The Golden Revolution

By John Butler

Alchemist

Saturday, April 7, 2012

http://www.lbma.org.uk/assets/Alch6504Butler.pdf

Adapted from The Golden Revolution: How to Prepare for the Coming Global Gold Standard by John Butler.

Contrary to the conventional wisdom of the current economic mainstream that the gold standard is but a quaint historical anachronism, there has been an unceasing effort by prominent individuals in the US and also a handful of other countries to try and re-establish a gold standard ever since President Nixon abruptly ended gold convertibility in August 1971. The US came particularly close to returning to a gold standard in the 1980s. This was understandable following the disastrous stagflation of the 1970s and severe recession of the early 1980s, at that time the deepest since WWII. Indeed, Ronald Reagan campaigned on a platform that he would seriously study the possibility of returning to gold if elected president.

Once successfully elected, he remained true to his word and appointed a Gold Commission to explore both whether the US should and how it might reinstate a formal link between gold and the dollar. While the Commission’s majority concluded that a return to gold was both unnecessary and impractical – Fed Chairman Paul Volcker had successfully stabilised the dollar and brought inflation down dramatically by 1982 – a minority found in favour of gold and published their own report, The Case for Gold, in 1982. Also around this time, in 1981, future Fed Chairman Alan Greenspan proposed the introduction of new US Treasury bonds backed by gold as a sensible way to nudge the US back toward an explicit gold link for the dollar at some point in future.

In the event, the once high-profile debate in the US about whether or not to return to gold eventually faded into relative obscurity. With brief exceptions, consumer price inflation trended lower in the 1980s and 1990s, restoring confidence in the fiat dollar. By the 2000s, economists were talking about the ‘great moderation’ in both inflation and the volatility of business cycles. The dollar had been generally strong versus other currencies for years. ‘Maestro’ Alan Greenspan and his colleagues at the Fed and their counterparts in many central banks elsewhere in the world were admired for their apparent achievements.

We now know, of course, that this was all a mirage. The business cycle has returned with a vengeance with by far the deepest global recession since WWII, and the global financial system has been teetering on the edge of collapse off and on for several years. While consumer price inflation might be low in the developed economies of Europe, North America and Japan, it has surged into the high single- or even double-digits in much of the developing world, including in China, India and Brazil, now amongst the largest economies in the world.

The economic mainstream continues to struggle to understand just why they got it so wrong. They look for explanations in bank regulation and oversight, the growth of hedge funds and the so-called ‘shadow banking system’. They wonder how the US housing market could have possibly crashed to an extent greater than occurred even in the Great Depression. Some look to global capital flows for an answer, for example China’s exchange rate policy. Where the mainstream generally fails to look, however, is at current global monetary regime itself. Could it be that the fiat- dollar-centred global monetary system is inherently unstable? Is our predicament today possibly a long-term consequence of that fateful decision to ‘close the gold window’ in 1971?

I believe that it is. But what that implies, given the damage now done to the global financial system, is that there is no way to restore a sufficient degree of credibility and trust in the dollar, or other major currencies for that matter, without a return to some form of gold standard. This may seem a rather bold prediction, but it is not. The evidence has been accumulating for years and is now overwhelming.

Money can function as such only if there is sufficient trust in the monetary unit as a stable store of value. Lose this trust and that form of money will be abandoned, either suddenly in a crisis or gradually over time in favour of something else. History is replete with examples of ‘Gresham’s Law’, that ‘bad’ money drives ‘good’ money out of circulation; that is, that when faith in the stability of a money is lost, it may still be used in everyday transactions – in particular, if it is the mandated legal tender – but not as a store of value. The ‘good’ money is therefore hoarded as the superior store of value until such time as the ‘bad’ money finally collapses entirely and a return to ‘good’ money becomes possible. This monetary cycle, from good to bad to good again, has been a central feature of history.

In the present instance, we find a growing number of countries expressing concern about the stability of the dollar amid relentlessly expansionary US monetary policy, excessive dollar reserve accumulation and the associated surge in inflation, including China, India and Brazil. The ‘Arab Spring’ of 2011 originated in part from soaring food price inflation.

Concern is increasingly giving way to action. China has entered into bilateral currency swap arrangements with Russia, Brazil, Argentina, Japan, South Korea and Thailand as all these countries seek to reduce their dependence on the dollar as a transactional currency. As the dollar’s role gradually declines, global monetary arrangements are likely to become increasingly multipolar, as there is no single currency that can realistically replace the dollar as the pre-eminent global monetary reserve. The euro area has major issues with unsustainable sovereign debt burdens and an undercapitalised financial system. Japan’s economy is too small and too weak to provide a dollar substitute. And while China’s economy has been growing rapidly, its financial system is not yet mature or robust enough to instil the necessary global confidence in the yuan as the dominant reserve currency. Yet growth in global trade continues apace, to the benefit of nearly all economies. A global currency facilitates global trade.

