of Gold Investing”:

At one time, 70 percent of the world’s gold reserves were held by governments and their central banks, with the U.S. Treasury holding the single greatest portion [at 22,000 tons in 1945, over 50 percent of the world total]. Now, more than 70 percent of the gold is in the hads of private individuals worldwide. Ironically, they hold it as security against the potential breakdown of the dollar-based international financial system it was sold to defend. At the same time, many of the world’s central banks, perhaps because they sense danger, are in a dollar reduction mode. The dollar, in the bigger picture, is slowly fading, and gold is once again in ascendancy.”

Indeed it is, as gold is now poised to breach $500 for the first time in a generation, on its likely march to multiples of that.

Vince Daliessio November 28, 2005 at 2:10 pm


I see your point about the dynamic effects of a government-managed “conversion”. However, the preferable means would be a simple collapse of the dollar (inevitable), with the outflow of gold from the US government into private or institutional hands as collateral for the government’s debts, now in default. In other words, while lining up at the bench of the “bankruptcy court”, those who hold government paper will receive gold at some fraction of dollar value, as democratic a distribution of Federal gold as could be hoped for, although other assets such as property will serve as redeemable collateral too. I realize this has very little chance of happening (especially since all government debts are denominated in dollars, not gold, and therefore the Federal government would have to be made prostrate prior), but it is the only way a conversion will occur quickly without concentrating the gold in the hands of the “middlemen” you are worrying about.

Paul Edwards November 28, 2005 at 3:30 pm

Vince and P.M.:

You two have to slow down so that i can try to catch up with you. Can you tell me if you are concerned about the issue that Rothbard addresses below? The problem is that the banks will be granted a free gift of capital by the amount of their demand deposits (minus reserves). The possible rebuttal to that is that allowing them this onetime windfall would avoid a great economic upheaval caused by the massive contraction of bank credit that would be required to mitigate this advantage.

“From the standpoint of the free market, there is admittedly a problem with this transition to 100 percent gold. For the Federal Reserve’s gold would be transferred to the commercial banks up to the value of their demand deposits by the Federal Reserve’s granting a free gift of capital to the banks by that amount. Thus, overall, commercial banks, at the end of December 1981, had demand deposits of $317 billion, offset by reserves of $47 billion. A return to gold at $1,696 an ounce would have meant that gold transferred to the banks in exchange for their reserve at the Federal Reserve would also have increased their reserves from $47 to $317 billion, via a writing up of bank capital by $270 billion. The criticism would be that the banks scarcely deserve such a free gift, deserving instead to take their chances like all other firms on the free market. The rebuttal argument, however, would stress that, if a 100 percent gold requirement were now imposed on the banks, their free gift would do no more than insure the banking system against a potential holocaust of deflation, contraction, and bankruptcies.”

Vince Daliessio November 28, 2005 at 5:02 pm

WOO. At first glance, $300-odd billion seems like a small price to pay, both to convert to a gold currency, and to avoid the sacking of depositor’s money in the bankruptcies of the woefully undercapitalized banks. But isn’t that what’s happening already, although very slowly? Isn’t one of the reasons for our negative savings rate in this country the fact that returns to savings in banks are negative after taxes and inflation? I wish I could ask Murray what he meant – did he really advocate vindication of fractional-reserve banks, or did he see this as simply a cost that would have to be dealt with one way or another?

Paul Edwards November 28, 2005 at 5:53 pm

Hi Vince,

It strikes me he was both advocating calling the loss a loss and getting on with it, or else he was just presenting a second of two approaches. One would be a crushing contraction of bank credit to precede going back to real money, or two, let the banks have this one last laugh as we go back to 100% money.

I don’t think he was ever philosophically against aggressive deflations because they speed up adjustments and recoveries. But i guess he was acknowledging that option one would present an unusual drama. And I’ve never seen him have a single good word to say about fractional-reserve banks.

billwald November 29, 2005 at 11:21 am

So the Fed transfers gold to the banks at $1700/oz. The banks then have their outstanding loans covered by gold. How does this help the working class? Existing cash would become worthless (Gresham’s Law). We sell our gold teeth to pay our property taxes.

Then what? Is the electronic in circulation also valuless? Banks can’t issue new credit because they unly haave sufficient gold to cover existing loans. Gold is then inflated to $5,000/oz? Is new cash money issued by the commercial banks after the gold is inflated? Do the banks buy foreign gold and pay for it with the new paper?

All this would do is accelerate the transfer of assets from the working class to our owners.

Paul Edwards November 29, 2005 at 11:42 am

“All this would do is accelerate the transfer of assets from the working class to our owners.”

That’s been done already and the process continues on a weekly basis.

