Money

by Jim Davies

Exclusive to STR

February 1, 2008

Although two thirds of a century has passed since he wrote it in 1963, Murray Rothbard's classic What Has Government Done to Our Money? still has no equal as an explanation of what money is and how government distorted it.  Rothbard called for free-market gold, which was of course impossible while government remained in control--but when it evaporated, three years ago, the market almost uniformly chose gold as its primary medium of exchange, so he has been handsomely vindicated.  

The change was not instant. There had been a great deal of preparation--of quiet though illegal trading with gold--for several years, in what government called the "black market." As soon as people graduated from the Academy, they knew that government paper was as doomed as it was completely fraudulent, so when they had enough left over to save, they bought gold coin and bullion and squirrelled it away somewhere known only to themselves and their heirs, or used it for trade with those they knew and trusted. What a wise move! During the last few years that government existed, its currency went South in a massive way, making the heavy inflation of 1979 seem trivial. In the last few weeks of its miserable life, the paper dollar became as worthless as the 1923 Reichsmark, and dollar millionaires were two a penny. "Money" had to be spent the very hour it was earned, while it would still buy something. So those with a little gold in storage were much better placed, and they were the ones who had graduated earlier than in that final year.  

Following E-Day gold immediately served its proper purpose, and those without any quickly earned some by exchange of goods and services--and inflation stopped cold because the supply of gold is more or less fixed. True, for a few months there was a brisk trade in minting; that is, people scoured their attics for unwanted jewelry and had it melted down and pressed into coins. That did increase the amount in circulation, and so there was some mild inflation for that period. Mining of gold continued worldwide, and by that means too the supply has increased by 1% or 2% a year--but productivity meanwhile has risen so very much more sharply than that, that prices have generally fallen--that is, there has been a net deflation of several percentage points a year. It makes a pleasant change!  

The exchange rate with the old US Dollar became infinite--there were no buyers of paper--so I can describe its value only by reference to goods and services. It's been found that the metric system is far easier to use than the old one with 16 ounces to the pound, 112 pounds to the hundredweight (so why "hundred"?), 20 hundredweight to the ton, etc, so the coins are stamped with weights like "100 grams" and "25 grams" (respectively equal to 3.512 and 0.878 ounces). A good wage rate for skilled work is about one gram per hour, or 40 grams for a typical work week or 2 kilograms a year. At once, you can see a problem: the smallest gold coin (10 grams) is too valuable for the purchase of small items like bread, beer and pizza--for it represents the value of nearly two days' wages (you folk back in 2008 saw exchange rates of around $30 per gram).  

That has been neatly and quickly solved by the use of electronic gold, which was first seen in 1996 but which was savagely suppressed by government after a decade and a half. With an account at any of the competing online gold banks (actually all banks are gold banks, so that's redundant), the customer carries a debit card with which to purchase anything priced as finely as to hundredths of a milligram. Variants on the idea have the balance carried electronically within the card--one can have it "recharged"  by handing over a 100-gram coin to an exchanger, for example, and then spend the 100 grams in small amounts over time.  

Banks and other exchangers charge fees for their services, since they like to eat, but competition keeps fees affordable and reputation keeps them honest. A "good name" in business is everyone's primary asset, for in this online era, it's perfectly simple to check what A has said about B, rather in the way that eBay pioneered in the early years of the century except that the writer of an adverse report had better be ready to justify his words if its target reacts with a denial. Everyone is "armed" in this way--his keyboard is a powerful weapon--but as was often truly said about guns, an armed society is a polite one. So it has proven. Reports made to the public database are worded with care, and disputes (and their outcomes) that can't be resolved by negotiation are settled in court.  

Banks are primarily warehouses, which store gold for customers and normally charge a small fee and issue warehouse receipts in the form of certificates (one genuine form of paper money now in circulation) and provide plastic cards as above. Some lend out or invest gold entrusted to them, but if so, it's made clear in the deposit contract and such banks (rather like the old Savings & Loan banks) pay interest to depositors rather than charging fees. That interest rewards the depositor for the risk he is taking, and he closely oversees the bank's investments to ensure he's happy with its policy. Hence, banks have evolved into two main types already: those that do and those that do not lend out depositor property. I notice that the former type is having a hard time at present; it seems depositors are much more interested in the safe keeping of their gold than in making upon it a modest return. That's understandable, for there are so many other, more lucrative investment opportunities available in the market.  

The old practice of lending out more money than was on deposit (nine times more, in a typical case in the old world!) was made possible only by the Fed's fractional-reserve rules, which were endorsed by government and made the whole banking system inherently unstable while helping cause sustained inflation. That now never happens. Reason: banks can attract depositors only by demonstrating honesty. No sane person would lend a gold kilogram to someone who then printed up a "certificate" for nine kilograms and loaned it out for interest at risk! Such a scheme was absolutely mad--and is now universally understood to be mad.  

The biggest single expense for most people remains our homes, but their prices have begun to fall because in the old world, they were artificially boosted by several factors triggered by government. Here's how I've seen this rather complex change.  

First, the basic cost of a regular house is about 3 gold grams per square foot of living space, and has been for a very long time, but since about 1950 that has been inflated by those factors to about 4.5 grams in recent years. Naturally, a premium has always applied in addition, if the home is in an especially desirable location or has exceptional construction quality, etc., and a discount applies in the contrary case that it is old and poorly maintained, etc.  

