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The Gold Standard The Gold Standard Institute

Issue #15 15 March 2012 1

The Gold Standard
The journal of The Gold Standard Institute

Editor Philip Barton
Regular contributors Louis Boulanger
Rudy Fritsch
Michael Moore
Keith Weiner
Occasional contributors Publius
Thomas Allen

The Gold Standard Institute

The purpose of the Institute is to promote an
unadulterated Gold Standard

Patron Professor Antal E. Fekete
President Philip Barton
President Europe Thomas Bachheimer
Editor-in-Chief Rudy Fritsch
Senior Research Fellow Sandeep Jaitly

Membership Levels

Annual Member 75 per year
Lifetime Member 2,500
Gold Member 25,000
Gold Knight 250,000

Editorial ........................................................................... 1
News ................................................................................. 3
Letters to the Editor ...................................................... 3
Bullion vs. Buffett .......................................................... 3
Do Real Bills Eliminate the Need for Savings? ......... 4
A Gold Standard Part 1: Six Reasons for a Gold
Standard ........................................................................... 5
Currency Wars Part II: A closer look ............................. 7
Economic Foundation Must be Gold, not Paper ..... 8
Caution: Falling Currencies ......................................... 10
New Austrian School of Economics ......................... 12

Gold Standard In Extremis?
Those who understand Gold and the Gold Standard
are doing their best to convince TPTB of its
manifest benefits; but are not having much success.
Although there is more and more open talk about
the role of Gold, friends of Gold are still officially
ridiculed, demeaned, or criminalized. Was Iraq
invaded and Saddam Hussein killed because of
Washingtons love of democracy or because
Saddam wanted to break the Petro Dollar cartel?
Was Libya attacked and Gadhafi killed because of
Washingtons love of democracy or because
Gadhafi wanted to replace Dollars with Gold money
in North Africa? Interesting questions but we need
not answer them. We simply need to watch what is
happening right now in Iran.
Put under pressure by Western sanctions, Iran is
being forced to trade Gold for food and other vitally
needed goods. As Brussels is cooperating with
Washington, Iran cannot use the Euro or the Dollar;
Iran is being driven to using Gold instead in
Iran like every other sovereign on Earth has a finite
amount of Gold; so when does Iran run out of
Gold? When do Iranians start to go hungry? This is
an unpleasant but unavoidable question; the answer
is for Iran to find a way of replacing Gold traded for
food. Clearly this is the reason India is being asked
to pay Gold for Iranian oil.
The discipline of Gold re-establishes itself. Trade
under Gold must balance, or one party will sooner
or later run out of the precious, irreplaceable yellow
metal. The Iranians and the Indians must find a way
to do offsetting trades; equal amounts of Gold for
oil from India, and equal amounts of Gold for food
from Iran.
At this point, you may interject; but wait, why dont
they simply barter directly, food for oil? Good
question and the answer is simple; how do you value
rice, wheat, and other stuff, in oil; and conversely,
how do you value crude oil in foodstuffs and sundry
supplies? How do you go from bushels of rice to
barrels of crude? There must be a numeraire, a
The Gold Standard The Gold Standard Institute
Issue #15 15 March 2012 2
means of comparing value else trade is unlikely.
Gold serves as an admirable measure of value, far
better than the rapidly depreciating Dollar or Euro
or other Fiat paper.
Once the Iranians agree to trade say a ton of Gold
for food and supplies, and the Indians agree to trade
a ton of Gold for oil, we can see oil tankers laden
with a ton of Golds worth of oil leaving Iran and
sailing for India. We also see freighters laden with a
ton of Golds worth of food and supplies leaving
India and sailing for Iran.
Can we also see a ton of Gold leaving Iran, being
shipped to India at the same time a ton of Gold is
leaving India, bound for Iran? This does not make
sense. The cost and risk of shipping a ton of gold is
not negligible and at the end of the day, nothing
would change; after the exchange of Gold, India has
exactly the same quantity as before and so does
It is much more sensible to simply net out the two
transactions. India gets the oil, Iran gests the
supplies, and Gold stays put. Now we have come to
the meat of it; if Gold stays put, exactly how is trade
consummated, how does the netting out take place?
Clearly, bills or invoices must be written against
goods like rice being shipped from India; and while
the rice travels to Iran, the rice bills go to India. They
are held in the Indians accounts receivable, unless
full bill circulation is established, and the bills can be
used to fund other trades instead of just sitting in the
cash register.
At the same time, bills are written against the oil
being shipped from Iran, and while the oil moves to
India, the oil bills go to Iran. So, we have bills drawn
on urgently needed goods on their way to the
consumer, and these bills will mature into Gold
wait, wait is this not the definition of Real Bills?
The very basis of the Real Bills Doctrine of Adam
Bills drawn against urgently needed goods that
mature into Gold Amazing! The two essential
components of a Gold Standard are suddenly in play,
under duress. Gold as money and numeraire; Gold
as guarantor of exchange Real Bills clearing trade
while the Gold supply is not invaded.
As Gold driven trade picks up, how long do you
think it will be before China is also buying oil for
Gold from Iran? How long before Venezuela and
Chavez insist on Gold for their oil? How long before
all the dominoes start to fall?
Unfortunately, even some friends of Gold are either
unfamiliar with Bills and their vital role in clearing,
or are in fact against them, claiming that Real Bills
are inflationary Do you see anything inflationary
here? Bills are drawn against real goods, the goods
are delivered, the Bills net out the trade then, after
doing their job, after being paid off on their due
date, the Bills disappear. Where is the inflationary
effect? There is none.
Gold on its own cannot support international trade;
Bill circulation is essential for a viable Gold
Standard. Once full circulation of the bills is
established, all competing Fiat paper will quickly bite
the dust. And just what is full circulation? It is
multilateral rather than bilateral exchange of Bills
and goods. Multilateral circulation allows netting out
far more complex trades, like triangular trades.
Multilateral means that a bill drawn on Indian rice
heading to Iran may end up maturing in China, or in
Venezuela not necessarily in Iran.
Multilateral trade using Real Bills has not been in
effect since before WWI. Multilateral trade is ever
so much more efficient than bilateral; the volume of
world trade achieved before WWI was not matched
under bilateral trade until the nineteen seventies, in
spite of great growth in the World economy.
Perhaps this is the reason China has encouraged
their people to accumulate Gold; perhaps this is the
reason the Indian and Russian central banks are
accumulating Gold; perhaps they are not as blind as
TPTB in Washington and Brussels.
Rudy J. Fritsch-Editor in Chief
Hurry. Book a plane, train, car, or stick out your
thumb. The New Austrian School seminar is
commencing on the 24th March. See details inside.

