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How would a country get away from a fiat currency and into a hard currency?

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Edgar729 Posted: Sun, Sep 30 2007 9:12 PM

For instance, in Somalia they have no central goverment and are as close to anarchy as any country in the world. How could an entreprenuer like myself go over there and try to establish a gold standard? I was thinking that if you open up a bank over there (specifically a micro loan bank) that you could only lend out in gold denominated notes and accept payments in the gold equivalent. Over a short period of time, because they have no access to capital there and I would be the only source, you could establish a gold standard through the free market. What do you guys think?

 Not only would this do wonders for the people there but it would be a great business decision. I fI didn't have to accept worthless paper and could accept commodities in exchange for my services that would be great!

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Torsten replied on Mon, Oct 1 2007 2:57 PM

I'm not to familar with Somalia, but as for the rest of Africa the currencies are pretty useless(high inflation, Ghana had a currency reform pretty recently). The locals will do their business dealings in Dollars or Euros. And sometimes they may use diamonds or precious metals for exchanges. But they don't use the gold really as money, since it is much easier to calculate with Dollars and you can also pay foreign suppliers with Dollar, while they would frown up on Gold, Diamonds or the like (unless they know the value and you offer more then the amount in Dollar of course). As for the micro loans, how do you intend to get your money back? While the majority of people is poor in most African countries, you'll get up to 5% that are very wealthy, so I consider that "no access story" rather a myth. Those having no paper currency, may use live stock or other items as substitutes. Personally I would rather first find out what is scarce and wanted in Somalia and then try to import that to Somalia. Before that you should be on good foot with some of the locals. I take the guess that Indians and Arabs are of the more potent merchants their. The locals usually don't like them too much (like in Uganda, Tanzania, etc.). Assuming that you are White this may even be an advantage to you. I'd advice that you frist visit the country, perhaps you could start in Kenya, which has a better established infrastructure...

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I was reading about the currency situation in Somalia a while back and they still use the local currency even though it isn't backed by a central government. They still have inflation though because the forces who wish to re-establish a State get currency printed up in other countries and use it to fund their operations.

The currency there is essentially a free market currency even though it's not backed by a commodity. Introducing gold into the country would more than likely lead to inflation the same as the New World gold did to Spain unless you were to use it to purchase goods for export and 'warehoused' it in country while issuing gold certificates.

I couldn't find the article talking about the currency situation but instead found a nice propaganda piece...

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Torsten replied on Tue, Oct 2 2007 6:56 AM

Anonymous Coward:
I was reading about the currency situation in Somalia a while back and they still use the local currency even though it isn't backed by a central government. They still have inflation though because the forces who wish to re-establish a State get currency printed up in other countries and use it to fund their operations.
That is possible, they just use the old currency as a habit. Which proves that currency is actually institutional. I heard something similar about the old rubel after the revolution in Russia. Just wondering whether old and new Somali Shillings can not be distinguished.

Anonymous Coward:
The currency there is essentially a free market currency even though it's not backed by a commodity. Introducing gold into the country would more than likely lead to inflation the same as the New World gold did to Spain unless you were to use it to purchase goods for export and 'warehoused' it in country while issuing gold certificates.
So why does the presence of dollars and Euros not have a similar effect?!

Some info on the economy of Somalia: http://en.wikipedia.org/wiki/Economy_of_Somalia

Here is a funny quote:

For Olad, there are benefits. "Sometimes it's difficult without a government and sometimes it's a plus," he says. "Corruption is not a problem, because there is no government."

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/SOMALIAEXTN/0,,contentMDK:20398872~menuPK:367671~pagePK:141137~piPK:141127~theSitePK:367665,00.html

 

 

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Edgar729 replied on Tue, Oct 2 2007 10:59 AM

Tortsen,

      Thank you very much for the link to the "business in Africa" link. It was a very fun read. Anyways, I don't understand how gold would lead to the same inflation problem we have with fiat currencies. Wouldn't production be directly linked to the gold in the economy? Also, how would you ever "print" money or mess with the markets if the few banks in that country only accepted gold denominated payments? BTW, in the very begining stages of this bank you could establish this gold standard by having the person in question who is taking the loan out, or opening a savings account, pay for the transaction cost to buy the gold. Given enough time without goverment intervention the market would latch on to the gold standard immediatly if they could save a few percentage points on every deposit. Not to mention that their savings accounts would be yielding relativly significant returns so the incentives would be there.

 I am sure that a free market push to a gold standard would result in an increase in the standard of living, more liberty, and (over time) it would lay the foundation for a powerful economy. Perhaps Somalia isn't such a bad place to do business? Hell, if you look at the average americans financial information objectively, the average american is a credit risk. No savings, high debt, eroding purchasing power, little respect for the sanctity of contracts (culturally), and a life style trend that is leading downwards. The average somalian may have very little capital, but the majority of them are debt free and their clans insure their contracts!

Anyways, what I am getting at is this: perhaps the american empire has deteriorated so much of the fundementals in this country that we should start seeking other places to sow our seeds of production. We should continue our intellectual battle and Ron Paul is a tremendous source of goodness that may be able to re-establish much of the fundementals that make entreprenuership in this company a great option. But as things are now, we are playing the "whos dumber than me" game. People accept our pathetic excuse for a currency and banks accept our applications for loans because they have the FED and the rest of the goverment in their pockets. Even with all the bad loans the banks made in the last 5 or 6 years they are getting bailed out at our expense.

 It's just not safe here to be an entreprenuer anymore. Mark my words, 30 years from now (this is assuming Ron Paul doesn't win, and he has a hell of a good chance that he can... but plan for the worst and hope for the best,right?) with all these entitlement programs and everything, the rich will NOT BE ALLOWED to leave. And if they do leave, they will have to leave everything behind and that includes their production. They'll call it the "traitors paymernt" or something like that and tax the living hell out of you for leaving this war state.

 So I am saying that perhaps entreprenuers should start looking for other "New Worlds" to sow their seeds in.

