Liberty Maven

The Money Matrix series rolls on by asking ‘What are the Types of Money?’ and ‘What is the “Best” Currency and Why?’

Originally published August 7th, 2008 by Jake, the Champion of the Constitution at http://www.nolanchart.com/article4440.html

In Part 3, it was explained that money is a commodity and its main purpose is to serve as a medium of exchange. We also learned about the 7 “Ron Paul requirements” of good money. This article will define the four types of money followed by a discussion of what is the best currency.

Money can be classified into 4 types.

1. Commodity money - Money that is made out of a commodity, typically a precious metal, either gold or silver coins. The worth of metallic commodity money is defined by its mass. Shown above is an American Silver Eagle weighing 1 troy ounce, or 31.1 grams.

2. Receipt money - A private coiner or banker issues paper receipts or certificates always redeemable for an exact quantity of precious metal and the receipts may be traded independently. Shown here are two forms of receipt money issued by the United States and in use until 1964 when the Federal Reserve Note (FRN) replaced them. The first is a $100 Dollar “Gold Certificate” and the second a $5 Dollar Silver Certificate. Where the FRN reads “Five Dollars,” the certificate reads “Five Dollars in Silver Payable to the Bearer on Demand.” (What exactly is a ‘Dollar in Silver’ you ask?? Good question! Hold on!)

3. Fractional money - Money backed by a commodity but only at a fraction of its face value, or “fractionally backed commodity money.” More detail in the next part.

4. Fiat money - Money that is declared “legal tender” by a government with no commodity backing. Fiat is Latin for “so be it” meaning money ordered into existence by a sovereign power.  As we learned in Part 2, all standard American currency is fiat; actually ALL global currencies today are fiat! Shown below is a fiat $100 dollar FRN. Note where the FRN reads “One Hundred Dollars,” the gold certificate reads “One Hundred Dollars in Gold Payable to the Bearer on Demand as Authorized by Law.”

Picture Source1 Source2 Source3 Source4

Furthermore, besides commodity money, which by definition is already in its physical form, there are two other manifestations of money.

Paper money - Money made of paper. Depending on its backing it could be either Receipt, Fractional, or Fiat money. Often used as a synonym for fiat money.

Electronic money - Money reduced to accounting process involving “blips” of money no longer requiring a physical medium for transfer. Depending on its backing it could be Receipt, Fractional, or Fiat money. An overwhelming percentage of a typical American’s money is in Electronic Fiat money, i.e. bank accounts.

As I started to demonstrate in Part 1’s “What is a Dollar Worth?” here is where today’s money starts to get a little hazy. Although money is a commodity, fiat money under continuous debasement (namely, increasing the money supply or inflation) has stripped money’s intrinsic worth as a commodity from all global currencies. This statement is fact, and the Federal Reserve acknowledges this as well:

“In the US neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount.

What, then, makes these instruments - checks, paper money, and coins - acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and real goods and services whenever they choose to do so. This partly is a matter of law; currency has been designated ‘legal tender’ by the government - that is, it must be accepted.” - from “Modern Money Mechanics,” Federal Reserve Bank of Chicago

So in its physical form, today’s paper money and metallic coins have some value as commodities and hence is technically fractional money, although paper’s worth is extremely minute. The dominant money type, electronic money, has zero intrinsic worth. Let me illustrate this further.

Currency———-Intrinsic Value* (¢)——Face Value (¢)——% Higher/(Lower) than Face Value

Penny ——————-0.5————————- 1 ————————- (47%)

Nickel ——————–5.8————————- 5 ————————– +1%

Dime———————-2.1 ———————— 10————————- (81%)

Quarter—————–5.2————————- 25————————- (81%)

Silver Eagle ——–1,662———————- 100 ———————— +1680%

Gold Eagle———87,000 ——————– 5,000———————– +1770%

Dollar Bill ———Worthless——————-100————————- Worthless

2 Euro Coin ** —— 9 ————————– 310 ————————– (97%)

[* Intrinsic value is defined as the worth of JUST the coin's metal, as calculated from the metal spot price (Zinc, Copper, Nickel, Silver, Gold) on August 5, 2008 and the mass of the coin (links above). For what this looked like in June, and info on the soon-to-be Steel Pennies and Steel Nickels, click here.]