The Gold Standard The Gold Standard Institute
Issue #15 15 March 2012 3
On the date of this issue (15th March), Professor
Antal E. Fekete, the Patron of The Gold Standard
Institute, is speaking on a four member panel at the
Institute of Economic Affairs in London. Other
speakers are:
Professor Philipp Bagus, author of The Tragedy of
the Euro and co-author of Deep Freeze: Icelands
Economics Collapses, and Professor of Economics
at the University Rey Juan Carlos in Madrid.
Professor Patrick Barron, of the University of
Wisconsin and the University of Iowa, a professional
banker and prolific writer.
Godfrey Bloom MEP, European Economic and
Monetary Affairs Committee co-ordinator in the EU
Parliament and a long-standing forecaster of the
Euros failure.

News from Thomas Bachheimer in Europe (in
German) here, here and here. The interview has
been aired more than 30 times now and is linked on
more than 10 gold related pages.

Chatham House: Gold would place unacceptable
constraints on national economic policies.
Unacceptable to whom? The four main points
presented by this report out of Chatham House are
nave in the extreme. They include the statement that
its [golds] price can be extremely volatile. It is
worth reading to really come to grips with the depth
of ignorance that still prevails with regard to gold.
And remember this is not a school project, it is
from a specialist think tank and is written by
economists. Iran uses the gold word.

Guardian: Obama appointed US Trade Advisor
scammed in African gold deal.

GATA: Download the BIS PDF. Checkout Our
Products Forex & Gold Services page 17.
New York Times: Creditors now have the right to
seize Greeces gold. Greece should demand that the
world, or at least the Eurozone in its entirely, nets
out in gold simultaneously. Were talking real
money here, not government chits. Why should
Greece be the only country asked to actually
extinguish its debts? There are many countries with
worse per capita debt than Greece, including the US.

GATA: The Vietnamese understand gold perfectly.

Yahoo Finance: Obama wants cheaper pennies and

Mineweb: State bank of India lures rail employees
with discounted gold coins.