It was precisely a multipolar world amid rapidly growing international trade that ushered in the classical gold standard in the 1870s. Although gold had been in the ascendant in global monetary affairs for several years, growing German political and economic clout provided an important tipping point as Germany favoured gold for settlement of international balance of payments. While the Bank of England was the dominant central bank of its day, reflecting British economic power, it never sought to impose a gold standard on its trading partners. Rather, it accepted the gold standard as an international fait accompli.

The US Federal Reserve may find it plays a similar role in the near future. While it is certainly possible that, in order to restore confidence and trust in the dollar, the US relinks the dollar to gold on its own initiative, more likely is that another country, or group of countries, where economic power is in the ascendant, where there are large and growing current account surpluses, and where a meaningful amount of gold has already been accumulated, will be the first movers. All of the BRICs are potential candidates, as are certain oil-producing countries and, possibly, Germany and Japan.

When presented with a fait accompli, the US will have little choice but to go along or find that the dollar not only loses reserve currency status entirely, but also is no longer accepted for international transactions. In the event, we believe a decision to accept the new global gold standard will be rather easy to reach. While it is unclear just what kind of gold standard will prevail – history provides a range from which to choose, some of which worked better than others – the key point is that, whatever form of standard prevails, it must restore a sufficient degree of credibility and trust in global monetary affairs. That requires that, simultaneously and alongside the return to gold, there must be a dramatic deleveraging of the undercapitalised financial system in the US, euro area, UK, Japan and also a handful of other countries. Fortunately, this is easily accomplished. All that is required is that the rate of gold convertibility is set at a gold price sufficiently high to imply that existing debt burdens, now clearly excessive, are reduced to levels that can be credibly serviced from existing levels of national income and, in the case of sovereign debts, from tax revenues.

However, given just how overleveraged financial systems are, and how large sovereign debt burdens are becoming amid unprecedented peacetime deficit spending, the rise in the price of gold will need to be an order of magnitude higher than it is today. That may surprise some, given that the price of gold has been rising for years. But what should really surprise us is that the growth of money and credit has been far greater. Simply taking the numbers as they are and allowing the gold price to rise sufficiently to compensate for decades of cumulative, excessive money and credit growth implies that a credible gold conversion price in dollars would be above $10,000. The credible, sustainable conversion prices in euros, yen, sterling and other developed world currencies would also lie far higher than where they are today.

From an investor’s perspective, there are far greater implications of a return to a gold standard than merely the large rise in the gold price. The dynamics and determinants of interest and exchange rates, and risk premia for the entire range of assets, are going to change. For example, for those countries that return to gold, exchange rates will become essentially fixed. Interest rates, however, while nominally still under the control of central banks, will need to be set at market-determined levels, not below, or gold reserves will be depleted, eventually leading to a funding crisis. Risk premia for most assets will need to rise, primarily because, constrained by the gold standard, both monetary and fiscal authorities will have less flexibility to provide stimulus during economic downturns. As such, cyclical profit swings will tend to be larger, as will the number of bankruptcies.

While a lack of policymaker flexibility and increased risk of corporate bankruptcy might concern some investors, consider that it was precisely an excess of policymaker flexibility – chronically loose monetary and fiscal policy – which got the developed world into its current predicament. This point is clear: poorly managed fiat currencies and the financial systems built upon them caused the global credit crisis, not gold. And what a world of ‘too big to fail’ needs are reforms that indeed allow large firms to go bankrupt from time to time, so that capitalism can in fact work as intended.

It is worth considering why bankruptcy has become such a bad word. While no investor wants to lose money on a bankrupt enterprise, when looking at a capitalist economy as a whole, bankruptcy is absolutely essential to economic progress. Josef Schumpeter’s ‘creative destruction’, unlocking resources in unproductive enterprises and moving them to where they can be more efficiently employed, or mixed with new technologies or business techniques, is what capitalism is all about. Real long-term economic progress depends on it.

There are other reasons not to fear gold but rather embrace it. A gold standard will reward savings, something that is sorely lacking in much of the developed world. It will rationalise government finances, in particular by making it difficult if not impossible for countries to incur large debts and then try to pass these off on future generations, something of dubious morality. Absent easy money, it will force economies to become more flexible, and labour and capital to become more mobile. By implication, financial leverage will also be limited and ‘too big to fail’ will instead become ‘too big to bail’. Indeed, absent easy money or bailouts, the financial sector will only grow to the extent that it actually serves the broader, productive economy. Huge numbers of engineers and other quants who went to the City looking for outsize bonuses will make their way back into real industries making real things, where they will be joined by fresh graduates and lay the groundwork for what is likely to be an era of great industrial innovation.

