An Interview with Jim Davidson

Let’s start with a little background.  For thousands of years, people used gold and silver coins for money, right? 

Yes, Rob, that’s true.  There’s actually a little confusion on that matter in the minds of many historians.  You see, Herodotus attributes the first “gold and silver” coins to King Croesus of Lydia, about 670 B.C.  However, I suspect that refers to a bi-metal coin of both gold and silver.  Historians have widely interpreted that “authoritative” statement by Herodotus to mean that both gold and silver coins were invented by Croesus.  It is a sad thing that appeal to authority works so much havoc in an otherwise fairly learned profession like history.  There are treasure-troves of disk-shaped gold items, each stamped with a similar design going back to 1,700 B.C.  I believe these are gold coins, but many historians would not agree, calling them “buttons.” 

Before coins, there were “pieces of silver.”  These are mentioned, for example, in the Book of Genesis, regarding Joseph being sold by his brothers for 20 pieces of silver, an event at least 1,725 years B.C.  Many other objects of gold or silver have been used in trade, including earrings, armlets, knife-shaped money, and ingots. 

What was it about gold and silver coins that made them ideal to use in trade? 

Gold and silver were widely valued, so they were widely accepted.  Money has two main functions: It is a store of value and it is a medium of exchange. 

One of the leading competitors in trade was the practice of using livestock for money.  Even today, Somalis have a traditional culture that values various things in terms of the number of cows or camels or sheep or goats it takes to pay for them.  The blood price for murdering a man is 100 camels.   Camels sell for around US$600.

As a store of value, cattle are not so good.  They get old.  They die.  If you slaughter the cow, its meat only lasts a few days before spoiling.  It is very difficult to put three camels into a shoebox in your attic, as it annoys the camels and smells horrible. <smile>

Gold and silver, in contrast, are an excellent store of value.  They are very compact in form, so they are easy to hide.  You can imagine a silk trader 2,000 years ago carrying silks from China across Asia to sell them in Levantine ports such as Tyre.  Being able to hide his wealth would help him to keep it. 

Another feature of gold and silver coins is that they are interchangeable or fungible.  One ounce of gold is just like another.  It matters very little whether a picture of a king or a queen or an empress or a leaf or a kangaroo is stamped in the metal.  An ounce troy of gold is an ounce troy of gold.

A related feature is divisibility.  One can divide gold into very small parts.  There are wafers of gold bullion as small as one gram.  Tenth ounce gold coins are widely minted. 

Silver is also made into very small coins, as well as into huge 1,000 ounce troy ingots.  I think the silver in a pre-1964 US dime is one of the smallest amounts of silver in a regularly minted coin.  Silver is helpful in making change for transactions where the available gold coins don’t quite add up to the purchase price.

Gold and silver have another property.  They are scarce.  They aren’t readily reproduced by manufacture.  So, other things that have been used as money, such as strips of leather, pieces of paper, clay seals and iron nails, lack this feature of scarcity.

Gold and silver coins are made in their particular form so as to be difficult to alter or counterfeit.  Alteration, such as shaving a coin, reduces the amount of metal.  A fairly famous Greek archon inherited his throne from a man who shaved all the coins in the realm and used the shavings to mint more coins--effectively devaluing the currency.  The famous archon chose to gather in all the coins and mint new coins--which were exchanged for the old.  These new coins had the first milled edge--making it obvious if the coin were shaven. 

Another famous Greek, Archimedes, worked out a very simple test using the displacement of water to establish the density of gold.  He was able to deduce that a crown made for his archon in Syracusa was not pure gold--which had been provided to the goldsmith--but partly silver.  The goldsmith was put to death for stealing. 

Touchstones have also been used for thousands of years to establish whether gold or silver coins are the real stuff, or some alloy such as electrum, which combines gold and silver together.  So, again, the advantage of using gold and silver coins is that you know what you are getting.

Wasn’t some money issued by private entities? 

Depending on what you mean by private, a great deal of money has been issued privately.  Sovereign individuals used to mint all the coins in the world. Croesus may have been King of Lydia, but he was also a private person. 

In the United States, anyone who had any gold or silver could have it minted by United States Mint into coins.  A very small brassage fee was collected.  This practice was known as free minting.

During the gold rush in California, many coins were minted privately.  The same has been true elsewhere.

How did that work out? 