[** As of August 5, $1 = 1.55 Euros. ALL Fiat Notes (Euro, Yen, etc) are intrinsically near worthless - its just pretty toiletpaper - the printing costs are basically the same no matter what the denomination is.]

First, note the disparity between the face value and intrinsic value for the common coins. It is worth noting that the 2 Euro coin is worth an order of magnitude less than the American coins - it is only worth 3% of its face value! This pattern repeats for the other Euro coins and also for currencies such as the Chinese Yuan. The European and Chinese central banks have been quite careful to keep the intrinsic values of their coin currency extremely low.

Second, although the intrinsic values of the American coins are still significantly below their face values, one coin, the Nickel is now worth slightly higher than its face value even though the commodity price of nickel crashed >15% in the last month. To understand why this is so, one needs to understand a little US coin history. Although the depictions on the coin have frequently changed, the 5-gram mass of the coin and its composition at 25% nickel and 75% copper have remained* the same since 1866. The coin originally served to provide small change for the silver and gold coins of the day. Although for most of its lifetime the coin’s lifespan has been intrinsically worth far less than its face value, in fact it was usually receipt money, since most of the time it could be exchanged for silver or gold. The fact that the nickel is becoming intrinsically worth more than the face value is yet another warning signal that the American currency has been significantly debased.

[* Source: A Guide Book of United States Coins 2008 by R.S. Yeoman. Except for WWII years when the Nickel was changed to be based on silver as nickel was needed for wartime use.]

Third, the intrinsic value (and actual price!) of the Gold and Silver Eagles is far higher than its face value. This is no surprise as commodity money is always exchanged, or priced, according to its mass, just like most other tangible physical commodities.

Let’s now address the question from above. What exactly is a “Dollar in Silver”? To answer this properly, it is best to first return to the very origin of the word. The word dollar came from the German word ‘thaler.’ The ‘thaler’ was a German silver coin made by a 16^th century private minter. Thalers were renowned for their uniformity (consistent weight) and fineness, and poor pronunciation later resulted in the Spanish milled ‘dollar,’ which the American dollar was originally based upon. As a matter of fact, all terms like the dollar, the British pound sterling, the French franc, and the German mark were originally just different countries’ nicknames for units of weight of gold or silver. Exchange rates did not fluctuate; money from different nations was exchanged solely on the amount of gold or silver backing.

When Alexander Hamilton wrote the Coinage Act of 1792, he simply defined the dollar as equal to the silver content of the Spanish milled dollar.* This is the proper legal and historical definition of the dollar as mentioned in the Constitution of the United States of America in Article 1, Section 9 and the 7^th Amendment. This definition has never been changed, and cannot be changed anymore than any other definition of weight, such as the pound, or measure of length, such as the foot, can be changed!

[* It was defined as 371.25 grains of silver. (1 Troy ounce ≈ 31.1 grams ≈ 480 grains)]

This mind-bender of using legal tender laws and propaganda such as “good as gold” to infer and trick Americans into believing that an electronic Federal Reserve Note ‘dollar’ has the same backing as the Constitution’s ‘dollar’ is a gross evil. As Ron Paul declared to Congress in his “Bring Back Honest Money” speech (see link in Part 1) on July 25, 2003:

The legal tender power enabled politicians to fool the public into believing the dollar no longer meant a weight of gold or silver. Instead, the government told the people that the dollar now meant a piece of government-issued paper backed up by nothing except the promises of government to maintain a stable value of currency. Of course, history showed that the word of the government to protect the value of the dollar is literally not worth the paper it is printed on…

Stephen Field [was] the only Justice to dissent in every legal tender case to come before the [Supreme] Court. Justice Field accurately described the dangers to our constitutional republic posed by legal tender laws:

“The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting on the unrestrained will of Congress. Those limitations must be preserved, or our government will inevitably drift from the system established by our Fathers into a vast, centralized, and consolidated government.“

Ron Paul adds: “A government with unrestrained powers is properly characterized as tyrannical.”

