In Advance Of A Gold Standard, A Look At Gold Stocks vs. Flows

Tyler Durden's picture

Submitted and copyright by Keith Weiner 

Stocks vs. Flows

Today, people who believe that gold is money think that one should hoard gold.  They seek to take possession personally.  Or when they have it stored professionally, they look for a private vault outside the banking system where they can (hopefully) trust their warehouse receipt.  And why shouldn’t they avoid the banking system?

Its corruption was always inevitable.  The advent of the central banks before World War I ensured it.  The theft (in the US) of the gold of the people in 1933 cemented it, along with the dollar devaluation.  The treaty at Bretton Woods in 1944, in which the world agreed to treat the US dollar as if it were gold nailed it in place.  The default on the US government’s gold obligations in 1971 by President Nixon set it in stone.  Today, we have a corrupt central bank that centrally plans money, credit, discount, and interest.

The regime of irredeemable paper money is going to collapse.  Anyone who understands it should want to get out of it, and not be a creditor to insolvent banks.   This is a rational personal response to an irrational system.

But it is not necessarily a vision for how the world ought to be run, or how a banking system should be designed.  Today, it is necessary to hunker down, trust no one, hide one’s gold, and take no unavoidable or unnecessary risk.  Today, one is concerned with one’s stocks of gold.  One has what one has, one tries to get a little more while one can, and then one hopes that after “it” happens, one will have enough.

But let’s assume we had the Rule of Law once again, reasonable expectation of enforcement of contracts, and the absolute right of property.  What kind of financial system would we have?  Would it be the product of fear and distrust wherein gold does not move, but is hidden and buried in vaults?

Many today propose that banks must back their reserves with 100% gold.  They envision a vaulting and payment processing system only.  But without realizing it (or in some cases deliberately), this policy rules out credit.  Perhaps it is based on this view, that detractors of the gold standard say that there is not enough gold for modern production and trade.

And they would be right!  Most businesses make a small margin.  They buy their inputs such as raw materials, labor, tooling and other consumables, and they sell their product for a little more.  In any competitive market, margins are thin.  Therefore most companies will never have the capital to buy their inputs for cash (and even for those few who could, this would be an inefficient use of capital).  And then what happens when technological change allows a new business to insert itself into the supply chain?  The supply of gold coins would have to expand, which is clearly not feasible.  Or else a new business could not be added to the supply chain.  This problem is intractable.  It does not go away when the economy grows larger, technology improves, production becomes more sophisticated, or markets interconnect globally.

The point of this essay is that if we are to have a dynamic economy with production, trade, invention, innovation, global markets, and growing efficiency then there must be a financial system in which gold flows.

One gold coin can do a lot of work in the economy if it is unshackled and thereby allowed to move to where it’s needed to pay creditors and extinguish debts.  Then it can move to the next and the next.  In a free market, both Real Bills and bonds (and probably other credit instruments) will arise.  The structure of credit, who owes whom and when each obligation is due, the amount of total credit, the terms and conditions of credit, and the business models of those who deal in credit will evolve based on the needs of the participants in the markets.

Credit will be limited only by the creativity of the entrepreneur, the inventor, the innovator, and others.  That is, gold will flow and men will prosper if there is no draconian rule that bank reserves must be 100% backed by static stocks of gold, no onerous restrictions on who may deal in trade credit, and no reactionary rules against lending based on ancient hatred of “usury”.

As we begin the earnest discussion of how best to go back to a gold standard, and what that gold standard should look like, I think it is important to keep in mind that gold must be free to move.

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SumSUN's picture

Those who don't know history are doomed to repeat it.

killallthefiat's picture

Will gold buy some bitchez in the collapse?  Therefore "Gold, bitchez?"

Central Bankster's picture

There is plenty of gold, silver, platinum, palladium, and copper to use as money.  Most the plebs will use copper and silver.  Silver is the money of merchants and Gold is the money of Kings they say :)

Mr Lennon Hendrix's picture

Plebs didn't use monie, they bartered, and lived day to day.  They had no wealth, and the wealth they had was stolen by the monachs.

Boy we've come a long way.

strannick's picture

At the moment 'gold being free to move' equals 'gold rotten with fraud'. For bankers, 'liquid gold' means they sell you paper instead of gold.