Investors should not fear the golden revolution. Rather, they should welcome it. After all, they don’t call particularly prosperous historical episodes ‘Golden Ages’ for nothing.

Reprinted with permission. Currently serving as the Chief Investment Officer of a commodities fund, John was previously Managing Director and Head of the Index Strategies Group at Deutsche Bank in London, where he was responsible for the development and marketing of proprietary, systematic quantitative strategies for global interest rate markets. 

For further reading/viewing:
"Book Review: The Golden Revolution", Keith Weiner, August 20, 2012
"Podcast #22 with John Butler", TF Metals Report, May 25, 2012
"Beyond currency wars, the coming Global Gold Standard with John Butler" (video), Capital Account, April 3, 2012

Book Review: The Sovereign Individual

The International Society for Individual Liberty published James Elwood's book review of the amazing and prescient The Sovereign Individual: Mastering the Transition to the Information Age.

Here is a brief excerpt from the full review:

It is the computer revolution that provides the promise of a real-world Galt's Gulch. Still in its infancy, the cybereconomy will allow the successful practitioners of computer technology to escape the regular economy and the predations of governments. Widely available strong encryption tools like Pretty Good Privacy (PGP) are already allowing ordinary users to make it impossible for government to monitor their communications or decipher the contents of their hard drives or storage disks.

The Information Revolution will also bring us the death of politics as we know it. Participants in the cyber-economy will operate in the anarchic environment of the Internet, choosing who they will deal with, how and when. The authors think that the morality of the marketplace will dominate the Internet, and that private clubs with their own security procedures will arise to prevent theft by cybercriminals. Politicians will become increasingly irrelevant, as people bypass them and form new voluntary local institutions and virtual communities on the Internet.

The death blow to the nation-state will be digital cash, which has just become available. E-cash or even e-metal, using encrypted verifiable signals will allow individuals to make their transactions in secret on the Internet, and will destroy the ability of governments to exact wealth through the hidden tax of monetary inflation. Using financial institutions domiciled in tax havens, and using anonymous remailers, cybernauts will be able to largely avoid taxes and inflation, and thus amass wealth at a vastly accelerated rate.

Governments will starve. Their ability to exact large sums from the rich for transfer payments will disappear. If they are to survive, they will be forced to radically downsize, and treat their citizens like customers instead of livestock. And since their ability to police large territories will also decline due to weapons technology, there will be enormous pressures to break up nations into much smaller jurisdictions. The provision of protection will become a business service, and much more personalized, especially for the rich cyber-entrepreuners.

For further reading:
"The Sovereign Individual Book Review", Peter Macfarlane, October 31, 2008
"Will Computer Technology Liberate Individuals from the Nation-State?", Greg Kaza, The Freeman, February 1, 1998

Book Review: When Money Dies

The Wall Street Journal and Andrew Stuttaford have just published an excellent book review of Adam Fergusson's When Money Dies: The Nightmare of Deficit Spending, Devaluation and Hyperinflation in Weimar Germany (2010, first published 1975).

From Product Description:

When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery. In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy. Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake.

Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, “quantitative easing,” that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline. Whatever the reason for a country’s deficit—necessity or profligacy, unwillingness to tax or blindness to expenditure—it is beguiling to suppose that if the day of reckoning is postponed economic recovery will come in time to prevent higher unemployment or deeper recession. What if it does not? Germany in 1923 provides a vivid, compelling, sobering moral tale.

From The Wall Street Journal review, Stuttaford writes:

"The death of the German mark (it took 20 of them to buy a British pound in 1914 but 310 billion in late 1923) plays a key part in the dark iconography of the 20th century: Images of kindling currency and economic chaos are an essential element in our understanding of the rise of Hitler. Mr. Fergusson adds valuable nuance to a familiar story. His tale begins not, as would be popularly assumed, in the aftermath of Germany's political and military collapse in 1918 (by which point the mark had halved against the pound) but in the original decision to fund the war effort largely through debt—a decision with uncomfortable contemporary parallels (one of many in this book) tailor-made for today's end-timers."

For further reading:
"When Money Dies", Jonas Clark, March 17, 2009

More Book Reviews: Good Money

The Freeman from the Foundation for Economic Education published an excellent book review of Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775–1821 (2008) by George Selgin. The reviewer is George Leef, book review editor of The Freeman.