 Ron Paul 2008!

Do not depart from me O Lord
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Torsten:
So why does the presence of dollars and Euros not have a similar effect?!

They do...assuming they just enter the economy with no goods leaving. All those folks who live and work elsewhere that send money home are effectively inflating the money supply.

My comment was based on someone showing up with a bunch of gold and starting up a bank. If they were to use Dollars or Euros floating around in the Somali economy to buy the gold then it would be a different story but that didn't sound like the plan to me.

I think this is the study(pdf) I was referring to in my earlier comment.

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Perhaps a momentary jump in prices might occur, but in a scenario like somalia competition would set in very quickly into those areas with fat profit margins. With no zoning laws, or intellectual property laws, or anything of the sort... someone could just throw up a booth next to your business and drop the price. Further, if they had a gold standard... I think that over the long run prices would stabalize in that economy, not lead to inflation. Even if you brought in the gold from somewhere else, you would still be using that gold in loans. Those loans carry heavy interest rates that will keep those people who took the loans bargaining for ever lower prices. I am going to read the study you posted now but its just a thought. I think that the market, absent all goverment intervention, would treat the new capital as nothing more than a new source of profits. Market competition would set in, the heavy interest rates would keep investment rational, and things would move along smoothly.

 Perhaps I am being naive and talking out of my rear, but I just don't see how a gold standard would lead to anything except to the opposite of what happens when our goverments touch currencies. Thats why I couldn't imagine our inflation in an economy thats moving to gold.

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To get to a hard currency from a fiat currency would be fairly simple, in fact we already have the essentials in place currently. My idea is this:

Pass a Constitutional amendment requiring that all U.S. commodity exchanges regulated by the CFTC or of a certain size would be required to maintain both pit and electronic trading of 3,6,9, and12 month futures in gold and silver, 24 hours a day, 7 days a week. Mini-contracts would be available so that the small American capitalist could participate.  At the same time you would freeze all mining, logging, or any other commodity extraction on federal lands, and pledge those lands as backing for the dollar, dividing the estimates of M3 by the no. or square whatever you choose of all public land.  Let's say it was 1 square inch/$, while the gold in Fort Knox (is there any? since Rep. Paul says the government won't run an audit or let him inspect the vaults, something you would think a member of Congress should have a right, and even perhaps duty, to do) could further back the dollar by perhaps 1-2 cents/dollar.  The huge raise in revenue to Treasury that would accompany the election of President Paul and implimentation of the free-market agenda, guided finally by correct Austrian school principles instead of  the blindingly false axioms of Keynesianism and the eternal central planners, would strengthen the dollar, and as national debt went down the dollar would gain vs. gold.

I've heard there is a tonne of gold in a square mile of seawater. Perhaps in the future, giant de-salinating plants which will be needed anyway for drinking water soon,  and running on free solar energy, could routinely filter out gold sludge which in turn would be shipped on huge boxcars to smelting centers in Europe, US and Japan.  Bullion would mount up, dollar debt would decline, and in combination with dollar strength, this would pummel the gold price, making it even easier to back the dollar with gold.

So the Grad Plan is: mandate 24/7 commodity markets in gold and silver futures by amending Constitution. Then back dollar with public lands divided by M3 or M4. Then reduce the national debt by Paul-Austrian free-market capitalism leading to increased tax revenue. Finally, technology leads to new and large deposits of gold specie into the Treasury vaults.  Oh, and of course, the central bank would have to be abolished and there would have to be a free market in interest rates.

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Paul Grad:

To get to a hard currency from a fiat currency would be fairly simple, in fact we already have the essentials in place currently. My idea is this:

Pass a Constitutional amendment requiring that all U.S. commodity exchanges regulated by the CFTC or of a certain size would be required to maintain both pit and electronic trading of 3,6,9, and12 month futures in gold and silver, 24 hours a day, 7 days a week. Mini-contracts would be available so that the small American capitalist could participate.  At the same time you would freeze all mining, logging, or any other commodity extraction on federal lands, and pledge those lands as backing for the dollar, dividing the estimates of M3 by the no. or square whatever you choose of all public land.  Let's say it was 1 square inch/$, while the gold in Fort Knox (is there any? since Rep. Paul says the government won't run an audit or let him inspect the vaults, something you would think a member of Congress should have a right, and even perhaps duty, to do) could further back the dollar by perhaps 1-2 cents/dollar.  The huge raise in revenue to Treasury that would accompany the election of President Paul and implimentation of the free-market agenda, guided finally by correct Austrian school principles instead of  the blindingly false axioms of Keynesianism and the eternal central planners, would strengthen the dollar, and as national debt went down the dollar would gain vs. gold.

I've heard there is a tonne of gold in a square mile of seawater. Perhaps in the future, giant de-salinating plants which will be needed anyway for drinking water soon,  and running on free solar energy, could routinely filter out gold sludge which in turn would be shipped on huge boxcars to smelting centers in Europe, US and Japan.  Bullion would mount up, dollar debt would decline, and in combination with dollar strength, this would pummel the gold price, making it even easier to back the dollar with gold.

So the Grad Plan is: mandate 24/7 commodity markets in gold and silver futures by amending Constitution. Then back dollar with public lands divided by M3 or M4. Then reduce the national debt by Paul-Austrian free-market capitalism leading to increased tax revenue. Finally, technology leads to new and large deposits of gold specie into the Treasury vaults.  Oh, and of course, the central bank would have to be abolished and there would have to be a free market in interest rates.

 Instead of mandating anything, what if you just closed the FED and deregulated banks, the debt markets, and the equity markets. Then just stop printing dollars and tell everyone to get out of the currency within 10 years because it would no longer be legal tender. In that way the market would rise up to meet the demand for getting out of the currency. I know it would be rough, but the poison of fiat money will always be painful to remove from a system.

