Wednesday, April 28, 2010

The National Currency and Banking System

Michael S. Rozeff, on April 25, 2010, published part seven of his brilliant story on America’s decline into unconstitutional money, entitled "The U.S. Constitution and Money".

Rozeff's mission is to summarize one of my favorite monetary books of all time, Edwin Vieira’s Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution. Part seven below is about the national banking system and Rozeff states, "A monetary revolution occurred between 1861 and 1864 with the introduction of several kinds of unconstitutional paper monies by the U.S. government and the buildout of the National Banking System and its National Currency. The focus here is on these monies, this system, and the revolutionary corporative state that was born at that time in the monetary sector, as we continue our trip through Edwin Vieira Jr.’s Pieces of Eight. This article also analyzes the infamous logic of Charles Evans Hughes in a gold seizure case in 1935. Coming up next is the Federal Reserve System."

The U.S. Constitution and Money, Part 1 and Part 2, can be found here.

The U.S. Constitution and Money, Part 3 and Part 4, can be found here.

The U.S. Constitution and Money, Part 5, can be found here.

The U.S. Constitution and Money, Part 6, can be found here.

The U.S. Constitution and Money: The National Currency and Banking System (Part 7)

The U.S. Constitution and Money, Part 8, can be found here.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

Saturday, April 24, 2010

All That is Paper Does Not Glitter

By Adrian Douglas
Gold Anti-Trust Action Committee
Monday, April 19, 2010

At the public hearing on the metals markets held by the U.S. Commodity Futures Trading Commission on March 25, I was able to introduce testimony on the record that the London Bullion Market Association is operating a massive fractional reserve gold market that I called a Ponzi scheme. You can read a transcript and view the video clips here:

Jeffrey Christian of CPM Group confirmed that what is loosely called the London "physical market" is actually trading a hundred times more paper gold than there is physical metal to back those trades.

How is it possible for the LBMA to sell so much more bullion than they actually have in the vaults?

It is possible because of what they define as "allocated" and "unallocated" accounts.

An allocated account is where the investor has on deposit with a financial institution specific bars of gold or silver that are segregated for him and he is given their serial numbers. This gold and silver can be audited and the customer can have confidence that his investment is safe insofar as it really exists, is being stored on his behalf, and he has title to it.

The LBMA describes "allocated" accounts on its Internet site as follows:

"These accounts are opened when a customer requires metal to be physically segregated and needs a detailed list of weights and assays. The client has full title to the metal in the account, with the dealer holding it on the client's behalf as a custodian."

One would be justified in thinking that an unallocated account is when the investor's metal is held by the bullion bank but not specifically identified by serial number. For example, if two customers each want to buy 200 ounces of gold they cannot have allocated bars because the standard gold bar is the London Good Delivery (LGD) bar, which is 400 ounces. This would mean that these two investors could together be assigned an LGD bar -- a specific bar and serial number cannot be allocated for them, but a real bar is held on their behalf.

A casual review of the LBMA definition of an "unallocated account" would support this view. The LBMA states:

"Unallocated accounts. This is an account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest, and most commonly used method of holding metal. The units of these accounts are one fine ounce of gold and one ounce of silver based upon a .995 LGD (London Good Delivery) gold bar and a .999 fine LGD silver bar respectively."

The LBMA clearly states that an unallocated account is still an account for "holding metal." The LBMA further says that specific bars are not set aside for unallocated accounts and that customers with such accounts have a general entitlement to the metal.

I think a reasonable understanding of this description is that if 10,000 unallocated account holders have collectively purchased 100 tonnes of gold, then there will be 100 tonnes of gold in the vaults of the LBMA for those unallocated customers.

But that understanding would be wrong, for the LBMA's statement is misleading and deceptive.

The LBMA's definition of unallocated accounts continues as follows:

"Transactions may be settled by credits or debits to the account while the balance represents the indebtedness between the two parties.

"Credit balances on the account do not entitle the creditor to specific bars of gold or silver, but are backed by the general stock of the bullion dealer with whom the account is held. The client is an unsecured creditor."

The balance on the account is a measure of "indebtedness between the two parties." In other words the account balance is an IOU for bullion. It is NOT really a "method of holding metal" as first described by the LBMA. No, the unallocated account is backed by the general stock of the bullion dealer -- and that may be, as Jeffrey Christian has confirmed, only one physical ounce for every hundred ounces that have been sold in unallocated accounts.

The most important assertion about unallocated accounts is: "The client is an unsecured creditor." If 100 tonnes of gold had been bought by 10,000 unallocated account holders and the bullion bank commits to holding 100 tonnes on their behalf, the creditors cannot really be unsecured. The clients would be secured by 100 tonnes of gold. That the account holders are described as "unsecured creditors" means that their accounts are being operated or are subject to operation on a fractional-reserve basis.

So unallocated accounts are not really "the most convenient, cheapest, and most commonly used method of holding metal." Rather, they are a method for holding an IOU for bullion, a paper promise, an unsecured debt instrument issued by the bullion bank.

This is an unscrupulous scam that is being perpetrated on a massive scale. The LBMA trades on a net basis 20 million ounces of gold each day and 90 million ounces of silver. At current prices that represents $6.3 trillion annually, or 60 percent of the entire U.S. economy.

If the bullion bank does not really purchase the bullion that unallocated account holders think they are buying, then these investors are essentially making interest-free loans to the bank. Actually, it's a negative interest rate, because the bullion bank customers pay fees. These loans are index-linked to the price of bullion.

So what better motive could there be for the bullion banks to suppress the prices of gold and silver? Through unallocated accounts the bullion banks get money loaned to them at negative interest rates. But the rates are indexed to the price of gold or silver, so the last thing the bullion banks want is for the price of gold or silver to go up.

At the CFTC hearing the bullion dealers and their apologists argued against imposing position limits in the gold and silver markets of the New York Commodities Exchange because the dealers have to hedge their "positions" in the London physical market. But none of them actually stated categorically that they were hedging real physical metal holdings.

In my statement to the Commission I said the bullion banks essentially had "paper hedging paper." Christian confirmed this. He also stated that in 2008, when gold and silver purchases were heavy, the bullion dealers had to hedge those sales by going SHORT on the Comex. When CFTC Chairman Gary Gensler challenged the logic of what Christian had just said, Christian explained that he had misspoken. But I believe it was a Freudian slip. The bullion banks have a massive and leveraged vulnerability to rising bullion prices and so their response in 2008, as bullion prices threatened to break out, was indeed to sell short on the Comex to drive down prices.

HSBC and JPMorgan Chase are market makers on the LBMA. Together they own 95 percent of the over-the-counter precious metals derivatives as reported to the U.S. Office of the Comptroller of the Currency, and, by comparison with the CFTC Bank Participation Report, HSBC and JPMorgan Chase are the biggest short sellers on the Comex.

Since the LBMA is not really buying all the metal that investors are supposedly purchasing from it in unallocated accounts, not only is the LBMA hurting those investors but it is also suppressing the exchange price of the bullion held in allocated accounts for their customers. If the LBMA was to back all bullion sales with 100 percent unencumbered bullion, the price of bullion would be multiples of the current price because physical demand would be many times higher.