From the review (February 24, 2010):

"Good Money has an intriguing origin. While reading a book by nineteenth-century British economist William Stanley Jevons, Selgin came across a passage taking issue with Herbert Spencer’s argument that the production of money could be entrusted to the free market. Jevons wrote that in his view “there is nothing less fit to be left to the action of competition than money,” adding that the nation’s experience with privately minted coins in the late eighteenth century “amply confirmed” his opinion. Selgin wanted to know just what that experience was and investigated: 'What I discovered amazed me, not the least because, instead of confirming Jevons’s position, it did just the opposite.'"

Virtual Law: Navigating the Legal Landscape of Virtual Worlds

The American Bar Association recently published an innovative virtual worlds legal book, Virtual Law: Navigating the Legal Landscape of Virtual Worlds (2008).

From the Reviews:

"The book is timely, circumspect, well written and grounded where it is supposed to be while provocative in areas that it needs to be. The author's experience in virtual world use and commentary shines as he teases out the importance of law to virtual worlds, and vice versa. Benjamin Duranske makes virtual law in concept and practice very tangible and understandable. This book is not only a book introducing Virtual Law -- it is a book of reference for lawyers, virtual world users and virtual world owners alike." -- Taran Rampersad Virtual World/Second Life®/ICT Consultant, KnowProSE.com

"Knowing 'virtually' nothing about Second Life, I finally determined to curl up with Virtual Law as continuing education this weekend. I didn't put it down until I finished it. The comprehensive outline of topics, the accessible language, and spot on exhortations of the relevance of this technological phenomenon should make this a best seller. The book gave me, a total amateur, several business development ideas on first reading, and I look forward to actually spending real dollars, not Lindens, to purchase several more copies for non-lawyers to read." -- Chris Grant , Esq. CEO InfecDetect , LLC Princeton, NJ

"Ben Duranske hits the mark again and again with this clear, straightforward overview of legal issues in virtual worlds. All of the main arguments are here, in a single source, allowing the reader to balance the claims of contract law against those of property law in regulating the toughness of the magic circle. Woven together, these arguments constitute a desperately-needed consensus, one that recognizes the inevitable influence of real-world law on the future of this critical medium, but also its limits." -- Edward Castronova Associate Professor, Indiana University, Bloomington, Indiana

"Benjamin Duranske's 'Virtual Law' is far and away the most thorough, clear-sighted, and enlightening introduction to the legal implications of virtual worlds that has been written. It is a must-read for anybody -- lawyer, plaintiff, or defendant -- with a stake in the legal system's fast-evolving relationship with this strange new realm of human affairs." -- Julian Dibbell Contributing editor, Wired magazine; co-moderator, Terra Nova collaborative blog; author, Play Money: Or, How I Quit My Day Job and Made Millions Trading Virtual Loot
From Amazon Product Description:

This book introduces readers to the emerging and exciting world of virtual law. It examines current cases and legislation impacting virtual world providers and users, and makes predictions about the future application of current law. It addresses the application of intellectual property law (copyright, trademark, and patent), criminal law, property law, contract law, securities law, tax law, and civil procedure. It also provides practical advice to lawyers who wish to create a virtual world presence for their practice or who have clients with virtual world connections. The book includes extensive appendices listing in-world and web-based resources for practitioners and legal scholars.

For further reading/viewing:

"Metanomics Revisited", Metanomics with Robert Bloomfield, September 22, 2008
"Blawg Review #156", Virtually Blind, April 21, 2008
"Virtual Banking Revisited", Metanomics with Robert Bloomfield, January 14, 2008
"Virtual Banking", Metanomics with Robert Bloomfield, January 10, 2008

Debate on Abolishing the Federal Reserve

At the annual FreedomFest gathering in Las Vegas on July 10, 2009, Gene Epstein of Barron’s and Thomas Woods debated Warren Coats and John Fund in "Fed Up with the Fed: Is it Time to Abolish?". At the debate, "Kill the Monster" was the opening statement delivered by Woods.

Thomas Woods also talked about his book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (2009).

More Book Reviews: Good Money

Business History Review (Autumn 2009) from Harvard Business School published an excellent book review of Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775–1821 (2008) by George Selgin.

Jeffrey Rogers Hummel of San Jose State University also completed a book review for George Mason University's History News Network on August 6, 2009.

