The Real Debate On Gold And Money

Tyler Durden's picture

Submitted by Jeff Snider, President and CIO of Atlantic Capital Management

The Real Debate On Gold And Money

Monetary adjustments, heavy as they have been in these past four years, will remain a permanent part of our economic landscape so long as central banks remain committed to their current course.  Now that the annual excitation of economists and their dreams of recovery are waning, and the “unexpected” decline in the economy has returned right on schedule, the discussion needs to turn toward those monetary interventions.  I have had many discussions with clients and members of the general public on the topic of the gold standard over the past few years, especially in the past several weeks as Chairman Bernanke deliberately broadcasts his specific problems with it from the perspective of a central banker tasked with “saving” the economy.  Even getting past the glaze of apparent anachronism, largely that something so archaic seems utterly incompatible with our modern electronic society, the persistent, and otherwise extremely healthy, mistrust of banks prevents a further discussion of how the gold standard really works.  For those that actually know the US paper dollar was primarily issued by banks prior to 1913 in the form of deposit claims on “reserve” assets, it is simply asserted that the principle of “universal currency” issued by the government, with its full faith and credit backing it, is a better fit, a more complete system befitting our digital age.  This simple line of thinking confuses the needs for clearing money imbalances with money itself, more than anything, but it also misses the central transformation of the 20th century.

If the greatest trick the devil ever pulled was convincing the world he didn’t exist, the greatest trick our central bank ever pulled was convincing the world we couldn’t live without it.  For most of that past twenty years, that PR campaign has been centered on the Great “Moderation”, so called because it apparently represented the full embodiment of economic management – a period of unparalleled prosperity, a Golden Age of soft economic central planning.  Give the central bank enough “flexibility” and it will produce unmatched economic and financial satisfaction. 

In 2012, as the illusion and luster of the Great Moderation fades into the realization of the unthinkably high cost by which it was all purchased, soft central planning is no longer unchallenged by general apathy.  Into that breach the topic of “flexibility” flows, a battle that has profound implications for the future, especially the longer term.  Chairman Bernanke wants at least to maintain his flexibility, preferring to expand it as much as possible.  But as we face continued and mysterious economic headwinds that are fully unexpected by the sophisticated and elegant math of economic practitioners, engaged observers who otherwise were content with that central bank apathy awake to the possibility that flexibility for the Federal Reserve comes at the price of individual flexibility.  More power for Chairman Bernanke necessarily means less power for you and me.

If the topic of the Great Moderation is open for re-examination as nothing more than asset inflation disguising recklessness and poorly conceived and constructed theory (often shockingly simplistic, it is hard to believe sometimes that the mathematical models that rule the economic world encompass so many simple assumptions and just ignore any other parameters that cannot be statistically fit into them), the idea of central bank/universal currency should also be addressed.  The Great Moderation itself (the asset bubbles, credit production and, above all, interest rate targeting) would never have been possible without central bankers controlling not only the supply of money, but also its very definition.

A gold standard in whatever form represents a decentralized paradigm of monetary control, the true expression of the free-est marketplace.  You may argue that such a paradigm is ultimately economic suicide, a pro-cyclical monetary drag on economic affairs during dislocations, but you cannot argue that the ultimate decision for that drag lies with individual persons, not central bankers.  A true gold standard, one where banks may only issue “dollars” that are convertible into some specified physical quantity of gold, means that control of the money supply rests entirely within the willingness of individual economic actors to exchange real money (gold) for paper dollars (currency).  That is the ultimate monetary power.

An individual bank operating under this paradigm would actually care about public perceptions of its risk profile and ability to successfully carry out its role as an intermediary of credit.  Since the stock of money is exogenously controlled by the general public, individual banks would actually compete with each other to maintain some real standard (as opposed to an ephemeral accounting notion) of sanity and reserve, so much so that the very idea of intentional complexity and opacity would be harmful to its own prospects.  Profits are driven by the careful elucidation of true intermediation since the scarcity of reserves reinforces the public’s general skepticism of the potential for banking mischief.  As is often the case with banks as businesses, the alignment of a bank’s ultimate goal (profits) with depositors’ collective desires for safekeeping rarely coincide.  A bank seeks to grow its profits through some degree of informed speculation (the very definition of intermediation), taking on some degree of financial risk that without a doubt exceeds the level of risk a depositor would deem appropriate.  So the dance within the financial system of deposits of real money is one where the bank will always try to push the boundary of “appropriate”, and depositors will restrain that boundary through marginal withdrawals of real money.

