Statement Introducing the Free Competition in Currency Act

By Ron Paul
Before the US House of Representatives
Wednesday, December 9, 2009

http://www.lewrockwell.com/paul/paul619.html

Madame Speaker, I rise to introduce the Free Competition in Currency Act of 2009. Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Money makes the transaction process far easier. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes.

This medium of exchange should satisfy certain properties: it should be durable, that is to say, it does not wear out easily; it should be portable, that is, easily carried; it should be divisible into units usable for every-day transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange.

Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people. Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce. It is precisely for this reason that gold and silver are anathema to governments. A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government. Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses.

At this country's founding, there was no government-controlled national currency. While the Constitution established the Congressional power of minting coins, it was not until 1792 that the US Mint was formally established. In the meantime, Americans made do with foreign silver and gold coins. Even after the Mint's operations got underway, foreign coins continued to circulate within the United States, and did so for several decades.

On the desk in my office I have a sign that says: "Don't steal – the government hates competition." Indeed, any power a government arrogates to itself, it is loathe to give back to the people. Just as we have gone from a constitutionally-instituted national defense consisting of a limited army and navy bolstered by militias and letters of marque and reprisal, we have moved from a system of competing currencies to a government-instituted banking cartel that monopolizes the issuance of currency. In order to reintroduce a system of competing currencies, there are three steps that must be taken to produce a legal climate favorable to competition.

The first step consists of eliminating legal tender laws. Article I Section 10 of the Constitution forbids the States from making anything but gold and silver a legal tender in payment of debts. States are not required to enact legal tender laws, but should they choose to, the only acceptable legal tender is gold and silver, the two precious metals that individuals throughout history and across cultures have used as currency. However, there is nothing in the Constitution that grants the Congress the power to enact legal tender laws. We, the Congress, have the power to coin money, regulate the value thereof, and of foreign coin, but not to declare a legal tender. Yet, there is a section of US Code, 31 USC 5103, that purports to establish US coins and currency, including Federal Reserve notes, as legal tender.

Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency. Gresham's Law describes this phenomenon, which can be summed up in one phrase: bad money drives out good money. An emperor, a king, or a dictator might mint coins with half an ounce of gold and force merchants, under pain of death, to accept them as though they contained one ounce of gold. Each ounce of the king's gold could now be minted into two coins instead of one, so the king now had twice as much "money" to spend on building castles and raising armies. As these legally overvalued coins circulated, the coins containing the full ounce of gold would be pulled out of circulation and hoarded. We saw this same phenomenon happen in the mid-1960s when the US government began to mint subsidiary coinage out of copper and nickel rather than silver. The copper and nickel coins were legally overvalued, the silver coins undervalued in relation, and silver coins vanished from circulation.

These actions also give rise to the most pernicious effects of inflation. Most of the merchants and peasants who received this devalued currency felt the full effects of inflation, the rise in prices and the lowered standard of living, before they received any of the new currency. By the time they received the new currency, prices had long since doubled, and the new currency they received would give them no benefit.

In the absence of legal tender laws, Gresham's Law no longer holds. If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society. Merchants would have been free to reject the king's coin and accept only coins containing full metal weight.

The second step to reestablishing competing currencies is to eliminate laws that prohibit the operation of private mints. One private enterprise which attempted to popularize the use of precious metal coins was Liberty Services, the creators of the Liberty Dollar. Evidently the government felt threatened, as Liberty Dollars had all their precious metal coins seized by the FBI and Secret Service in November of 2007. Of course, not all of these coins were owned by Liberty Services, as many were held in trust as backing for silver and gold certificates which Liberty Services issued. None of this matters, of course, to the government, which hates competition. The responsibility to protect contracts is of no interest to the government.

The sections of US Code which Liberty Services is accused of violating are erroneously considered to be anti-counterfeiting statutes, when in fact their purpose was to shut down private mints that had been operating in California. California was awash in gold in the aftermath of the 1849 gold rush, yet had no US Mint to mint coinage. There was not enough foreign coinage circulating in California either, so private mints stepped into the breech to provide their own coins. As was to become the case in other industries during the Progressive era, the private mints were eventually accused of circulating debased (substandard) coinage, and with the supposed aim of providing government-sanctioned regulation and a government guarantee of purity, the 1864 Coinage Act was passed, which banned private mints from producing their own coins for circulation as currency.

The final step to ensuring competing currencies is to eliminate capital gains and sales taxes on gold and silver coins. Under current federal law, coins are considered collectibles, and are liable for capital gains taxes. Short-term capital gains rates are at income tax levels, up to 35 percent, while long-term capital gains taxes are assessed at the collectibles rate of 28 percent. Furthermore, these taxes actually tax monetary debasement. As the dollar weakens, the nominal dollar value of gold increases. The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases, the federal government considers this an increase in wealth, and taxes accordingly. Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals.