Finally, we now arrive at this article’s last query. What is the “Best” Currency and Why? I suppose I have already ruined the surprise, but gold is technically the stronger case with silver as the runner-up. Reasoning for this is historical preference, constitutional and technical. One should also ask whether gold and silver meet the “Ron Paul Requirements” as outlined in Part 3.

Historically, many other commodities have been used as money - Greeks’ cattle, Egyptians’ copper, Tibetans’ dried yak dung, and even salt. Actually any commodity can be money! However, the fact remains that over these last few millennia, mankind’s free markets have gravitated to gold and silver, mostly solely due to the influence of the “Ron Paul requirements.” Just a handful of generations ago, the entire global economy exchanged gold and silver for goods. In fact, gold and silver was at the center of most wars of confiscation (such as the Sino-British Opium Wars), a key reason for global colonization and resource plundering (picture a Spanish galleon treasure fleet returning from the Americas), and major economic events such as the California and Klondike gold rushes. Even today the IMF, BIS, and all the central banks still hold amounts of gold as assets in their vaults. One has to wonder just how many wealthy men have really been completely fooled that fiat money is true monetary wealth. After all, Scrooge McDuck of “DuckTales” fame was portrayed as being dim-witted at times, but at least he understood what true monetary wealth really is.

Picture Source

The answer from the Constitution is likewise similar, Article 1, Section 8, Clause 5, states that only Congress shall have the power “to coin Money, regulate the value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”

Article 1, Section 10, Clause 1, prohibits the following: “No State shall coin Money; emit Bills of Credit; make any Thing but Gold and Silver Coin a Tender in Payment of Debt.”

As the Constitution was never amended by the states as legally required, I confess I find it hard to fathom how legal tender laws are constitutional or even necessary.* Although Congress most recently created the Fed and hence the Federal Reserve Note, via the Federal Reserve Act of 1913, the Congress has no legal authority to transfer over control of our money creation to a private party. The 1935 Supreme Court case A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935) ruled: “Congress is not permitted by the Constitution to abdicate, or to transfer to others, the essential legislative functions with which it is vested.”

[* A more in-depth argument with the same conclusion is this excellent article from HonestMoneyReport.com. The entire government has in a large way failed to honor the Constitution - requiring Declaration of War by Congress to go to war and gold and silver coinage may seem like small details to the ignorant, but these days freedom of speech, of press, of religion, to bear arms, to not be subject to unreasonable search and seizure are ALL being infringed upon by the government.]

Technically, several of the reasons gold and silver are good choices to serve as commodity money are:

• Both are held in high value, used in both luxury goods (jewelry) and high-end industrial applications (ie electronics, photography) requiring small amounts of the metal. Often these are niche applications, and the gold and silver are negligible but critical expenses, so the industries are fairly impervious to price increases.
• Gold is most malleable (a single gram can be beaten into a square meter sheet) and most ductile of all metals, and does not tarnish. Silver does tarnish but has the highest electrical conductivity of any element and the highest thermal conductivity of any metal.
• Both are truly ‘precious metals’ and scarce in the physical sense. Production rates are inelastic and will not fluctuate in the near future. Many years have gone by since either metal’s demand was met by supply - government dishoarding has been filling the gap. Gold is especially rare; a typical ‘rich’ gold mine only yields 1-4 grams per tonne (1,000,000 grams). The entire global gold stock is estimated at 5 billion troy ounces, which sounds like quite a lot, but if all the gold in the world were concentrated in one location there would only be enough to fit a cube with 20 meters to each side.