 Further, the idea of backing our money with our land that the goverment has. That land should be auctioned off ASAP and the moeny from the auctions used to wind down the goverment and pay down our debt. The same exact concept should, and I think Ron Paul has already talked about it, be used for our foreign military bases.

 I dunno, I just think that if the goverment tried to make laws for a gold standard, as opposed to just abolishing agencies that shouldn't exist and just allowing the effects to play out, that somehow it would leave a quazi evil seed somewhere that would sprout into a monster later.  No need to ask the demon to perform the exorcism, know that I mean? Just start exorcising the demon and everything else will play out well.

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Grant replied on Thu, Oct 4 2007 10:36 AM

The only rational way to do it is to denationalize money (which are Ron Paul's and Hayek's positions). Let the Fed keeping printing if it likes, but if it no longer has a monopoly, the bulk of the danger is gone. Trusting government to oversee a monopoly on anything is really silly anyways, and doomed to failure.

I wonder if firms like e-gold do well in poorer countries without a trusted currency?

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Currency, by definition, is never "hard;" people keep the hard money and spend the least hard.

However, the problem is easy if there is a federal system: the central government is mandated to coin both gold and silver coins, the several States adopt one or the other. If someone finds a reef of gold, then the "gold" States will flourish and the "silver" States  decline: you will know what is happening (unlike Spain, where the gold from South America wrecked the nation.)

Unhappily, the States that have enacted legal money statutes – Colorado, Missouri, and Nevada – have acccepted both gold annd silver, thus defeating the very principle of bi-metallism! 

If you are interested, there is a fail-safe measure the Congress could adopt  to save this country from the fate of Spain, namely "Currency as Seigniorage.".The Treasury should be mandated to deliver a Double Eagle to whomsoever hands in 20/20.67  ounces of gold  PLUS twenty Federal Reserve Accounting Unit Dollars. Then, as the green "money" depreciates, more and more gold will come flooding into the Mint.

I proposed this to the Committee on the Rolle of Gold in 1982; it was one of seventy submissions (echoes of the Septuagint!) 

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Grant:

The only rational way to do it is to denationalize money (which are Ron Paul's and Hayek's positions). Let the Fed keeping printing if it likes, but if it no longer has a monopoly, the bulk of the danger is gone. Trusting government to oversee a monopoly on anything is really silly anyways, and doomed to failure.

 

Or they could use the open market operations to remove fiat currency from the economy, deflating the dollar until it gets to a reasonable level in relation to gold stores and then just say 1 oz of gold is equal to $700 or whatever.

If they didn't enforce their supposed monopoly they would cause a shortage in the money supply that would spark competition from private entities who would have every incentive to ensure the *real* value of their investments didn't deflate in proportion to the constricted dollar supply.

This plan would take a while but after the Fed sold off all their 'privately' held assets they would lose the ability to control the economy as long as they were barred from buying new ones. Also phase out the FDIC, it wouldn't be needed unless banks tried to keep up the fractional reserve system and got smacked down by their competetors, and their role as 'lender of last resort' and they would become unneccessary other than as a bank holding the government's accounts for payroll and whatnot.

There would be some pain here and there but it would also seriously curtail things like CEO's making 400% higher wages than the average worker so most common people wouldn't complain too much. 

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Edgar729:

Paul Grad:

To get to a hard currency from a fiat currency would be fairly simple, in fact we already have the essentials in place currently. My idea is this:

Pass a Constitutional amendment requiring that all U.S. commodity exchanges regulated by the CFTC or of a certain size would be required to maintain both pit and electronic trading of 3,6,9, and12 month futures in gold and silver, 24 hours a day, 7 days a week. Mini-contracts would be available so that the small American capitalist could participate.  At the same time you would freeze all mining, logging, or any other commodity extraction on federal lands, and pledge those lands as backing for the dollar, dividing the estimates of M3 by the no. or square whatever you choose of all public land.  Let's say it was 1 square inch/$, while the gold in Fort Knox (is there any? since Rep. Paul says the government won't run an audit or let him inspect the vaults, something you would think a member of Congress should have a right, and even perhaps duty, to do) could further back the dollar by perhaps 1-2 cents/dollar.  The huge raise in revenue to Treasury that would accompany the election of President Paul and implimentation of the free-market agenda, guided finally by correct Austrian school principles instead of  the blindingly false axioms of Keynesianism and the eternal central planners, would strengthen the dollar, and as national debt went down the dollar would gain vs. gold.

I've heard there is a tonne of gold in a square mile of seawater. Perhaps in the future, giant de-salinating plants which will be needed anyway for drinking water soon,  and running on free solar energy, could routinely filter out gold sludge which in turn would be shipped on huge boxcars to smelting centers in Europe, US and Japan.  Bullion would mount up, dollar debt would decline, and in combination with dollar strength, this would pummel the gold price, making it even easier to back the dollar with gold.

So the Grad Plan is: mandate 24/7 commodity markets in gold and silver futures by amending Constitution. Then back dollar with public lands divided by M3 or M4. Then reduce the national debt by Paul-Austrian free-market capitalism leading to increased tax revenue. Finally, technology leads to new and large deposits of gold specie into the Treasury vaults.  Oh, and of course, the central bank would have to be abolished and there would have to be a free market in interest rates.

 Instead of mandating anything, what if you just closed the FED and deregulated banks, the debt markets, and the equity markets. Then just stop printing dollars and tell everyone to get out of the currency within 10 years because it would no longer be legal tender. In that way the market would rise up to meet the demand for getting out of the currency. I know it would be rough, but the poison of fiat money will always be painful to remove from a system.

 Further, the idea of backing our money with our land that the goverment has. That land should be auctioned off ASAP and the moeny from the auctions used to wind down the goverment and pay down our debt. The same exact concept should, and I think Ron Paul has already talked about it, be used for our foreign military bases.

 I dunno, I just think that if the goverment tried to make laws for a gold standard, as opposed to just abolishing agencies that shouldn't exist and just allowing the effects to play out, that somehow it would leave a quazi evil seed somewhere that would sprout into a monster later.  No need to ask the demon to perform the exorcism, know that I mean? Just start exorcising the demon and everything else will play out well.