Just as pernicious are the sales and use taxes which are assessed on gold and silver at the state level in many states. Imagine having to pay sales tax at the bank every time you change a $10 bill for a roll of quarters to do laundry. Inflation is a pernicious tax on the value of money, but even the official numbers, which are massaged downwards, are only on the order of 4% per year. Sales taxes in many states can take away 8% or more on every single transaction in which consumers wish to convert their Federal Reserve Notes into gold or silver.

In conclusion, Madame Speaker, allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government. The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess. With a sound currency, everyone is better off, not just those who control the monetary system. I urge my colleagues to consider the redevelopment of a system of competing currencies and cosponsor the Free Competition in Currency Act.

For further reading:
"Washington – Tear Down Your Wall Against Currency Competition", Ron Holland, December 15, 2009
"Competition: Good for the Economy, Good for the Currency, Says Ron Paul", Brian Doherty, December 11, 2009
"Ron Paul Calls for Competition in Money", John McManus, December 11, 2009
"Ron Paul's Next Bill: No Chance", Patrick Heller, December 11, 2009
"Academia's War Against Free Market Money", Gary North, December 1, 2008

New Underground Economy

By Richard W. Rahn
The Washington Times
Wednesday, December 9, 2009

http://www.washingtontimes.com/news/2009/dec/09/new-underground-economy/

Key indicator: Avoidance of bank accounts

The underground or "black" economy is rapidly rising, and the fault is mainly due to government policies.

Here is the evidence. The Federal Deposit Insurance Corp. (FDIC) released a report last week concluding that 7.7 percent of U.S. households, containing at least 17 million adults, are unbanked (i.e. those who do not have bank accounts), and an "estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked" (i.e., those who rely heavily on nonbank institutions, such as check cashing and money transmitting services). As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States.

Tax revenues are falling far more rapidly at the federal, state and local level than would be expected by the small drop in real gross domestic product (GDP) and changes in tax law that have occurred since the recession began. The currency in circulation outside the U.S. Treasury, Federal Reserve banks and the vaults of depository institutions - that is, the currency held by individuals and businesses - has grown by 13.3 percent in the last two years, while real nominal (not inflation-adjusted) GDP has not grown at all, and real (inflation-adjusted) GDP incomes have fallen by more than 3 percent. With the growth of electronic means of payment and financial service providers, it would be expected that the currency component of GDP would fall, not rise.

The underground economy refers to both legal activities, such as often found in construction and services industries where taxes are not withheld and paid, and illegal activities, such as drug dealing and prostitution.

Countries such as the United States, Switzerland and Japan historically have had relatively small, nonreporting and/or illegal sectors, a typical estimate being 13 percent of GDP.

Most European countries have had somewhat larger underground sectors (typically 20 percent or so) in part because of the desire to escape higher tax rates. Italy and some of the other Southern European countries are believed to have underground sectors that account for 30 percent or more of all economic activity.

I recall an Italian finance minister telling a few of us at a meeting a couple of decades ago that, for policy purposes, he assumed that "the economy was 40 percent larger than what was reported." In some developing countries and/or highly corrupt countries, underground or "off the books" activities are estimated to be as high as 70 percent of all economic activity.

The FDIC report about the size of the unbanked or underbanked sector in the U.S. should be of concern because those who do not use the banking system often have to pay higher fees to cash checks, pay bills (e.g., money orders, etc.), or transmit funds.

People who keep their savings in cash at home rather than in banks make themselves easier prey for criminals and are more likely to lose their money to fire, flood, or just neglect. Not surprisingly, a majority (71 percent) of the unbanked have household incomes of less than $30,000 per year.

There are many reasons people do not have bank accounts. Banks, because of the "know your customer" and other anti-money laundering regulations, make it difficult for nonestablished people, such as the young and transient, as well as legal and illegal immigrants, to open bank accounts.

Also, many of these same regulations are responsible for the rise in bank fees, which are a particular burden for low-income people. You can be sure that every time Congress passes some new law or the IRS implements some new regulation to "get tax cheats," much of the real burden of these compliance costs will fall on those least able to afford it, while those intent on finding their way around it will do so.

People also avoid having bank accounts because they are vulnerable to asset seizure, judgments, levies, etc. Increasingly, bankers and others who provide financial services are forced by governments to spy and snitch on their own customers, and this is a real turnoff for many people, which causes them to find other ways of maintaining financial privacy.

Many studies have shown that when people believe the taxes they are required to pay are reasonable and the political leaders tend to spend their tax dollars wisely, tax compliance rises, and vice versa. In the United States, there is increased evidence that many tax dollars are not being spent wisely and are often used to pay off political cronies.

Over the past year in particular, the public has become aware that many in Washington who advocate higher taxes and argue that everyone has a responsibility to pay taxes are themselves not complying with the tax laws and regulations.