If the bank expands its boundary too far, the amount of deposits that flee exceeds the ability of the bank to replace them, meaning bankruptcy.  In the true gold standard system, there are no alternatives to this course – it is the brutal realization of market discipline.  Market discipline, for its part, systemically keeps other banks in check as a reminder to remain aware of the exogenous level of appropriate credit creation.  Scarcity enforces a true standard of credit creation, ultimately set by the (admittedly imperfect) perceptions of individuals as they carry out actions in the real economy.

The great trick, then, was the transformation of the banking system, first away from real reserves, and then the displacement of the marginal authority of depositors altogether.  As early as 1865 in the United States, in Jay Cooke’s pamphlet, elite opinion first sought to equalize precious metals and government bonds as bank reserves, which was eventually realized.  Then came physical Federal Reserve Notes, backed by tax collection powers rather than scarce real money.  Then came ledger money and the rise of accounting – the beginnings of a cashless society.  The slow transformation of the monetary system, and central bank realization of a level of flexibility on par with economic control was finished with the adoption of equity capital rules (Basel) and the supremacy of interbank wholesale money markets.  Depositors were shoved out of the monetary equation, and with them, the primary considerations for and ties to the real economy.

In our current central bank standard, particularly as central banks adhere to both interest rate targeting and monetary elasticity, the level of deposits of “money” (whatever that means today) has little bearing on a bank’s survivability, at least anything approaching a systemic counterbalance.  Sure, IndyMac failed because $1 billion in deposits of digital dollars were adjusted off its accounting ledger (especially after Senator Schumer’s letter), but IndyMac’s real restraint was financial collateral.  That has many implications (as we have observed the growing shortage of collateral for funding operations), but it also means that the ultimate source and arbiter of bank funding is not deposits.

As long as a bank can pledge some kind of financial collateral with a central bank, that bank will remain in business, regardless of how its depositors (the public) feel about its recklessness.  Indeed, most of the credit production accomplished during the past thirty years (encompassing the whole of the Great Moderation) was done by banks that have no depositors whatsoever.  The Great Moderation would be more appropriately called the Great Financialization, where securities overtook the role of “reserves”, and central banks committed to unlimited funding of those reserves (to achieve a specified interest rate target, meaning a zero or near-zero interest rate target can lead to the possibility of unlimited reserve creation, but, again, the effective restraint being the supply of “quality” collateral, as defined by central banks themselves). 

Under these terms, it is easy to see why Chairman Bernanke decries the role of a gold standard.  The current interest rate targeting/quality collateral reserve standard is almost completely at his whim.  In practical application, the only restraint on his control of the money supply is the political willingness of governments to issue debt.  Yet, far from being the opposite of the rigid gold standard, we see instead rigidity reappear in other places.

The unending string of bailouts of systemically “important” institutions is the prime example of this new rigidity.  The fact that there even exists the notion of systemically important institutions belies the fact that the “flexible” system has improved at all upon the gold standard.  The myth has been propagated that it was the gold standard in the early 1930’s that transmitted the monetary collapse throughout the world, a conduit for the collapse in money to transmit into the global real economy.  Even if we accept that explanation and interpretation, how is the current state of affairs any different?  In 2008, the systemically important banks transmitted the same kind of monetary contagion far and wide through the rigidity and weaknesses of the same interbank money markets that were supposed to be such a marked improvement.  Even in the nearly four years since that time, central bankers are still wrestling with bypassing their own interbank creations due to persistent dysfunction, with the system rigidly locked in a perpetual state of crisis.  This more than suggests that not only does rigidity remain in the system, it continues to grow worse, hardly an improvement on the gold standard (and the gold standard in the 1920’s was nothing like the classical gold standard, it was a gold exchange standard that permitted central bank sterilization, the first widespread uses of central bank flexibility).

Part of this new strain of rigidity stems from a stark perversion of the meaning of intermediation.  During the Great Financialization, the banking system itself transformed from its traditional method of increasing the productivity of money and the general pool of savings into a system of transmitting monetary policies regardless of market conditions.  Instead of reactive to marketplaces, the banking system would subsume and set markets on orders from central planners.  Owing to the growing acceptance of the rational expectations theory, central banks began to view credit and credit producers as tools of psychological manipulation.  It was the simultaneous application of both increasing the stock of money and enticing monetary actors to increase its circulation that led to the supposed golden age of central banks.  Debt-fueled consumption and the “wealth” effect were the realized supremacy of all the economic theories that worship at the altar of aggregate demand.