Where is the warning to owners of allocated metal accounts that their bullion dealer is running a scheme that involves deliberately and willfully selling naked short against their investment?

In 2003 Graham Tucker, chairman of Gold Bullion Securities, made a presentation to the annual LBMA Precious Metals Conference about the newly launched gold-backed ETF that today trades on the American Stock Exchange under the ticker GOLD. The transcript of his speech can be found here:

In that speech Tucker said:

"There are three essential components of [a] listed security in our opinion. Firstly, ownership of the gold; investors want allocated gold, not a third-party credit risk, which is what unallocated gold is. In fact, you could argue unallocated gold isn't gold; it’s just a piece of paper issued by a bank, and in most cases, unsecured risk."

This is a speech being made in front of all the members of the LBMA. You simply can't make those types of statements in front of such a crowd if they aren't true. And we know it is true because the LBMA says the same thing on its Internet site. The LBMA say its clients are "unsecured creditors."

Goldman Sachs has just been charged with fraud for failing to advise customers to whom they were selling a particular investment that the firm had been paid by the John Paulson Fund to engineer the investment in a way that made it likely to go down in price.

There is an exact parallel in selling allocated gold as a safe-haven investment and failing to disclose that activities of the same bank will impede its price from rising or even make its price go down.

In 2007 Morgan Stanley settled out of court a class-action lawsuit brought by precious metals investors. The complaint alleged that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store, but Morgan Stanley either made no investment specifically on behalf of those clients or it made entirely different investments of lesser value and security.

In a recent interview with King World News investors Harvey and Lenny Organ recounted their difficulties in getting the gold and silver that was supposed to be held for them by Bank of Nova Scotia. They recounted a visit to the bank vault, where they saw very little inventory.

Some bullion dealers and fund representatives have countered with their own eyewitness accounts, asserting that they have allocated metal stored at the bank and they have verified that the bullion is in storage there. These bullion dealers and fund representatives have misunderstood the issue, for the sanctity of allocated gold and silver investments was not in dispute. The Organs were referring to unallocated metal, not allocated. The Organs had bought metal on the Comex and taken delivery and asked Bank of Nova Scotia to move it to the bank's vault in Toronto . In the process the Organs' metal apparently was switched to unallocated and the unallocated metal inventory they were shown was insufficient to contain their holding.

Those rushing to defend Bank of Nova Scotia to claim there is plenty of gold and silver in the bank's vaults should check the bank's Internet site first:

"How secure is a 'gold certificate'?

"Scotiabank gold certificates are backed by the assets of the Bank of Nova Scotia."

Thus there is no guarantee that the certificates have any gold or silver backing at all. Elsewhere the bank says:

"Unallocated gold is a claim on the Bank of Nova Scotia for the ounces entitlement to a specific quantity of gold bullion."

So unallocated bullion is not bullion at all; it's an unsecured claim against the bank.

Bank of Nova Scotia is a market making and clearing member of the LBMA and a member of the London gold fix group.

Economics tells us that the price of something goes up when demand goes up and/or supply goes down. How can the price of precious metals increase when the supply of unallocated gold and silver can be created to infinity out of thin air? Investors make investments in precious metals as wealth protection against unlimited fiat currency creation. What a cruel irony that their unallocated precious metal investment is also being created out of thin air.

What should investors do?

Investors need to do their due diligence. They need to determine if they are actually holding a 100-percent precious-metal-backed investment.

There are some unallocated investment vehicles that are entirely honest where all the gold and silver sold is actually purchased and held on behalf of the customers. One such example is, which conducts and publicizes third-party audits to verify 100-percent backing.

If a bullion dealer's contract does not unequivocally and expressly state that the unallocated investment is 100-percent backed by bullion or states that the investment is unsecured in any way or is only a claim against the dealer, then investors should take delivery or convert to an allocated investment.

If unallocated bullion investments have a reserve ratio of only 1 percent, as suggested by CPM Group's Christian, such instruments are an accident waiting to happen, the next fraud waiting to be exposed.

But whatever the reserve ratio, if it is significantly less than 100 percent, this source of "paper bullion" created out of thin air as a ledger entry is the main reason gold and silver prices have not kept pace with inflation, because the apparent supply is so much higher than the real physical supply.

You should not facilitate this price suppression by holding such vehicles. You should take action. All that is paper does not glitter, and when the music stops it will not fulfill the investment goals for which it was intended.

If you buy a lifeboat on the Titanic, you want a lifeboat on the Titanic. You don't want an IOU for a lifeboat on the Titanic, where, if no lifeboats are available, you may be offered a settlement in cash.

Adrian Douglas is publisher of the Market Force Analysis financial letter and a member of GATA's Board of Directors. Reprinted with permission.

For further reading:
"Rebuttal to 'Cash Futures, Physical Forwards, and London Gold's 100-to-1 Leverage'", Adrian Douglas, April 23, 2010
"Cash Futures, Physical Forwards, and London Gold's '100-to-1 Leverage'", Paul Tustain, April 21, 2010
"Debunking the Post-CFTC Precious Metals Fearmongering Campaign", Erik Townsend, April 19, 2010

Thursday, April 22, 2010

Central Banking as an Engine of Corruption

By Thomas J. DiLorenzo
Mises Daily
Friday, April 16, 2010

Much has been written about the famous debate between Thomas Jefferson and Alexander Hamilton over the constitutionality of America's first central bank, the Bank of the United States (BUS). This was where Jefferson, as secretary of state, enunciated his "strict constructionist" view of the Constitution, making his case to President George Washington that since a central bank was not one of the powers specifically delegated by the states to the central government, and since the idea was explicitly rejected by the constitutional convention, a central bank is unconstitutional.

Treasury Secretary Alexander Hamilton notoriously responded by inventing the notion of "implied" as opposed to enumerated powers of the Constitution.

George Washington signed legislation creating the BUS not because of the strength of Hamilton's argument but because of a shady political deal. The nation's capital was being relocated from New York to Virginia, and Washington wanted the border of the new District of Columbia to abut his property at Mount Vernon. In return for a redrawing of the district's border, Washington signed the Federalist's legislation creating the BUS.

America's first central bank was borne of a corrupt political deal, but that particular act of political corruption pales in comparison to what Hamilton and the Federalists really had in mind. As Murray Rothbard wrote in The Mystery of Banking (p. 192), Hamilton and his political compatriots, especially defense contractor/Philadelphia congressman Robert Morris, wanted

to reimpose in the new United States a system of mercantilism and big government similar to that in Great Britain, against which the colonists had rebelled. The object was to have a strong central government, particularly a strong president or king as chief executive, built up by high taxes and heavy public debt.

An especially important part of what Rothbard called "the Morris scheme" was "to organize and head a central bank, to provide cheap credit and expanded money for himself and his allies."