Book Review: The Euro

The Society of Business Economists published a review of David Marsh's The Euro: The Politics of the New Global Currency (2009). The book focuses on the politics behind the creation, and subsequent development, of the euro, which has become the most successful launch of a 100% irredeemable fiat currency in the history of mankind. The amount of euros in circulation has surpassed that of the United States dollar, and the euro has become the second largest reserve currency worldwide. Ron Paul has said:

"The rise of the euro internationally is another sign that the U.S. dollar is not what it used to be. There is increasing pressure on nations to buy and sell oil in euros, and anecdotal evidence suggests that drug dealers and money launderers now prefer euros to dollars. Historically, the underground cash economy has always sought the most stable and valuable paper currency to conduct business." ("The World's Reserve Currency", January 1, 2007)

Interesting to note is how the design of the European System of Central Banks and the independent European Central Bank that oversees it represented a complete victory for the Bundesbank, even to the extent of locating it in Frankfurt, where the future Oz-like headquarters building symbolizes a towering, powerful force.

Additional book reviews are available from Cayman Financial Review and The New York Times, "Division, Unity, and the Euro".

More Book Reviews: End the Fed

Since I posted the first review of Ron Paul's End the Fed (2009), other excellent book reviews have come to my attention. One such review is from David Gordon at the Mises Institute. David covers new books in economics, politics, philosophy, and law for The Mises Review, the quarterly review of literature in the social sciences, published since 1995.

Additional reviews are from George F. Smith, "One Man in a Million", and David Kinchen, "Bring Back Sound Monetary Policies Backed by Something More Substantial Than Printing Presses".

Also, watch U.S. Representative Ron Paul discuss his new book on C-SPAN Book TV (September 18, 2009).

Book Review: End the Fed

The New American has published a flattering and thoughtful review of Congressman Ron Paul's latest book, End the Fed (2009), by Charles Scaliger, who states:

"For the first time in the Fed’s nearly century-long history, large numbers of Americans and not a few political leaders, led by Ron Paul, are waking up to the realities of central banking and the Fed’s role in causing the value of the dollar to depreciate and the economy to oscillate between boom and bust."

"If we do not soon abolish the Federal Reserve and return to sound money, we will likely experience national insolvency and an end to our dwindling political liberties. End the Fed is, simply put, a must-read for every American who can spell his name."

Listen to George Selgin discuss Ron Paul's bill H.R. 1207 and the audit of the Fed on Wisconsin Public Radio's The Joy Cardin Show (August 14, 2009). Selgin advocates an audit of the Fed as an initial reform, followed by constitutional restraints on the Fed, then abolishing the Federal Reserve System and replacing it with laissez-faire free banking.

Also, listen to U.S. Representative Ron Paul discuss the ongoing destruction of the U.S. Dollar on Jay Taylor's Turning Hard Times Into Good Times Internet radio program (April 7, 2009).

For further reading:
"Ron Paul Q&A: Audit the Fed, Then End It", Sudeep Reddy, September 16, 2009
"Ron Paul and the Federal Reserve", Thomas Greco, September 1, 2009
"The Fed on the Defensive", Gary North, August 29, 2009
"End the Fed? A not-so-crazy idea", George Selgin, August 3, 2009
"Bernanke Fights Audit Threat to the Fed", Forbes, July 21, 2009
"Auditing the Fed will Audit the State", George F. Smith, July 1, 2009
"Ron Paul's Competing Currencies", Peter Brimelow, January 29, 2008
The Case Against the Fed, Murray N. Rothbard, 1994

Book Review: Lords of Finance

The Economist magazine published a book review of Liaquat Ahamed's Lords of Finance: The Bankers Who Broke the World (2009). Theorizing aside, Ahamed provides a colorful historical account of the tumultuous period of the 1920s and early 1930s, and it seems like a redux of Barry Eichengreen and Peter Temin's "The Gold Standard and the Great Depression" (1997).

However, I would disagree that the discipline of a monetary gold standard acts as a negative straightjacket paralyzing government policymakers. The last eight decades have clearly shown the perils and instability of an unparalyzed fiat monetary policy. It is naive to claim that a restrictive gold standard is what caused and exacerbated the Great Depression, because the gold standard of the time was mismanaged by the authorities who increased interest rates to protect reserves, thereby leading to unnecessary levels of contraction and deflation across countries.

An Austrian analysis of the period's economic events is available in Murray Rothbard's America's Great Depression as well as Banking and the Business Cycle by C.A. Phillips, T.F. McManus, and R.W. Nelson. More important than adherence to a commodity monetary standard or not, and why this book is relevant to readers of The Monetary Future, is why central bankers possess the anointed capability to make those overriding decisions in the first place.