Unfortunately, as a tool of central banks, with the promise of liquidity and uninterrupted profit expansion, banks began to lose and discard the idea of intermediation altogether.  The whole of financial innovation during this period was not directed toward real economy productivity nor even monetary productivity, it was directed toward maximizing the new rigid rules of the monetary regime.  Banks, instead of worrying about various obligors’ ability to repay loans, instead set themselves to creating profits regardless of any ability to repay.  Accounting rules were invented (gain-on-sale being the most notorious), as were new methods of attracting these new bank reserves for the sake of attracting new bank reserves.  Quality collateral could be synthesized out of nothing; the real economy was not even needed (see synthetic CDO’s and interest rate swaps). 

Essentially, central bank flexibility has bastardized intermediation, as liquidity and scale became the sole determinants of financial profitability.  Traditional depository banks could no longer compete, as was designed.  So long as aggregate demand was meeting some mathematical target, central bank planners cared little about this growing process of de-intermediation.  Banks, for their part, only cared about buying and holding whatever obligation got them funding, even if that obligation would be deemed unworthy under regular means of intermediation.  This de-intermediation of banks applies not only to the current circumstance of hundreds of billions of PIIGS debt issued in the past few years, it equally applied to subprime mortgages that were packaged and securitized, forming the initial basis of the financial-collateral-as-bank-reserves monetary pyramid.  The repo market and interbank wholesale markets reached their apex in the 2000’s, but made their first marginal impacts as early as the 1970’s.  Even by the mid-1980’s, repos were causing problems, as bad repo trades led to the first few failures of what would become the S&L crisis.

The question of the gold standard is a question of what kind of banking system do we desire.  Do we accept a bank-first approach to the economy, where we also accept the central bank dogma that the banking system and the real economy are one and inseparable?  If we view the banking system through the lens of true capitalism, the bank-first approach reverses the accepted notion that intermediation exists as a tool for increasing productivity and production in the real economy.  That scarcely describes the system we have right now, or have had for forty-five years (particularly the last twenty-five), where banks exist to serve themselves, where financial firms scarcely pay lip service to aligning their goals with their liability-holders (or clients).  Nor is it compatible with the basic, simple idea of productivity:  those with bad ideas are eliminated.  Instead, intermediation now means those with every bad idea possible are given funding because profits have little to do with real economic success.  The financial economy really has become a game that simply seeks to transfer “money” from one perception to another.  How it goes about that transference, nobody really cares anymore as long as some type, any type, of economic activity appears at the margins.

Given the dramatic rise of derivative contracts, especially synthetic bond creation through interest rate swaps, the banking system at the top really doesn’t even need the real economy to function on any scale.  In fact, in this system of unlimited reserves and central bank flexibility, the real economy has become a hindrance to the banking system’s all-consuming quest for profit and growth.  Intermediation in the real economy is far less attractive, on a profitability basis, than pure financial speculation with the blank check of digital dollars conferred by the definition of modern bank money:  financial collateral.  Italy can guarantee the debt of banks that it itself depends on for “money”, all so those same banks can access the ECB and serve as a means to transfer that “money” back to Italy.  This is not intermediation, and it has, right now, subsumed the whole of the bloated financial economy.

Until QE 2.0, 99.999% of the public (including 99.999% of economists) would never have guessed it was collateral and accounting notions of balance sheet equity, both of which are eminently fudge-able at will, that actually governed the global banking system.  That kind of flexibility, which brought about the overgrown financial economy and this pitiful diminishment of intermediation, is an anathema to a free economy and polity.  The decentralized opinions of markets, the collective will of individual acts of free expression and movement, have been sacrificed unto the deity of the philosopher kings of elite opinion.  Our intellectual betters can scarcely be expected to allow the uneducated common man to chart the collective economic course, let alone define the rules of the game.  Markets no longer serve as a roadmap to the effective and efficient use of scarce real resources, they are tools of psychological manipulation to fulfill the religion of aggregate demand, soft central planning’s answer to the five-year plan.  It all started the moment the gold standard was softened, conferring the ability of central banks to redefine money unto themselves.  What was the ultimate monetary authority in the hands of the people was redefined into the hands of elite opinion.  Flexibility can only visit one side of that equation.