Thanks Edgar for the very interesting comments, not only from you but from the other commentators who all had excellent ideas.

It's true that I should have mentioned removing the Fed first, rather than as an afterthought.  This, and removing FDIC insurance, would help greatly, although remember that Dr. Paul is a gradualist, or at least speaks like one, and I think America would except gradualism much more readily than an overnight laissez-faire capitalist revolution within the framework of the Constitution. I'd be all for that overnight change myself. The effects on the banks would be salutary, as smart money fled to non-fractional reserve, and well-managed banks, while the poor judgement risk-takers and swindlers will soon be forced out. L'union fait la force ...but also makes for safety, so the big and safe will grow bigger and safer. And they could offer less on their CD's to outcompete poorly run banks.

You say "I know it will be rough, but the poison of fiat money will always be painful to remove from a system."  Well, I don't know.  Its certainly not painful to those who trade value for value, and then save and rent those savings, or turn them into hard-commodity assets including land.  But I think my system would be fairly painless. 

Frankly, it seems to me that as long as we have commodity markets open in gold and silver, and as long as the government doesn't suddenly post guards at the entrances and exists of coin shops and banks trafficking in gold specie, then we do in effect have a hard currency, or at least one that we can manage as if it were because all we have to do to know its gold value is look at the monitor and place that number under (1 with a line under it), so I know my dollar is worth 1/746ths of an oz. of gold right now, although before lunch it was 1/744ths, etc....I am also free to switch into other "hard" (hahahaha) currencies like da Swissie, backed around 40% in gold.  Maybe we should just peg to the Swiss Franc, and save all this headache. But my idea for 24/7 commodity pits (or electronic is ok too) would instill even more confidence in the dollar than the current "closed for the weekend" soon-to-be anachronism.

But abolish FED, abolish FDIC, have 24/7 gold/silver futures open would go a long way. Yet, I don't see why we'd have to abandon the Dollar,(although I very much like the idea of being able to use any currency you wished, even if obsolete, or foreign gold silver and copper coins in daily in-US transactions. But sadly, the collectivists and prohibitionists have made this natural Right illegal).  We could call the Dollar a national treasury note or instrument, and since bullion under my plan would be building up in Treasury's vaults,and since the debt would be at worst steady and almost surely declining under Paulian economic policy, then each month Treasury could report that the Dollar was backed by a higher and higher percentage of gold, or gold and silver.  The fact that the trend was continuing steadily, say from 39% gold-backing to 51% in one year, would mean that dollar holders would almost certainly view the dollar as a "hard" or "gold" dollar, even though it wasn't, and treat it as if it were truly "as good as gold". (I think if we ever issue a commemerative 20$ Gold Double Eagle, it should have Murray Rothbard on the obverse.) I think you are too pessimistic Edgar.  There would be a boom and euphoria after the cleanout of lousy market predictors.  Savers and the poor would get richer, so it would be quite popular. Not much pain I think. The only agencies you'd need would be Treasury (under James Grant or Walter Williams?) and the CFTC to keep open the 24/7 futures markets.

I'm surprised you'd suggest selling the land ASAP and using it to pay down the debt, given our Libertarian distrust of government having our money.  The public would be getting worthless paper in exchange for a hard asset, and any money raised would soon go into the very same black hole of wasteful projects and debt it currently goes into.  Also, how do you determine the true value of the land? And if you say "what it will bring at public auction", remember the Rothbardian principle that the FED creates malinvestment by getting the money into the hands of the bankers and debtors first, who then spend it first, so, assuming the government ran these public land auctions, the lands would go primarily into the hands of those who have most benefited from the fraudulence of the FED. That's not fair.  Not to mention how the auctions would probably be slanted towards the benefit of the large corporations, say, by selling all or most of the lands in such large parcels that few individual capitalists could bid on them.

However, once the debt had been erased or almost erased, and the percentage of gold backing of the dollar had risen steadily for so long that people viewed it as virtual gold, then the public lands could be sold.  But selling the public lands under such a spendthrift collectivist government as we currently have would be accelerated suicide, worse than we are currently commiting.  Also remember that we have entered an inflationary cycle only 2 or 3 years back, and that these cycles tend to last 20-22 years.  Thus we'd probably get a lot more for the resources on those lands 20 years from now.  And of course, since there will be no demand for construction lumber for the next several years, to sell timber now is foolish ---but of course its all part of corporate welfare, so they'll plead for their usual theft of our resources at non free-market prices.  None dare call it corporate communism.

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Brian W. Firth:

Currency, by definition, is never "hard;" people keep the hard money and spend the least hard.

However, the problem is easy if there is a federal system: the central government is mandated to coin both gold and silver coins, the several States adopt one or the other. If someone finds a reef of gold, then the "gold" States will flourish and the "silver" States  decline: you will know what is happening (unlike Spain, where the gold from South America wrecked the nation.)

Unhappily, the States that have enacted legal money statutes – Colorado, Missouri, and Nevada – have acccepted both gold annd silver, thus defeating the very principle of bi-metallism! 

If you are interested, there is a fail-safe measure the Congress could adopt  to save this country from the fate of Spain, namely "Currency as Seigniorage.".The Treasury should be mandated to deliver a Double Eagle to whomsoever hands in 20/20.67  ounces of gold  PLUS twenty Federal Reserve Accounting Unit Dollars. Then, as the green "money" depreciates, more and more gold will come flooding into the Mint.

I proposed this to the Committee on the Rolle of Gold in 1982; it was one of seventy submissions (echoes of the Septuagint!) 

The Currency as Seigniorage idea is ingenious. I can't see any theoretical flaws in it; the only practical problem would be lugging around rolls of double eagles when attending auctions.  Was this your own idea? and what was the response of the committee? The fact that it has not been implimented augurs well for its validity.

