The Road to Roosevelt’s Gold Seizure

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

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

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

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

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

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

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

Interview with Blueshift Research on PayPal

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

Excerpt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Seigniorage Curse

By Gregor Macdonald
Gregor.us Blog
Tuesday, March 24, 2009

http://gregor.us/oil/the-seigniorage-curse/

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

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

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

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

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

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

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

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

What if Your Gold Isn't Really There?

By Patrick A. Heller
Numismaster.com
Tuesday, April 6, 2010

http://numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=10006

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our Beautiful Laundrettes

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

http://c4ss.org/content/2158

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

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

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

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

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

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

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

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

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

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

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

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

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

Sowing the Seeds of Central Banking

Michael S. Rozeff, on April 3, 2010, published parts three and four of his brilliant story on America’s decline into unconstitutional money, entitled "The U.S. Constitution and Money".

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

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

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

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

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

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

E-money Use on the Rise in Russia

By RT.com
Monday, April 5, 2010

http://rt.com/Business/2010-04-05/e-money-use-rise.html?fullstory

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

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

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

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

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

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

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

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