Hamilton was Morris's Machiavellian string puller in the Washington administration. As explained by Douglas Adair, an editor of The Federalist Papers (1980 Penguin Books edition, p. 171),

with devious brilliance, Hamilton set out, by a program of class legislation, to unite the propertied interests of the eastern seaboard into a cohesive administration party, while at the same time he attempted to make the executive dominant over the Congress by a lavish use of the spoils system. In carrying out his scheme … Hamilton transformed every financial transaction of the Treasury Department into an orgy of speculation and graft in which selected senators, congressmen, and certain of their richer constituents throughout the nation participated.

What Adair is talking about here is how Hamilton went about nationalizing the old government debt. New government bonds were issued and the old debt was to be cashed out at face value. This plan "immediately became public knowledge in New York City," wrote John Steele Gordon in Hamilton's Blessing (p. 25), "but news of it spread only slowly, via horseback and sailing vessel, to the rest of the country." Thus, a tremendous arbitrage opportunity was created for the New York/Philadelphia political insiders like Robert Morris and his business associates. This was the first instance in US history of political insider trading.

The political insiders, including many members of Congress, immediately swung into action to purchase as many of the old government bonds as they could from unsuspecting Revolutionary War veterans for as little as 2 percent of par value. As historian Claude Bowers described the scene in his book, Jefferson and Hamilton,

expresses with very large sums of money on their way to North Carolina for purposes of speculation … splashed and bumped over wretched winter roads…. Two fast-sailing vessels, chartered by a member of Congress … were ploughing the waters southward on a similar mission. (p. 47)

Among the men who became instant millionaires were "leading members of Congress who knew that provision for the redemption of the paper [at face value] had been made," wrote Bowers (p. 48).

Upon observing this caper, Hamilton's political nemesis, Thomas Jefferson, came to understand that Hamilton was intentionally creating a system of institutionalized corruption in order to buy the political support in Congress for his party's big-government mercantilist/imperialist agenda — the very kind of political system the colonists had waged war against. In a February 4, 1818, essay (in Thomas Jefferson: Writings, pp. 661–696), written long after Hamilton's death in 1804, Jefferson recalled what Hamilton was up to: "Hamilton's financial system had two objects. 1st as a puzzle, to exclude popular understanding & inquiry. 2ndly, as a machine for the corruption of the legislature" (emphasis added).

With regard to the latter "object," Jefferson explained that Hamilton:

avowed the opinion that man could be governed by one of two motives only, force or interest: force he observed, in this country, was out of the question [note: this was pre-Lincoln]; and the interests therefore of the members [of Congress] must be laid hold of, to keep the legislature in unison with the executive. And with grief and shame it must be acknowledged that his machine was not without effect.… Some members [of Congress] were found sordid enough to bend their duty to their interests, and to look after personal, rather than public good.

Jefferson then described the very same scene mentioned above in the quote from Claude Bowers:

The base scramble began. Couriers & relay horses by land, and swift sailing pilot boats by sea, were flying in all directions. Active partners & agents were associated & employed in every state, town and country neighborhood, and this paper was bought up at 5 and even as low as 2% in the pound, before the holder knew that Congress had already provided for its redemption at par. Immence sums were thus filched from the poor and ignorant.

"Men thus enriched by the dexterity of a leader [Hamilton]," Jefferson wrote, "would follow of course the chief who was leading them to fortune, and thus become the zealous instruments of all his [political] enterprises."

But the political power created by such graft was only temporary, said Jefferson. "It would be lost with the loss [i.e., retirement or death] of the individual members [of Congress] whom it had enriched." Therefore, Jefferson reasoned, "Some engine of influence more permanent must be contrived." This permanent engine of corruption, said Jefferson, "was the Bank of the U.S." A central bank, once established, would be very difficult to destroy, and would inevitably become a permanent source of financing for political bribery and manipulation. How prescient.

Jefferson concluded that "Hamilton was not only a monarchist, but for a monarchy bottomed on corruption," with a central bank being the financial centerpiece of the corrupt regime. He arrived at this conclusion based on observing Hamilton's behavior as Treasury Secretary, as well as a personal conversation involving himself, Hamilton, Secretary of War Henry Knox, President John Adams, and Attorney General Edmund Randolph in 1791, the year the BUS came into being.

Jefferson recalled how President John Adams said of the British constitution, "purge that constitution of its corruption, and give to its popular branch equality of representation, and it would be the most perfect constitution ever devised by the wit of man." To which Hamilton objected,

Purge it of its corruption, and give to its popular branch equality of representation, & it would become an impracticable government; as it stands at present, with all its supposed defects, it is the most perfect government which ever existed.

Hamilton was "so bewitched & perverted by the British example," wrote Jefferson, "as to be under thoro' conviction that corruption was essential to the government of a nation" (p. 671). Hamilton viewed "his" bank, the Bank of the United States, as being absolutely essential to his Americanized version of "the most perfect government which ever existed."

Thomas DiLorenzo is professor of economics at Loyola University Maryland and a member of the senior faculty of the Mises Institute. He is the author of The Real Lincoln, Lincoln Unmasked, How Capitalism Saved America, and, more recently, Hamilton's Curse. Reprinted with permission.

Wednesday, April 21, 2010

Austrian Finance, Central Banks and the Virtues of Free Banking

Scott Smith of The Daily Bell interviewed Professor George Selgin on "Austrian Finance, Central Banks and the Virtues of Free Banking" (April 18, 2010). It includes an excellent exchange about "100%-reserve" banking" versus "fractional" reserve banking in an Austrian economics setting. I tend to favor the argument advanced by both Selgin and White that unrestrained market forces in free banking would favor "fractional" reserve banking.

George A. Selgin is a professor of economics in the Terry College of Business at the University of Georgia, a senior fellow at the Cato Institute in Washington DC, and an associate editor of Econ Journal Watch. Selgin formerly taught at George Mason University, the University of Hong Kong, and West Virginia University. Selgin's principal research areas are monetary and banking theory, monetary history, and macroeconomics. He is one of the founders, along with Kevin Dowd and Lawrence H. White, of the Modern Free Banking School, which draws its inspiration from the writings of Friedrich Hayek on denationalization of money and choice in currency.

A central claim of the Free Banking School is that the effects of government intervention in monetary systems cannot be properly appreciated except with reference to a theory of monetary laissez-faire, analogous to the theory of free trade that informs the modern understanding of the effects of tariffs and other trade barriers. Selgin is also known for his research on coinage, including studies of Gresham's Law and of private minting of coins during Great Britain's Industrial Revolution, and for his advocacy of a "productivity norm" for monetary policy – a plan that would have policymakers target the growth-rate of nominal gross domestic product at a level that would allow the overall price level to decline along with goods' real (unit) costs of production.

From The Daily Bell After Thoughts:

George Selgin, along with his mentor Lawrence White, blazed an original trail in the late 20th century that virtually resuscitated the concept of free-banking. Free-banking is simply the idea that a bank (or any entity operating as a bank) is free to accept deposits and loan money beyond the deposits it has on hand. This banking methodology is known as fractional banking and evokes strong feelings within the free-market universe.