The collective will of the people is certainly far from perfect.  There is no question that the public succumbs to irrational fear and prejudice, and that power that rests in the hands of the temporarily unwise leads to real problems, but in a nominal system of freemen we would certainly be far wiser to maintain decentralized control and instead exerting our considerable collective efforts to mitigating the inevitable fits of irrationality.  But even those fits of irrationality perform a vital function, a process intentionally disabled by central bank flexibility.  Fear and prejudice that leads to financial distress, and even economic distress, is a self-correction mechanism of the real economy to clear out bad ideas and bad growth (any and all economic activity is not preferable, the real economy absolutely needs the right mix of economic activity to prosper in the long run).  Creative destruction is just as much a part of free market capitalism as decentralized authority, and creative destruction has been circumvented and disabled numerous times by the illusion of prosperity that is this bank-first, credit-first monetary system.

With that in mind, the question of exogenous money and central bank flexibility comes down to a simple question:  would you rather have had 2008 in 1990 or 2008?  Or, even better, 1971?  At what point would it have been best to reinstate exogenous money creation and let creative destruction carry out its vital function?  Politicians would have protested and Fed Chairmen would have vociferously decried their lack of flexibility, but we would have been better off maintaining our own flexibility by exercising the ultimate measure of monetary control.  We were in far better shape long ago to weather this storm of imbalance before the economy was distorted away from its productive foundation (described by real money) into a consumptive economy (run on figments of political flexibility and expedience).  The transformation and distortion in the real economy that took hold in the late 1970’s, “perfected” in the 1990’s, was based entirely within the philosophy of money.

That is the final judgment of monetary standards.  Chairman Bernanke decries the gold standard, but his institution’s record is far worse.  Not only in terms of alternate standards (the current system is just as rigid and susceptible to global contagion, if not more so) but the utter corruption that the financial economy system has undergone strongly disfavors central bank supremacy.  Some of that damage will likely be permanent; at the very least it will damage the real economy for generations as we attempt to unwind financial incentives that placed unproductive speculation at the forefront, far above incentives for productive work.  Investors’ expectations, for example, even after twelve years of a bear market, remain elevated by an asset price system devoid of true price discovery.  Far too many people still seek the easy lure of asset inflation, and that destruction of patience and care in the investment class will be a drag on the whole system for a long time.  More than a generation’s (possibly as many as three) worth of knowledge and competence has been displaced by easy money.  I fail to see how any of this is better than a gold standard.  Gold is, again, far from perfect, but, in the end analysis, it may be the least objectionable.

The definition of money is really a political consideration.  The slow relegation of monetary power to the Federal Reserve is a concentration of economic authority that is wholly incompatible with a free market, free society.  To paraphrase Abraham Lincoln, our economic system cannot remain both free and centrally planned, a market economy divided against itself cannot stand - we must become all one thing or all the other.  There are no perfect answers; there are only hard choices to make.  Perhaps that is the most loathsome and destructive aspect of the current standard of central bank flexibility, an aspect that I believe renders full judgment in favor of restoring decentralized power.  Central banks and their economic dogma essentially try to convince the public that there are no hard choices.  The entire welfare society system that this central bank regime was created to serve is built on that notion, that wealth is easily conjured and transferred, if only money could prove as flexible as the diktats of imposed political will.  Nothing so far in human history has been so thoroughly and unambiguously repudiated by the empirical evidence of human history itself.  By exposing that lie we can put to rest the notion that the real economy cannot function without the financial economy.  This bank-first approach to monetary policy is just a mislabeled effort to maintain and expand the current strain of central planning; there is no mistake about which direction central banks want to take if we are, indeed, fated to become all one thing.

The discussion of the gold standard is nothing more than politics of eliminating the PhD class’ flexibility.  In that respect, I care little about the mechanics of whatever means is used to impart central bank confinement.  It could be nothing more than a narrowly defined, transparently monitored and completely predictable restriction on the growth of bank reserves.  It could be a gold price rule.  Whatever means might effectively remove “discretion” from the vocabulary of central bankers should be included in all discussions.  Given an extremely limited role, central banks can actually be useful, particularly if they are reduced to nothing more than rigid clearinghouses of fiscal and financial imbalances (no, the ECB is not performing this job particularly well at the moment since it is busy trying to keep the monetarist side of the economic house from ruin and discredit). 