When you have a secretary of the Treasury and the chairman of the House Ways and Means Committee (the tax writing committee) accused of cheating on their taxes, it greatly undermines the moral authority of the tax collectors, making the common citizens feel like chumps and, hence, much more willing to try to legally avoid or illegally evade taxes themselves.

The evidence is unambiguous; governments cannot increase tax compliance and decrease the size of the underground economy by ever increasing and more onerous regulations.

It is no accident that those governments that allow their citizens a high degree of personal and financial liberty, including financial privacy, and spend taxpayer dollars wisely, honestly and competently, have much smaller underground sectors than corrupt and oppressive governments. Washington, take note.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

For further reading:
"Tax haven clamp down moving to enforcement phase: OECD", Reuters, December 2, 2009
"Book Review of 'The End of Money and the Struggle for Financial Privacy' (by Richard Rahn)", Timothy Terrell, Quarterly Journal of Austrian Economics, Volume 2 Number 2, Summer 1999

Life Takes Virtual Currency

By Roger C. Wood
Fortune Brainstorm Tech
via CNNMoney
Tuesday, December 8, 2009

http://brainstormtech.blogs.fortune.cnn.com/2009/12/08/life-takes-virtual-currency/

Living in the post-Visa world

Nine-year-old Boy #1 – “I like Fusion Fall. It’s kind of a mission game; it’s not like a chatting game. Sometimes I like to play chat, that’s why I like Club Penguin. But now I like Fusion better, mostly it’s just more fun to earn Taros and Nanos and Fusion Matter. I like spending Fusion Matter because I can get more HP and cool clothes. And, it loads my clothes super fast.”

Nine-year-old Boy #2 – “I hate Adventurequest because it’s just an RPG and it looks like no one else is there. I like to earn prestige and HP. I get hurt all the time, so I need to buy HP all the time. I haven’t figured out all of the shopkeepers in Fusion Fall, but there are different types. The power shopkeeper seems like the best.”

“Load my clothes”? “Prestige and HP”? “Power shopkeeper”? If you have no idea what these kids are talking about, welcome to the post-VISA world of virtual currency. The very nature of basic transactions will be transformed by this generation and this piece of a kid’s conversation is just the beginning.

No matter what you call it – virtual currency, s-commerce, contextual payments, in-apps buying or stored value – young people want to pay for things in little pieces without leaving the entertainment experience.

For instance, the kids above want their avatar warrior to walk up to an avatar merchant and buy some digital medicine to repair their digital muscles. As Apple's (AAPL) iTunes has shown the world, most people want to buy digital stuff in little tiny pieces, for less than one dollar or euro, without entering a credit card number each time. This is what the interactive media industry calls a “micro-transaction.” Using virtual currency and the concept has forever changed the world.

The primary way to accomplish all of this, while maintaining the security controls of the global personal banking system, is with stored value and virtual currency. Converting real money to virtual currency gives life to all kinds of marketing applications, as we have seen with “frequent flyer points,” one of the most successful forms of virtual currency around the world.

Having consumers load real money into accounts, “storing” the value, then drawing down on the balance in the form of points or credits as required, is a good idea for a lot of reasons.

• First, it minimizes interest impact from using credit cards for the consumer. In some countries, they don’t even like credit cards. In many parts of the world, interest is considered a sin.
• Second, it minimizes transaction fees from the Web site.
• Third, younger consumers want to make their spending modular. This demographic often subconsciously segment their spending into categories like phone, games, clothes, etc. Stored value and virtual currency helps them to facilitate the process.

As millennials — people born after 1978 — begin to play a bigger role in the global economy, we will see a blossoming of innovations using stored value and virtual currency in new and exciting ways. Lending will be restricted, credit will be scarce and young people will adapt faster than older generations. To paraphrase Negroponte, virtual currency will be noticed only by its absence, not its presence.

Virtual currency will be intrinsic to each and every transaction. Maybe one day, we will log on to Yahoo! (YHOO) and check our Yahoo! Coins balance. Then pay for dating services, games and comedy video with the Yahoo! Coins you bought. Or, AOL will give you AOL Coins for sharing TMZ videos and news items from PopEater, which you can then use to buy stuff on Sorority Life or Farmville, while hanging out on Bebo.

It will seem antiquated to use real money to pay for anything. Real money will be something you load into a stored value account for some specific purpose and the virtual currency will be what you actually use to pay for something. Virtual currency won’t really be a topic for discussion. The real excitement will come from the transformation of our lifestyles, business models and how we come to value intangible digital goods.

Below is my version of the five forces driving the irreversible trend towards ubiquitous virtual currency.

One World
American Express (AXP) travelers checks got it. Frequent flyer consortiums got it. In the future, new payment networks will emerge. Kind of like JCB, Visa and MasterCard, but a lot more flexible. When kids see a virtual currency payment network logo, they will assume the virtual currency they hold will be valid, regardless of its origin. It could have been earned on AOL, bought on Arkadium or gifted on Facebook. Kids want “one world” and they will spend their time on digital properties with open payment networks that allow them to move virtual currency around at a fraction of the fees and regulations required for moving real money.