The United States economy was in a sense based on free-banking, even after the Civil War, and until the advent of the Federal Reserve in 1913. However, the US never offered an entirely free-banking economy – given the Constitutional definition of money-as-silver – and bank owners often found they could not be chartered without buying a good deal of municipal (local) debt.

Famous free-market economist Murray Rothbard has suggested that local American debt was often questionable and made bank balance sheets unstable – leading to bank runs. This gave American free-banking a bad name, leading to the appellation "wildcat" banking. Thus we could argue that untrammeled free-banking was never implemented in the US.

Where are we now? Today, in America and around the world, banks function with fiat-money fractional reserves, and Ben Bernanke has suggested doing away (recently), even, with those. The idea is that within a central bank money environment, banks are basically distribution centers for debt-based money and it does not matter whether they have additional "funds" within their coffers or not.

Bernanke's position in fact is simply a recognition that the banking system, not based on gold and silver money, is really only an imitation of what once existed. Today, the Fed and other banks could just as easily disburse paper and electronic money directly to businesses and consumers - but that would mean bypassing the banking system that is a main feature of modern societal power and control.

The current system obviously does not work very well. Free banking would be one solution. Yet free-banking - which Selgin and others believe has proved viable for long periods of time in the past, especially in Scotland, and less well in the US (to the degree that it was implemented) – remains a controversial subject.

Free banking arouses strong passions. Anti-free bankers have suggested than anything other than a 100 percent gold standard – when it comes to securing money in banks – would be something of a criminal endeavor, even in a free-market society. Beyond that, and regardless of the degree of criminality, the position of anti-free bankers remains that the marketplace itself would immediately reject a banking system that did not back deposits fully with precious metals.

The crux of the argument within free-market circles, therefore, is whether or not free-banking (fractional reserve banking) is (1) an acceptable behavior and (2) a practical one. Free-banking backers (and we are partial to free-banking) would respond that (1) the market should be allowed to decide whether free-banking is acceptable and (2) the practicality of free-banking has been proven by past episodes.

Ultimately, we don't believe that money is so complicated as people make it out to be. Money, historically, is gold and silver and governments (historically) have done anything and everything in their power to control money and to substitute paper and – now – electronic media in its place. But inevitably substitute money media is abused and inflated and history shows us that sooner or later gold and silver tend to circulate once again within the context of an honest money standard.

So here is the question. What would be a default standard in a truly free-market economy? We would suggest that one answer might be free-banking where anyone is able to offer a warehousing service for gold and silver and issue paper notes (receipts) that may be accepted at least locally as cash. Additionally, we would suggest individuals or entities doing the warehousing would be entitled to pursue fractional reserve banking so long as it was disclosed.

Is it wrong to let the market decide on what kind of banking works? Free-banking, fractional reserve banking, even central banking (or a variant thereof) all seem logical to us so long as they are pursued within a free-market context. It may even be that the marketplace would determine a 100% gold reserve to be ideal. But the point is, let the market decide. The problems begin when government steps in. Then distortions, bad-dealings and destructive inflation (and price-inflation) are inevitable when they do. In our opinion, a private marketplace for money would sort out these problems through competition and people's natural inclination to be prudent (for the most part) about their hard-earned money. See, maybe it's not so complicated after all.

Tuesday, April 20, 2010

The Search for a Reserve Currency

By Gregory R. Copley
Monday, April 19, 2010

Currency, like all forms of abstract value, is based on trust. And trust itself is based - except among the most naïve - on experience, and the repetitive demonstration of fidelity, whether positive or negative. At present, the US dollar, which had experienced a gradual rise during the 20th Century to the position gained well into the Cold War of being the trading world’s reserve currency. It had the mass, in terms of volumes of available currency; it had the backing of an indisputably wealthy national asset base to move away from the gold standard; it had stable governmental backing.

All of that is evaporating. Not, in absolute terms, as far as the mass of currency available, because that has dramatically expanded in recent years, and particularly during the past year of the Administration of Pres. Barack Obama. Not in the underlying asset valuation of the US economy, but it has begun to erode as the productive capability of the US to extract that value diminishes due to excess governmental interference and anti-business practices. It is far to say that other countries, from Nigeria to Russia, have vast untapped underlying asset value. That they did not create global reserve currencies from their naira and ruble was due to governance failures.

However, as we are witnessing, good governance as an essential component of currency value and the trust in that currency, can transform overnight, just as we witnessed the post-World War II collapse of sterling, and, now, the shakiness of trust in the US dollar (despite the reality that, at $14.2-trillion in value in 2008, is the world's largest). The age of the US dollar as the global reserve currency is not yet over, but it is threatened, and the trend toward a flight from the dollar (despite occasional returns to it) is evident. At present, however, the dollar is shored up because in many respects there is nothing of its stature ready to replace it. This leads to the essential question:

Are we entering a period in which we may have no global reserve currency?

The People’s Republic of China (PRC) has been searching for safe-havens for its holdings of foreign earnings. The US dollar has slipped in its esteem, with some short-term benefits, perhaps for US exports, but with perilous long-term consequences. As a result, and whilst attempting to preserve the intrinsic value of its currency holdings, the PRC has been gradually scaling back its holdings in US currencies or US dollar-denominated instruments.

Where can the PRC go with its hoard? It looked at euro investments, at Canadian and Australian dollar holdings, and so on. The Australian and Canadian economic bases — at just under a trillion US dollar GDP for Australia, and about $1.4-trillion GDP for Canada — are insufficiently large to hold much in the way of PRC investments. Nonetheless, these economies have benefited from the PRC dilemma. The euro, however, is, like the US dollar, suffering from a loss of credibility, and unless some profound action is taken the euro may dramatically diminish in credibility, severely hampering the loose confederal structure of the European Union, preventing it from becoming the federal state of Europe to which some (mostly unelected) aspire.

We are, then, faced with a situation in which we may find a world without a standby currency, when, for a period after World War II, it had a couple: the US dollar and the pound sterling. It could have had more — the German mark and the Japanese yen — of the parent states of those currencies had been in a position to build a global base of trust. Now we are left in territory unfamiliar to all those now living, other than for the interregna of the World Wars.

Read the rest of the article.

Gregory R. Copley is the Editor of GIS/Defense & Foreign Affairs.

For further reading:
"Euro's reserve standing may be hit by Greek crisis", Mike Dolan, Reuters, April 7, 2010
"China Said to Consider Yuan Trading Versus Ruble, Won", Bloomberg, April 7, 2010

Monday, April 19, 2010

Unconstitutionality of Legal Tender Notes

Michael S. Rozeff, on April 17, 2010, published part six of his brilliant story on America’s decline into unconstitutional money, entitled "The U.S. Constitution and Money".