Letters to the Editor
Thanks, your journal is fantastic! - WS
Bullion vs. Buffett
All warfare is based on deception. - Sun Tzu
When a man assumes a public trust, he should consider
himself a public property. - Thomas Jefferson

By associating buyers of gold bullion today to the
buyers of tulip bulbs during the famous Tulip mania
of the 17
century, Warren Buffet has carved himself
a place of honour among the great deceivers of our
time. Im referring of course to a recent article he
wrote that was published in Fortune magazine. The
timing of it, alone, deserves our attention.
My purpose here is not to criticize his arguments, as
others have already done this admirably well.
Instead, I intend to demonstrate how this was a
perfect example of the ongoing bullshit that gets
dished out endlessly to us when it comes to bullion
(which was explained in Bullion vs. Bullshit, my
contribution last month to this Journal). That Mr
Buffett is a person of great influence and enjoys the
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Issue #15 15 March 2012 4
admiration and trust of many in the world of
investments should not go unnoticed.
Keeping gold outside the monetary system has
involved a whole program of deception over many
years and this, of course, continues in earnest as
currency wars escalate globally. But the deception
must now also intensify with respect to private
ownership of bullion. Think of it as another theatre
of operations aimed at sustaining the delusion of fiat
money and the belief that gold has no role to play,
with Mr Buffett leading the attack.
At stake here is no less than the full faith and credit
of sovereign governments who issue the fiat
currencies of the world, particularly that of the US
government. After all, the US dollar and US
Treasury securities still represent the foundations of
the existing global monetary and financial system.
This systems status quo survival depends on those
foundations remaining firmly in place.
The US dollar may be losing its status as the global
reserve currency, but US Treasuries continue to play
a unique role in the global financial system (see False
Belief #2: Risk-Free Investments, in this Journals March
2011 issue). Mr Buffet knows of this unique pricing
role only too well as a successful investor, which
explains why he warns that now bonds should come
with a warning label. He is right about that. But he
conveniently chooses not to explain why: the Feds
Now, when it comes to gold...whether or not Mr
Buffet knows gold is money is a moot point. He
certainly had the opportunity to be made well aware
of it: his father, after all, was a strong advocate of a
return to gold redeemable money. What does
matter, however, is that you not be deceived by what
I consider to be a blatant abuse of public trust and
that you see through the deception in his arguments
against gold ownership.
Exactly what Mr Buffetts purpose is in ridiculing
gold hoarders is unknown. But he should stick to
what he is good at: investing. Saving money is not
investing. It may not be pleasant for him to see that
gold hoarding has become more rewarding (as a
means of increasing ones purchasing power) than
investing. It is indeed not productive for that to be
the case, for the time being. But that is the
inevitable consequence of forty years of fiat abuse.
Louis Boulanger
Louis holds a B.Sc. from Laval University in Canada; is a Fellow
of the Canadian Institute of Actuaries and the New Zealand
Society of Actuaries; and is a Chartered Financial Analyst.
Prior to coming to New Zealand in 1986, Louis worked for nine
years with a global consulting firm based in Montreal, Canada.
In New Zealand, Louis worked for another global consulting
firm for 18 years, including as Chief Executive of New Zealand
operations for five years. In 2006, he launched his private
Louis is also Founder & Director of LB Now Ltd, which
provides independent investment advice to private and
institutional clients, facilitates the purchase of bullion for private
and institutional clients as an authorized dealer for BMG
BullionBars and also helps firms comply with GIPS.
For more information of LB Now's services or to subscribed to
Louis' e-letter Prosper! see the contact details below.

P.O. Box 25 676, St Heliers, Auckland 1740, New Zealand
Ph: +64 9 528 3586 Mob: +64 275 665 095