The proposal is to stop it in its tracks on a permanent basis. If we prefer, we can always perform a massive credit contraction first, which would be more fair to the people and would not confer an advantage to the banks, but it would also cause some major disruption in peoples lives for a year or two while things liquidate.

Paul Edwards November 29, 2005 at 11:51 am

And existing cash would become not worthless, but each dollar would be worth and would remain worth 1/1700 oz of gold. In fact, that would become the new definition of a dollar: 1/1700 oz gold. So if you had $1700 in your wallet, it would be like (identical to) holding a 1 oz gold coin. If your house was worth 170,000, then it would be worth 100 oz. Simple.

To avoid further credit expansion on top of real gold, our society would either begin to enforce fraud, or utilize the bank run to keep the banks honest. I advocate the former, but the latter would suffice somewhat more painfully.

Yancey Ward November 29, 2005 at 2:12 pm

This has been an interesting thread, but I don’t think transition to a gold standard is possible. The present system will have to collapse first, which will happen eventually, but the timing is uncertain.

Paul Edwards November 29, 2005 at 3:00 pm

I only like to describe as impossible the things that are against nature. Making men virtuous enough to rule well over other men is impossible. Abolishing the fed and bringing the dollar back to a gold basis, without a monetary collapse on the other hand, is more than possible, it’s desirable and relatively simple, unlike putting a man on the moon for instance.

That it may not happen is not because of an impossibility, but rather is due simply to the predisposition of those in a position to affect this change. I think there is a great advantage to us in making and keeping this distinction.

Finally, as the history of the German mark suggests, there is nothing about the collapse of a monetary system that will render a gold standard any more likely. People must have understanding first and know why they want things to change.

David White November 29, 2005 at 3:15 pm


It seems to me that if/when the world’s reserve currency collapses, there will be nowhere else to go but to gold, as it is the ultimate monetary reserve. The people won’t understand it any more than they understand how to put a man on the moon, but over time it will be the best thing that could have happend to them, or at least to their progeny.

Paul Edwards November 29, 2005 at 4:08 pm

Well David, if it happens that way, then i guess its destiny, but the germans went from the mark to the rentenmark which was created and defined in terms of the mark, and not in terms of gold, nor of the USD.

The problem as i see it is, without an “official” declaration of the fixed relationship between the dollar and an ounce of gold, the economy will have to degenerate completely into barter before gold will have a chance to emerge from barter once again for it to be adopted as money.

That just sounds like such an extremely excruciating path to take compared to having the fed present the conversion and then close its doors.

Yancey Ward November 29, 2005 at 4:53 pm

Below you will find part two of Mauldin’s essay on the “Dollar Asset Standard”, in which he summarizes an optimistic scenario for the developed world. You can find part 1 in the same location, if you did not read it earlier when I linked to it. It is thought provoking, and I agree with some of it, especially the last part about the collapse of the welfare state, I just think the rest of it is way too optimistic and makes some fundamental errors of reasoning.

This Time It Really Is Different

Paul Edwards November 29, 2005 at 5:44 pm

Thanks Yancey. I tried to read it, but wow, I’d have to learn a whole new vocabulary to follow it. Is it austrian?

David White November 29, 2005 at 6:43 pm


The mark was anything but the world’s reserve currency at that time, and Germany’s financial markets were in such a shambles that the country was all but cut off from the world economy. The opposite is the case with the US today in that it’s inextricably tied to the world economy and therefore can’t get away with inflating its debts away without severe consequences. Yet it must if it is to (pretend to) meet its financial obligations to the tens of millions of Boomers who will start retiring in 2008.

In other words, it’s damned if it does, damned if it doesn’t.

As for those who argue that China et al. cannot afford to let the US economy tank, they simply do not understand how deeply flawed not just the US monetary system is but the global monetary system is and how impossible it will to suspend economic reality much longer. A Ponzi is a Ponzi, after all, and the longer it lasts, the worse its “correction” will be, meaning that we do indeed face an “excruciating path” back to monetary rectitude, as you can be assured that our brave representatives in Rome-on-the-Potomac will continue to fiddle while the empire burns.


What a coincidence, as I just finished the book to which you refer — “Our Brave New World” — and have been tracking the Bonner/GaveKal/Mauldin debate accordingly.

I’m with you (and Bonner) that GaveKal is way too optimistic (i.e., no, Paul, the authors are NOT Austrians), and I would add that the Asian manufacturers are not about to stand by and let the West reap all the profits while the Asians do the grunt work. Think Toyota, for example, which may need some Western branding savvy to sell its products here but otherwise has all the creative talent it needs, at far less cost, and can therefore dispense with outsourcing this work to the West.

Bottom line: We’re in deep doo-doo.

billwald November 30, 2005 at 10:38 am

“It seems to me that if/when the world’s reserve currency collapses, there will be nowhere else to go but to gold, as it is the ultimate monetary reserve.”