Rozeff's mission is to summarize one of my favorite monetary books of all time, Edwin Vieira’s Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution. Part six below is about the legal tender cases and Rozeff states, "What is legal tender? Why is Ron Paul’s drive to end legal tender laws so important? How did we get here? The legal-tender cases introduced government-controlled paper money into the American monetary system for the first time in 80 years, paving the way for today’s irredeemable legal tender Federal Reserve Notes. Find out why legal tender paper money is unconstitutional and what is constitutional. See how the government breached the Constitution. Read the stirring words of Justice Field’s dissents as he stood against the big government ideas of the Court’s majority. This article examines the thorough debates on this subject in Congress and the Supreme Court, as it continues to summarize Edwin Vieira’s work on the monetary powers and disabilities of the U.S. Constitution."

The U.S. Constitution and Money, Part 1 and Part 2, can be found here.

The U.S. Constitution and Money, Part 3 and Part 4, can be found here.

The U.S. Constitution and Money, Part 5, can be found here.

The U.S. Constitution and Money: The Legal Tender Cases (Part 6)

The U.S. Constitution and Money, Part 7, can be found here.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

Friday, April 16, 2010

Digital Gold Currency and the Establishment of Sovereign DGC Systems

David Knox Barker, founder of Long Wave Dynamics, LLC, was recently interviewed by Clif Droke of the Gold & Silver Stock Report and he spoke extensively on digital gold currencies and their role in the future world monetary system. The most interesting aspect for readers of The Monetary Future revolves around the notion of sovereign players entering the digital gold currency market alongside the private digital gold currency banks. Barker states:
"All of a sudden for the first time in 20 years the central banks aren’t sellers of gold. I think we’re in a window here where gold is effectively the world’s second reserve currency. It’s not acknowledged publicly and people aren’t aware of it but I believe gold is the second reserve currency behind the dollar. Depending on what government policy does will depend on whether gold becomes more dominant. I think fiat currencies are here to stay but what most people have not yet recognized – James Turk has recognized it; he’s the founder of – is that during the next long wave advance gold will become even more important. [Turk] has created a new currency based on gold. If you combine the data system of the Internet with gold and with secure vault storage in Switzerland or London, Digital Gold Currency has the potential to become huge. Right now you can open an account with DGC at any given time and you can move in and out into other currencies into your gold account. It’s coming.

Imagine yourself as a Wal-Mart or an IBM and you operate in hundreds of countries and you have to hedge your currencies in all these countries. With James Turk’s company, businesses can open an account in Digital Gold Currency and operate in a way that prevents their having to do a lot of the hedging and eliminate a lot of the expenses they incur in their hedging activities. That’s one reason why I’m optimistic about the drivers of the next long wave advance.

Object oriented programming is another thing I’d like to mention that’s going to be a dominant force in the next advance. What you see is that these are the technologies that selected by industry during the long wave winter and begin to be capitalized but they don’t get fully implemented until the advance. For instance, the object oriented paradigm, which was converted to the object oriented computer programming approach, is making the world more efficient. But it’s also doing a few other things. The world really is a loosely coupled object model and object oriented programming, or OOP, is realizing that and allows companies to deploy in a more efficient manner. I think OOP is going to be a major driver in the next advance of the long wave. There’s also a connection between OOP (object oriented programming) and digital gold currency because under the hood of the systems running major corporations and banking institutions is an object oriented paradigm, a view of the world, which allows everyone to operate more efficiently and what it allows is for your computer systems to more intelligently reflect the real world. The way this will play into Digital Gold Currency (DGC) is that it will be a driver to make DGC a logical option for people. I think there will be a combination of private digital gold currency banks as well as sovereign players. I think you’ll see certain countries buying into Digital Gold Currency and effectively establishing sovereign DGC systems."
In another question from Clif Droke about what realistically can be done to balance the power of the Federal Reserve, Barker answered:
"I sincerely believe that Digital Gold Currency (DGC) will balance the Fed; it’s coming. The Internet has met gold and secure vaults in Switzerland, London or New York and we’re going to have international currency. It’s interesting that for the first time in 20 years central banks are no longer selling gold, they’re holding it.

I think what we’re effectively seeing is the development of the world’s second reserve currency. You’re going to see DGC combined with the Internet to see some very interesting dynamics in the currency market. I can actually see Fort Knox being turned into a Digital Gold Currency bank before this crisis is over with independence from the Federal Reserve and run by the U.S. Treasury.

So if you had a central bank that had only a price stability mandate and actually maintained higher reserve requirements and didn’t juice the system, and if you also had a competing Digital Gold Currency system, it would make for a very interesting world and I think it’s where we’re headed."

David Knox Barker is the founder of Long Wave Dynamics, LLC, and the publisher and editor of The Long Wave Dynamics Letter. Barker is one of the world’s foremost experts on the economic long wave and stock market cycles. He is the author of Jubilee on Wall Street (2009), published earlier as The K Wave (1995) by McGraw-Hill. He is a writer, inventor, entrepreneur, technical market analyst and world-systems analyst. He has researched and written on the impact of the long wave on international financial markets and the international political economy for over twenty-five years. He has applied long wave dynamics to entrepreneurial business development decisions throughout his business career. Barker was founder and CEO for ten years from 1997 to 2007 of a successful life sciences market research and marketing services company, serving a majority of the top 20 global life science companies. Barker holds a bachelor’s degree in finance and a master’s degree in political science.

For further reading:
"An interview with a long wave master (part 1)", Clif Droke, April 12, 2010
"The Great Republic", David Knox Barker, DGC Magazine, February 2010
"A Historical Review of the American Gold Market"
, Steven C. Kennedy, January 2002

Monday, April 12, 2010

An Interview with Dr. Zeno Dahinden, CEO of

Mark Herpel of Digital Gold Currency Magazine has just published a thorough and engaging interview with the CEO of e-dinar, Dr. Zeno Dahinden, in the April 2010 issue. Mark is a pioneer in getting the interviews with the various news-makers and the people that matter most in the world of digital currency.

Interview with Dr. Zeno Dahinden, CEO of, March, 2010

Sunday, April 11, 2010

The Road to Roosevelt’s Gold Seizure

Michael S. Rozeff, on April 8, 2010, published part five of his brilliant story on America’s decline into unconstitutional money, entitled "The U.S. Constitution and Money".

Rozeff's mission is to summarize one of my favorite monetary books of all time, Edwin Vieira’s Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution. Part five below is about the bimetallic system and Rozeff states, "Between 1873 and 1900, America’s bimetallic money system survived the battles between free silverites and gold standard supporters. Bimetallism looked triumphant, but a mere 33 years later, Roosevelt trashed it. The battles of 1873-1900 accompanied a weakening of obedience to constitutional provisions and a loss of understanding of their meaning, as well as the introduction of a parallel paper money system. America in this period, without realizing it, was wending its way toward the severe uprooting of both specie as money and the Constitution in the years 1913-1933 and toward the debt-laden society of today. (It’s been a long bear market for the Constitution.) This part, after a brief review, looks at the Bland-Allison Act, the Sherman Silver Purchase Act, and the Gold Standard Act, among others."

The U.S. Constitution and Money, Part 1 and Part 2, can be found here.