Gold, itself has a definable tradition, a tradition that is readily accepted in many parts of the world, so it may yet be ahead of the game in that regard – certainly not what Chairman Bernanke had in mind when he derided precious metals’ “tradition” in front of Congress last year.  In the ultimate fit of irony, perhaps it would be most fitting that owing solely to that tradition gold restores the proper balance of flexibility in the monetary system and the financial economy.  Less flexibility for Bernanke will mean more for you and me.  This restraint will finally define the devilish allure of the seemingly easy answers and illusory prosperity of central banks and conventional economics as nothing more than anesthesia.  However, once you turn over ultimate monetary authority to the central bank and give them the flexibility to define money, as we are finding out, it is far more difficult to recover it.  To paraphrase Rahm Emanuel, we should not waste the re-occurrence of crisis to take it all back.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
easypoints's picture

Gold is for kings, silver is for gentlemen, debt is for slaves.

matt_chart's picture

barter is the money of peasants,


Got Silver?

Pladizow's picture

To: Easypoints

Cite your quotes - Norm Franz

economics9698's picture

The best banking system is 100% reserve requirements with banks issuing their own currency.  In the electronic age this would be routine and simple.

Second best would be “free banking” where banks usually lend out 50% to 83% (19th century numbers) of their reserves.  A “conservative” bank would be around 50% and a “risky” bank around 80%.  This is money inflation but much better than today’s 10% reserve requirement and money expansion by the Fed.

I would not trust the US government to issue a currency.  This allows manipulation like the 1907 Knickerbocker financial crisis that was the justification to the public for the Fed.

economics9698's picture

The gold standard helps the average consumer by keeping inflation at zero and prices declining. 

If there is $200 in the economy and company A builds a better mouse trap, lowering its price from $15 to $10 and increasing sales from 2 units to 4 units the total revenue for the company increased from $30 to $40. 

This is extremely important to understand and why the elite capital owners DO NOT want a gold standard.

When company A has good times not there is $10 less in the money supply and other companies, call them B and C, MUST lower prices to maintain market share or lose market share.

Understand what that means.  This was referred to as “messy competition” in the 19th century.  Industrialist hated having to constantly lowering prices and finding ways to save money whenever a competitor improved their productivity.

Competitor C must lower prices from $2 to $1.9 losing revenue (on sales of 20 units) from $40 to $38.

Competitor B must lower prices from $5 to $4.5 on sales of 10 units lowering total revenue from $50 to $40.

Is the picture becoming clear why capital elites do not like the gold standard?

Savings was $80 before the better mouse trap was invented but now there is a increased demand for money as consumers scramble to buy the better mouse trap.  Savings drop from $80 to $77 and more money is spent.

Under a gold standard with fewer savings available demand for loadable funds would drive up interest rates, attracting more savings, and so forth, the cycle repeating.

The key to the gold standard is it forces manufacturers to constantly strive to be competitive or they will price themselves out of the market by other, maybe unrelated industries.  Think of the implications in today’s world and the significance this would have on oil markets.

The gold standard removes the power of central governments, forced balanced budgets and trade, in the long run.

The main appeal is that in the 1880s to 1890s prices DECLINED 25% and wages ROSE 3% for the masses.  Compare that to today’s wealth concentration going to the top 20% and the bottom 30% stagnated for decades.

Simply put fiat allows governments to live unrestrained and wealth to be transferred from the bottom 80% to the top 20%.  This is the real reason central governments and elites want a central bank.  They simply hope the masses are too stupid to catch on to the con game.

StychoKiller's picture

But, but...ya cain't eat gold!  There ain't enough gold in the World!

And my favorite:  No one's gonna want to trade food for gold coins.

Beam me up Scotty, there ain't enough intelligent life on this rock to fill a washtub!

valkyrie99's picture

I could agree with the advantages of a 100% reserve banking commodity backed system.  I am not with you, or this author, on the recently emerging "free" banking pro-fractional reserve theory.  This just takes the power of printing money away from gov't and gives it to private bankers.  They are not a better choice to trust.

The author states:

"An individual bank operating under this paradigm would actually care about public perceptions of its risk profile and ability to successfully carry out its role as an intermediary of credit.  Since the stock of money is exogenously controlled by the general public, individual banks would actually compete with each other to maintain some real standard (as opposed to an ephemeral accounting notion) of sanity and reserve, so much so that the very idea of intentional complexity and opacity would be harmful to its own prospects. "

So we should trust banks to not take short term profits because they'll fear reputational risk inpeding their future competitive viablilty.  When have banks ever acted in this manner? 

Certainly not in our modern financial system, but not ever either. "Free" banking is like what we had in the US from appx. 1785 - 1836(?) (when states started passing laws regulating banks). We were claimned to be on a gold standard, but bank notes backed by gold reserves that didn't exist issued much of the circulating currency.