Now, over time several other factors "ought" to have brought that natural price of 3 grams down some--so the government-caused inflation has been greater than it seems, and now that its cause has gone away I think we shall see in the next few years a fall that continues down past 3 to around 2.5 grams/sq. ft. or not much more than half the present prices; some believe they will fall even further. Those other factors are:  

- building techniques, productivity and construction materials have improved steadily over a couple of hundred years

- construction "codes" that made building artificially expensive have been shredded; buyers now get only what they want

- land is abundant ( America has a population density eleven times lower than Japan , for example) and zoning laws no longer prohibit its use

- telecommuting has steadily reduced the need to live close to cities, and the booming personal-aircraft industry now promises to reduce it much further yet, so the city land-price premium will apply less

- the tax content buried in both labor and material prices has vanished

- mortages are harder to get, as below  

Homes can be mortgaged as before--though that expectation of falling prices means the days of 90% loans are long gone--and only when lenders place their own (or their shareholders') money at risk. The folly of lending large sums to borrowers with a poor credit record on the security of an ill-kept, grossly overpriced building therefore does not happen; the '08 recession took place because that kind of irresponsibility was forcibly underwritten by taxpayers. Today, there is neither force nor taxpayer, so the industry is rational.  

So, housing remains a big expense but it's already falling and has much further yet to fall. That will mean more money is available to each family for other spending and investing, which signals a healthy economy for many years to come.  

A further, one-time boost to the economy has come from the widespread practice I mentioned in my report on Ownership; during the months preceding E-Day, many of us took the government's hyperinflated "money" and paid off our mortgages. Lenders got all they were entitled to--dumpsters full of paper--while we were left with nice houses, free and clear, each initially worth perhaps ten kilograms--and any cars, boats and other boys' and girls' toys which had been bought with the ubiquitous "home equity" loans the banks had touted for so long. Good deal! That meant we have needed to spend nothing on housing, so we've had much more available to spend on other things, or to save; only the bankers were losers, and since they had always been in bed with government that licensed the paper and forced creditors to accept it, the justice of that never struck me as anything but poetic.  

The rate of investing, or saving, was for many decades very low in America because so much was siphoned off to the banks by those large mortgages and to the government by high taxes--which used the money to prop up failing industries so as to maintain voters' jobs, rather than in stimulating innovation--so the growth that only free capitalism can deliver was hindered. That brake has now been released. The extra money everyone has is invested in just such a way, and although three years is too short a time in which to see the fruits of that investment, I've no doubt that it will bear a rich harvest in the decades to come. People invest without Nanny's supervision!  There is no longer a brokerage cartel governed by stifling regulations; if John Sovereign wants to buy a share in the ABC Company, he goes ahead and does it online, using whatever eBay-like service brings him the best price. He is, of course, exercising responsibility as well as his freedom--the two go together, as always. There are still a few charlatans on the Net as well as honest dealers, and the good old principle of caveat emptor continues to apply. However, thanks to the transparency of information there, no such charlatan survives long; even the novice investor knows to check out the facts before parting with money. In my view, that transparency will virtually eliminate misrepresentation a very few years hence--with infinitely greater efficiency than the old system of regulation. Bottom line: a lot more money is placed in ventures which, in the opinion of the individual taking the risk (than which there is none better) will yield the most benefit. This is capitalism at its best!  

There are about 140,000 tons of gold in the world, including that used in jewelry. About 10% of it is in America , and proven reserves amount to a further 50,000 tons--which may take a century or two to extract. So it's sometimes asked, how can a mere 14,000 tons (14 million kg) suffice to circulate in an economy this vibrant--whose annual product, at last count, was around 700 million kg, or 50 times greater? The answer is shown in Rothbard's book, above; it doesn't matter what the money supply is, so long as it is stable. If it were ten times less than it is, prices--and earnings--would just appear as ten times smaller.  

Therefore, it didn't much matter what happened to the 4,000 tons of gold stored at Fort Knox . It might have been nuked, as it nearly was in the James Bond fantasy "Goldfinger," or a claim might have been staked by some Kentuckian hillbilly who ever after would live in opulence, necessarily letting his fortune trickle down into circulation; but in fact a remarkably benevolent and intelligent soldier, Colonel Henry Lysander, provided a much better solution. He graduated from the Freedom Academy in 2024 and soon saw the unique opportunity chance had given him to benefit the coming new society while securing for himself and his men both wealth and honor--for he was the commander of the Fort Knox Battalion, US Army. He figured out that the gold should (after E-Day) be placed in charge of a company operating an e-gold bank, for distribution among as many resident on that day as claimed one equal share; and in 2026 he called his men together (those who had not already walked out) to explain his plan. They agreed to defend the facility against all attacks, and not to walk away, in the usual manner, from what was then still nominally a government job. He said that if they wished, after government vanished they could stay and form and operate the new banking company. Meanwhile, their wages would be paid in gold--regulations notwithstanding.  

So it was; the new company staked claim to the gold and its enormous vault, and title was recorded in the usual way, the contract specifying that all 350 million in the new society would be allocated one equal share of 11.4 grams, minus a 0.1% administration fee to the company. Wind of the plan had reached the Pentagon early in 2027, and there might have been a nasty fight over it, but by then the Army was very short staffed and the fulminations of the top brass never came to much. By now in 2030, 300 million of the expected 350 million shares have been distributed, and as the contract provides, any surplus remaining in 2035 will be divided among those who by that year have staked their claim. Most account holders are content to keep their asset in electronic form backed by gold in the vault, but the Fort Knox smelter has been fired up to produce 11-gram coins for those requesting metal, with insured overnight delivery. Former Colonel Lysander is one of the heroes of the new America .  

Thus, our economy grows at a healthy rate (more goods and services are produced), and because the supply of money is stabilized by the market itself, prices are gradually falling. In this free society members all know better than to accept in payment anything other than genuine money, no legal-tender laws force us to do otherwise, and for the first time in over a century, we all enjoy knowing that the money in our pocket has true, intrinsic worth with which no government can meddle. For the first time ever, a large society has a rational way to store and exchange value.