Through COMEX gold, unallocated gold, gold certificates, GLD, ect, gold demand is dilluted by these gold frauds, and its price is maintained artificially low.

Under a gold standard, of course there is enough gold to go around, just the price will be much much higher.

fourchan's picture

i agree paper is a load of devaluating crap.

Pinto Currency's picture

 

 

Replacing fractional reserve fiat money with fractional reserve gold money will solve almost any problem.

Harlequin001's picture

the article is pointless gibberish.

BigJim's picture

What the author fails to understand is that cheap money (ie, fractionally created credit) doesn't make capital cheaper; it just expands the money supply at everyone else's expense, distorting prices for things usually bought on credit.

Bay of Pigs's picture

Nice to see you batting a thousand on the votes Trav. Oops, O-fer...

disabledvet's picture

"you can buy all the gold you want" right now--it's "just the amount of money necessary" isn't it. The fact of the matter is there is NOTHING rational about a "gold standard"--it does rationalize PRICING however. of course the moment we go on a gold standard "you'll never see any of it" as the government and the banks will have it all. now since it is patently false that the dollar isn't "redeemable"--it is in fact "redeemable for anything--AT A PRICE" then "we have what we have." for the media its "you have no just but to obey." for the rest of us however "it's a problem solving excercise." and given the fact that the media has stuck every knife they have in the back of every person who either currently serves or who has ever served in the US Military (while pining for war i might add) then the reality of "a solution" which is coming will exterminate the bulk of them from their physical exsistence. "You will obey" indeed.

Bobbyrib's picture

"Under a gold standard, of course there is enough gold to go around, just the price will be much much higher."

 

Why do you guys continually ask that the same criminals who constantly cheat the citizens of our country now involve gold to back our currency? Any person who is not a fool would rather hold on to their gold than to trade it these cheats. The price of gold may be higher under a gold standard, but the minute you trade it in for credit/gold backed dollars it would wise of you to not expect to see gold for as long as you live. As someone else said "gold is the money of kings," in our society would you consider yourself a king if you gave up all your gold and gave it to a bunch of cheats/crooks? I certainly wouldn't. Fuck the gold standard, the citizens of our country are far too stupid to understand that if they elect the wrong person (like FDR or Nixon) the gold standard could become a rigged game much like the rest of the current US economy.

Each person who holds gold should hold onto it as long as possible. When the time comes trade amongst yourselves for goods and services you need. Keep the cheats out of your economy, they will only fuck/skew it up (that's all bankers and politicians know how to do). I believe that if a gold standard were made they would call in all the gold held by private citizens (afterall there would be a gold "shortage") then you would be at the mercy of the cheats all over again.

rocker's picture

Please don't forget the two ten year old wars financed by the China/Bush Charge Card. Just charge it. Bartering of the highest order.

I have always been amazed how stupid most Americans are when it comes to this.  Debt Slaves to the Fed.

How the hell do you go to war and give tax breaks and extra medicare benefits.  You charge it and don't count it against the deficit.

Sort of what the banks do. Off the books balance sheet. But the shame is "Most" Americans still do not understand how we borrowed from China.

And why is it only important now. Didn't someone once say, "Deficits Don't Matter".  So why now?

Two great investments, Precious Metals and Ron Paul.  Eh.

AE911Truth's picture

"Americans still do not understand how we borrowed from China"

Speaking of borrowing from China....

Anybody have reliable info on the 1934 issued gold backed Federal Reserve Notes entered into evidence in the Keenan Complaint?

It seems the FED borrowed a lot of gold from China (documented by the FRNs) and they want it back.

http://tiny.cc/0v9d2

Watauga's picture

Before you respond along the lines of "George Bush is to blame for everything," keep in mind I was critical of Bush even before he was elected, believed he would not make a good President, and am comfortable saying that he was, in fact, a terrible President.  Now, that said, you do realize, do you not, that, as bad as Bush was, Obama has had the U.S. engaged in "the wars" nearly as long as Bush had us so engaged, that Obama has done more (stimulus, bailouts, deficits, debt) to destroy our economy than any President in history (after Lincoln, of course, who created, through his war against the sovereign C.S.A., the very possibility of Obama's tyranny), and that Obama's culture, race, and religious wars against the majority of Americans are the most evil acts committed by a President in our history?