Do Real Bills Eliminate the Need for
Real bills of exchange do not eliminate the need for
savings as some opponents assert that proponents
claim. They are not intended to do so. The function
of savings and the function of real bills are entirely
two different things.
Savings are necessary to provide resources for the
expansion of farms, mines, and factories. As
productivity precedes real bills, savings must come
before any real bills are generated.
Once items are produced and on their way to the
final consumer, then real bills come into being. Their
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Issue #15 15 March 2012 5
purpose is to facilitate the movement of goods from
their origin to their final destination.
Real bills free up savings so that more savings are
available for production. They do this by eliminating
the need for borrowing savings to distribute goods.
Real bills cannot and do not replace savings. They
are not a substitute for savings. Since real bills make
the distribution of goods more efficient and less
costly, they are not a form of savings.
When an economy operates on the real bills
doctrine, it expands and prospers. Without the real
bills doctrine, it stagnates because savings must be
withdrawn from production to fund distribution.
Because it frees up savings for production, the real
bills doctrine leads to an increasing standard of
living. It eliminates the need for savings to fund the
distribution of goods. Thus, it makes more savings
available for the production of wealth, which leads to
a higher standard of living. Moreover, the real bills
doctrine may actually increase savings. As more
wealth is created, more resources become available
for savings.
When the real bills doctrine is abandoned, the
standard of living suffers. It is lower because the
production of wealth is lower. The production of
wealth is lower because savings that would have
gone into production must be diverted to the
distribution of consumer goods.
Real bills do not eliminate the need for savings. To
the contrary, they lead to an increase in savings.
The above discussion assumes the true gold-coin
standard accompanied by a decentralized
competitive banking system without special
Thomas Allen
Thomas Allen has been a student and adherent supporter of the
gold standard and the real bills doctrine since 1972. In 2009, he
wrote and published Reconstruction of Americas Monetary and
Banking System: A Return to Constitutional Money. Many of his
writings on money and other subjects can be found at and an index to these blogs is at
A Gold Standard Part 1: Six Reasons
for a Gold Standard
The gold standard would keep you from printing money and
destroying the middle class. Every country where you have
runaway inflation, there's no middle class. Mexico, there's no
middle class, you have a huge poor class, and a lot of wealthy
people. Today we have a growing poor class, and we have more
billionaires than ever before. So we're moving into third world
status... Ron Paul
There are six very important reasons for a gold
standard, not the least if which is the current
economic situation around the world.
Europe and the US have accumulated so much debt
that its paper money is virtually worthless, unless you
have high amounts of it. Something only one percent
of the population has. The US debt, for example, is
greater than all the other countries debt put together,
including Europe incurring around 200 Billion
dollars a year in interest payments alone. And that is
at the current low rate of interest. With an increase
in the interest rate to a reasonable 6 percent say, the
US would have to borrow 77 percent of the money
the government spends each year instead of the
current 40 percent just to pay the interest bill.
The only thing that has been bolstering up the US
dollar is the governments ability to simply print
more money to pay its debts. And the ONLY
reason they can do that is because the US dollar
currently has the luxury of being the worlds reserve
Now, because many countries are seeking a way out
of this, countries such as India, Iran, Russia and even
China are looking to trade around the world in other
currencies and even gold rather than the US Dollar.
And of course we are all aware of the issues in
Europe whose currency, the Euro, is faring no
Interest rates on savings are minimal if at all.
Treasury Bonds are almost at the point of going into
negative return which means that one would have
to pay interest to buy treasury bonds. Who is going
to do that I wonder? Not only that,
recommendations coming out of the Federal Reserve
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Issue #15 15 March 2012 6
indicate that the US economy should have an
inflation of 33 percent over the coming years.
Property prices in the US are in the doldrums and
unlikely to recover any time soon. They took a
massive dive after the Freddie Mac & Fannie Mae
fiasco in 2008. The US government responded to
that by guaranteeing their debt and bailing them out
with, you guessed it, more printed money.
And just recently the US government has printed
hundreds of billions of dollars to buy their own
government bonds.
Quantative easing is like having a credit card and
continually increasing the limit while spending UP
TO the limit at the same time. The amount owed on
the credit card not only increases but the interest
payments do too.
Some companies, those that are cashed up and do
not have to invest more in capital in order to earn,
can make good earnings on their shares and so can
seem like a good investment. Coca Cola,
McDonalds, Apple etc are some examples. But even
these depend on future sales and if the economy
takes a dive through massive inflation, then who is
going to be able to buy their products?
Throughout the ages this scenario has played out.
Rome in its hey day, Russia, German, even the UK ,
by devaluing its currency, the pound by 14 percent,
in one fell swoop in one day in 1967 caused inflation
to skyrocket 26.9 percent over the coming ten years.
In hindsight of course it is obvious that pegging the
US dollar to gold or even NOT removing the gold
standard would have prevented that and would have
prevented the wild undisciplined printing of
monopoly money that has resulted in such massive
debt. That was an almost fatal mistake for the US
economically as debt has risen disproportionately
since and the value of the dollar has fallen to 3
percent of its prior value.
How would it be then if the Gold Standard had
NOT been removed? Well we can only speculate
but the following seems fairly obvious.
1. The economy would have remained stable.
There would have been no inflation or
deflation. The fact that the dollar was
pegged to gold and each dollar would have
simply represented a amount of gold held in
trust would mean that the value of the dollar