Social Buckets
Our first Web portals (AOL, CompuServe, etc.) essentially were “social circles” didn’t translate in that digital world and were replaced by what I call “social buckets.” There is no universally accepted social rank anymore or transfer of social status from one digital world to another. I’m a god in digital music bucket if enough people download my self-published iMix collections on iTunes, but that celebrity doesn’t translate to YouTube. Ten-year-olds kick my butt on FusionFall (the aforementioned multiplayer game) and my ability to throw a knuckleball in the real world means little to them. I’m certainly no sociologist, but I do think that our concept of social status varies by digital bucket. Virtual currency will be the only common denominator.

Who owns your friends?
Imagine you get together with some friends at the pub. Your friends arrive then proceed to talk, drink and have a good time. Each one of your friends also brings a representative from their financial institution that they will use for individual transactions. Every time one of your friends buys a drink, their financial institution’s guy starts talking to them and you have lost your ability to host effectively. Sound chaotic? Even ridiculous?

This is what it feels like today for a digital media company. Every visitor to their site uses a payment method that oversteps it bounds and dominates the conversation with the consumers. The digital media company brought everyone together, yet the digital payment companies, offer businesses and payment gallery operators start dialogs with the visitors that prevent the digital media company from properly hosting the party. In the future, digital media companies will take control of the conversation with their friends through their own branded payment options.

Size Matters Not
Virtual currency will make the size of the digital media company irrelevant in relation to its potency. Virgin, Airtran and JetBlue are all really small airlines that used effective virtual currency and stored value business models to make a lot of trouble for Continental, Delta and United in long-haul air travel. A small Web site with a great concept of virtual currency and stored value can have a disproportionate impact on the marketplace. Just look at ActiveCause.com or Causes.com, versus United Way. I meet lots of 28-year-olds in my work life, and I really don’t know many that donate to the United Way.

Net Worth
Net worth was once judged by the difference between one’s assets and one’s liabilities. Both were valued in relation to money, which represented ounces of gold. What will the world be like when digital goods, images, ideas, concepts are a central part of the equation? I create a character on Blizzard’s World of Warcraft or Eve Online and it’s a hit. Hell, who knows, it might just be the next Avatar, SpiderMan or James Bond. I’d probably make out a little better than if I’d owned, say, a million shares of Washington Mutual stock. Thought products, secured by virtual currency, will likely make the next tycoons. Ralph Lauren, Paul McCartney, the mysterious founders of Skype, Steven Spielberg and even Jay-Z, all created multigenerational wealth through digital assets that none of us can actually touch. I’m sure the folks at TenCent, China’s most popular Internet portal, would agree.

Bye for now, I’m signing into WeeWorld to download a Justin Timberlake digital jacket for my avatar using my green diamonds.

Roger Wood is CEO of ORCA Inc., a provider of electronic payment and transaction solutions for social interactive media.

For further reading:
"Can Virtual Currencies Eclipse Real Currency?", Pixels and Policy, November 6, 2009

Requiem for the Dollar

By James Grant
The Wall Street Journal
Saturday, December 5, 2009

http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html

Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head.

I wonder, though, just how far we have really come in the past 200-odd years. To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners.

In ancient times, the solidus circulated far and wide. But it was a tangible thing, a gold coin struck by the Byzantine Empire. Between Waterloo and the Great Depression, the pound sterling ruled the roost. But it was convertible into gold -- slip your bank notes through a teller's window and the Bank of England would return the appropriate number of gold sovereigns. The dollar is faith-based. There's nothing behind it but Congress.

But now the world is losing faith, as well it might. It's not that the dollar is overvalued -- economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors.

You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation -- fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet won't buy a pack of gum.

For most of this country's history, the dollar was exchangeable into gold or silver. "Sound" money was the kind that rang when you dropped it on a counter. For a long time, the rate of exchange was an ounce of gold for $20.67. Following the Roosevelt devaluation of 1933, the rate of exchange became an ounce of gold for $35. After 1933, only foreign governments and central banks were privileged to swap unwanted paper for gold, and most of these official institutions refrained from asking (after 1946, it seemed inadvisable to antagonize the very superpower that was standing between them and the Soviet Union). By the late 1960s, however, some of these overseas dollar holders, notably France, began to clamor for gold. They were well-advised to do so, dollars being in demonstrable surplus. President Richard Nixon solved that problem in August 1971 by suspending convertibility altogether. From that day to this, in the words of John Exter, Citibanker and monetary critic, a Federal Reserve "note" has been an "IOU nothing."

To understand the scrape we are in, it may help, a little, to understand the system we left behind. A proper gold standard was a well-oiled machine. The metal actually moved and, so moving, checked what are politely known today as "imbalances."