For further reading/listening:
"The Myths About a Return to the Gold Standard", John Tamny, May 5, 2009
"Gold-Exchange Standard, Gold, and Monetary Freedom", Michael S. Rozeff, May 4, 2009
"Heroes and Zeroes", The New Yorker, February 2, 2009
"Did Hayek and Robbins Deepen the Great Depression?", Lawrence White, Journal of Money, Credit and Banking, Volume 40 Issue 4, 2008
"Is the Gold Standard Still the Gold Standard among Monetary Systems?", Lawrence H. White, Cato Institute, February 8, 2008
"Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy" (plus audio), Richard H. Timberlake, Econ Journal Watch, Volume 2 Number 2, August 2005"Two Kinds of Gold Standards", Gary North, August 26, 2003
"The Austrian Analysis and Solution for the Great Depression", Richard M. Ebeling, December 1997
"Austrian Business Cycle Theory and the Causes of the Great Depression", Richard M. Ebeling, October 1997
"Did the Gold Standard Cause the Great Depression?", Mark Skousen, May 1995
"The 'Costs' of a Gold Standard", Roger Garrison, The Gold Standard: An Austrian Perspective, 1985
"The Political and Economic Agenda for a Real Gold Standard", Ron Paul, The Gold Standard: An Austrian Perspective, 1985

Monetary Historian Vieira Plans Reprinting 'Pieces of Eight'

The Gold Anti-Trust Action Committee published the June 2009 reprinting announcement by Edwin Vieira Jr. for his seminal work, Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution. Originally published in 1983, the book is a landmark achievement in constitutional law and in dissecting how the State has usurped the control of money, establishing the prerogative of issuance. An earlier review of the book by James Turk is also available at GATA.

Also, watch Dr. Vieira's excellent video on "Economic Federalism".

Book Review: Good Money

The Mises Institute published a review of George Selgin's 2008 publication, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821. Professor Selgin tells the fascinating story of the important yet almost unknown episode in the history of money—British manufacturers’ challenge to the Crown’s monopoly on coinage.

In the 1780s, when the Industrial Revolution was gathering momentum, the Royal Mint failed to produce enough small-denomination coinage for factory owners to pay their workers. As the currency shortage threatened to derail industrial progress, manufacturers began to mint custom-made coins, called “tradesman’s tokens.” Rapidly gaining wide acceptance, these tokens served as the nation’s most popular currency for wages and retail sales until 1821, when the Crown outlawed all moneys except its own.

Good Money not only examines the crucial role of private coinage in fueling Great Britain’s Industrial Revolution, but it also challenges beliefs upon which all modern government-currency monopolies rest. It thereby sheds light on contemporary private-sector alternatives to government-issued money, such as digital monies, cash cards, electronic funds transfer, and (outside of the United States) spontaneous “dollarization.”

George Selgin is Research Fellow at the Independent Institute and BB&T Professor of Free Market Thought at West Virginia University. His research covers a broad range of topics within the field of monetary economics, including monetary theory, monetary history, macroeconomic policy, and the history of monetary thought.

Praise for Good Money

“George Selgin’s story of how private enterprise solved a monetary problem that threatened seriously to retard the Industrial Revolution is a splendid piece of historical analysis. He has done an incredible job of unearthing all of the details of what went on in Britain in the late eighteenth and early nineteenth century. It is a fine example of historical research.” —Milton Friedman, Recipient of the 1976 Nobel Memorial Prize in Economics

“Almost all previous research and publication in the two contingent fields of the history of coinage and the metal industries has formed a dichotomy between two different groups of specialists: economic historians and numismatists. . . . A great strength of this book is that Selgin has mastered both bibliographies and integrated the fields. Two further aspects of the work, which enhance its academic status, lie in the extensive deployment of primary sources (particularly the Boulton archive, the Boulton and Watt papers and the records of the Committee of the Privy Council on coin) and the wide range of themes covered. . . . The prominent sub-plot in Selgin’s book breaks surface in the introduction, the conclusion and in the robust defence of ‘genuine’ private commercial tokens. He is clearly at one with Herbert Spencer (and The Independent Institute, a promoter of private enterprise and co-publisher of the book), in challenging—or at least questioning—the claims of the state to what has always been one of the earliest, most universal, and most ruthlessly enforced public monopolies. In exploring these issues, Selgin reveals much about the dynamic of the British economy in this period and the fractious relationship between private enterprise and the apparatus of the state.” —Economic History Review

Watch George Selgin present his book's core thesis at the Austrian Scholars Conference, March 14, 2009.

Lew Rockwell interviews George Selgin on "Libertarian Coinage".
Listen to George Selgin discuss the book on a radio interview.

Toward A Free Market Monetary System

The Mises Institute reprinted Friedrich Hayek's "Toward A Free Market Monetary System" on its website on November 21, 2008. The article was also included in Good Money, Part II: The Standard in The Collected Works of F.A. Hayek, along with Hayek's paper delivered at the 1981 VISA International Annual Conference in Athens, Greece, "The Future Unit of Value".