As such things go, it went very well.  Privately issued money competed with government-issued money.  Often, a silver coin that was privately minted would be more acceptable because it had a more reliable silver content--it was not as likely to be debased. 

The Roman emperors, who were somewhat a precursor to the modern state, and much admired by the same sort of brutal government types who favor the modern welfare/warfare state, were well known as debasers of the currency.  The term “seignorage” is sometimes used to designate the amount of gold and silver the emperors (or other governments) would take out of the coins.  That’s a particularly interesting commentary on a famous statement by Jesus around A.D. 35.  When he said, “Render unto Caesar that which belongs to Caesar,” he is reputed to have held up a coin incidentally showing Caesar’s image, but clearly conveying to his audience the notion of debased coinage.  The rest of the quote is, “and render unto God that which is due to God.”  In other words, pay taxes you owe (if any) to Caesar in his debased coin, but don’t imagine you are fooling the deity.

Getting control of the supply of money has always been important to those who seek to rule others.

Why did these entities stop issuing their own money?

In almost every instance, private parties were prevented from issuing currencies by government edict or decree.  In the place of free market money, the government would establish “the coin of the realm.”  Very quickly, that practice would be used to debase the currency.  Instead of continuing to use fixed weights, the government would insist that the “face value” of the coin be treated as its worth.  The free market would react very swiftly by raising prices.

How well did metal-based currencies hold their value? 

An interesting example which you can read in G. Edward Griffin’s The Creature from Jekyll Island (1998) has to do with men’s attire.  In the year A.D. 2, one could buy a good quality toga, a pair of sandals, and a sash or belt for about one ounce troy of gold.  Today, in 2002, one ounce troy of gold will buy you a good men’s suit, a pair of shoes, and a belt.  (A recent price is $323.90 per ounce troy of gold.) 

That’s a pretty stunning example of metal holding its value.  Of course, progress in arts and sciences has created all manner of new things that you can buy which were never available before.  But the idea that gold is a store of value that holds its value over a very long period is certainly key to its widespread acceptance. 

In contrast, the US dollar in 1971 was worth about ten times what it is today.  Let’s take the case of a 1972 model year Lincoln Crowne Victoria LTD.  A pretty nice car, not the finest but not the cheapest.  You could buy a basic model with no options for $2,800 in September 1971.  The same basic model of the same car by the same company in September 2001, updated to 2002 model year standards, cost $28,000. 

So, a dime in 1971 money would buy what a dollar buys today.  That’s a stunning indictment of the Federal Reserve system. 

Was there ever any inflation with metal-based currencies?

Yes.  In fact, the amount of gold discovered in the world increases by about 2% every year.  However, productivity also increases.  If there were no new gold or silver, then prices would tend to deflate, because of productivity improvements. 

It turns out that the average rate of productivity improvements and the average rate of new gold and silver brought in by discovery has been remarkably constant for 2,000 years, and very nearly equal to each other.

Why did governments get into the business of issuing money?

I think the best answer to this question comes from asking a very closely related question: What business are governments in?  Now, I am not talking about the “official version” or their claims.  If you read the literature spewed forth by government agencies, you would be led to believe that governments are in the business of helping everybody, being nice, providing order and goodness, and raising generations of happy children.  No doubt you should not believe everything you read. 

The answer I would give to my question is: Governments are in the business of plunder.  Those in government are incapable of being productive.  They must feed on the fruit of the labor of others.  Taxation is theft.  You can wrap it in a bow, spray it with perfume, and sing a song about it with great solemnity like “God Bless America,” or one with a perky tune like “Yankee Doodle,” but it is theft.  Governments plunder from everyone within reach. 

And, it turns out, by getting into the business of issuing money, governments can plunder more people.  Imagine those moonshiners in the Missouri Ozarks, like my grandmother’s family.  “Way up in dem mountains, dey dint tahk lahk udder folk, and dey dint have no truck with revenooers.”  

Much the same is true of foreign trade.  Hundreds of millions of people around the world use US dollars.  Those dollars inflate.  That inflation is a tax on all those people who are not living in the USA, don’t vote, and don’t get a say in US policies.  (I happen to think that the people living in the USA don’t get their votes counted, and have no meaningful say in government, either.) 

