Hello and Happy April!
I cannot believe it is Springtime already! It is beautiful here in Palo Alto and the Kung Fu Kids are so excited for the Easter Bunny’s arrival this weekend. I hope you are enjoying the Springtime (or Autumn, if you’re in the Southern Hemisphere…we have quite a global audience here at Kung Fu Finance!).
I returned home from Denver yesterday from an amazing weekend spent with incredible, top-notch future business-owners and a fantastic mastermind session with Craig Ballantyne and Matt Smith. If you ever have the opportunity to attend a session like this, don’t hesitate for a minute: JUST GO.
Of course you will receive outstanding coaching from the best in the business (Matt and Craig), but even more importantly you will grow your network and connect with the most fascinating, supportive, helpful, action-taking people you could ever imagine hanging out with (or doing business with).
And that, my friends, is priceless, and holds true in all areas of your life, not simply “investing” or “Internet Marketing”.
So if you are ready to take your business, your investing, your love life, your health, or your fitness to a new level, definitely investigate attending a “live in-person” event in your area of interest, whether a local club (e.g. real estate investing club, options investing club, business networking club, running club, judo club, etc.) or a nationwide event.
Something about meeting people and getting that information “live in person!” really makes a difference, and you walk away with new friends, new ideas, new information, and a lot of motivation…Just what you need when you are ready to take your investing (or running, or weight loss, or business, or…) to the next level.
People really do make the world go ‘round, and I guarantee you will meet fascinating people who will help you along your journey to your goals.
In fact, today’s guest post comes from a wonderful friend whom I originally met via an investing conference in Argentina. Gary Kinghorn actually only lives minutes away from me here in Silicon Valley, but it was our common interest in La Estancia de Cafayate and Doug Casey’s investing work that drew us together literally thousands of miles away in Argentina!
Gary is one of the smartest and savviest investors I know (and just a generally awesome guy!), and today I’d like to share with you the first part of an essay he wrote for us on monetary reform and gold-backed currencies.
Is a return to some type of gold standard really best for the global economy? Is it even possible, or desirable?
What about the opposing viewpoint, some type of interest-free money, public banking, or social credit?
Gary thoughtfully presents both sides of the issue for us and lets us decide…
Take it away Gary, and thank you!
Ruminations on Monetary Reform and Gold-backed Currencies (Part 1)
It used to be that the wise debutante would avoid discussing religion or politics, which for certain would end up offending someone. Today, the third rail of polite dinner conversation is monetary reform. It’s a topic with passionate supporters on both sides of whether or not a gold standard or gold-back currency is required as the right solution.
While not trying to settle anything here, I’ll lay out the positions of both camps, and let you do your own research and decide for yourself. I’ve actually gone back and forth myself on this discussion, and can see the merits of both sides. Since dozens of books have been written on this subject, and the argument goes back decades if not centuries, I’m unlikely to settle the issue here in the next 2000 words or so anyway.
The Boxing Ring, Corner 1: Gold-Backed Currency Advocates
In one corner, we have the gold-backed currency advocates represented most notably by the Austrian School of Economics, their close political allies, the Libertarians, and sound money politicians like Ron Paul, whose political orientation aligns well with the former two groups.
The Boxing Ring, Corner 2: Interest-Free Money, Community Currency, Public Banking, Social Credit Advocates
In the other corner, we have a large group of monetary reformers, authors, bloggers and economists that advocate against a gold standard in favor of various compatible solutions that include interest-free money, community currency, public banking and social credit.
(Note that I’m not including in this discussion the folks that are against a return to gold-backed currency because they don’t think the world needs any monetary reform — folks like Ben Bernanke or most anyone currently in government or leaders on Wall St. — because, well, they’re benefitting from the current system, and are the root cause of our social and economic problems.)
What is the Argument?
The crux of the argument is how money is created, who issues it, how big the money supply should be, and what mechanism ensures a completely “fair” system (rather than benefiting the financial elites, monopolists and the politically connected).
The “Ideal” Monetary System
Most would argue that an ideal monetary system should provide stable prices and minimize the boom-and-bust business cycles caused by too loose and too tight money and credit supplies. To keep prices stable, the money supply would have to adjust smoothly to reflect changes in GDP from growth in resources, population, productivity, etc.