would not rise or fall on speculation or trade
of the dollar.
2. It would not be possible to spend more than
the amount of gold held by the nation and
so debt to the nightmarish levels we now see
would not be possible. In short we would
not be spending more that we are making.
3. Being backed by gold, money would not be
an idea backed by confidence where such
confidence can be eroded (as we speak)
despite current frantic attempts to bolster it.
4. People would own something other than a
piece of paper, the value of which
deteriorates yearly so it is worth less and less
and more is needed to buy the same goods
and services.
5. Prices would not continually rise to
compensate for the decreasing value of the
dollar because, of course, pegged to gold the
dollar would not decrease in value but
remain the same. The demand for salary
increases would not be so prevalent since
prices are not rising and more money would
not be needed to buy the same goods and
6. Companies would not have to seek cheaper
labor and so more industry would remain in
the country. This would boost production
and the balance of payments.
There is in short, a lot to be said for the discipline of
a gold standard.
In part two we will examine how we could return to
a gold standard given the current economic situation
Michael Moore
Michael Moore is the author of All About Gold. He writes
prolifically on precious metals and gems. His website is:
The Gold Standard The Gold Standard Institute
Issue #15 15 March 2012 7
Currency Wars Part II: A closer look
My last piece was an overview of Jim Rickards
excellent book Currency Wars. Two interesting parts
deserve deeper treatment. First I will summarize
Rickards concluding section - his endgame scenarios
- and then Ill examine his application of critical
threshold theory, or how we might get to the
Rickards sees four possible outcomes for the US
dollar as its global reign winds down, and also gives
reasons why each might not happen. He lists the
outcomes in order of increasing potential for
disruption. The list also seems to ranks them by
increasing likelihood. That is to say, we are probably
headed for the worst case (fourth) scenario.
These four scenarios are:
1. A basket of currencies, or a parade of
multiple, shifting lead reserve currencies,
replaces the US dollar. But there has never
in history been a transition between global
reserve currencies without gold as an anchor
for the changeover. This could lead to
greater instability and ultimately to the un-
workability of any new reserve currency
2. The IMFs pool of SDRs (Special Drawing
Rights) is gradually expanded for use as a
new global currency, integrated into all levels
of commerce. But the dollar may be
repudiated by the markets before SDRs are
ready to replace it. Also, the US
government may cling to its monetary
power by using its IMF votes to veto the
SDRs broad introduction, prolonging the
dollars life.
3. An orderly return to a gold standard. A
dollar price of $2,500 - $44,000 per ounce
depending on how the new gold backing for
existing dollar and foreign currency balances
is measured. $7,000 is Rickards best guess,
given current monetary aggregates. This
approach has the greatest chance of
successful implementation, in terms of
preserving economic activity. That is,
provided government leaders act rationally,
in the best interests of their citizens, rather
than with a goal of preserving their own
political power. In other words, c) is more
likely than a) or b), but only marginally so.
4. A chaotic return to gold money amidst a
catastrophic dollar repudiation and
subsequent global payments system failure.
A hasty re-valuation of gold, at
approximately the same price as c) above.
Given the accompanying destabilizing
effects on stocks / bonds / real estate, and
on law and order itself, disruptions might
prevent any new financial system from
taking hold.
Regarding the timing of Americans abandonment of
the dollar, Rickards suggests a fascinating predictive
tool. A critical threshold model gives a framework
for understanding the process by which a dollar
repudiation might proceed. Last time I referenced
the avalanche or fire in a crowded theatre analogies
Rickards used to describe the phenomenon, but that
omits a key factor.
Rickards is implicitly highlighting the role of
independent minds in this drama. The earliest
adopters of a new belief system ultimately determine
whether it succeeds. They do so by virtue of their
superior insight and determination. These unofficial
leaders cause that avalanche-like arrival of the new
system. In fact, they make it inevitable before 99.5%
of people even consider it.
Rickards uses a simple version of a critical threshold
model to illustrate the concept. He estimates some
typical levels at which people might be influenced to
abandon the dollar and applies them to the US
population size. In his initial model, the first 1000
people will renounce dollars when 500 have already
independently done so, and the next 1 million will
join in once 10,000 have acted.
Even before Rickards gives estimates for later
thresholds, we can see this dynamic system is
currently stable. Even if the initial 500 people have
acted, the avalanche will not progress much beyond
the first threshold. If there are no other ways to get
to the 10,000 votes needed to move to the next
level, the dollar survives.
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Issue #15 15 March 2012 8
Some readers may already be considering the
intriguing implications. But before we go any
further, two brief points. First, for purposes of this
example, Rickards defines a dollar repudiator as a
person who, wherever possible, avoids holding
dollars or any paper assets denominated in dollars.
This describes hard-core gold advocates, but many
people who intellectually understand gold still hold
large fractions of their net worth in fixed-income
Second, although Rickards doesnt discuss it, the first
500 in this example might best be called original
thinkers, or prime movers. They have done their
own research, reached their own conclusions, and
probably dont care what anyone else says or does.
And every day, a few more of these types are
considering gold and then unilaterally repudiating the
dollar. This may be the means of gaining the next
critical threshold.
Now, as I noted in my last piece, these thresholds
are themselves dynamic. Rickards observes that if
the second threshold falls from 10,000 to 1,000, the
avalanche would progress unchecked. If the next 10
million people will defect after 100,000 people have
acted, and the next 100 million after 10 million have
acted, then in hindsight we can say the tipping point
was actually reached with the initial five hundred
So what does this framework tell us about the
fragility of the dollars rule? That only a tiny number