Say a certain baseball-loving North American country were running a persistent trade deficit. Under the monetary system we don't have and which only a few are yet even talking about instituting, the deficit country would remit to its creditors not pieces of easily duplicable paper but scarce gold bars. Gold was money -- is, in fact, still money -- and the loss would set in train a series of painful but necessary adjustments in the country that had been watching baseball instead of making things to sell. Interest rates would rise in that deficit country. Its prices would fall, its credit would be curtailed, its exports would increase and its imports decrease. At length, the deficit country would be restored to something like competitive trim. The gold would come sailing back to where it started. As it is today, dollars are piled higher and higher in the vaults of America's Asian creditors. There's no adjustment mechanism, only recriminations and the first suggestion that, from the creditors' point of view, enough is enough.

So in 1971, the last remnants of the gold standard were erased. And a good thing, too, some economists maintain. The high starched collar of a gold standard prolonged the Great Depression, they charge; it would likely have deepened our Great Recession, too. Virtue's the thing for prosperity, they say; in times of trouble, give us the Ben S. Bernanke school of money conjuring. There are many troubles with this notion. For one thing, there is no single gold standard. The version in place in the 1920s, known as the gold-exchange standard, was almost as deeply flawed as the post-1971 paper-dollar system. As for the Great Recession, the Bernanke method itself was a leading cause of our troubles. Constrained by the discipline of a convertible currency, the U.S. would have had to undergo the salutary, unpleasant process described above to cure its trade deficit. But that process of correction would -- I am going to speculate -- have saved us from the near-death financial experience of 2008. Under a properly functioning gold standard, the U.S. would not have been able to borrow itself to the threshold of the poorhouse.

Anyway, starting in the early 1970s, American monetary policy came to resemble a game of tennis without the net. Relieved of the irksome inhibition of gold convertibility, the Fed could stop worrying about the French. To be sure, it still had Congress to answer to, and the financial markets, as well. But no more could foreigners come calling for the collateral behind the dollar, because there was none. The nets came down on Wall Street, too. As the idea took hold that the Fed could meet any serious crisis by carpeting the nation with dollar bills, bankers and brokers took more risks. New forms of business organization encouraged more borrowing. New inflationary vistas opened.

Not that the architects of the post-1971 game set out to lower the nets. They believed they'd put up new ones. In place of such gold discipline as remained under Bretton Woods -- in truth, there wasn't much -- markets would be the monetary judges and juries. The late Walter Wriston, onetime chairman of Citicorp, said that the world had traded up. In place of a gold standard, it now had an "information standard." Buyers and sellers of the Treasury's notes and bonds, on the one hand, or of dollars, yen, Deutschemarks, Swiss francs, on the other, would ride herd on the Fed. You'd know when the central bank went too far because bond yields would climb or the dollar exchange rate would fall. Gold would trade like any other commodity, but nobody would pay attention to it.

I check myself a little in arraigning the monetary arrangements that have failed us so miserably these past two years. The lifespan of no monetary system since 1880 has been more than 30 or 40 years, including that of my beloved classical gold standard, which perished in 1914. The pure paper dollar regime has been a long time dying. It was no good portent when the tellers' bars started coming down from neighborhood bank branches. The uncaged teller was a sign that Americans had began to conceive an elevated opinion of the human capacity to manage financial risk. There were other evil omens. In 1970, Wall Street partnerships began to convert to limited liability corporations -- Donaldson, Lufkin & Jenrette was the first to make the leap, Goldman Sachs, among the last, in 1999. In a partnership, the owners are on the line for everything they have in case of the firm's bankruptcy. No such sword of Damocles hangs over the top executives of a corporation. The bankers and brokers incorporated because they felt they needed more capital, more scale, more technology -- and, of course, more leverage.

In no phase of American monetary history was every banker so courageous and farsighted as Isaias W. Hellman, a progenitor of an institution called Farmers & Merchants Bank and of another called Wells Fargo. Operating in southern California in the late 1880s, Hellman arrived at the conclusion that the Los Angeles real-estate market was a bubble. So deciding -- the prices of L.A. business lots had climbed to $5,000 from $500 in one short year -- he stopped lending. The bubble burst, and his bank prospered. Safety and soundness was Hellman's motto. He and his depositors risked their money side-by-side. The taxpayers didn't subsidize that transaction, not being a party to it.

In this crisis, of course, with latter-day Hellmans all too scarce in the banking population, the taxpayers have born an unconscionable part of the risk. Wells Fargo itself passed the hat for $25 billion. Hellmans are scarce because the federal government has taken away their franchise. There's no business value in financial safety when the government bails out the unsafe. And by bailing out a scandalously large number of unsafe institutions, the government necessarily puts the dollar at risk. In money, too, the knee bone is connected to the thigh bone. Debased banks mean a debased currency. (Perhaps causation works in the other direction too.)