Now, it is an interesting thing that some people say the inflation tax dollars go to the benefit of the USA government.  That is simply false.  The dollars are issued by the Federal Reserve, which sets interest rates through a cartel system controlling access to banking services.  It is the Federal Reserve that reaps the benefit of inflation. 

Further, don’t be fooled by the “consumer price index” and other fake measures of inflation.  Inflation is the increase in the supply of money.  The money supply keeps on increasing, even when the official rate of inflation is very low or “zero.”  (In much the same way, and for similar reasons, the amount of US government indebtedness increased even during recent years when there was an official “surplus.”) 

E.C. Riegel, an author who came to my attention thanks to Spencer MacCallum, once wrote that governments cannot properly issue money, since they are not private enterprisers.  The taxes they impose are not a free market exchange, because they are compulsory.   

Was the money that governments issued in the beginning generally sound?

Yes.  In the beginning, government-issued money has to be sound, or it won’t be accepted.  Unless the government confiscates all the competition, as the USA government did in 1933 when Roosevelt ordered all privately held gold to be seized, government-issued money has to compete with private money.  So, a process of gradualism is used to increase the amount of seignorage. 

Riegel also makes the point that by deficit spending, the USA government issues bonds that bring currency into existence through the operation of the Federal Reserve System.  Doing so is much like watering the milk--it dilutes the supply of money with “counterfeit” funds that are not derived from any actual sales.

When did the U.S. start issuing paper money, and why?

The first paper money issued in the United States was issued by the Continental Congress in 1776.  By 1785, these “continentals” were essentially worthless. 

Paper money was issued then because it was considered the only practical way to raise funds for the war against England.  Paper money was issued from 1862 to 1865 by Lincoln to fund the war against Southern Independence.  These “green backs” were backed by nothing, but were eventually redeemed for gold or silver. 

The paper money you use today is similar in type to paper money issued by the Federal Reserve going back to 1913.  After 1964, that money could no longer be redeemed for gold or silver.

Paper money is not conceptually wrong.  Warehouse receipts for gold and silver have been issued since at least the time of the first printing presses, about 1450.  It is easier to carry around a gold certificate representing 400 ounces of gold than it is to carry around 33 pounds troy (about 26 of the pounds you are used to) in an ingot. 

The difficulty of paper money arises when more certificates are issued than the banker has gold in his vaults.  On account of this difficulty, places where honest banking was the norm, such as Hamburg prior to 1809 (when Napoleon sacked the town), would have traditional festivals during which all the vaults would be open for inspection.  People could go see that there was as much gold in the vault as on the books of the banker. 

Eventually, those who wanted to have ultimate power and control over everyone else sought to have “100% seignorage.”  In other words, paper money that was backed by nothing and redeemable for nothing.  This “fiat” money or money by decree would only be acceptable if people could pay their taxes and if there were a legal tender law requiring that it be accepted. 

Has there traditionally been a relationship between war and the value of government money?

Yes.  In fact, I once wrote a very lengthy essay on this subject called “USA, RIP.”  It appeared in an issue of The Libertarian Enterprise a few months back.

War has always been a great tool for bankers to create indebtedness.  Many wars over the last several thousand years were fought for gold, or were funded by debasing the currency. 

One of the more interesting directors of the Second National Bank of the United States was E.I. DuPont.  He was also a gunpowder manufacturer, who used his influence in the government to promote wars against Indian nations, against the British (1812-1815), and against Mexico in order to sell more gunpowder. 

When did the U.S. government devalue its currency, and why?

The process began in 1933, when the “National Banking Emergency” was used as an excuse to change the dollar price of gold from US$20 per ounce troy to US$35 per ounce troy.  That was done in order to provide some backing for the paper money in circulation--there not being enough gold in government coffers to fully back the currency. 

It appears very likely that the USA government went into bankruptcy in 1933, and was unable to meet its obligations.  A cartel of bankers, already very powerful, insisted on the changes in government monetary policy.

Why did FDR ban Americans from owning gold?

The government was out of gold to meet its obligations.  FDR did not merely ban gold ownership.  He confiscated all the gold in private hands.  Banks opened their “safety deposit” boxes for Secret Service agents to ransack.

When and why was the Federal Reserve established? 

The act of Congress creating the Federal Reserve was passed in 1913.  It was extremely convenient that the most prominent opponents of the Federal Reserve and of the income tax amendment went to their watery graves on the RMS Titanic in April 1912.