In general, this is the ideal system we are trying to achieve, and for brief periods, has worked in the past to provide growth, freedom and social stability, at least until the system was compromised in some way.
Round 1: The Gold Standard Advocates
Gold standard advocates would say that today’s problem is unrestrained growth of the money supply and credit from the government and banking system, notably the central banks.
This unrestrained growth, enabled by holding interest rates at abnormally low levels, penalizes saving and investments, fosters inflation, and will ultimately lead to the destruction of the currency and a general breakdown of the social fabric and economy.
The restriction on the money issuers to maintain gold convertibility at a fixed price provides the effective governor on unrestrained money creation and maintains long-term price stability that encourages long-term savings and investments. The price of gold is a fixed benchmark against which all other prices can be relatively held stable, whether it’s a loaf of bread, gallon of gas or a man’s suit.
I would point out that there is a secondary point of contention on whether the issuer of the money supply has to have 100% gold backing, i.e. must have in a vault at its disposal enough gold to account for all outstanding money at the stated convertibility price of gold.
There are many calling for a gold-backed currency in which the price-peg is maintained, and the issuer stands ready to buy or sell gold at the stated price, but does not have 100% gold to back all the outstanding currency.
In theory, this makes sense because as we have discussed above, what we really want is a money supply that reflects GDP, or ALL the goods and services being produced in the economy, not just the amount of gold in a vault.
If the money supply is managed well, prices are stable, there is unlikely to be a run on the gold holdings of the money issuer, even if it is not backed 100%. This would give the issuer the flexibility to increase the money supply to reflect GDP growth, without having to acquire more gold.
The people who argue that the price of gold to back all the currency in the current money supply should be approaching $10,000/oz miss the point that a 100% backed money supply may not be required.
If the dollar was completely stable, and long-term interest rates returned to normal while inflation was reliably low, the market price of gold would drop precipitously from today’s price, even with the current size of the money supply.
Round 2: The “Anti”-Gold Standard Advocates (Social Credit, etc.)
Back to our main argument, the advocates of the social credit monetary reform system argue that the real solution is not in putting a gold-backed constraint on the monetary system, but in reforming who issues the money supply and how it is issued.
They argue that the banking cartel has taken over the creation of money, and that all money is “interest bearing” at inception, and this is the root cause of our monetary system not being viable.
Interest-free currency, social credit and public banking are various mechanisms to return the creation and management of the money supply to the people.
Today’s money supply is largely created by bank loans that create money out of nothing, but require interest to pay off the money to resolve the credit-backed currency loan.
If currency is created interest-free by the issuing authority, we can overcome our always expanding money supply problems (and need for constant GDP growth), and eliminate the inherent disparity caused by the banks getting interest on something they create out of nothing, which ultimately keeps most people in poverty and siphons more and more money up to the wealthy.
As an alternative, public banking, such as the state bank of South Dakota, the only state-owned bank in the U.S., would reap the benefits back to the people of the interest earned from a credit-based money supply, rather than benefitting the too big to fail banks, the money power and monopoly capitalists that prey on indebting others.
South Dakota remains relatively fiscally solvent to this day as a result, compared to most other municipal and state entities that are teetering on bankruptcy or liquidating public assets to hold off defaults.
Perhaps the best example of an interest free currency was Abraham Lincoln’s Greenback issued to finance the Civil War. It was issued directly by the Treasury as a non-interest bearing instrument when northern and international bankers were offering the Union loans with upwards of 30% annual interest.
The Greenback was generally a success, and might well have been responsible for saving the Union at the time, but when the banking cartel reasserted itself, the Greenbacks were phased out and U.S. Notes, and later Federal Reserve Notes all carried an inherent interest payment again at the time of creation.
Community currencies or social credit schemes are merely variations on this same theme depending on the size and scope of the trading community, the municipality or group backing it, and the nature of the issuing authority.
While there are inherent troubles for large-scale commerce, and there are challenges to overcoming fraud and corruption, community currencies have been known to thrive and be viable alternatives, especially as the predominant currency collapses (e.g., Argentina c. 2001).
[Kung Fu Girl again…]
Thank you Gary! So there you have the two main opposing camps…be sure to tune in on Wednesday for the arguments that each side has against the other, what on earth the Wizard of Oz has to do with our monetary system, and of course, which camp should win!
And please let me know in the comments what you think!
To your financial success,
— Kung Fu Girl