Now, again, don't kneejerk into some spasm of "Bush did it" or "It's all Bush's fault" as Obama, himself does.  Obama as messiah is a fraud and a failure.

And yes, they all stink, from Boehner to Bush to Reid to Pelosi to Frank to McConnnell to Obama.  They stink to high heaven, as the onld saying goes.    

Harbanger's picture

So does a nice face and a story.  And she'll even give you some of her sugar daddys gold to boot.  Some things never change.

Central Bankster's picture

No doubt, if you can talk and you look half decent- you get laid.  I'm not understanding the getting money from their sugar daddy part.  clarify?

Harbanger's picture

If she's got a sugar daddy, she knows she's a player.  Not a bad person, just circumstance and survival. She wants to be in love.  When a woman gives you her heart there's nothing she won't do.  Nothing.  It's a blessing that most men don't see.

BidnessMan's picture

Can tell you are not married....

fijisailor's picture

can tell you have never been in love

SilverDOG's picture

BidnessMan

Takes endless perseverance to maintain sharing, in a PAPER relationship.

A paper marriage contract, ensures absolutely NOTHING.

Effort Does. Do It.


DoChenRollingBearing's picture

@ killallthefiat

They'd probably be lined up all around the corner...

Chief KnocAHoma's picture

Here is the short and simple version:

It was obvious in the late 1960's that our (the USA) economy and trade balance was about to swing wildly to the import side. So as the holder of the largest bullion reserve in the World it was in our interest not to exchange goods (oil) for gold.

It was better to have a bad ass military and tell the rest of the World "we will give you our paper for your oil and cheap shit made in asia."

Win win for everyone. The US gets your oil and keeps our gold here. You don't get blown off the face of the planet.

The only way a gold standard will ever be reintroduced in this country would be if we became net exporters again. No way will we ever unload a ship full of toxic sheet rock from China, then reload the boat with gold and watch it sail over the horizon.

These circumstances should tell you pretty well what the REAL money is.

Sweet Chicken's picture

No way will we ever unload a ship full of toxic sheet rock from China, then reload the boat with gold and watch it sail over the horizon.

These circumstances should tell you pretty well what the REAL money is.

 

God that is such a horrific thought but the simplicity of your imagery is perfect. Well done! +1

vast-dom's picture

IN ADVANCE OF NO STANDARD -- FLING FIAT FLING GOLD SILVER TRADE OBSIDIAN POINTS AND IPADS BARTER ETC. -- THIS HOMO SAP INFESTED ROCK IS DOOMED.

HoofHearted's picture

And most of us reasonable people see that one needs to be able to lend out gold so that said gold can earn interest (or a dividend if someone wants to go to that area). Then maybe you can eat it. But this 100:1 fractional reserve garbage is just too much. And if the banksters have any way of playing around with our gold, then they are going to try it...unless we go back to the punishment for debasing the currency that the US originally had. Then maybe we wouldn't be dealing with the Bernank or Timmay.

madcuban's picture

Money doesn't need to be backed 100% by gold.  That is an insane assumption and it has never been the case.  Gold being "free" to move is a function of Gresham's Law.  Bad money drives out good money.  If we do it right, gold will find its way back out into circulation.  This article is ridiculous and based on ill-conceived assumptions.  Credit has a place, but let's not get carried away.

ShoeShineBoy's picture

 while your sound bites come across AS IF you knew one thing or two, it does not help hiding how moron you are in your baseless arguments. Let's cut to the chase, while that said credit is someone's (hopefully a AAA debtor in your world) liability, gold is no one's liability. got it?

madcuban's picture

have you ever listened to lew lerhman or read ron paul's book on the gold standard originally written for ronald reagan when he wanted to renew a gold standard and had ron commission a study??  go do those things and then come back and tell me i am wrong on that count.   and while your at it, go read shiff's book on how an economy works and why it fails.  moron.  and while you are it, shine my shoes.