Many contended for the hubris prize in the years leading up to the sorrows of 2008, but the Fed beat all comers. Under Mr. Bernanke, as under his predecessor, Alan Greenspan, our central bank preached the doctrine of stability. The Fed would iron out the business cycle, promote full employment, pour oil on the waters of any and every major financial crisis, and assure stable prices. In particular, under the intellectual leadership of Mr. Bernanke, the Fed would tolerate no sagging of the price level. It would insist on a decent minimum of inflation. It staked out this position in the face of the economic opening of China and India and the spread of digital technology. To the common-sense observation that these hundreds of millions of willing new hands, and gadgets, might bring down prices at Wal-Mart, the Fed turned a deaf ear. It would save us from "deflation" by generating a sweet taste of inflation (not too much, just enough). And it would perform these feats of macroeconomic management by pushing a single interest rate up or down.

It was implausible enough in the telling and has turned out no better in the doing. Nor is there any mystery why. The Fed's M.O. is price control. It fixes the basic money market interest rate, known as the federal funds rate. To arrive at the proper rate, the monetary mandarins conduct their research, prepare their forecast -- and take a wild guess, just like the rest of us. Since December 2008, the Fed has imposed a funds rate of 0% to 0.25%. Since March of 2009, it has bought just over $1 trillion of mortgage-backed securities and $300 billion of Treasurys. It has acquired these assets in the customary central-bank manner, i.e., by conjuring into existence the money to pay for them. Yet -- a measure of the nation's lingering problems -- the broadly defined money supply isn't growing but dwindling.

The Fed's miniature interest rates find favor with debtors, disfavor with savers (that doughty band). All may agree, however, that the bond market has lost such credibility it once had as a monetary-policy voting machine. Whether or not the Fed is cranking too hard on the dollar printing press is, for professional dealers and investors, a moot point. With the cost of borrowing close to zero, they are happy as clams (that is, they can finance their inventories of Treasurys and mortgage-backed securities at virtually no cost). The U.S. government securities market has been conscripted into the economic-stimulus program.

Neither are the currency markets the founts of objective monetary information they perhaps used to be. The euro trades freely, but the Chinese yuan is under the thumb of the People's Republic. It tells you nothing about the respective monetary policies of the People's Bank and the Fed to observe that it takes 6.831 yuan to make a dollar. It's the exchange rate that Beijing wants.

On the matter of comparative monetary policies, the most expressive market is the one that the Fed isn't overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring (it lost altitude on Friday). Why has it taken flight? Not on account of an inflation problem. Gold is appreciating in terms of all paper currencies -- or, alternatively, paper currencies are depreciating in terms of gold -- because the world is losing faith in the tenets of modern central banking. Correctly, the dollar's vast non-American constituency understands that it counts for nothing in the councils of the Fed and the Treasury. If 0% interest rates suit the U.S. economy, 0% will be the rate imposed. Then, too, gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.

Let me interrupt myself to say that I am not now making a bullish investment case for gold (I happen to be bullish, but it's only an opinion). The trouble with 0% interest rates is that they instigate speculation in almost every asset that moves (and when such an immense market as that in Treasury securities isn't allowed to move, the suppressed volatility finds different outlets). By practicing price, or interest-rate, control, the Bank of Bernanke fosters a kind of alternative financial reality. Let the buyer beware -- of just about everything.

A proper gold standard promotes balance in the financial and commercial affairs of participating nations. The pure paper system promotes and perpetuates imbalances. Not since 1976 has this country consumed less than it produced (as measured by the international trade balance): a deficit of 32 years and counting. Why has the shortfall persisted for so long? Because the U.S., uniquely, is allowed to pay its bills in the currency that only it may lawfully print. We send it west, to the central banks of our Asian creditors. And they, obligingly, turn right around and invest the dollars in America's own securities. It's as if the money never left home. Stop to ask yourself, American reader: Is any other nation on earth so blessed as we?

There is, however, a rub. The Asian central banks do not acquire their dollars with nothing. Rather, they buy them with the currency that they themselves print. Some of this money they manage to sweep under the rug, or "sterilize," but a good bit of it enters the local payment stream, where it finances today's rowdy Asian bull markets.

A monetary economist from Mars could only scratch his pointy head at our 21st century monetary arrangements. What is a dollar? he might ask. No response. The Martian can't find out because the earthlings don't know. The value of a dollar is undefined. Its relationship to other currencies is similarly contingent. Some exchange rates float, others sink, still others are lashed to the dollar (whatever it is). Discouraged, the visitor zooms home.

Neither would the ghosts of earthly finance know what to make of things if they returned for a briefing from wherever they were spending eternity. Someone would have to tell Alexander Hamilton that his system of coins is defunct, as is, incidentally, the federal sinking fund he devised to retire the public debt (it went out of business in 1960). He might have to hear it more than once to understand, but Congress no longer "coins" money and regulates the value thereof. Rather, it delegates the work to Mr. Bernanke, who, a noted student of the Great Depression, believes that the cure for borrowing too much money is printing more money.

