Non Debt Based Money

Here is a nice little summary about how our debt based money, fractional reserve banking system is leading us toward gold. The problem with a gold standard is that gold is too rare so in a gold standard the dollar you repay is more valuable than the dollar you borrowed, a bankers wet dream, but you and I still have to repay the interest too.

If I were going to argue for a monetary system, it would be for a non debt based fiat system along the lines of Lincolns Green Backs, if I were going to argue for one that is, for now I'll just urge you to read this from Rolf Winkler at OptionArmageddon.com.

“Stable money is the key to recovery”

The title above comes from this article by Judy Shelton. She’s a regular contributor to the WSJ op-ed page and has long advocated a return to the gold standard. I thought I’d highlight it because another gold standard advocate appeared on a different op-ed page recently (see below). Could the gold standard argument go mainstream?

First, Shelton:

…At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system — anchored by a gold-convertible dollar — ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence…

And Walker Todd, former Federal Reserve Banker on the op-ed page of the CS Monitor:

…A gold standard offers exactly the kind of discipline that’s missing from the Fed. But its impact would be wider: Both in substance and in symbolism, gold provides integrity to the entire global financial system. Governments, however, have historically bridled at the constraint and accountability a gold standard brings. After all, when currency can be exchanged for gold, it’s harder for governments to inflate the money supply, which they’re tempted to do in order to spend beyond their means or cheat on their debts…

There are plenty of “fringe” folks calling for a return to the gold standard. I commented to a friend at a wedding two weeks ago that gold coins are probably one of the safer places to park cash if you fear holding dollars. He laughed at me. (He’s actually a regular reader of the blog.) But I suspect many of my readers might laugh if someone seriously told them to park their savings in gold coins or gold bars. Hell, I would have laughed at the thought of it a couple years ago.

But during 2007, shortly after I published my first op-ed about the credit crunch, I read Roger Lowenstein’s book on the LTCM collapse. When I did, the profound instability of our international monetary order struck me like a freight train. Using the LTCM debacle as exhibit A, Lowenstein explains deleveraging, the process by which levered institutions have to sell assets to raise the capital they need to pay their debts. If too many institutions are in too much debt and have to sell all at once, liquidity evaporates and asset prices collapse.

This is the death sprial scenario for a fractional reserve banking system based on fiat currency.

My concern is that the bailouts will not only fail, they will backfire, leading to a run on the dollar. At that point, the gold standard argument may go mainstream.