Now let us review the requirements for good money from Part 3 and see how gold, silver, and the current fiat money do.

Durable - All meet this requirement.

Easily Divisible - All meet this requirement, although silver is better than gold at smaller denominations.

Portable - All meet this requirement. See below to obtain an idea of how portable the commodity money is. Gold is extremely dense and is more portable than physical fiat money. Note one reason that paper was preferred to precious metals in the past was the inconvenience of lugging around chests of silver. However, in today’s electronic money world the capability already exists to make this a non-issue.

Recognizable and Uniform - All meet this requirement. Silver and gold are difficult to counterfeit due to their high densities.

Stable Purchasing Power - Fiat fails. Gold and silver have been inflation hedges for thousands of years, and to suggest the FRN can do the same is laughable. The purchasing power of gold is remarkably stable, reference Walt Thiessen’s ‘gold dime’ article, all the more so since the gold and silver markets are most likely suppressed (later in the series!).

Scarcity - Fiat fails again as the supply of FRNs has been uncontrollably expanding, and can suddenly be rapidly expanded by the Federal Reserve and government at their choosing. Gold and silver, as above, are economically and physically scarce precious metals.

Reproducible - All meet this requirement.

Clockwise from top left: (a) 2€ coin, intrinsic $0.09, face $1.30, (b) 31.1g silver Hong Kong coin, intrinsic $17, face $1.50, (c) 1.55g gold Chinese Unicorn, intrinsic $45, face $0.74, (d) 50g gold bar, intrinsic $1430, face not applicable, (e) $20 Federal Reserve Note, intrinsic <$0.01, face $20

I will close with a short discussion on Alan Greenspan, Chairman of the Federal Reserve from 1987-2006 and a CFR director for 7 years from his 1966 paper, “Gold and Economic Freedom” (link in Part 1). This series will return to Gold and the Fed in Parts 6-8.

“The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… The law of supply and demand is not to be conned. As the supply of money increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Although I have not taken the time to read his memoir The Age of Turbulence, nowhere have I been able to find a clear refutation of the above. As a matter of fact, in this source, while Fed Chairman, Greenspan stated he was the sole supporter of a gold standard in the FOMC meetings. In another source, he states, “There is no inherent anchor in a fiat-money regime.” And, though he expresses “nostalgia” for an anchored currency, he says, “There is no support for a gold standard today, and I see no likelihood of its return.”

However, libertarians everywhere have to wonder. Greenspan was a life-long acolyte of writer Ayn Rand, whose sinister nickname for him was “The Undertaker.” Dark speculation exists that perhaps all of Greenspan’s “priming the pump” policies were really creative destruction in disguise, and an unstoppable tsunami will soon swamp the global fiat financial system. I’ve written an interesting brain-teaser here. However, the question as to whether Greenspan acted knowingly or unwittingly, is water under the bridge. We will know the definitive results of his policies within a few years.

So I ask you, Reader. Who is the sucker here?

The next article in the series will address the concept of seigniorage.  This term is double-speak for stealing money undetected from the people.

Author’s Note: At this point in the series, it’s best to have read the Rothbard and Greenspan sources and have started on the Detweiller. Links are in Part 1.

The Money Matrix - Prelude (PART 1/15)
Published: August 1, 2008
Prelude and Source List to a Series on Global Monetary Policy of Control and Explaining Big Government’s Finances

The Money Matrix - What is a Dollar Bill Worth? (PART 2/15)
Published: August 2, 2008
“Living so free is a tragedy when you can’t see what you need to see!” - Powerman 5000 ‘Free’

The Money Matrix - What Makes Money Money? (PART 3/15)
Published: August 3, 2008
A quick history of money per Rothbard followed by the properties of money per Ron Paul

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

_________________________________________________________

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