Published by the University of Chicago Press in 1999, volumes five and six in The Collected Works of F. A. Hayek concentrate on Hayek's work on money and monetary policy. Launched at the centenary of his birth, these volumes bring forth some of the economist's most distinguished articles on monetary policy and offer another vital addition to the collection of Hayek's life work.

Good Money, Part I: The New World includes seven of Hayek's articles from the 1920s that were written largely in reaction to the work of Irving Fisher and W. C. Mitchell. Hayek encountered Fisher's work on the quantity theory of money and Mitchell's studies on business cycles during a U.S. visit in 1923-24. These articles attack the idea that price stabilization was consistent with the stabilization of foreign exchange and foreshadow Hayek's general critique that the whole of an economy is not simply the sum of its parts.

Good Money, Part II: The Standard offers five more of Hayek's articles that advance his ideas about money. In these essays, Hayek investigates the consequences of the "predicament of composition." This principle works on the premise that the entire society cannot simultaneously increase liquidity by selling property or services for cash. This analysis led Hayek to make what was perhaps his most controversial proposal: that governments should be denied a monopoly on the coining of money. Taken together, these volumes present a comprehensive chronicle of Hayek's writings on monetary policy and offer readers an invaluable reference to some of his most profound thoughts about money.

For further reading:
"Hayek's Plan for Private Money", Robert P. Murphy, July 18, 2005
"Market Standards for Money", Friedrich Hayek, Economic Affairs, Volume 6 Issue 4, April/May 1986
"The Case for a Genuine Gold Dollar", Murray N. Rothbard, 1985

Book Review: When Washington Shut Down Wall Street

The Economic History Association owns and operates the EH.net website, which published a book review of When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy (2007) by William L. Silber. A podcast interview with the author is also available. William Silber is Marcus Nadler Professor of Finance and Economics at the Stern School of Business, New York University. The author or editor of eight books, he has served as Senior Economist with the President's Council of Economic Advisors and as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York.

From the Publisher

When Washington Shut Down Wall Street unfolds like a mystery story. It traces Treasury Secretary William G. McAdoo's triumph over a monetary crisis at the outbreak of World War I that threatened the United States with financial disaster. The biggest gold outflow in a generation imperiled America's ability to repay its debts abroad. Fear that the United States would abandon the gold standard crushed the value of the dollar on world markets. Without a central bank in the summer of 1914, the United States resembled a headless financial giant.

William G. McAdoo stepped into the breach with bold and courageous action. He shut the New York Stock Exchange for more than four months to prevent Europeans from selling their American securities and demanding gold in return. He smothered the country with emergency currency to prevent a replay of the bank runs that embarrassed America during the Panic of 1907. McAdoo launched the United States as a world monetary power by honoring America's commitment to the gold standard, while every other country, except for Britain (the reigning financial superpower), abandoned it at the outbreak of the Great War. In 1914 the gold standard conferred the monetary stamp of approval. McAdoo also provides a blueprint for crisis control that merits attention today. His recipe for smothering a crisis emphasizes the importance of an exit strategy. An exit plan allows policymakers to bludgeon the crisis with a sledgehammer, while minimizing collateral damage.

Archival material and contemporary newspaper accounts recreate the drama of McAdoo's plan to sustain American financial honor. His accomplishments during 1914 place him alongside Paul Volcker and Alan Greenspan as Great American financial leaders. McAdoo, in fact, nursed the Federal Reserve into existence as the 1914 crisis waned and served as first Chairman of the Federal Reserve Board by virtue of his position as Treasury Secretary.

Comments on the Book

Niall Ferguson, Harvard University, author of Colossus: William Silber has performed two sterling services with this fascinating and original book. He has illuminated the hitherto neglected financial crisis of 1914, an event that deserves to be mentioned in the same breath as the Crash of 1929 in the history of Wall Street. But he has also come up with some bold and compelling answers to two burning questions that are of more than purely historical interest: How should monetary policymakers cope with a really big and unexpected political shock? And how does one international reserve currency come to be overtaken by another? I cannot praise this book too highly. It is rare that one author so skillfully unites the disciplines of finance and history.

Peter L. Bernstein, author of The Power of Gold: Silber tells a compelling tale proving the power of the law of unintended consequences. The financial crisis of 1914 was a major turning point in American economic history, an outcome nobody could have predicted as massive amounts of gold sailed to Europe, banks shook at their foundations, and the nascent Federal Reserve System was only just going into operation. What a story!

Business History Review from Harvard Business School also published a review by Maury Klein.