ShoeShineBoy's picture

 ohh right, mr. suck my mad cuban, while you were polishing your useless arguments reading all those papers/books, i have been shining my PA trading all those unbacked  claims and debts you only hear from headlines, day in day out, listening bunch of technocrats talk their books. Oh, yeah, i don't have any drawdown year, if you wonder. And, i might have read more than you can possibly imagine. Now, go eff urself.

zerotohero's picture

I applaud your sense of self importance.

Stack Trace's picture

We all suffer from self-importance. It is a form of ignorance that keeps this whole mass-delusion from unwinding.

If you aren't important to yourself then really ... Why bother?

In fact this sort of circular, specious, adhominem retort is getting stale as the promises made by Greece last week.

Not that I endorse the positions above. I just find your "self-important" hypocrisy a little to smarmy.

TheSilverJournal's picture

Money does need to be backed by 100% gold because gold is money. Backing by less than 100% is counterfeitting. That's what the US did with Bretton Woods...exported counterfeit notes to the central banks of the world and now those notes are coming to be found out as the worthless counterfeit gold notes that they are.

This doesn't mean that there can't be fractional reserve banking. As long as the fraud that comes along with fraction reserve banking is removed and depositors are told that they may not be able to withdraw their deposits on demand, then there's no problem with it.

TheSilverJournal.com

AgShaman's picture

It's not that the author's premise of a different paradigm of Flowing Gold can't exist and offer a more fruitful economic landscape.

It's more of a dynamic that the proletariat rejects these systems based on more historical monetary settings.

People enjoy using plastic....and buying on credit. It gives them a false sense of 'worth' and importance within the construct. They can enter into a fictitious world that they might not be allowed if they had to actually earn the full principle before gaining ownership in various trinkets or lifestyle sets.

They have been brainwashed into believing that a paper currency is equivalent to money. When the true lessons come to their doorsteps....the final phase of the bull market will be nearing the top and they will be entering the bubble at the top to perform their primary function of completing the bubble and offering the earlier participants an exit strategy.

The Govt. and FED are a symbiotic bubble building machine....with a mandate to keep the majority of serfs cluelessly locked into their stations and seperated from the few that reside closer to the controlling power base.

The fact that only 1% of the American populace is involved in physical PM's is proof positive of the disconnect in their knowledge of history and how it applies to MMT. If most of the people were not so distracted....then perhaps they wouldn't have missed out on the early and middle innings of this bull market....and 500%+ thus far.

You could ask them why the govt. values their gold holdings at $42.22....and the market sets the price at $1700....and they'd still not connect the dots. Like the Middle Ages....the unwashed masses are told what to believe by their slave masters and Lords. They will provide the same function they've been providing for millenia....and no internet age will account for their awakening.

Gold will return again as a component in some monetary construct when the Overlords are ready to roll it out for their own ends and agendas....definitely not until they've decided it's time

SWRichmond's picture

They have been brainwashed into believing that a paper currency is equivalent to money. When the true lessons come to their doorsteps....the final phase of the bull market will be nearing the top and they will be entering the bubble at the top to perform their primary function of completing the bubble and offering the earlier participants an exit strategy.

Exactly.

zerotohero's picture

Oh you - now you sound full of yourself too.

madcuban's picture

maybe you didn't hear me.  i said go get your shine box and shine my shoes.  i find it funny that your response, instead of being based in any facts whatsoever, is just a bunch of self important nonsense.  it is clear you are just an a$$ clown.  you might read many things, but none of it would seem to be even remotely intelligent.  this article points to the rule of law being the necessary basis of a flourishing economy, and that is correct.  pegging the dollar to gold (redeemable by a properly determined %-in all likelihood not 100%) would allow the market to trade freely.  but at the end of the day, gold would still be held as a store of value. 

SilverDOG's picture

madcuban,

 

HhMMmmm?

Careful with your paper trading gurus points of view upon gold's "place" in an economy. Schiff! BWaahahaha! He is losing his shirt currently. I removed my investments from EuroPac and have outperformed effortlessly.

No wonder Ronnie Raygun did not utilize his own written noose. He changed, in eight(8) years, the USA from #1 creditor to #1 debtor of the world.

