Monday, April 02, 2012

More Government Propaganda

Quite often around family gatherings and other social events discussions will emerge on subjects which generate heated exchanges. Recently this writer observed/participated in one such discussion on the subject of money: what is it and how did it come to evolve?
Most individuals do not dedicate much thought to the subject and simply open their wallets or purses and use the interestingly engraved pieces of paper to exchange for items offered in commerce; never concerning themselves with either the issuing authority or the acceptance of pieces of paper for items of actual utility. An excellent exposition on the subject is offered in this video.

A 5000 year recorded history of gold's use as a medium of exchange would lead one to conclude that it is a useful substance for such a purpose. It is relatively rare, esthetically pleasing to the eye, extremely durable, easily divided into smaller units and thus readily transported. Governments on the other hand have chafed under their inability to control the supply of gold and thus have tended to view its use as money as a hindrance to their power. This is due to the population's resistance at some point to further seizure of their property through increased taxation. In earlier epochs governments, when controlling the issuance of monetized gold engaged in theft from their subjects by striking coinage containing increasing quantities of base metals yet stamping the coins with values exceeding the true gold content. Populations quickly caught on to this subterfuge and began demanding larger quantities of the coins in exchange for the fruits of their labor hence: inflated prices.

The increased inconvenience of the use of coinage impelled governments to issue receipts for precious metals held at a central bank. These receipts, called banknotes, circulated as money due to the understanding that they were redeemable on demand for existing precious metals deposited in the central bank vault. Gradually the government noted that few users of these banknotes tended to redeem them for actual gold and eventually discontinued these redemptions in the case of the US in 1933.

Although gold redemption continued for international transactions according to the Bretton Woods agreement of 1944, even that practice was ended in 1971 with all payments backed only by trust in the promises of politicians and politically appointed bureaucrats.

Since 1944 most international financial transactions have occurred in US dollars. The value of those dollars fluctuates against foreign currencies based on market forces influenced by the expectation of foreign governments that the US central bank will exercise restraint in the creation of dollars through its printing presses and computer keystrokes.

By engaging in ever increasing spending on wars and vote buying welfare schemes the western governments have been unable to confiscate sufficient wealth through taxes. The result has been finance through borrowing i.e. bonds and creating money from thin air. Such practices are equivalent to the former coinage debasement of the ancient empires and like those debasements have resulted in the steady rise in all prices (inflation). This situation could not occur if currency (money) were backed by a substance such as gold which the government can not create. For this reason the government engages in propaganda promoting the fiction that gold is not money but simply a "barbarous relic" from antiquity.
Bernanke laid out the case against fixing a nation’s money to such a barbarous relic, offering all the usual arguments about inflexibility, frequent financial panics, etc. There’s nothing new or surprising here because a gold standard is anathema to any modern day economist, but here’s the chart that caught my attention (highlights added):

Ben Bernanke and the Gold Standard

Perhaps it would have been better to not bring up price stability at all, since, I don’t see how you can credibly spin that as being a negative for the gold standard.

While the U.S. experience with hard money was far from perfect, it resulted in regular bouts of inflation and deflation that, in the end, worked out to be, basically, zero percent inflation for over a hundred years, ending in the early-20th century. During that time, the only serious bout of inflation occurred during the Civil War when the nation printed pure fiat money called “greenbacks” to pay for the war.

This compares rather favorably to the experience since the Federal Reserve was founded in 1913, during which time the U.S. dollar has lost about 98 percent of its value, due primarily to the Fed’s policies.

Next time you have occasion to remove a dollar denominated bill from your wallet, read the text thereon. You will find that it is a "Federal Reserve Note". One of the Webster definitions of "note" is: "an instrument of debt acknowledgement". Most of the population has bought the government propaganda that such a document is money when it is in fact a mere promise by a bankrupt debtor. Gold is the only monetary asset that has no second party liability. If this is not so, why do banks worldwide buy and carry it on their ledgers as an an asset?


RegT said...

Imagine my surprise when I went to Costco to buy a bottle of Laphroaig 10 year old single malt to discover that the price had doubled (triple in state-run liquor stores) since the last time I purchased one (admittedly, several years ago).

I realized it was a matter of inflation and tariffs on an imported item, but it broke my heart, nonetheless. I returned home without it, unable to justify the purchase on my now-limited income.

ΛΕΟΝΙΔΑΣ said...

Count your "blessings". Here in Georgia Costco cannot sell hard liquor.