One of the first issues for a new nation, formed as the result of secession from the United States of America, will be monetary policy. There will be tremendous political pressure for the new lawmakers to establish a fractional banking system and a new national currency that is a mirror image of the US monetary system. And that one decision will be the determination if the new nation will...or deserves to continue.
If any American state secedes and establishes a currency that is not a gold standard, you can be certain that, like in the song..."meet the new boss, same as the old boss." You've just traded one group of tyrants for a smaller group of tyrants.
No government in the history of mankind has devalued its money and survived.
Not One.
So, why does gold as money make sense?
First...gold IS money. Currencies of any type are paper representations of money. Tragically, most people think just the opposite. They view the paper slips in their wallets as money, and gold as a collectible trinket with value...little more than a Hummel figurine or a stamp collection.
Throughout history, all kinds of things have been used as money. Anything that can be used as a medium of exchange can be used for money. Sea shells, salt and even cattle have been used for money by civilizations. But problems arose with those types of exchange.
How do you give change for a cow?
So, gold has evolved into the best form of money on the planet, followed closely by silver. It is best because of the following characteristics:
1. Durability: You can't use something that deteriorates, molds, rots or crumbles away. Gold does none of those.
2. Divisible: Money needs to be divisible without destroying the value of the item used as money. That's why people don't use diamonds. Dividing a diamond into smaller pieces could destroy or diminish its value.
3. Consistency: You can't use things that are of different value, such as collectibles, artwork, real estate or autos. All of those things fluctuate in value and many of them depreciate over time.
4. Convenience: Pennies are copper, but copper is very heavy. You cannot carry a large sum of copper pennies without inconvenience. The same could be said for lead or steel or other minerals. Gold has a high value relative to its weight.
5. Base value: Gold has value in and of itself. It is not assigned a value by a government.
2. Divisible: Money needs to be divisible without destroying the value of the item used as money. That's why people don't use diamonds. Dividing a diamond into smaller pieces could destroy or diminish its value.
3. Consistency: You can't use things that are of different value, such as collectibles, artwork, real estate or autos. All of those things fluctuate in value and many of them depreciate over time.
4. Convenience: Pennies are copper, but copper is very heavy. You cannot carry a large sum of copper pennies without inconvenience. The same could be said for lead or steel or other minerals. Gold has a high value relative to its weight.
5. Base value: Gold has value in and of itself. It is not assigned a value by a government.
Over thousands of years of human commerce and trade, gold has proven to be the best form of money for the greatest numbers of people. And it has always been the worst enemy of governments that wish to grow unlawfully and use their citizens as sources of income.
Governments throughout the ages have found ways to devalue their money, and thereby keeping more and more for themselves. Governments are the only entities that can create inflation, and they do it by issuing more currency than they have money on deposit.
Just look at the American experience. In the early days of currency, banks issued paper notes with different denominations. Those "notes" were actually an IOU slip that promised the bearer that he could redeem the note at the bank. The note was not the money...the money was on deposit at the bank. The bank would then hand the bearer the amount of gold or silver equal to the denomination of the note. For example, if the note was a $50 note, the bank would receive the note from the bearer and in turn would hand the bearer a gold or silver coin with X number of grains of pure gold or silver.
But early in the 20th Century, the American Federal Government began disconnecting its currency from real money. The early Federal Reserve Silver Certificates clearly said: "This certifies that there is on deposit in the Treasury of the United States of America X dollars in silver payable to the bearer on demand." The term "dollar" was the weight of silver, not a denomination.
By 1968, that wording had been omitted from any and all Federal Reserve notes. Now, the currency bills say "This note is legal tender for all debts, public and private." But they are only redeemable for more Federal Reserve notes. So, truly, they are only worth what another person will accept in exchange.
For example, you go to the grocer and pick up a loaf of bread. Last week you bought an identical loaf of bread for $1.00. But this week, the grocer will not accept $1.00. This week, he will only agree to exchange his loaf of bread for $1.25 in Federal Reserve currency. Nothing about the bread has changed. So, that is not a price increase, but is a dilution of your purchasing power.
In today's America, we see the Federal Reserve printing trillions of dollars in paper money with absolutely no underlying value. Washington is flooding the world with our paper money. When the US military invaded Iraq, it carried PALLETS of $100 bills in the bellies of transport planes. Billions of dollars have simply vanished in Iraq with no trace of where they went.
Eventually, America will experience the same hyperinflation seen around the world in other collapsing nations. Americans lived it at the time of the Revolution of 1776. The term "not worth a Continental" was in response to the collapse of the paper money issued by the Continental Congress. Money issued by the Confederate States of America became worthless by a combination of issuing too much paper currency combined with the confiscation of the Confederacy's gold bullion after the war. Germans lived it in the 20th Century. The nation of Zimbabwe is experiencing a complete collapse of their money right now.
And all of these examples were due in part or in whole to the government disconnecting the currency from the money supply.
In my opinion, the best solution for a new nation would be to allow every individual bank to issue bank notes based upon its deposits of gold and silver. Fractional reserve banking (legalized counterfeiting) should also be made illegal so that money cannot be created out of thin air. The nation should determine the number of grains of pure gold or silver that constitutes a "dollar," and then allow the free market to find the equilibrium of value. The bank notes would instantly represent solid money, inflation would vanish, and capital would flow to the new nation in unending streams from around the world.
I recommend that those contemplating the formation of a national monetary policy and new currency spend time studying the works of Friederich Hayek, Ludwig von Mises and economist Murray Rothbard.
You might start by reading "The Case For a 100% Gold-Backed Dollar", found at:
Eventually, some other nation of the world, in a desperate attempt to save its own economy, will go back to the gold standard. It may occur in an Islamic country, since Sharia law and the Koran define money as a certain weight of either gold or silver. And, with Islamic fundamentalism on the rise, it makes sense that this event would be found within Islam.
In recent days, news stories coming out of China tell that the Chinese government is encouraging its own citizens to begin buying and owning gold. The Chinese government sits on the largest pile of American dollars on the planet and doesn't want to get stuck with worthless script. Don't be surprised if something good happens in China relating to gold and money.
However, I'm confident that it will happen somewhere soon. It just seems more likely to occur at the secession of an American state from the Union. When any state secedes, the first thing it will be forced to establish is a currency. What a perfect time to assert the most trusted and reliable form of currency the world has ever known...gold and silver.
Copyright 2009 by Russell D. Longcore
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