A flurry of assumptions, by the multitudes equals -0-.

madcuban's picture

I agree. Schiff seems to be wrong about things here and there. But his overall view on the price of gold and the error of government are spot on. I only referred in the above post to his book. How an economy grows and why it fails is still true and a basic read for anyone not properly educated in economics (austrian) and wants to start learning. As for Reagan, he wasn't perfect by any means, but a clear better choice than Obama, Romney, Gingrich, or Santorum.

madcuban's picture

I agree. Schiff seems to be wrong about things here and there. But his overall view on the price of gold and the error of government are spot on. I only referred in the above post to his book. How an economy grows and why it fails is still true and a basic read for anyone not properly educated in economics (austrian) and wants to start learning. As for Reagan, he wasn't perfect by any means, but a clear better choice than Obama, Romney, Gingrich, or Santorum.

tmosley's picture

how moron you are

lol, those who dwell in glass do well to refrain from throwing stones.

Physical gold is no-one's liability.  That makes it cash.  That doesn't mean that a person can't, with full and up front disclosure, deposit it in a fractional reserve bank which allows withdrawals on demand such that the bank has the right to refuse withdrawal for a certain period of time (with the requirement that it to pay a penalty to do so).  That is exactly how it works under free banking, and this system WORKED.  It worked so well that bank runs were incredibly rare.

Max Fischer's picture

 

 

The only "successful" examples of free banking in the US were before the Civil War, and they were few and far between.  The Scottish free banking era ended in the mid 1800's.  

If anarcho-capitalists wish to taken seriously, you guys need to prove that your archaic ideologies are applicable to the modern, complex, multi-trillion dollar, intertwined economies of today, where hundreds of billions of dollars are moved around the planet in the blink of an eye.  Libertarians are infamous for making similar false analogies. Just because something worked 150 or 200 years ago in colonial America, doesn't mean that it's applicable today. There's a reason why Gunsmoke and Little House on the Prairie reruns aren't popular today.  

Max Fischer, Move Forward. 

 

madcuban's picture

You are confused.  Banking was largely unnecessary before the civil war, this was despite the fact that many states had competing currencies.  Several times before that "central banking" was attempted several times with the aid of the federal government and much to the distress of states.  Each time, those central banks failed and created many problems for the fewer actual local banks.  The civil war actually made things worse as Lincoln actually needed a central bank in order to finance his war.  Lincoln was about as bad a president as it comes, as he purposely destroyed most state's currencies so he wouldnt have to repay what he borrowed from them to pay for his war on the south.  remember, the civil war started out largely as a trade war and an effort to stop the south from seceding.  Only later did he use slavery as his excuse for the civil war.  But i digress.  There were many successful banks, and there were NO successful central banks.  We have proof, it's called history.  read up on it.

SilverDOG's picture

How these derived digressions are formulated is outstanding. 

The spectrum limits exhibited remind me of special education 8th grade history we had to hear in the hall next to study.

Amusing shotgun approach, keep shooting, you missed.

madcuban's picture

Derived?  Oh, you probably meant contrived.  English.  Learn it. Use it. Speak it.

SilverDOG's picture

madcuban

 

Use the dictionary when you do not understand. Not your proverbial mouth. 

Look it up, Tard.

BigJim's picture

  If anarcho-capitalists wish to taken seriously,

You can advocate the return of a gold standard without being an anarcho-capitalist. In fact, anarcho-capitalists are more likely to advocate free-banking, as 'the gold standard' requires government intervention in the money supply via legal tender laws.

...you guys need to prove that your archaic ideologies are applicable to the modern, complex, multi-trillion dollar, intertwined economies of today, where hundreds of billions of dollars are moved around the planet in the blink of an eye. 

Most of these "hundreds of billions of dollars" moving around the planet in the blink of an eye are i) fractionally-created unbacked promises, and ii) the result of FX trades, which wouldn't exist under a gold standard, because gold would be money.

...Libertarians are infamous for making similar false analogies. Just because something worked 150 or 200 years ago in colonial America, doesn't mean that it's applicable today. There's a reason why Gunsmoke and Little House on the Prairie reruns aren't popular today.

Does that specious analogy make you a libertarian, then?

Motley Fool's picture

glass houses :P

 

"Physical gold is no-one's liability." True.

" That makes it cash. " Define cash.

" this system WORKED." It worked until it didn't, every time. Just like a fiat system. :P