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Anonymous Coward:

Grant:

The only rational way to do it is to denationalize money (which are Ron Paul's and Hayek's positions). Let the Fed keeping printing if it likes, but if it no longer has a monopoly, the bulk of the danger is gone. Trusting government to oversee a monopoly on anything is really silly anyways, and doomed to failure.

 

Or they could use the open market operations to remove fiat currency from the economy, deflating the dollar until it gets to a reasonable level in relation to gold stores and then just say 1 oz of gold is equal to $700 or whatever.

If they didn't enforce their supposed monopoly they would cause a shortage in the money supply that would spark competition from private entities who would have every incentive to ensure the *real* value of their investments didn't deflate in proportion to the constricted dollar supply.

This plan would take a while but after the Fed sold off all their 'privately' held assets they would lose the ability to control the economy as long as they were barred from buying new ones. Also phase out the FDIC, it wouldn't be needed unless banks tried to keep up the fractional reserve system and got smacked down by their competetors, and their role as 'lender of last resort' and they would become unneccessary other than as a bank holding the government's accounts for payroll and whatnot.

There would be some pain here and there but it would also seriously curtail things like CEO's making 400% higher wages than the average worker so most common people wouldn't complain too much. 

Grants proposal to denationalize the money seems simplest and most direct way to clear the air.  Anonymous Coward's "Or they could use open market operations to remove fiat currency from the economy, deflating the dollar until it gets to a reasonable level in relation to gold stores."  That would work too, but that is the current system, and gives the power to the FED, and so what happens,as now, when the FED instead of raising interest rates by fiat or withdrawing liquidity in the face of inflation, does the exact opposite as it did a few weeks ago, and lowers when it should raise because it is under the influence of the banking/debtor sector who agree bi-partisanly to inflate the currency?  Volker created a lot of credibility for the FED, and Greenspan, since he hung out with Rand and was bandied about as a crypto-libertarian hard money guy ---- witness his statement on gold standing as the last bastion of value against central bank monetization of debt prior to becoming FED chief ---  he seemed like he could handle the debt bomb and probably could when it wasn't the extreme guns and butter wild deficit spending we are now seeing which feels like the LBJ days of Vietnam. "We're the richest nation in the world" the economically ignorant parrot, "we should be able to "defend ourselves" and still feed and pay for health insurance for the "less priviledged" so they can afford their cigarettes, which helps them cope with stress."

The FED can roll along for a long time and look good if inflation is in the 2-3% range, but only if government debt is not too outrageously large, andif it has someone like Volker as Fed chief, a Democrat and not a super-wealthy man at the time, willing to raise rates in the face of screaming Democrats and their unions, and Republican manufacturers. Unless I've bought a snowjob on Volker.  I always thought he cracked that Johnson-Nixon-Carter massive inflation with the sand in his veins.   But eventually a Volker or Greenspan leaves and you have a combo of a deficit-crazed president and/or congress, with a compliant fed thats buckling to pressure from the corporate socialists, like now.  It's pretty clear, but John Q. Public who doesn't know what Austrian economics are, doesn't have much clue to how it works.  That same person can usually grasp the essentials of Austrian economics because they strike his common sense as right; Austrian economics is probably not much different from rural Missouri economics when Truman was coming up.

I'd say all these schemes would work. I think Grant's is the simplest route but would seem somewhat drastic to the man on the street; I find Mr. Firth's plan  simplicity itself and most ingenious, although I can't see granny having an easy time collecting 20/20.67 oz. of gold to take down to Treasury. Anonymous Cowards plan of having the Fed withdraw liquidity seems the simplest-least-drastic-solution and I would guess most palatable to the public under the current situation, since it reinforces their belief that the government can do things better than the market and they don't have to give up their security blanket of the FED a lot like the security blankets of FDIC insurance and the minimum wage.

"So each time there is another central bank caused catastrophe, we learn from our situation and apply it to the future." "Thanks Mr. Fed chief."

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Anonymous Coward:

There would be some pain here and there but it would also seriously curtail things like CEO's making 400% higher wages than the average worker so most common people wouldn't complain too much.

 

I'm curious, how would it curtail their wages? 

 

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Paul Grad replied on Thu, Oct 4 2007 10:39 PM

Anonymous Coward ---I did want to criticise, though, your use of the phrase "deflating the dollar until it gets to a reasonable level in relation to gold stores". Judging what is "a reasonable level in relation to gold stores" seems to me to be a completely subjective and impossible thing to do.  The gold futures pits have been open for decades, and the price usually fluctuates every split second or few seconds, so it would seem that if the top traders and experts in the world cannot agree on a fixed or "reasonable" level in relation to gold stores, how can the FED planners do so?  Only the market can discover it through its collective anarchy; no government or FED expert or panel of experts can do this. That's why I suggested a constitutional amendment mandating 24/7 open precious metal pits, as a practical substitute for the Constitutional requirement to coin only gold and silver, but with similar effect.

The other idea I had was for a literally hard currency.  In each U.S.$20 there would be about 20 cents worth of ground gold dust mixed into the cotton rag.  The paper would sparkle when held up to the light.  A stack of  approx.$75,000 worth could be smelted down to one oz. of gold if the holder so wished.  These "gilts" would help protect the purchasing power of the currency by making people constantly aware of inflation (and Austrian theory). Obviously a theory I derived from those British Gilts, which I believe are Bank of England bonds with a gold-leaf seal attached(?).

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Grant replied on Thu, Oct 4 2007 11:29 PM

Paul Grad:
I'd say all these schemes would work. I think Grant's is the simplest route but would seem somewhat drastic to the man on the street;

The man on the street would not notice. His banks would function the same as the did before, FDIC and all. Eventually of course, the dollar would face competition, and the layman may (or may not) choose to switch currencies. It would certainly not happen overnight. But the threat of competition alone, as it so often does, might change the monetary policy of the Federal Reserve. Essentially, the entire banking system of the USA would face competition. In my opinion, thats really the only way to arrive at a sound financial system - the market process.

