There are few economists and economic writers that can clearly articulate complex economic concepts as well as L. Carlos Lara and the other members of the United Services & Trust Corporation.  Here is an historical and factual discussion of…

Sound Money

In-Depth by: L. Carlos Lara | Friday, February 5, 2010

My thoughts on the subject of sound money, of course, are not original. They have been guided here by my own private study of writers of a unique school of economic thought. These great thinkers, to whom I refer, can be traced to Salamanca, Spain as early as the 15th century. Later they were found in Austria, but now are centrally located here in the United States. These economic theorists have at their core of thinking the principles of scarcity and choice. More importantly, they believe that economic value is subjective to the individual. These concepts, when used in the thinking process, provide the ability to see the world and especially the market economy in a uniquely different way from all other schools of thought. What becomes apparent by utilizing this way of thinking is that an idea has crept into our world that is destructive. Ludwig von Mises, one of the greatest of these economists, believed that this idea was evil and that no one should give in to it.  He felt, as most Austrian economists do now, that fighting against this idea was a responsibility each one of us had to society because the stakes are extremely high. They are nothing less than the future of human freedom. (1.)

Young or old, our own education is where our fight must originate. However, learning how the world works according to this manner of thinking is a different type of education not earned in the classroom. In fact, this type of education is an individual endeavor and each of us must decide when we really want to take it up in earnest. What most disappoints us is that even after we decide to take up this intellectual battle sometimes our understanding comes slowly. Painful experiences, for example, can be some of our greatest teachers, however, it is not until these experiences are combined with a sound body of knowledge and historical evidence that an epiphany occurs. As for me, I am “too soon old, too late smart.” (2.)  Nevertheless, it is never too late to begin.

To understand what is meant by sound money, we need to examine a bit of history.  There are a few unique characteristics about money that I suggest we revisit in order to obtain a full perspective on this matter especially in light of our current economic environment.

The Genesis of Money

First of all, money did not come into being by some sort of agreement, or social contract. Money comes into being freely in the market place by trial and error. This happens as individuals begin to facilitate the process of exchanging goods with one another.

In the days of bartering (what economists refer to as “direct exchange”), problems arose when people attempted to exchange two different commodities. For example, if you had butter to exchange for beef, but no one wanted your butter, then you obviously had a problem without a solution. This exchange problem, because it came up quite frequently, forced society to search for a commodity to serve as a temporary exchange, or what economists refer to as an “indirect exchange.” Obviously, the commodity society ultimately selected for the indirect exchange had to be highly marketable. It may have been eggs, milk or bread, but, whatever it was, society eventually employed it as money.

Over the course of time the one medium of exchange that won over all other forms of money has been gold. Why gold?  Because it has features no other commodity has. For example, it is divisible. Imagine trying to divide butter to pay for something. Gold, on the other hand, can be cut up into tiny pieces while retaining its prorata value so that money calculations can be made. By making gold in either bullion bars or coins, it becomes very portable and very convenient to use.

There is also the fact that from time immemorial gold has been valuable as jewelry principally because of its decorative beauty. In addition to this, we must not forget that gold is limited in its supply. It is mined from the ground at great expense in order to get more of it.  But that is not all; gold is extremely durable and non-perishable. It can last for centuries. And finally, gold is homogeneous.  It can be made to look exactly like another of its kind, as in gold coins. For these reasons it is not surprising why historically gold has been the money of choice. No doubt, gold is sound money.

This brings up two extremely relevant questions.

What is the right quantity of money? How much should it grow?

These questions have been asked by economists for centuries. The struggle continues.  As we well know, there has been an astronomical increase of the money supply by the Federal Reserve Bank during the last four decades and especially last year. The general public, I believe, innately knows that all this new money creation is not a good thing for society. I also am also convinced that only one man in a million knows how it is done and why. To help understand this and know for certain what the right answers to these two questions are, we need to try asking ourselves this question: What should the optimum amount of canned peas be in society? Or, what is the optimum amount of fresh turkeys, or watermelons, or cattle, or whatever commodity comes to mind. The point is that the more consumable goods we have in society the better it is for everyone. In fact, more goods in the market help bring down prices and our standard of living goes up. However, this is not the case with more money. An increase of money provides no social benefit whatsoever.

Why no benefit?  Because money cannot be eaten or consumed. Money, remember, is used for exchange purposes only. Once a commodity is in sufficient supply as money, no further increases are needed. Any quantity of money is optimal. The more mining of gold for uses other than money, such as jewelry, is perfectly fine, but more gold as money is not needed. An increase in money only dilutes its value. And, it is this last point–dilution–that represents the sum total of our money problems today.