of actors decide events. We still live in a world of
elites, in more ways than one.
Does this mean gold advocates appeals to the
general public are wasted efforts? Not to the extent
people keep taking possession of additional physical
metal. That is the second front in this war. Yet
despite this age of internet-empowered
commentators, average citizens still have limited
influence on global power structures.
But todays serfs can remake themselves into
members of the elite through the acquisition of
readily available knowledge. May the gold advocates
ranks continue to swell until that tipping point is
reached, for the new world awaits.
Economic Foundation Must be Gold,
not Paper
In the last article, we looked at how a Golden
foundation can support an economic superstructure;
and at how this superstructure may look. The
foundation has two other legs in addition to Gold
money; Real Bills and bonds. Nearest to money are
Real Bills; Bills turn into Gold within 91 days, while
earning the discount. They are paper the very closest
to Gold, the very closest to money. They are so close
to money that they naturally circulate, fulfilling a
monetary role; the vital role of clearing trade.
Bill circulation leverages the productivity of Gold.
Large trade transactions, even international trade, are
cleared by Bill circulation. Gold just sits in the vault,
'gathering dust'... unless trade balances start to get
out of whack. Then Gold will start to move, to
change ownership, to settle the imbalance. As no
country wants to lose their precious, irreplaceable
'yellow metal', their policy will submit to the
discipline of Gold and will strive hard to maintain
trade balance.
Furthermore an unlimited number of Bills, that is an
unlimited amount of trade can be supported by the
Golden foundation; in effect, Bills are a proxy for
the velocity of money. The more trade, the more
Gold coin spent, the more Bills are created. Under
paper an increase of velocity is a sign of growing
inflation; it is a sign that people are starting to
understand that their paper money is losing value.
People become eager to exchange paper for
anything real; anything that holds its value over time.
Under Gold, by contrast, a growth in velocity simply
means that people are more willing to spend, more
willing to consume and this propensity to
consume leads directly to a growth in the number of
Bills in circulation. If the propensity to spend
declines, the total value of Bills in circulation must
match the decline as bills previously drawn
mature, and fewer new bills are drawn.
Bonds are a step farther from money than Bills.
Bonds are not self liquidating, they do not mature
into money; they need to be repaid by some other
means. Commercial debt is repaid from income
generated by investing the borrowed funds... if the
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Issue #15 15 March 2012 9
investment pays. Consumer debt is repaid by income
earned by the borrower hopefully. The risk of
default is real, and collateral must be provided to
offset the risks the lender takes on.
As a consequence of these circumstances, bonds
cannot and do not circulate; they do not serve a
monetary function. Bills serve to clear debt directly;
in contrast, bonds must first be sold into the markets
and exchanged for money. The money realized from
the sale can then be used to clear debt never the
bonds directly.
Bonds are not money, nor are they a proxy for
money; they are a promise of money. The key
question is how solid is the promise; what is the risk
to the bond holder? Clearly the perception of risk
does much to influence the price of bonds. The
larger the perceived risk, the lower the value of the
bond and similarly, the higher the interest rate.
Even farther from money than bonds are equities;
equities are not money, they are not proxies for
money, they are not even promises of money.
Equities are only a potential or possibility of future
money. Buyers of equities are counting not only on
income, that is dividends, but on a growth in the
principal value. Such growth is not a promise, just a
possibility. Indeed, unlike bonds held to maturity,
the value of equity is subject to decline. Thus,
equities are more risky than bonds, and it only makes
sense to hold them if they earn substantially more
than a more secure bond earns; and much more than
a truly low risk/no risk Bill earns. This fact is a key
in setting interest rates (more on this next month).
But we need to clearly differentiate capital gains
under paper, from true growth of the value of
equities under Gold. Capital gains under paper are
mostly a reflection of the decline in the purchasing
power of the paper. A company that was worth
1,000,000 monetary units ten years ago may be
valuated at 2,000,000 monetary units today. This is
called capital gains but the truth is that the unit
of measure, the numeraire, has shrunk in value
rather than the equity doubling in real value.
Suppose you bought 1,000 Square Meters of land a
few years ago; and today, you declare that you own
10,760 Sq. Ft does this increase from 1,000 to
10,760 represent Capital Gains? Like heck! Surely it
is the same land, the same size we are just using a
different unit of measure.
However, suppose that we sneak in a new unit of
measure call it the 2012 Meter vs the 2002
Meter and the new meter is only 0.3 or 30% of the
old Meter why, then we may get away with
claiming that we now own 10,760 Sq. Meters of land!
This is called capital gains and this is exactly how
the paper money game is played.
We all pay tax on a phantom capital gains that come
about simply because the unit of measure shrinks,
while the real value of our holdings stays the same.
Thus the influence of Gold is felt even far from
money. The honesty and discipline that Gold
imposes affects all markets, not just the ones closest
to money. Capital gains are but another paper
scheme designed to extract money from the long
suffering taxpayer.
Traditionally, that is under Gold, equities were
evaluated by the dividend flow; any potential
increase in share value was considered a bonus.
Notice that as the speed of monetary debasement
increases, the fraudulent idea of paper based capital
gains is becoming more visible. Notice that today,
many public companies, even Gold mining
companies, are starting to offer dividends to satisfy
changing shareholder expectations. Are equity
markets being prescient?
The pervasive positive influence of Gold on the
whole economy is a very good reason that Gold and
not paper must be the foundation of the economy.
Simply put Gold is honest, paper is false. False
capital gains are impossible under Gold. Gold holds
its value through time, so any increase in the Gold
price of equities must reflect a true gain in value
not a deliberate shrinking of the unit of measure.