Is the Federal Reserve a government agency or a private corporation?

It is a private corporation created by a special chartering act of Congress.  There is a tiny amount of Congressional oversight, and the chairman of the Federal Reserve is appointed by the president and confirmed by the Senate.  However, the banks controlling the Fed are so powerful that there is rarely any doubt about who is going to get appointed. 

Can the Fed influence the rate of inflation or the value of the dollar?

Yes.  Directly.  Both.

What causes inflation, too much money chasing too few goods and services?

Inflation is caused by printing too much money.  Those who have control of the printing presses are responsible. They “monetize” debts by increasing the amount of money, which makes it worth less and less.

Does the federal government have a monopoly on money, or can people use private money to conduct transactions?

No, there is no monopoly sanctioned by law.  It is possible for people to use private money, and it happens all the time.  E-gold, American Liberty Silver, and e-Bullion are some examples of privately issued currencies.  Over $10 million of these currencies are in circulation right now.

There is another type of money that is not issued by the Federal government, either.  It is letters of credit.  A company issues a letter of credit, which is a negotiable instrument, and buys, say, 100,000 bushels of wheat.  The seller turns that letter of credit over to a factor and receives some majority of its face value.  The factor then may sell the letter or keep it.  Eventually, the buyer is called upon to make good on the letter.  By that time, he has sold the wheat for a profit, and pays off the letter. 

Why would someone want to use private money instead of government money?  

Why would someone want to oppose government misbehavior and plunder?  In order to make his world a better place.

Has there ever been a fiat currency that did not eventually become worthless?

Not yet.  The US dollar is headed that way now.

Why do people believe that the U.S. dollar is worth significantly more than the paper it’s printed on?

In part because they use a related item, checkbook money, to pay their taxes.  In part because they were slowly acclimated to the process of removing gold and then silver from their money.  Remember 1964?  After that, silver was no longer a part of USA coins, and the old coins quickly went into private stockpiles.

That’s because the silver content of the coins was worth more than the face value of the coins.  Today, the silver content is worth a bit more than four times face value.

What are the alternatives to using government money?

Using private money.  I think American Liberty Silver issued by NORFED.org is very good, well designed, and the whole concept well-conceived.  I also likee-gold.com which offers gold, silver, platinum, and palladium redeemable currencies.  GoldMoney.com offers you currency wherein you own the grams of gold in the vault.  The customer service of e-Bullion.com is exceptional.  I also like CrowneGold.com, which has some nice offshore features.

How quickly is the use of private, metals-backed electronic currency growing? 

Since 1996, it has been growing at an accelerating pace.  I think the rate is presently around 22% per month. 

Do you have any figures?

Yes.  In January 2002, there was about $2 billion in transactions per year (on an annualized basis) being conducted in privately issued money.  Today that figure is close to $4 billion.  By November 2005, I expect it to exceed $1 trillion.  In fact, with the growth rate accelerating, I may have to calculate that date again.  It may be much sooner. 

How do people know that their electronic currency is actually backed by precious metal?   

The simplest thing to do is test it out.  Redeem your money for gold.  If gold is delivered, you know the claim was good.  I’ve performed redemption for myself and others many times since 1998, when I got my start in this industry.  It has never failed with a currency that has merit.  There have been scams, where the currency claims to be backed by gold but is not, but I have never had any trouble identifying these. 

What is to prevent this precious metal from being stolen?

Guys with guns.  The GoldMoney gold is stored in a private vault run by Via/Mat, a Swiss firm.  The e-gold gold is stored in three vaults in Zurich, London, and Dubai.  E-Bullion has five treasury grade vaults on four different continents.  

Who are the major players in the private money market, and what are their strengths and weaknesses? 

The major players I take seriously are GoldMoney.com, e-gold.com, e-Bullion.com, NORFED.org, and CrowneGold.com.   

GoldMoney has great corporate governance structures, and is extremely well designed as an interlocking system of controls and audits.  I think GoldMoney may be the most reliable currency.

E-gold is the oldest, founded in 1996, and is still the best.  It has the most customers, well over half a million at this point.

E-Bullion has the best customer service, bar none.  I am always amazed at how quick and responsive the people at e-Bullion are.  They also have the most experience with physical gold and silver.  