I suspect the reserve currency will be guns and ammo. If we crash it won’t be back to 1929 but the 1429 of city states.

“And existing cash would become not worthless, but each dollar would be worth and would remain worth 1/1700 oz of gold.”

“Gresham’s Law” predicts that the gold money will br horded and the value of the old money will crash. Every day it will take more of the old money to buy the new money.

Yancey Ward November 30, 2005 at 11:05 am


I also thought the biggest fallacy, to which you obliquely referred, is that the world would divide into manufacturers and designers; I see no reason to believe that the Chinese and the Indians won’t be just as good as Americans at the latter, and at a cost advantage at present exchange rates. With the sorry state of our education system, and the truly asinine subjects in which graduates now get degrees, I think the Chinese and the Indians will be fare superior engineers and designers in short order.

Yancey Ward November 30, 2005 at 11:06 am

That should have read “far superior”.

David White November 30, 2005 at 12:06 pm


A “crash” back to city-states would represent the massive devolution of power that the world is so desperately in need of, and insofar as “guns and ammo” were involved, I suspect this would be a lot less dangerous than our present world of mega-states and their WMDs.

In any case, the demise of the latter would signal the collapse of central banking and a return to sound money, where “hording” would go by its rightful name — saving — which in turn would provide the basis for the sound lending practices upon which a production (rather than a consumption) economy depends.


Yes, I fully agree. In fact, I recently told my nephew (a computer science/genetics student at Georgia Tech) that while there will be high demand for his services, the increased supply from Asian and India will be difficult for him to compete against.

So yeah, “it’s different this time,” but not at all in the way that GaveKal Research believes.

I’m sticking with Bonner and buying gold.

P.M.Lawrence November 30, 2005 at 6:41 pm

David White, Vince Daliessio, what I was describing is something like what Paul Edwards was concerned about, although the same issues arise whether it is as a bank windfall or as a middleman or a government windfall.

Vince Daliessio’s preferred alternative would actually involve a dramatic interruption to the economy with much value loss. The nearest going concern equivalent would be for governments to start accepting gold for tax payments, making small tax cuts and releasing gold stocks to cover the deficit until the end of the transition, all sufficiently slowly that the effects could spread out rather than giving material localised winners and losers.

The thing is, it’s not that quick release gold would get concentrated with middlemen but that on its way THROUGH there the middlemen etc. pick up enduring and revenue yielding gains – acquiring existing assets with the appearance of investing, but achieving a wealth transfer of those assets (NOT gold) rather than true investment which makes new productive capacity. There’s no problem with middlemen merely passively holding gold, just with the enduring effects of what they would do with it.

In my book, today’s increase in “private” holding of gold is still mostly quasi-governmental – remember that governments these days follow the fashion of being more at arms length in appearance, if not in fact. But also, that is precisely what you would get as and when the middlemen started to pick up the gold. It’s what would have happened to the British gold reserves that Gordon Brown released, only that was mostly mopped up by the usual quasi-governmental players.

It may be worth mentioning that even under the gold standard, governments intervened via the bond markets and interest rates to stabilise the amount of specie around, allowing the interest rates and industrial cycles to vary instead.

Peter December 7, 2005 at 12:04 am

Alongside the “digital gold currencies”, soon there’ll be “cybergoldbank.com” allowing you to get involved the gold loan market (it already exists and is earning profits, and paying nice dividends, and it’s not even fully live yet), and “pvcse.com” trading shares. Vive la Révolution!

Vince Daliessio December 7, 2005 at 12:12 am

There is also a private, free-market, hard-money currency in circulation right here in the US – The Liberty Dollar;


Paul Edwards December 7, 2005 at 9:35 am


“There is also a private, free-market, hard-money currency in circulation right here in the US – The Liberty Dollar”

If it were truly a currency, would you really think it necessary to draw anyone’s attention to it? The reason that a reader might be unaware of the liberty dollar as a US currency is because it is not a US currency. At best, it’s something that a small and determined and tenacious group of people barter with. More likely, they still use the exchange value of silver in terms of the dollar to determine how much something costs in terms of the liberty dollar.

The belief that a private commodity money can emerge in a situation such as we have here, where there is an over century old dollar in use, is a belief that assumes Mises’s regression theorem has been refuted.

If an Austrian intends to refute Mises’s regression theorem of money shouldn’t he come out and refute it? I’m sincerely interested to hear it.

Paul Edwards December 7, 2005 at 9:43 am


“…even under the gold standard, governments intervened via the bond markets and interest rates to stabilise the amount of specie around, allowing the interest rates and industrial cycles to vary instead.”

I’m not aware of governments ever using the pretext of stabilizing the amount of specie available to justify inflation. In what period of time did this take place? I presume you are speaking of some time when there was no central banking in the US.

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