The U.S. Constitution and Money, Part 3 and Part 4, can be found here.

The U.S. Constitution and Money: The Bimetallic System 1873-1900 (Part 5)

The U.S. Constitution and Money, Part 6, can be found here.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

Friday, April 9, 2010

Interview with Blueshift Research on PayPal

In April 2010, I was interviewed by Seth Agulnick of Blueshift Research for a strategy piece that he was compiling on PayPal. Below is my excerpt from that study, "PayPal's Recent Efforts Secure Its Leadership Role":


Three payment industry experts consider PayPal an industry leader in the alternative payment industry. One source pointed to PayPal’s 130 million membership base and Facebook’s recent decision to partner with PayPal for its online payments. PayPal’s growth could come from transactions outside the United States as well as in-game, in-store and mobile payments. PayPal’s challenges include 15 to 20 foreign PayPal imitators, its decision not to accept online “sin payments,” customer service issues and merchant frustration, and the United States’ slow adoption of mobile payments.

A digital currency consultant, blog author and a former bank and software executive said PayPal’s growth will be somewhat limited by international competition, especially in payment categories where it has chosen not to participate, such as gambling and adult sites. However, its recent deal with Facebook is a huge coup as Facebook could have provided serious competition in the United States with its own payment system. PayPal could break into the brick-and-mortar store market as mobile payments increase. However, its ability to change consumer behavior the way credit cards did likely is limited to certain online games.

1. “They’re going to be limited internationally and by the choices they’re making in restricting some of their categories. If you look outside the U.S., there are probably 15 or 20 PayPal imitators that have sprung up because they’re addressing markets PayPal is either intentionally or unintentionally ignoring.”

2. “There are a lot of categories they restrict. They restrict online gambling, which is very big in Europe. They restrict the adult sites. They are now restricting the prescription drug companies. Those are the things that have given their competitors an opening, so I don’t think they’re going to just grow and grow unchallenged. I think they’ll actually be facing a lot more competition in the future.”

3. “In the online gambling world, the two notable competitors are Moneybookers and [Neovia Financial PLC’s/LON:NEO] Neteller. Both are in the UK. There’s also a company often considered a serious competitor of PayPal called [Smart Voucher Ltd.’s] Ukash. They started in Germany, I believe, and their volume is extraordinary.”

4. “Facebook decided recently not to challenge PayPal but to allow PayPal transactions to go through Facebook. I think Facebook has more of the branding trust than PayPal, but they made the decision that they didn’t want to deal with the customer service issues or fraud issues that would come up. That’s an enormous win for PayPal because Facebook is probably the only [competitor] they were afraid of.”

5. “I know there’s a lot of merchant frustration around transactions being reversed without warning, and it’s difficult for them to dispute it because it’s time-consuming and PayPal is so big. It’s really the same thing you see with Visa and MasterCard. There’s no finality of the transaction. It’s always subject to a charge-back if the customer disputes it. That’s why they don’t want to be in online gambling, because a guy will say, ‘I didn’t mean to make that bet. I need to reverse it.’”

6. “PayPal does not have finality of payment the way you’re seeing some of their competitors do. If PayPal does get challenged, it’s probably going to be driven more by the merchants than by consumers.”

7. “Talk to 10 people who use PayPal from the merchant side, and you’ll have three, four, five of them who’ll say they’ve had problems with payments. That’s the same issue with Visa and MasterCard. PayPal started out with the mission of improving what Visa and MasterCard do in the online world, but they’re really just turning into those guys.”

8. “A PayPal account used at a walk-in location? PayPal could do that, absolutely. They’ve already opened up their API [Application programming interface] to developers. If they get more into the mobile payment world, I don’t see why it couldn’t function there just as well as it does in the online world. You flash your mobile phone at the merchant. Definitely, that’s possible.”

9. “I definitely think that’s a good way for PayPal to go. It doesn’t attack the cash market, but it eats into checks and Visa and MasterCard and Amex [American Express Co./AXP].”

10. “[Mobile payments] already are common in Africa and South America and other parts of the world. That’s kind of the big joke: Why do mobile banking and mobile payments work for undeveloped countries, but we can’t seem to get a foothold in the U.S.?”

11. “In the undeveloped countries in Africa, there were so many people who were unbanked. They didn’t have traditional banking relationships, but many of them had mobile phones. They were able to send money to Grandma or to each other, and it started getting accepted at the merchant level.”

12. “The challenge in the U.S. is that you already have the infrastructure here of the banks and the payment networks and the payment processors. What’s slowing it down is that you have to do all the negotiating with all the interested parties. Everybody wants a slice of the pie and wants to protect its turf.”

13. “Especially when you look at in-game payments, like the spontaneous purchases for Farmville and things like that, it definitely can change consumer behavior if you can make a payment without having to leave the game. A lot of the mobile payment companies are recognizing that already and they’re ahead of PayPal in that area. One is Zong and another is Boku [Inc.].”

14. “PayPal has the possibility to change consumer behavior, but I think it will be focused on the in-game payments. I don’t see it changing people’s spending habits just because they’re on eBay and somebody takes PayPal. I don’t think it changes behavior there.”

15. “They do have a good brand, and they do have trust with that brand. But it’s only the same kind of trust you’d have with your bank. They would turn over your banking records if required by subpoena. So how far does that trust go?”

The Seigniorage Curse

By Gregor Macdonald Blog
Tuesday, March 24, 2009

Much has been said the last few decades about the Oil Curse. The idea that countries with a large petroleum inheritance actually devolve over time, failing to diversify their economies. The result is often a stagnant culture and a dysfunctional political structure. Amidst the arrested development, these countries are of course deeply vulnerable to swings in the price of oil. Writers who have looked at the Oil Curse will often compare Indonesia (discovered oil) to South Korea (no oil) from the time after the Korean War ended. Indonesia of course remained a mess for decades, while South Korea became an economic supergiant, based on its promotion of education, innovation, and engineering.

Another country that now looks quite arrested in its development is the United States. But not because of an Oil Curse. Rather, the United States appears to have finally succumbed to its multi-decade “advantage” via dollarization. In dollarization, the US Dollar has been the world’s reserve currency, and the United States economy has “enjoyed” the freedom to borrow and print ad infinitum without the usual penalties. In this regard, the United States has functioned as the King, who issues coinage with your bullion, but takes a small shaving in the process. In return, US citizens and those holding dollars enjoyed the purchasing power premium of a currency backed by the King. That’s the power of Kings. The power of Seigniorage.

A problem develops internally, however, when the King or the King’s economy no longer offers as much value for the premium charged. And that’s exactly what’s been happening to the US economy over the past 30 years. Oh, not all parts of the US economy. Innovators have rolled onward as the dysfunctional and shoddy parts of the economy took greater hold. But what happened eventually is that the shoddy parts–especially the financial sector–ran out of things to monetize. In fact, the US economy stopped making things to monetize.