NORFED has the power of 1,200 redemption centers worldwide, and a really well-designed currency.  Because they issue money with a face value, it is more readily accepted and useful.  Because the money they issue is artificially over-valued (has a face value greater than its silver content’s market price), the money is spent into circulation.  (Money that is artificially undervalued, such as the US-issued American Silver Eagle bearing a $1 face value but containing $5 of silver content, is rapidly removed from circulation and kept in private stockpiles.) 

Crowne Gold is a relative newcomer, but has really excellent facilities for gold accumulation. 

Who accepts this private money as payment other than individuals who have signed up for an account? 

I’ve used NORFED money at many shops and locations.  The paper warehouse receipts and the silver coins spend just like money.  They are taken at face value. 

Is it possible to use private money to buy regular goods and services or pay bills? 

Yes.  For example, I’ve used a debit card that works with the Maestro system and is funded by an e-gold exchange provider.  

What kinds of fees are usually involved when you use private, electronic money? 

I think e-Bullion charges a fee of a tenth of a percent of each transaction, capped at 25 cents.  E-gold charges a similar fee of 1% capped at 50 cents.   Both charge a small storage fee. 

There is a related currency service (FastGrams.com) that lets you hold e-gold without spend fees or storage fees.  I use it for some of my metal.

How secure are the websites that process these transactions?

The web servers are extremely secure.  Crowne Gold’s servers are on Sealand, and are isolated both physically and with top notch computer security firewalls.  GoldMoney’s servers are on the Channel Island of Jersey, with similar security features. 

To my knowledge, none of these systems have ever been successfully hacked. Quite a challenge, really, for the hacker community.

Does private money provide greater privacy than government money?

I think it does.  For one thing, it is possible to get anonymous ATM/debit cards that are useful wherever the Visa logo is displayed. 

By way of contrast, your ordinary bank-issued Visa card is tied to your name, your Social Security number, your billing address, and your credit history.   It is well known that government agencies access this data whenever they are pursuing a suspected criminal.  By subpoena, anyone else can access these records, from ex-wives to would-be plaintiffs seeking to sue.

What if I thought that the value of gold was going to decline? 

It is a pretty good bet that the dollar price of gold will increase and decrease over time.   

The question becomes: What do you mean by value?  Value to me is a property of the gold itself, intrinsic to it.  The other properties of gold ensure that it is always going to have value in exchange.

Could I get some private, electronic money that was backed by a different precious metal?

Sure.  Silver, platinum, and palladium are presently available from various vendors.

If I try to redeem a “Federal Reserve Note” for something of value at a Federal Reserve Bank, what will happen? 

Federal Reserve Notes redeem for Federal Reserve Notes.  Since 1964, no Federal Reserve money has been issued with any text about redemption of any kind.

How about if I try to redeem an electronic gold gram at one of the private money companies?

It has been my experience that you can get gold.  Some of the private companies require that you redeem a certain amount all at once.  E-bullion offers redemption in one troy ounce, I think.

Is it true that one of the governors of the Federal Reserve has proposed including some type of strip in paper currency that would cause the value of the bill to decline the longer it remained outside a bank?

That’s a fascinating idea.  I’ve heard similar ideas discussed.  I suppose that would tend to stimulate an artificial increase in velocity, making the money into a “hot potato” that the last holder gets nothing for.  It is sort of silly, since the Federal Reserve Note dollar is increasingly worthless anyway.

It doesn’t take a strip of paper to make it worth less and less over time.  It only requires a bad management of the Federal Reserve to keep issuing more and more of the stuff.

The 2002 dollar has the same purchasing power as two cents issued in 1912.  That’s a pretty staggering loss of value.

How likely do you think it is that the U.S. government will ban the use of private money?

NORFED has done most of the research in this area.  They have been informed that the US Treasury Department, US Secret Service, and Federal Reserve have no objection to privately issued money.

Given that checkbook money, credit card money, and letters of credit are forms of privately issued money, it would be very hard to effectively ban e-gold or GoldMoney without horribly affecting the economy.  But, politicians are nimwits for the most part.

I have no faith in politicians.  They refuse to do the right thing every time.  So, in my cynicism, I’d say that the chance approaches unity as time goes on.  The more effective private currencies are at starving the state, the more effective they are at safeguarding private property, the more they would likely come under attack from the thugs who run the major world governments. 

Thanks, Jim!   

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