Rudy Fritsch
Rudys book Beyond Mises was written to make
Professor Fekete's work and Austrian economics
accessible. It can be ordered directly from
The Gold Standard The Gold Standard Institute
Issue #15 15 March 2012 10
Caution: Falling Currencies
In 1913, the US Congress
authorized the creation of the
Federal Reserve. Its mandate
was limited, but it grew over
time to become the central
planner of all things monetary.
In 1933, President Roosevelt
outlawed the ownership of gold.
In 1944, the soon-to-be-victorious allied powers
signed a treaty at Bretton Woods, agreeing to use the
US dollar as if it were gold. Their central banks
would hold dollars and borrow dollars, and pyramid
credit in their own currencies on top of the dollar.
The US dollar was redeemable by foreign central
banks, and so this was effectively a scheme for
various currencies to have a fixed exchange rate
between each other and to gold. It, at least, had the
virtue of limiting credit expansion, as there was still
this one tie to gold and hence to reality.
The problem with fixing the price of one thing
relative to another is that whichever one is
undervalued is hoarded and whichever is overvalued
is dumped. The US government set the price of
gold too low, and so foreign central banks were
increasingly demanding delivery of gold.
By the time President Nixon was in office,
something had to be done. In 1971, he defaulted on
the gold obligations of the US government. This had
the effect of severing gold from the monetary
system, plunging us into the worldwide regime of
irredeemable paper money. One consequence was
that the exchange rates of the various paper
currencies were allowed to float against one
This was the prescription of Milton Friedman,
monetary quack. He actually said:
If internal prices were as flexible as exchange rates, it
would make little economic difference whether adjustments
were brought about by changes in exchange rates or
equivalent changes in internal prices. But this condition is
clearly not fulfilled. The exchange rate is potentially
flexible in the absence of administrative action to freeze it.
At least in the modern world, internal prices are highly