Walter Bagehot, the Victorian English financial journalist, would be in for a jolt too. It would hardly please him to hear that the Fed had invoked the authority of his name to characterize its helter-skelter interventions of the past year. In a crisis, Bagehot wrote in his 1873 study "Lombard Street," a central bank should lend without stint to solvent institutions at a punitive rate of interest against sound collateral. At least, Bagehot's shade might console itself, the Fed was faithful to the text on one point. It did lend without stint.

If Bagehot's ghost would be chagrined, that of Bagehot's sparring partner, Thomson Hankey, would be exultant. Hankey, a onetime governor of the Bank of England, denounced Bagehot in life. No central bank should stand ready to bail out the imprudent, he maintained. "I cannot conceive of anything more likely to encourage rash and imprudent speculation..., " wrote Hankey in response to Bagehot. "I am no advocate for any legislative enactments to try and make the trading community more prudent."

Hankey believed in the price system. It might pain him to discover that his professional descendants have embraced command and control. "We should have required [banks to hold] more capital, more liquidity," Mr. Bernanke rued in a Senate hearing on Thursday. "We should have required more risk management controls." Roll over, Isaias Hellman.

So our Martian would be mystified and our honored dead distressed. And we, the living? We are none too pleased ourselves. At least, however, being alive, we can begin to set things right. The thing to do, I say, is to restore the nets to the tennis courts of money and finance. Collateralize the dollar—make it exchangeable into something of genuine value. Get the Fed out of the price-fixing business. Replace Ben Bernanke with a latter-day Thomson Hankey. Find -- cultivate --battalions of latter-day Hellmans and set them to running free-market banks. There's one more thing: Return to the statute books Section 19 of the 1792 Coinage Act, but substitute life behind bars for the death penalty. It's the 21st century, you know.

James Grant is editor of Grant's Interest Rate Observer and the author, most recently, of "Mr. Market Miscalculates".

North Korea Revalues Currency, Destroying Personal Savings

By Blaine Harden
The Washington Post
Wednesday, December 2, 2009

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/01/AR2009120101841.html

TOKYO -- Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.

The currency move appeared to be part of a continuing government crackdown on private markets, which have become an essential part of the food-supply system in the chronically hungry North.

In recent years, some market traders have stashed away substantial amounts of cash, while establishing themselves in profitable businesses that the government struggles to control.

But under the rules of the new currency system, the wealth of these traders has largely disappeared, unless it is held in euros, dollars or Chinese yuan.

The revaluation replaces 1,000-won notes with 10-won notes but strictly limits the amount of old currency that can be exchanged, news reports said.

According to two Web-based groups with sources in the North, that limit was set Monday at 100,000 won, which at current black-market rates amounts to $40. All North Korean currency that individuals possess in excess of that amount becomes worthless under the revaluation.

Amid widespread protests, the limit was raised to 150,000 won in cash and 300,000 won in bank savings, according to DailyNK, an online news organization that has informants in the North.

"I worked like a dog for two months for the winter, but the money became useless paper overnight," a resident of Sinuiju, a city that borders China, was quoted as saying on the Web site of Good Friends, a South Korea-based aid organization with informants in the North.

China's official New China News Agency said in a report from Pyongyang, the North Korean capital, that state-run shops were closed Tuesday as sales staff posted new prices on goods.

The exchange of old currency for new began Monday and will end Sunday, the news agency said, adding that the government did not explain why the revaluation had occurred.

In the past year, North Korea has put increasing pressure on local markets, closing several and limiting the range of goods that can be sold in them.

The government has also criminalized everyday market behavior while creating a new kind of gulag for those it deems economic criminals, according to a report released this fall by the East-West Center, a research organization established by Congress to promote understanding of Asia.

The report says security forces in North Korea have broad discretion to detain without trial nearly anyone who buys or sells in the local markets. But if traders can pay bribes, security officials will often leave them alone, the report says.

If the currency move substantially cripples the operation of local markets in the North, the consequences could be severe for the millions who depend on them for food. U.N. officials have estimated that as much as half the calories consumed by North Koreans come from food bought in markets.

South Korean officials said last month that North Korea appears to be on the brink of another severe food crisis, with stocks of food likely to run short by March.