The Seigniorage Curse appears to hollow out the economy by the following manner: First, the premium charged to holders of dollars becomes a new source of accrued, aggregate revenue. This extra capital flowing into the economy is initially seen as a global honoring of our economy’s strength, and innovation. But when innovation falters and less value is created, seigniorage is maintained–and thus the unhealthy dynamic begins. From this point forward, whether the US economy either leads in innovation, or lags in innovation, the Dollar advantage grows regardless. It then becomes clear that manufacturing Dollars, rather than manufacturing goods, is a better value proposition. Once that dynamic is in place, then a long cycle of financialization ensues, in which innovation and talent moves from design and manufacturing to the financial sector. The financial sector then becomes rapacious, as it scours what’s left of the economy to monetize. Whereas manufacturing and innovation were once monetized, the financial sector begins to monetize itself.

The final hurrah was seen this decade, when the financial sector, unable to monetize other US based streams of income, decided to monetize housing. That was all that remained. Seigniorage had allowed us to stop earning our living, and eventually we “bundled up and packaged” our real estate. Interestingly, it’s only in the aftermath of the burst housing bubble that we observe how many Americans are being ‘forced to sell” their homes. In fact, Americans had already sold them.

Every inheritance starts out as a gift. Just as oil-cursed nations remain ever vulnerable to swings in the price of oil, the United States is now vulnerable to its own number one export–the value of the US Dollar and by extension the value of US Treasury Bonds.

Gregor Macdonald is an oil analyst and energy sector investor, who also focuses on the coming transition to alternatives. Reprinted with permission.

For further reading:
"The History of Seigniorage Wealth", Elaine Meinel Supkis, February 7, 2008

Thursday, April 8, 2010

What if Your Gold Isn't Really There?

By Patrick A. Heller
Tuesday, April 6, 2010

One of the lesser reported comments before the Commodity Futures Trading Commission March 25 hearings about the imposition of possible trading limits for gold and silver could end up having the strongest impact in the future.

At one point during the testimony of individual investor Harvey Organ, analyst Adrian Douglas was allowed to share his expertise on the nature of gold trading by the London Bullion Market Association. The London market is the world’s largest exchange for gold. There, all contracts are, in theory, for physical delivery of the commodity.

This is much different than the smaller COMEX market in New York City, where almost all activity is to net purchases and sales to avoid having to take physical delivery. For instance, an investor with a long position will tend to sell the contract before maturity or exchange it for another with a longer term. Those with short positions, likewise, normally buy back their COMEX positions or roll them over into short contracts with maturities further in the future.

However, the theoretical operation of the London market does not match what actually happens. As on the New York COMEX, a high percentage of the trades on the London market are between parties that have no intention of delivering or of taking delivery of the physical goods.

The extent of the paper trading on the London exchange is what Adrian Douglas discussed. From his analysis, Douglas thinks that the ratio of gold in the vaults to cover commitments versus the amount of open contracts is less than 1 to 100. In other words, one ounce of gold is the only inventory available to cover contracts totaling more than 100 ounces of gold.

This news appeared to so shock the CFTC commissioners that they asked another speaker, Jeff Christian, for his opinion on this point. Christian readily agreed with the figure, and then tried to downplay its importance because the market has traded in this fashion for a long time.

The London Bullion Market Association contracts emphasize that those who buy gold contracts through it are not really buying gold. Instead, they are becoming an unsecured creditor of the LBMA. In any kind of run to take delivery on contracts, almost all parties will be out of luck.

The efforts by central banks in the Far East and Middle East to remove physical gold from London to fulfill their long contracts must be wreaking havoc for the LBMA. So, if you think you own gold when you own a gold contract in London for physical delivery of gold upon maturity, you probably don’t.

Similarly, those who think they own gold because they own shares of gold or silver exchange traded funds (ETFs) may be in for a huge surprise. GLD, the symbol for the largest gold ETF, uses HSBC as its lead storage company. HSBC is widely considered to have the largest gold short position on the COMEX. It is a possibility, though it would be at least improper if not illegal, that some of the GLD gold holdings may be pledged as collateral against the COMEX short contracts. The prospectus for GLD discloses that shareholders of the ETF are not actually owners of physical metals, but are actually creditors of the fund.

The same problem exists with the largest silver ETF, trading under the symbol SLV. The head custodian is JPMorgan Chase, who holds the world’s largest silver short position. Again, it is possible that some of the ETF silver is pledged as collateral to short commodity contracts, with ETF investors left holding only a claim against the assets of the fund.

If you think you own gold by holding a COMEX contract, don’t hold your breath. The COMEX has adopted several rule changes over the past year to allow the sellers of contracts to deliver shares of an ETF instead of the physical metal. Of course, the COMEX has long allowed contracts to be settled for cash instead of the commodity.

Maybe you think you own gold because you hold a “certificate” of ownership. The most common of these programs involve gold supposedly stored at the Perth Mint in Australia and at the Royal Canadian Mint in Canada.

While the auditors of the Perth Mint report that there are sufficient inventories on hand to settle all certificates, there was a never-resolved issue raised about two years ago. The Perth Mint is owned by Gold Corporation, which in turned is owned by the government of the state of Western Australia. Gold Corporation also has a 40 percent ownership interest in the AGR Matthey partnership, a major refinery. Simply stated, the AGR Matthey operation defaulted on delivering some gold or silver and appears to have borrowed some metal from the Perth Mint to make good. So, instead of necessarily having all the physical metal in house, the Perth Mint may have a receivable for significant quantities of physical gold and silver from an entity that simply does not have the metal to deliver.

The Royal Canadian Mint had its own controversy over the audit of its 2008 financial statements. The amount of precious metals inventory reflected on the financial statements did not match the lesser amount actually counted as being at the Mint. A difference of more than 17,500 ounces of gold was never fully explained, thought Mint officials think some of it may have been accidentally sold off as low purity slag from the Mint’s operations. Although it looks like the Royal Canadian Mint runs a tighter operation than the Perth Mint, COMEX, or LBMA, they don’t deserve a clean bill of health either.

Finally, if you think you own gold in storage, check to see if your storage contract is for allocated or unallocated metals. Allocated metals mean that specific inventory is set aside with your name on it. It is your asset and not an asset of the storage company. Unallocated accounts means that your holdings are lumped in with everyone else’s of the same description and you don’t own any particular coins or ingots. In fact, the inventory is actually owned by the storage company. This means that the “owners” of metal stored there are only creditors of the storage company, rather than owners of physical metals.

The safest ways to know that you own gold (and silver) is to hold the physical metals directly in your own hands, in safe deposit storage where the box is in your name, or in allocated storage. If you hold any other kind of asset that you think represents ownership of gold, maybe you don’t. In the past year, some major investment funds have been abandoning these uncertain forms of gold ownership to replace them with physical gold. For your own protection, you may want to do the same. The risks of owning paper gold are now part of the CFTC record, so don’t wait to take action.

Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” the company’s monthly newsletter on rare coins and precious metals subjects. Reprinted with permission.