For further reading:
"Ccompetitive Currencies, Legal Restrictions, and the Origins of the Fed: Some Evidence from the Panic of 1907", Steven Horwitz, 2001

Gold: The Once and Future Money

Publisher Wiley Business Finance has released a new book, Gold: The Once and Future Money (2007) by Nathan Lewis. "In this delectable tome, Nathan Lewis describes the booms, busts, the bubbles, and the crises in the economies of dozens of countries, from centuries ago to the present day. It is a romp through history, illuminating along the way money in all its forms -- from wampum and shells to silver and gold -- and details the catastrophic effects of inflation, deflation, floating currencies, and every kind of tax a government functionary could dream to impose on an economy," says Addison Wiggin, author of The Demise of the Dollar.

Jim Puplava interviews the author on an interesting podcast.

Brian Doherty of Reason magazine also interviews the author in a piece titled "A New Golden Age?" where Lewis suggests re-linking the dollar to gold.

Book Review: Who Killed PayPal?

Reason magazine published this excellent review of the Eric Jackson book, The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth (2004) in their August/September 2005 issue. The libertarian founders, Peter Thiel and Max Levchin, originally envisioned PayPal to operate as a global extra-governmental system of digital currency based around privacy, strong encryption, and e-mail addresses.

Book Review: State Banking in Early America

Business History Review from Harvard Business School published a book review of State Banking in Early America: A New Economic History (2003) by Howard Bodenhorn. Of importance to readers of The Monetary Future is the theme that the United States benefited from its free banking philosophy where state governments were independent of a centralized authority to address specific, local needs. This is especially relevant to the recent states' legislative initiatives for sound money. For more on states' initiatives, please see Judy Shelton's "Capitalism Needs a Sound-Money Foundation", The Wall Street Journal, February 11, 2009.

The Economic History Association also published a book review of Bodenhorn's book.

Book Review: Gold Wars

Jim Puplava interviews Ferdinand Lips, author of Gold Wars: The Battle Against Sound Money as Seen From a Swiss Perspective (2002). From the book's introduction:

"A 'gold war' is an attempt by the government upon the constitutional rights of the individual. Why do governments resort to gold wars? Sometimes they want to wage shooting wars without raising taxes; at other times they want to indulge in 'social engineering' through the redistribution of income. But in every instance there is one common thread: governments have correctly identified gold as the only antidote against their effort to build the Tower of Babel of irredeemable debt."

Mr. Lips was born in Switzerland in 1931 and he is a respected authority on gold and the gold market. He started his career in banking where he became a co-founder and managing director of the Rothschild Bank AG in Zurich. In 1987 he opened his own bank, Bank Lips AG, retiring in 1998 on an equity sale.

Mr. Lips continues to be very active in the banking and gold world and he is on the board of various African mining companies, among them, Randgold Resources Limited and the Afrikander Lease Limited. He is also a trustee of the Foundation for the Advancement of Monetary Education, the publisher of the book. Mr Lips states:

"Gold sales by central banks have always been announced three times. First when the central banks announce the sale; second, when they sell the gold; and, third, when the gold is sold. But they never tell the public who bought. Somebody's buying. I think it's Eastern people who are buying. Gold is moving from West to East."

"The Turks are buying. The Indians are buying. The Chinese are buying. The Russians are buying. Asian people know the value of gold. There has always been a market for gold, and it will become more dramatic when Western investment managers and portfolio managers discover that the stock market will be a problem for the next five to ten years. Then, they might also buy some gold for their portfolios. Then it will become interesting."

Book Review: Carl Menger and the Evolution of Payments Systems

The Review of Austrian Economics published Neil Skaggs' excellent book review of Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money (2002). Michael Latzer and Stefan Schmitz edit a compilation of various papers that anticipate modern monetary systems in the Mengerian tradition. The book also includes the first ever English translation of Menger's long version of "Money" (1909).

An included article by George Selgin and Lawrence White cautions against accepting the forecasts of multiple private monetary standards, and that market forces related to wide acceptance portend a long-term role for government base money. While I disagree that private monetary standards will not emerge spontaneously, especially when it comes to the international providers of digital gold currency, I sympathize with the viewpoint that building upon government-provided base money will facilitate acceptance. Precisely, that is why it may be necessary to convince a renegade, non-U.S.-aligned central bank to launch anonymous digital currencies in an effort to garner early market share. It will be the cash-like attributes of anonymity, untraceability, and real convertibility that prevail in the marketplace of economic participants.

Another included article by Stefan Schmitz, "The Institutional Character of Electronic Money Schemes: Redeemability and the Unit of Account", is the first economic discussion that I have seen regarding the digital money transition from the existing dominant unit of account to alternative unit of account.