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 Grant---I don't think other currencies would offer much competition since the FED would probably coordinate its moves with the ECB, BOE, and BOJ/BOC in Asia. A few years ago the foreign central banks and the fed were all increasing their money supply together at a rate of about 10%, so the option of fleeing from the dollar into a foreign currency was no longer a valid strategy, though the investors wouldn't have known that till they got their hands on the money supply data from the various currency blocks. The only hedges would be gold/silver, the platinum group, and ultimately copper as inflation got really bad.

So the only valid competition can come from metals, not other currencies, unless their fundamentals are transparent. If a certain currency ran according to sound fiscal principles, then it would be very competitative against the dollar, and against gold too because of interest accrual. But you're right that the threat of competition alone would be enough.  The threat is more powerful that its execution.

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Inquisitor:

Anonymous Coward:

There would be some pain here and there but it would also seriously curtail things like CEO's making 400% higher wages than the average worker so most common people wouldn't complain too much.

 I'm curious, how would it curtail their wages?  

My understanding is the massive increases in the top tiers of management's wages is directly related to the inflationary policies, the banks get the new money first and put most of it into the stock markets causing 'malinvestment' of this sort. If they had to compete on efficiency instead of having the inflationary crutch they probably wouldn't be able to offer multi-million dollar golden parachutes and bonuses based on keeping the stock price up like they do today. 

I could be completely wrong but it seems to me cutting off the artificially cheap money supply would inject a little sanity into the market...

Paul Grad:
Anonymous Coward ---I did want to criticise, though, your use of the phrase "deflating the dollar until it gets to a reasonable level in relation to gold stores". Judging what is "a reasonable level in relation to gold stores" seems to me to be a completely subjective and impossible thing to do.

A couple people took issue with that phrase. What I meant was after the Fed sells off all their non-money assets *then* peg the dollar to the amount of gold held by the government instead of now when the dollar supply is so inflated that gold prices would most likely double. If they had a mandate to close the open market window and sell off what they already own over a medium timespan it wouldn't effect the economy as drastically as if they were to just say 'we have X amount of gold and there are Y dollars in circulation so one dollar = 0.001 oz of gold'. 

This would also cause a liquidity crunch over the time period they were engaged in deflating the dollar that would allow competitors to enter the market as demand grew. By the time they were done there would (hopefully) be a thriving market in hard currency thereby breaking the government monopoly and they would have no other choice but to end the fiat and back dollars with commodities if they wished to compete. 

The only way I could see them being able to keep the fiat dollar is if they demanded it be used for tax payments. Chances are people would just exchange whatever currency they typically use day to day for some dollars to pay the tax man and if they received dollars from the government immediately trade it for inflation proof money. People would have a choice in what kind of money they used and if they really wanted they could participate in some fractional reserve banking with the fiat dollars but I suspect most people would get rid of dollars as fast as they got them so as not to lose value on their 'investment'.

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The problem isn't what currency IS, rather that it is MANIPULATED in a CLANDESTINE way with no BACKING by an unseen GROUP. Hence, get rid of the GROUP, store something of VALUE in a warehouse that has OPEN and PUBLIC audit, and you get rid of MANIPULATION.

As defined by the Constitution, the only thing Government can do is coin metals and establish weights and measures. It is not a loan agency. It merely certifies purity and weight and no one else has the right to do that. You could bring raw material to the GOV, and for a fee, they will certify purity and put it in a coin form which is a seal of authenticity.

That's the principle anyway... we all know how it worked out.

Currency is kind of evil to society in a way. It used to be that people traded items of value ( nails, livestock,etc.) that they made/raised themselves by learning a trade handed down through generations. They spent most of their lives perfecting the trade and passing it on to the next generation. You product was your currency, hence, the better product you made, the more it's worth. When currency (coin) came in to the picture, now people can do multiple things with the end goal of the currency rather than the product. Now they could float around and do different things instead of just one thing because in the end, they were going for the currency (coin), and trading the currency (coin), rather than the product. It diluted knowledge. People became Jacks of All Trades and Master of None. Maybe it was necessary for society to go forward but I feel it brought down human knowledge as a whole. It's why finely crafted products are outrageously expensive today. Hardly anyone knows how to make things anymore.

True currency = Knowledge + Skill

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MrJekyll:

The problem isn't what currency IS, rather that it is MANIPULATED in a CLANDESTINE way with no BACKING by an unseen GROUP. Hence, get rid of the GROUP, store something of VALUE in a warehouse that has OPEN and PUBLIC audit, and you get rid of MANIPULATION.

As defined by the Constitution, the only thing Government can do is coin metals and establish weights and measures. It is not a loan agency. It merely certifies purity and weight and no one else has the right to do that. You could bring raw material to the GOV, and for a fee, they will certify purity and put it in a coin form which is a seal of authenticity.

That's the principle anyway... we all know how it worked out.

Currency is kind of evil to society in a way. It used to be that people traded items of value ( nails, livestock,etc.) that they made/raised themselves by learning a trade handed down through generations. They spent most of their lives perfecting the trade and passing it on to the next generation. You product was your currency, hence, the better product you made, the more it's worth. When currency (coin) came in to the picture, now people can do multiple things with the end goal of the currency rather than the product. Now they could float around and do different things instead of just one thing because in the end, they were going for the currency (coin), and trading the currency (coin), rather than the product. It diluted knowledge. People became Jacks of All Trades and Master of None. Maybe it was necessary for society to go forward but I feel it brought down human knowledge as a whole. It's why finely crafted products are outrageously expensive today. Hardly anyone knows how to make things anymore.

True currency = Knowledge + Skill

Sorry to play Mr. Hyde to you, Mr. Jekyll, but I must disagree with your view of currency. In the good old days,your product was not your currency as you claim it was, but what you traded for currency.  Only when you traded it in a barter situation could it be construed as currency, or a mystical union which made it both product and currency as it was being handed over during the trade, but which ceased to be for the new owner as soon as he viewed it as a product or commodity, assuming he didn't plan to trade it further for a new product on the open market.  In that case it would still be a currency.