Your theory was espoused by those who wanted private banks at the time, but this isn't what happened. Instead we had 'wildcat' banks throuout the union who fruequntly colluded to increase the money supply by issuing more loans (debt-based currency), then calling in loans and refusing to issue more to contract the money supply, causing general deflation and forcing defaults as borrowers couldn't pay back the loans in rarer bank notes, allowing banks to buy up assets at depressed prices (with notes issued on  gold they didn't really have). Many banks failed and took with them the wealth of note holders and depositors. In addition to causing sufering, this system allowed an opening for the first attampts at central banking - the 1st and then 2nd national bank - who were claimed to be able to stabilize the system.

In Oct. 1815 Jefferson wrote Gallatan in protest of the 1st national bank and state-charted private banks: “The treasury, lacking confidence in the country, delivered itself bound hand and foot to bold and bankrupt adventurers and bankers pretending to have money, whom it could have crushed at any moment…These jugglers were at the feet of government. For it was not, any confidence in their frothy bubbles, but the lack of all other money, which induced…people to take their paper…We are now without any common measure of value of property, and private fortunes are up or down at the will of the worst of our citizens…


It is worth noting that permitting fractional reserve banking on a gold standard does not prevent government involvement in monetary matters.  States and the Federal government granted charters to open banks to cronies.  Those banks provided funding for the gov't like the Fed does by buying its' bonds, and made loans where their benefactor encouraged.  The gov't accepted payments of taxes and fees in banknotes, ensuring they would have demand.  This was the same formula that had ensured notes from the Bank of England had become accepted as circulating currency by the public.


When the Fed was pushed through in 1913, it was the fractional reserve bankers pushing, and this was accomplished by highlighting many panics the bankers had caused to show need for a stabilizing mechanism. It cemented and backstpped the bankers' ability to create money. If bankers aren't prevented from creating money, they will always be able to by the gov't. 

economics9698's picture

"So we should trust banks to not take short term profits because they'll fear reputational risk inpeding their future competitive viablilty.  When have banks ever acted in this manner?"

In the 19th century banks were very concerned about their public image because any whiff of overextending funds would cause a run and they would be gone.

I agree that 100% is best but free banking works well with clearing houses, which would be very fast and efficient today, to keep them honest.  In the northeast the clearing houses did a great job in the 1830s to 60s to clear notes and keep the banking system honest.  I would imagine today with instant communication the job would be done very efficiently.

valkyrie99's picture

So you offer for fractional reserve banking with transparancy  - ie more the system we had after the 1836(?) state banking laws instead of before. Certainly better then how it's usually done (or what many proponents of this advocate in my reading), but I would put out that bankers are very good at divising financial products for the point of avoiding oversight. Once one does, they would have a competitive advantage over those who didn't, so dishonesty would tend to spread. Since the initial results of lending additional new money into circulation is the giddy bubble part of inflation, there is a good chance they might not be discovered and stopped until they caused pain and at this pint revoking there privaliages would cause additional deflation in an ecomy already suffering from it. Also, that fractioonal reserve banking only really worked for bankers because the public trusts they were not lending out there deposits so there sole mission would be to find a way to make this hapen and with theability to create money they would eventually be able to buy the blind eye of officials overseeing their compliance with transparancy. 

I would point out how the ways around real reserves found through NY brokerages played part in the paninc of 1837, the new way around presented by insuring through OH Life and Trust turned into the panic of 1857, and new ways of using leverage to avoid reserve in instrimants to speculate on railroads had a role in the panic of 1873...they didn't do that great a job. If one bank was more risky then others they might risk reputational risk doing them in, but if they colluded then it was more likely the gov't would revoke redemption instead of letting them all fail. 

It's worth examining what a full reserve system has realy meant in history.  Banks would have to maintain full reserves on money people needed readily aviabale (like checking accounts), and wouls ususally charge a small fee for storage. However banks could still offer other products (time deposits where you didn't  have legal right to the same money until a certain date, sale of stock), that allowed people to get interest on stores of wealth - with the money they chose to take risk on that was lessened through the banks acting as financial intermdiaries. It just meant that banks couldn't put a depositors money at risk without there knowledge and consent. 

It's also my observation that those recently adding the pro-fractional resrve talk to the monetary reform conversation are often the bankers, who are starting to come around on other issues - I think it's important to keep demanding private banks do not get to create our money. 

cranky-old-geezer's picture



A better article would be "Money vs Currency".

Money is something that stands on its own two feet so to speak.  It has it's own known value without being related to something else.