Legalized Counterfeiting

To put my points into perspective, imagine a free market economy where gold is the money. In such a society one can acquire the gold in one of three ways– mining, selling, or as a gift. In each one of these methods of acquiring gold, the principle of private property is strictly honored. However, let’s suppose an individual decides to take advantage of gold’s homogenous feature and creates an enormous amount of counterfeit gold coins for himself. This act will create a permanent destructive rippling effect throughout society. In addition to its fraudulent method of acquiring the gold and undermining the foundations of morality and private property, the counterfeiter will also increase the money supply substantially when he spends the money in the marketplace.   With more money in supply, its value will necessarily decrease and drive up prices on all goods. This, of course, is price inflation. It is very destructive because it impoverishes the whole of society, while the counterfeiting continues. The counterfeiter obviously benefits immediately by getting the money first, as opposed to the later recipients of the money, or those who never get the money at all…usually the average hard working citizen. These good people wind up paying dearly because they are left to deal only with the increased prices on all the goods in the market place. For them the cost of living simply rises year after year, and no one can provide an explanation as to why it happens. For this reason, Austrian Economists have always said that the inflation process (the increase of the money supply), is a form of indirect or invisible tax on society. This entire counterfeiting scheme is cleverly hidden.

We are fortunate that private counterfeiting has really never been much of a problem in modern times. The shaving of the edges of gold coins, the customary method of counterfeiting, ceased when milling was developed. However, when counterfeiting is mandated by government, when it is legalized, we have a serious economic and moral problem for all of society. Historically, there have been two major kinds of government mandated counterfeiting-(a) Government paper money and (b) Fractional Reserve Banking. This is precisely what we have today in our United States, but not just here-now it is all over the world.

“There is in all of us a strong disposition to believe that anything lawful is legitimate. Thus, in order to make plunder appear just and sacred to many consciences, it is only necessary for the law to decree and sanction it.” (3.)

Frederic Bastiat
1801-1850

The American public, in just this past year, has become increasingly more informed in the absurd concept of printing dollars on a printing press, and then spending them as a solution to  stimulating the economy. They realize that a flood of dollars into the market only devalues the currency. However, a much more insidious and camouflaged feature of our banking system is Fractional Reserve Banking. If you have the time, you can learn how that works by watching this educational video “The Mystery of Banking.” In the meantime, the most important thing to comprehend and remember is that so long as government paper money is redeemable in gold, it is as “good as gold” and can be said to be sound money. Our paper money, however, has not been linked to gold since President Roosevelt made that linkage illegal in 1933.  Since that time, the continuous expansion of the money supply, mandated by government through its Federal Reserve Bank, has devalued our money by 97%.  There seems to be no end in sight.

Message of Hope

Obviously, we must re-link our dollar back to gold. By doing so, we would all own, by assignment, property rights to a unit weight of gold. If our dollars are redeemable in gold, all banks would automatically be 100% reserve banks. More importantly, inflation would stop because gold cannot be inflated.

Next, we must privatize all banking, thereby abolishing government’s monopoly over our money. If step one and two can be accomplished, then there would be no need for the Federal Reserve.  Step three would be to close it down. If that happened, the size and expense of government would decrease immensely; our taxes would go way down, our savings-which fuel investment-would go up.

Think this is too big to accomplish? You would be amazed at the literally hundreds of thousands who support this solution. This support has been fueled in large part by the Mises Institute, the Foundation for Economic Education and other such private institutes, funded with no connection to powerful elites. These centers of education have become the places for learning the economic principles that our children and grandchildren need to be taught. They continue to fan the flame of liberty by publishing articles, scholarly journals, books, by holding conferences, and teaching students. Because of their efforts spanning more than 60 years here in America, there is faith, hope and expectancy at these independent scholarly institutions that a dramatic change in the political and social landscape is right around the corner, a belief that a great change can take place overnight when the ideological conditions are right. These institutions continue to provide the educational fuel to keep the fire burning. Every conscientious citizen should join and become a member of one.

Remember, we do not need to convince the entirety of the United States. With only 10% of the population supporting this solution, public policy can actually change. In the end, all economic policies are ultimately dependent on the views of the general public and our choice is final! America was founded on the principle that the masses, the people, determine the course of our history, but this movement for change must start with the individual–that means you and me.

L. Carlos Lara is President of United Services and Trust Corporation, a Management Consulting Firm specializing in Business Consulting, Corporate Trust Services, Corporate and Private Seminars including Speaking Engagements.

Notes: ___________________________________________________

1.    Special credit to Ludwig von Mises, Austrian Economist born 1881 Lemberg, Austria-Hungary, died 1973 New York City, NY. Noted for Praxeology. The Science of Human Action. Also, special credit given to Murray N. Rothbard, Austrian Economist, 1926-1995, student of Mises, for all information in this article.
2.    From the title of the national best selling book Too Soon Old, Too Late Smart, Thirty True Things You Need To Know ,   by Gordon Livingston, M.D. Copyright 2004 by Gordon Livingston published by Da Capo Press

3.    Frederic Bastiat 1801-1850, The Law-the classic blueprint for a just society. Republished by the Foundation for Economic Education, Irvington-on-Hudson, New York

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