Your dim view of currency continues ""When currency(coin) came into the picture, now people can do multiple things with the end goal of the currency rather than the product. Now they could float around and do different things instead of just one thing because in the end they were going for the currency(coin), and trading the currency (coin) rather than the product. It diluted knowledge."

I think currency (coin), be it hard or fiat, is a wonderful invention that gets commodities to the people that want them the most more efficiently than any other system, and without coercion. You say "now they could float around and do different things instead of just one thing because they were going for the currency." Well firstly, in modern society, going for the currency is synonymous with going for the product, since virtually everything is available for a price.  In the old days, currency wouldn't get you a lb. of sugar if you ran out and the town had too; you just had to wait for the next spice ship to dock. 

But when you say, "now they could float around and do different things instead of just one thing" it sounds like you're criticising banking, and various clever inventions like the mortgage, which makes it possible for millions to live comfortably in shelters for years, instead of out in the cold and rain of the field. The problem I suspect is not with banking, but with various fraudulent banking practices like fractional reserve banking, the FED, Federal Deposit Insurance,fiat currency, and permitting absurdly dangerous schemes like the subprime loans while concurrently insuring those loans and practices. Grammeen(?) bank is showing that banking can be virtually 100% socially positive, though I'm certain a communist or anarchist/nihilist might well disagree. Get rid of these frauds in the financial system and there will be no problem.  And society needs to try this experiment of raw undiluted capitalism in a modern, developed, affluent society that is pro-capitalist in is everyday ideology, i.e. the USA, which is why even the faint prospect of Dr. Paul's election is so exciting.

Finally,"it diluted knowledge" you claim. On the contrary, it vastly multiplied and disseminated it. The book publishers of Renaissance Italy were amongst the first big capitalist businessmen in Western Europe. The currency employed in buying and selling of books brought knowledge to every corner of Europe, causing a rapid escalation in scientific discoveries during the next century. This both dispersed knowledge, and concentrated it in the libraries of the first bibliophiles. Additionally, these big Renaissance capitalists were also book nuts,---that's how they got into publishing---, so they had lots of interesting ideas floating around in their minds, while being the only ones around with enough capital to be able to realise those ideas. They conceived a palace in their minds; their will said "Build it!" and a few years later there it stood, for the whole world to gaze on for hundreds of years. No wonder they loved capitalism!

I don't even think there would be anything wrong with a fiat currency if: 1) completely accurate statistics for the macro-economy (of the US lets say) were available to investors in real time 2) the FED were always right in its interest rate adjustments 3)the FED were incorruptible, and always judged objectively, 4)the National Debt were paid off. (even a freeze or freeze and reversal only on national debt might work), and 5)precious metal futures markets were open 24/7 ---if other markets like currencies, oil, and base metals were also open 24/7, so much the better.  But the first 4 qualifiers above are pipe dreams, so we'd better just scrap the FED, realise that the only highly predictable models work on microeconomies only, crush our debt and move towards a hard currency, and trust to the market to set interest rates.

Too bad the Fed never adopted Wayne Angell's idea of the Fed pegging the dollar to gold at $350/oz and working the interest rates up and down to keep it in a $325-375 range.  Since it was roughly 10x the old price of gold, it would have been easy for the man on the street to figure what his current wealth was in pre-FDR dollars. If we'd have kept our debt rock steady, I think it would have worked until such time as the FED were finally packed with corrupt officials. But Wayne Angell had too much common sense for the FED.

 

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Well it helps if you understand the business of banking and bank note issue, as well as the economics of coinage.

Regarding coinage, gold standard requires either a manufacturing operation to manufacture gold coins fit for circulation. This means about 10% copper to make it hard-wearing. I don't think existing mints manufacture coins that are hard wearing and fit for circulation, so unless you can find some significant body of coins you'll have to get into manufacturing. This should probably not be done in Africa, Asia would probably be more cost efficient and able to be regularised, but check the local regulations to make sure you're allowed to do it.

Regarding coinage, you have to realise that gold coinage is useless for low value transactions, since a small gold coin is about 5g which is worth about USD100. To provide a usable system of money you need small change, which I believe are best suited to bank notes issued in the form of metal discs, payable in aggregate in gold coin -- look at the history of coinage and small change and it was common at times where there was a shortage of small change for merchants to issue such redeemable tokens, and the authorities tolerated them because the people needed small change.

To issue bank notes, whether in the form of paper/polymer or metal discs, it helps to have a financial services operation to combine it with, especially one that provides transactional banking services, and currency exchange services. If your bank notes are bankable and exchangeable, then they will be more marketable and useful. Also, a lending operation enables you to put the funds received from issue of notes and from acceptance of funds on deposit to current account and term deposit to profitable work, and to pay for the costs of maintaining metallic reserves.

 

 

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MrJekyll replied on Fri, Oct 12 2007 11:44 PM
"Only when you traded it in a barter situation could it be construed as currency, "
Uh yeah... currency is just a middleman. The only reason gold succeeded was that is was scarce, it didn't spoil, it could be easily divided and their was nothing better that came along

"But when you say, "now they could float around and do different things instead of just one thing" it sounds like you're criticizing banking, and various clever inventions like the mortgage, which makes it possible for millions to live comfortably in shelters for years, instead of out in the cold and rain of the field."

Ya that's working out great right now isn't it. All banks are evil period. And so are their servants.

"I don't even think there would be anything wrong with a fiat currency if..."

There is no IF in fiat currency. It is robbery. It always has been and has always ended badly.