Paper currency has no value of itself.  It represents the value of something else.  In that sense currency is a derivative, and a derivative is subject to fraud.

A simple example is gold certificates issued by banks way back when.  People would deposit their physical gold and get a paper receipt for it, like a deposit receipt today.  But the paper receipt was not easily usable in trade. It was for the actual amount of gold deposited, usually an odd amount.   Then banks started issuing standardized certificates for gold deposited.  Deposit 10 ounces of gold, get 10 certificates each representing 1 ounce.

These paper certificates were partly for convenience. Carrying 200 1-ounce certificates was much easier than carrying 200 ounces of physical gold.  People who trusted the issuing bank would accept these certificates in trade just like physical gold.

These paper certificates would fit the definition of  derivative in today's financial lingo.  The represent the value some underlying commodity. 

But derivatives are open to fraud by their nature, and banks eventually started committing fraud, issuing more certificates than gold they had on deposit.

They got away with it until there was a run on the bank.  Everybody wanting to redeem their certificates for physical gold.  The bank didn't have enough gold to redeem all the certificates, and the fraud was exposed.  People lost faith in the bank and unredeemed certificates instantly became worthless.

Today's US dollar is not money.  Originally it was a derivative on the underlying commodity gold, just like those gold certificates banks issued long ago.  Gold was the money.

In '71 the underlying commodity was removed.  Now dollars were derivatives on nothing, no underlying commodity. 

That's when US dollars should have become worthless, just like those bank-issued gold certificates became worthless when there was a run on the bank and people realized there was no gold behind their gold certificates.

To preserved the dollar's value, America's GDP was made the new "underlying commodity" dollars were based on. 

But like any derivative, the value of the underlying commodity can be misrepresented.  Ameica's GDP is worthless as it relates to the dollar. You can't redeem dollars for a slice of America's GDP. 

So paper currency is now just a con(fidence) game, with no value of itself, and nothing underlying of any value. 

It operates solely on confidence now.  As long as the government can keep people believing dollars have value, the con goes on.

valkyrie99's picture

You seem to define Money as "a store of weath" and currency as "widely circulating accepted medium of exchange".  You rightly point out how when means of exchange that lose trust and widespread acceptance they quickly decline and societies revert to their stores of wealth as their predominat medium of exchage (i.e. your concepts of money/currency become one). Unfortunatly the other phenominon that's observed, Gresham's law, shows how 'stores of wealth' or your 'money' are crowded out and eventually replaces by 'currency' or widely accepted means of exchage that are backed by less real commodity value. So we have a multi generational process of expansion and contractions of fiat cycles. 

I'm not sure that I have the solution or anything, just your comment was interesting.  This process does make me question whether currency/money basket that is overall somewhat more widely available then gold might be more lasting then a signle-commodoty currency/money.

lemonobrien's picture

fucks silver, give me golds, and as King, I'll have "Droit du seigneur"

GOSPLAN HERO's picture

The silver is mine, and the gold is mine, saith the Lord of hosts.

-- Haggai 2:8


The con is for slaves to keep taking on more and more debt while the kings/gentlemen/women keep stacking more and more metal. 

Beam Me Up Scotty's picture

The con is also the sheeple thinking they dont even need cash.  Just a rectangular peice of plastic with a magnetic stripe and a Visa logo on it.  Just how fast do you think someone can cut you off from your lifes savings when you rely solely on electronic dollars to live?  TPTB want to eliminate gold and cash both.  Total control, BITCHEZ!!

Sean7k's picture

Also known as the three percent tax. 

rocker's picture

You are right "Beam me up Scotty".    They do not want you to see cash in any form. 

My Bank was taken over by Well Fargo. It is so sad.  I told the Bank manager that they are my #2 pick of BAD banks. GS gets 1 and JPM gets 3.

They could not cash a check for $10,000 with that much in account already. I was told it would take a week for them to get the cash.

Then they pulled me in for a talk and gave me two debit cards. Told me that they are needed to get cash.

I took my pocket knife out and cut it in half right there.  To his astonishment and disbelief.

He then said I will have to provide a ID if I want to cash checks or do transactions. I said, drivers license? He said yes. That is how we work now.

They also told me the mininum to keep free checking is $1,500 and or a 15 dollar charge per month.

Been with the bank since 1969 and now look to close account because of who I have to deal with.

Wells Fargo has a large trading desk operation.  Who's money do you thing they are trading with ???  This will not end well again.