And thats why we have volatile foreign exchange
markets today, because Friedman and his followers
wanted to compensate for labor law and other
regulation that make certain prices ratchet only
upwards, but never downwards.
This fraudulent, unworkable, and dishonest scheme
of floating exchange rates certainly did not fix the
problem of wage and other price inflexibility. It did
cause several others.
One side effect was to loot peoples savings and
thereby teach them not to save, because the word
floating is disingenuous. The paper currencies all
sink. There is no mechanism, nor desire on the part
of the central bank, to increase the value of the
The floating currency regime is a regime of
sometimes-slower and sometimes-faster currency
debasement. Each government engages in a race to
zero. Sometimes one currency is sinking relative to
the others, and sometimes others are sinking relative
to it. This is enormously destructive.
The never-ending process of currency devaluation
has a follow-on effect: reduced investment. This of
course reduces growth. This premise must be taken
to its logical conclusion.
Savings, as such, are not possible using
irredeemable paper.
When saving, the wage earner sets aside a portion of
his wage; he consumes less than he produces. His
basic intent is to hoard this value until he retires and
needs to exchange it for food and other goods when
he can no longer work. It is advantageous to lend to
a productive enterprise to increase his quantity of
money, but this is not essential to the concept. The
key is that he can carry value over time. Gold and
silver do this, but paper does not.
Fundamentally, paper currency is a loan to the
government. Unlike a productive enterprise,
government is not borrowing to increase production.
Government does not produce anything; it
consumes. Government is borrowing to consume
with neither the intent nor the means to ever repay.
And therefore the loan is counterfeit (See
The Gold Standard The Gold Standard Institute
Issue #15 15 March 2012 11
Inflation: an Expansion of Counterfeit Credit). It
will not be repaid.
Gold and silver are positive values. One can hoard
them, as one can hoard any tangible commodity.
Paper currency is a negative value. It is debt. There
is no way to hoard it, its value is always falling, and
in the end it will default to zero.
The governments paper scrip loses value gradually,
and then suddenly. We are in the gradual phase
now. This phase will end without much warning
(other than permanent gold backwardation: see
Savings, under irredeemable paper are perverted into
speculation. People are forced to crowd into one
asset bubble after another. Those who blindly
follow always end up transferring wealth to those
who lead. People who bought houses between 2004
and 2008 in the USA still have not recovered. At
least those who deposited dollars into a bank
account have not lost as much, yet. When the
markets finally become aware that the banking
deposits are backed by mortgages on homes which
are worth 25% to 50% less than their mortgage
values, bank depositors will lose more.
Eventually, people will discover that they cannot
save in terms of dollars (those who dont figure it
out will be rendered economically irrelevant as their
wealth is removed from their hands). Savings are a
necessary prerequisite for investment. Investment is
necessary for companies to grow, to develop new
technologies, products, and markets. Growth is
necessary to hire new workers.
As existing companies achieve higher productivity of
labor, and do not need as many workers to perform
the same work, they lay off unneeded people. In a
free market, the unemployed would quickly be hired
by growing companies that expand and develop new
businesses. But todays structurally high
unemployment can be traced back to Friedmans
quack prescription (among other government
Weakening the currency not only discourages
savings, it also weakens businesses who have to keep
the currency on their balance sheet and who have to
import some of their inputs.
When a currency loses value, then all who hold it
incur a loss. It is not possible to employ workers
and run a business in a country without holding
significant amounts of its currency. Currency
debasement therefore imposes constant losses on
enterprises that try to operate in such an
Combined with the fact that imported supplies,
ingredients, parts, software, and other inputs are
constantly rising in cost in terms of the falling
currency, and one can see another reason why
Friedmans assertion is false. In many cases,
especially modern products, the cost of the labor
input into a product is a small percentage of total
Save your lunch money in gold and silver, the best
way to protect yourself against our mad regime. If
you want to speculate, make sure you risk only your
beer money.
Keith Weiner
1: The Case for Flexible Exchange Rates by Milton Friedman
The Gold Standard The Gold Standard Institute
Issue #15 15 March 2012 12
New Austrian School of Economics
The Austrian Theory of Money, Credit, and Banking
March 24 - April 2, 2012
(10am-12noon and 4pm-6pm)
Also discussing:
1. The Phenomenon of Economic Resonance
2. The Linkage and Kondratieffs Long-Wave Cycle
3. Why Silver?
Lecturer: Prof. Antal E. Fekete
Guest Lecturers: Sandeep Jaitly (United Kingdom, and Keith Weiner (United States of
Location: Munich, Germany
This is the fourth in a four-course series on Austrian Economics, a branch of economic science based on the
work of Carl Menger (1840-1921). The school is meant for those (incl. beginners) interested in the Austrian
theory of money, credit, and banking, with special emphasis on the present financial and economic crisis. The
complete program consists of four courses (20 lectures in 10 days each).
Registration Information
The participation fee for Course IV is 1,100.00 Euro (incl. 19% German VAT). There is a EUR 300.00 non-
refundable pre-registration fee that will be credited toward the tuition fee.
This includes tuition, non-alcoholic drinks and snacks during the lectures, printed lecture notes for the course.
Hotels and Restaurants are within walking distance and you will receive a list of suggestions.
Students will receive a scholarship reducing the tuition fee to 100.00 Euro for the complete seminar (limited to
10 scholarships in total).
Organizers of the course are Wilhelm Rabenstein and Ludwig Karl.
In order to register for the course you can get in contact with us via mail ( ) or phone (
+49 170 380 39 48, before calling please consider a possible time lag).
For further information, please take a look at the Events page of or consider
taking a look at our Facebook page