Economics is BS. Simply because our whole world is based on fiat currency, which is a game of lies and distortions. You can't make up charts and equations to make something true that is a flat out lie. There is nothing hard ( as in, to understand) about currency. It either has value or it doesn't. If someone doesn't want to accept a dollar, it has no value no matter what is printed on it. How many charts and equations does it take to figure that out? If you think economic strategies are going to protect you when rioting and society brakes down, you are in for a sorry surprise. If you don't know a LIFE NECESSARY SKILL, you are going to starve and die. If you can't grow your own food, build a house and do a little frontier medicine, you are FUBR. Better make it a point to live near a small farm with sustainable practices. Gold is only going to get you so far. You can't eat gold.
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Inquisitor replied on Fri, Oct 12 2007 11:51 PM

 

Economics is BS.

Good warning sign when not to take someone seriously. A lot of what passes for economics is indeed BS - now why let those who promulgate it get away with it? 

 

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Edgar729:
For instance, in Somalia they have no central goverment and are as close to anarchy as any country in the world. How could an entreprenuer like myself go over there and try to establish a gold standard? I was thinking that if you open up a bank over there (specifically a micro loan bank) that you could only lend out in gold denominated notes and accept payments in the gold equivalent. Over a short period of time, because they have no access to capital there and I would be the only source, you could establish a gold standard through the free market. What do you guys think?

First off, I do not believe in a gold standard. I believe that money should be backed on "faith", whether the government or another enterprise such as the free market. Money only serves as a medium of exchange to elimanate the double coincedence of wants. Money does not need to be back.  Only a mutual understanding of exchange needs to take place. Money makes this happen, but not a gold standard.  

 

Not only would this do wonders for the people there but it would be a great business decision. I fI didn't have to accept worthless paper and could accept commodities in exchange for my services that would be great!

Money is worthless. That is why I would recommend that you lend loans to people who produce and not consume. Production is worth and consumption is worthless. Only the production of goods are worth something. We exchange our production value and not our consumption value. 

 Back up your money any way you like, but it will fail if you lend it to consumers. Somolia will never take of  as a country.

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Paul Grad replied on Sat, Oct 13 2007 2:00 PM

IDigSluts_ky:

Edgar729:
For instance, in Somalia they have no central goverment and are as close to anarchy as any country in the world. How could an entreprenuer like myself go over there and try to establish a gold standard? I was thinking that if you open up a bank over there (specifically a micro loan bank) that you could only lend out in gold denominated notes and accept payments in the gold equivalent. Over a short period of time, because they have no access to capital there and I would be the only source, you could establish a gold standard through the free market. What do you guys think?

First off, I do not believe in a gold standard. I believe that money should be backed on "faith", whether the government or another enterprise such as the free market. Money only serves as a medium of exchange to elimanate the double coincedence of wants. Money does not need to be back.  Only a mutual understanding of exchange needs to take place. Money makes this happen, but not a gold standard.  

 

Not only would this do wonders for the people there but it would be a great business decision. I fI didn't have to accept worthless paper and could accept commodities in exchange for my services that would be great!

Money is worthless. That is why I would recommend that you lend loans to people who produce and not consume. Production is worth and consumption is worthless. Only the production of goods are worth something. We exchange our production value and not our consumption value. 

 Back up your money any way you like, but it will fail if you lend it to consumers. Somolia will never take of  as a country.

Backing money by "faith" alone is usually disasterous, and a recipe for big problems. But a "faith" currency is actually based on interest rates. If my fiat currency yields 5-7% at the bank, and inflation is running 1-2%, while gold prices average 0% annual increase, then I am better off with a faith currency than gold (during market hours ---  but when the banks and the commodity markets are closed, the fiat currency owner is at much greater risk  than the gold owner). That's why I think a fiat currency might be a possibility, if the treasury ran no deficits or even a surplus, and if inflation was truly 3 to 5 percent below the T-Bill/BankCD rate. Franklin points out that the real value of money is not the amount of gold or silver it respresents, but the amount of labour it can command. I would agree. So, money value can be fairly well delineated by interest rates and wage rates. But having a "hard" or partially "hard" currency is even better; it can be backed by gold, silver, a basket of industrial commodities, a partial pegging to other "sound" currencies (of which there are currently none), in addition to  the free-floating interest and wage rates just mentioned. It could also be backed by public lands, if public lands are permitted in the society in question (and might be what America might have to do soon if unfortunately, as the probabilities indicate, we get another collectivist president. However the probabilities at the start of the Revolution indicated that the Brits would hold on to their colonies. Nils desperandum!).

Allowing the consumer a choice between various currencies would also give the market a voice in choosing what currency was perceived as best, although I think this is currently the case, for the most part, due to the existence of financial and commodity- futures markets.

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Bostwick replied on Sun, Oct 14 2007 4:50 PM

Africans don't need to import corrupt Western banking systems. They understand commodity currency better than any of us slaves to democracy.

M-banking

 

Peace

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Simplistic answer:

  1. Freeze the country's money supply. Gut the powers of the central bank and blow up the printing presses if you have to.
  2. Limit the amount of government currency in circulation. Issue a new design and use polymer for longer circulation. The new design is just for replacing worn out notes. And this time, keep track of the serial numbers so everyone has an idea of how much actual amount of money is in circulation (after awhile).
  3. Allow people the free conversion of foreign currencies (No more "Official Exchange Rates") and abolish all rules regulating who can hold them.
  4. Remove all taxes on commodities (Copper, Silver, Gold, Oil, etc.) so they can be used as stores of value.
  5. Allow anyone to issue a parallel currency to the official (old fiat) currency, provided that they are 100% backed by commodity.
  6. Allow anyone to issue notes on the condition that have double the value in reserve from their own finances, not that of the depositors.
  7. Allow anyone the right to mint his own coinage (particularly minor coinage) provided it is of an common commodity, purity, size, shape, and weight. (If its 20 grams of 95% copper, then who cares who's face is on it.)
  8. No more central bank bailouts. Let the wildcat outfits and fraudsters face their own clientele (who will all be carrying heavy blunt instruments of some sort, proceeds to be aired on pay-per-view.)
  9. Tell the whiny cry-baby socialist public to quit asking the government for rulings and just figure out something on their own if the system hits some snags.
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