For further reading:
"North Korean misery as currency evaporates", The Telegraph, December 3, 2009
"North’s currency action shocking to its citizens", JoongAng Daily, December 3, 2009
"North Koreans in shock as cash is 'banned'", Times Online, December 2, 2009
"North Korea Takes Aim at the Black Market", BusinessWeek, December 1, 2009
"North Korea Revalues Currency to Curb Black Market, Reports Say", Bloomberg, December 1, 2009

International Money Laundering: OECD Handbook for Tax Auditors

By Linda Friedman Ramirez
Extradition and Cross Border Criminal Defense News
Sunday, November 1, 2009

http://obtainingforeignevidence.blogspot.com/2009/11/international-money-laundering-oecd.html

This publication, Money Laundering Awareness Handbook for Tax Examiners and Tax Auditors, October 2009, is a primer on the mechanics and means to detect money laundering, with a discussion of how money laundering can be carried out through transfers to offshore banks, credit cards as well as international trade. From the report:

"In international literature, money laundering through trade is known as ‘Trade Based Money Laundering’. It is seen by various organisations, such as the FATF and the World Customs Organization as a key method to move and/or launder large amounts of money derived from crime. The movement of money can be visible through the payment of expenses and visible or not, by moving money via air transportation, road transportation or by smuggling with goods. Criminal proceeds often need to be transferred to another country, a criminal transaction must be settled or funds must at some time come back to the criminal. These are reasons for criminals to move capital with the capabilities and constructed legitimacy of international trade. The techniques are discussed hereafter."

Table of Contents:

• Money Laundering
• Role of Tax Examiners and Auditors
• Money Laundering Indicators for Individuals
• Tax Return Examination and Pre-Audit Indicators
• Audit Indicators
• Specific Indicators on Real Estate
• Specific Indicators on Cash
• Specific Indicators on International Trade
• Specific Indicators on Loans
• Specific Indicators on Professional Service Providers

Is China Going Crazy After Gold Reserves?

By David Lew
Commodity Online
Tuesday, December 1, 2009

http://www.commodityonline.com/news/Is-China-going-crazy-after-gold-reserves-23411-3-1.html

Once again, China is making news on the hottest commodity—gold. China, the largest producer and consumer of the yellow metal these days, has announced that it wants to build up gold reserves. And how much? China says the country is eager to step up gold reserves to a massive 10,000 tonnes in the next 10 years.

Is China going crazy after gold? Yes, it looks if the recent statements coming out from the Chinese government is any indication, China is going indeed crazy after the yellow metal. In fact, gold reserves began to become big news in April this year when China announced that the country had increased its gold holdings to 1054 tonnes from 454 tonnes in 2003. Since then, almost every country—China, India, Russia, Brazil and even Sri Lanka—have been making news by announcing that they all want to build more gold reserves.

Dipping dollar value, ongoing economic recession and stock market fluctuations are the main reasons for central banks of several countries to mull mopping up gold reserves these days. India’s Reserve Bank surprised most other central banks last month by buying 200 tonnes of gold from the International Monetary Fund (IMF). India is these days once again in the fray to buy additional gold reserves from the IMF.

Why is there a scramble for gold reserves by countries like China, India and Russia? Every country these days wants to diversify its foreign exchange reserves by acquiring gold and other hard assets in place of the US dollar that has been dropping in value in the last one year.

On Monday, a top Chinese official announced that the country is eager to increase its gold reserves to 6000 tonnes in the next 3-5 years and 10000 tonnes in the next 8-10 years. Big, golden ambition, indeed. But considering the fact that China has now 1054 tonnes of gold, taking the yellow metal reserves to 10000 tonnes in the next 10 years is going to be a challenging task.

Bullion analyst Mark Robinson says this is the biggest and most ambitious task that China has ever announced. “If China wants to take its gold reserves to 10000 tonnes in 10 years, the country needs to buy or acquire the yellow metal to the quantity of nearly 1000 tonnes per year,” points out Robinson. He says China might now go aggressive on gold production as the country has allocated big funds to find new gold mining destinations.

“China wants to emerge as the global leader in gold reserves. Given the aggressive play that China is showing on gold, it looks perhaps possible that China will emerge as the biggest holder of gold in the world in the next 10 years,” added Robinson.

Which are the countries that own the largest quantity of gold reserves now? Check out here:

**America is the world leader in gold reserves. The United States has 8133 tonnes of gold reserves as on September 2008 that accounts for 76.5% of its foreign exchange reserves.

**Germany has the second highest gold reserves at 3412.6 tonnes.

** France has 2508 tonnes of gold constituting 58.7% of its forex assets.

**Italy has 2451.8 tonnes of gold constituting 61.9% of forex reserves.

**China became the fifth biggest holder of gold reserves with 1054 tonnes.

**Switzerland has 1040 tonnes of gold reserves constituting 23.8% of total forex reserves.

**India which recently bought 200 tonnes of gold from IMF has 557 tonnes of gold reserves representing 3% of total forex reserves.

** The IMF, which currently holds 3,217 tonnes of gold, is the third-largest official holder of the precious metal. The IMF has made gold sales a key element of its new income model aimed at lowering its dependence on lending revenue to cover expenses.

For further reading:
"China to Increase Its Gold Reserves", Erik Bethel, December 1, 2009
"China, gold, and the civilization shift", Ambrose Evans-Pritchard, November 26, 2009