NotApplicable's picture

You're lucky they didn't put you under Gitmo for brandishing that terrorist weapon in a financial institution.

gmrpeabody's picture

No kidding...

He could have yelled for security and had a good laugh. Rather surprised that he didn't (being the same ilk as those airport pukes, and all).

donsluck's picture

The last time I had a similar altercation at B of A, the manager asked me to step out of the line so we could talk (I was trying to cash, CASH, a B of A check without an account). I said no, because I would then loose my leverage. I said he would have to have security escort me out. Get this, the manager said "we have no security"

I walked anyways.

Bahamas's picture


You're lucky they didn't put you under Gitmo for brandishing that terrorist weapon in a financial institution."

Those bank scum could also withstand a beating just as long as you don't close the account!

wisefool's picture

There is no gold on the Sun, but people who understand the Sun can tax the crap out of everybody, payable in Fiat or PMs.

So Sayeth ALGORE/Bernanke.

EDIT: Junked you!

Likstane's picture

breastakingly brilliant!

I can't believe someone junked you!

LULZBank's picture

But... but... what about AAPL?

FACT: iPhone is the best hedge against Kidney failure.

lasvegaspersona's picture

Gold is exclusively a wealth asset. Silver is very nice but price fluctuations prohibit its use as a reserve. That's why no central bank hold silver but most find room for gold. If one must choose, choose wisely.

toothpicker's picture

"fluctuations" newspeak for "blatant bankster manipulation and government intervention" 

Pladizow's picture

Central banks not holding silver is a function of price and volume.

Debt-Is-Not-Money's picture

When talking to an asian friend several years ago he asked "what causes the stock market to move around so much?"

I answered "fluctuations"

He replied "fluc you amelicans too!"

francis_sawyer's picture

That's the stupidest fucking thing I've ever read... OK so let's see...

1. We'd love to DO AWAY WITH central banking

2. Now... The Central Banks are interested in accumulating gold

3. So we should have GOLD so we can be a part of whatever their NEW gold based system is...

What the fuck kind of logic is that?... In essence, it makes fiat & gold inseperable... If you don't want to deal with central banks, don't use whatever they put forth as currency...

jus_lite_reading's picture

I don't know if any of you gold bugs out there saw this but...

If you are buying gold, you are probably a terrorist according to the Obumbo gubmint and the NSA is definitely spying on you...

Make this go viral!! 



jomama's picture

i'd rather do just about anything than endure watching glenn beck.

*edit: go away glenn.  you're washed up.

jomama's picture

talk about turning on the light and finding cockroaches!

francis_sawyer's picture

I think you miss the point...

Bring up the name of being 'anti' one of these right wing pundits automatically paints you as a liberal fucktard (same as being anti one of the left wing pundits paints you as being a neo-con fucktard)...

A better choice would be to either be an equal opportunity fucktard, or just just leave it alone altogether... These MSM hacks are all 'soda drinkers' anyway, WTF cares if they like Coke or Pepsi?

Sequitur's picture

Can someone post a link to the gold video where it starts out with a gold coin and a dollar bill in a vault and asks what would you want in the future? Then it goes through the history of gold and the dollar. Then shows how you can still buy a lot of bread and suits with a gold coin, but not with dollars, then has China buying gold, then the video ends with the safe closing and the gold coin in the safe.

Dixie Rect's picture

Goldd. With two d's for a double dose of pimpin'

DoChenRollingBearing's picture

We don't need a Gold Standard.  We just need gold (each of us).


Google "Precious Foreva"

skepticCarl's picture

Correctomundo, DoChen.  Investors will do better to own gold individually, and outperform "cash", which is what Gold would be with a gold standard.

seek's picture

AKA competing currencies. That's all we need. Call gold a currency, no cap gains, etc on currency appreciation/depreciation, and let nature take its course.

I dream of the day that VISA cards debit accounts in micrograms of AU, or dollars, or whatever you select. (And I'll still regularly lose 90% of my holdings on boat trips.)

DoChenRollingBearing's picture

+ 1

PLEASE be careful while ice-fishing too.

CrashisOptimistic's picture

You'll be dreaming of that the day you die, too, regardless of when that is.

How can it make sense.  The population increases.  There has to be more money in the economy because it is bigger.  

You would limit money to mining production rather than population.  How can that work if mining stops producing it?  People keep getting born.  You would freeze human freedom and hold it hostage to mining companies.

Sean7k's picture

Guess you never read up on Malthus and how wrong he was. You are not limiting money to mining production, perhaps the number of ounces, but not the value of each ounce.