For further reading:
"The Latest Gold Fraud Bombshell: Canada's Only Bullion Bank Gold Vault Is Practically Empty", Zero Hedge, April 7, 2010
"For Warren Mosler: A Primer on the Difference Between Honesty and Fraud", Jesse's Café Américain, April 6, 2010
"Silver Short Squeeze Could Be Imminent", National Inflation Association, April 3, 2010

Wednesday, April 7, 2010

Our Beautiful Laundrettes

By Thomas L. Knapp
Center for a Stateless Society
Tuesday, April 6, 2010

In a recent op-ed, Bernd Debusmann laments a “loophole” in US “money laundering” regulations:

In order to get around draconian (if generally ineffectual) restrictions on carrying large amounts of cash in and out of the country without explaining it to this or that bureaucrat’s satisfaction, government-unapproved entrepreneurs have started making use of stored-value cards — gift cards, debit cards, what have you.

Because he conflates the symptom (violent drug cartels) with the disease (the absurd notion that what you choose to medically, religiously or recreationally eat, drink, snort, inject or otherwise ingest is anyone’s business but yours), Debusmann is deeply concerned that government hasn’t snapped shut the rusty jaws of yet another trap on this “loophole.” “[T]ighter regulations,” he writes, “surely can’t hurt.”

On that count, he’s very, very right. But not in the way he thinks. Tighter regulations can’t hurt because tighter regulations can’t work.

The “shadow economy” — that portion of the economy which government remains mostly powerless to shut down, to regulate or to impose its customary protection rackets (”taxes”) on — represents both the last remnant of an economically functional society and that society’s best chance of avoiding, or at least shortening and weathering, the next Dark Age.

We’ve long since passed the point where government has any hope of shutting down a substantial portion of the “shadow economy.” It’s never been very good at that anyway. Even at the height of the Soviet police state’s power, hard currency and Levi Strauss® blue jeans were moved across the borders with impunity. Even at the height of Prohibition, it wasn’t hard to find a drink.

The ubiquity of electronic networks and the availability of strong encryption are making it ever easier for traders to move and hide, and harder for governments to detect and seize, stored value. Sure, actual physical goods — be they “illicit” drugs or untaxed products of any description — are still vulnerable to seizure; but no more so than they ever were, which wasn’t very. The ability to securely pay for or receive payment for those goods, away from the eyes of the state, means more volume in those goods and more kinds of goods being traded in that way … and less government revenues available to be spent on stemming the tide.

Even with the game rigged in its favor — a proclaimed monopoly on the use of force and a self-arrogated “right” to regulate and seize at will — the unfree market is steadily losing share to the free market. Debusmann’s desired “tighter regulations” won’t reverse that trend. In fact, they’ll almost certainly accelerate it, for at least two reasons:

First, tighter regulations on “official economy” instruments like debit and gift cards will simply spur the creation of new repositories for value — repositories built beyond the reach of government from the get-go — and new instruments for accessing those repositories. If there’s a crackdown on “official economy” debit and gift cards, the “shadow economy” will quickly move to “shadow” cards — or, more likely, to thumb drives and encrypted Internet transactions. As a matter of fact, I suspect (I have no inside knowledge, mind you) that that’s already happening in a big way.

There’s a Darwinian imperative at work here. The technologies which work best are the ones which survive. And they don’t just survive, they thrive and eventually replace their predecessors in the ecological niche … then begin expanding into new niches. Just like increased use of antibiotics results in the emergence of antibiotic-resistant bacteria, increased regulation of technology results in the emergence of regulation-resistant technology. If you don’t believe me, just ask Apple about Cydia and the iPhone Dev Team.

Secondly, whole idea of “money laundering” is to move value out of the “shadow” economy and into the “official” one. But as the “shadow” economy grows, there’s less need to move value back and forth between the two. More and more types of goods and services come to be exchanged entirely within the “shadow” economy, because that’s where the money is (and it’s more attractive right up front if for no other reason than that the tax burden is eliminated, or at least minimized).

There’s a tipping point beyond which the benefits offered by participation in the “shadow economy” outweigh the risks associated with ignoring or eluding the state’s enforcers to participate in it. Between the increasingly crushing burdens of taxation and regulation on one hand, and the improving security and reliability of the free market on the other, I suspect we passed that point some time ago.

C4SS News Analyst Thomas L. Knapp is a long-time libertarian activist and the author of Writing the Libertarian Op-Ed, an e-booklet which shares the methods underlying his more than 100 published op-ed pieces in mainstream print media. Knapp publishes Rational Review News Digest, a daily news and commentary roundup for the freedom movement. Reprinted with permission.

Tuesday, April 6, 2010

Sowing the Seeds of Central Banking

The articles below summarize portions of Edwin Vieira’s out-of-print Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution alloyed with the gloss that comes from Rozeff as finance professor. Part three covers cases on state bills of credit and Rozeff states on part four, "This 39-page excursion into finance, history, and law covers the First and Second Banks of the United States, which were the proto-central banks of the time. Marshall’s expansionary interpretation (in McCulloch v. Maryland) of the Necessary and Proper Clause is given a going over. The anti-federalists knew what was coming. Hamilton’s report on a national bank and his debate with Jefferson and Madison are covered. The unconstitutionality of a federal power to incorporate is looked at in detail. Then too there’s quite a bit on the financial side of what was going on, including the fractional-reserve end of things. Lots of meat here, including material you have never seen before, drawn from obscure texts and journals and from previously unexplored regions of my brain."

The U.S. Constitution and Money, Part 1 and Part 2, can be found here.

The U.S. Constitution and Money: Cases on State Bills of Credit (Part 3)

The U.S. Constitution and Money: The First and Second Banks of the United States (Part 4)

The U.S. Constitution and Money, Part 5, can be found here.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

Monday, April 5, 2010

E-money Use on the Rise in Russia

Monday, April 5, 2010

The use of E-money is becoming more popular in Russia, but as the government begins to call for more regulation, that growth could be stalled. Using web money is not the same as making an electronic payment from a bank account. The service it provides is primarily intended for people who don't have a bank account or wish to keep a transaction entirely secret.

The customer essentially buys credits in the form of Web Money by wiring or depositing cash to any participating vendor. These credits can then be spent over the internet or given to another individual.

The amount of money in Russian e-wallets reached more than a billion dollars last year and the government thinks it needs regulation according to Finance Minister, Aleksey Kudrin.

“I met with the companies which are issuing electronic money, providing web-payments and the so-called e-purses. So far, these web services have not been recognized as using electronic money. According to the draft bill, the central bank will take over regulating the system.”

The Central Bank proposes to classify electronic money operators as non banking credit organizations. This would imply strict regulation which Boris Kim, Head of the Association of Electronic Trade, believes will harm the development of the sector.

“Payment systems are not credit organizations. They don’t take long-term deposits and don’t issue loans. So their risks are much lower then those of banks and they don’t need to be so strictly regulated."

But some control would be welcome, especially if it inspires greater confidence in the services on offer.

Clear legislation would help attract new customers and, therefore, more investment. It will also bring the whole system into the light, making it harder to use web money as a convenient means to finance crime or launder money.