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Gold, silver and liberty

In this article about sound money, gold and silver, Will Bancroft takes a look at the current financial crisis and an issue that receives very little media air-time. We see how money backed by gold and silver bullion, weights or measures, is not just better money but also more conducive to liberty and social progress. Read on to learn how our current financial crisis is at heart a monetary issue.

There is much debate in the mainstream today about the apparent reasons for the on-going financial crisis. Unfortunately, little focus has been given to the very basis of economic activity; money.  The money that we depend on to trade and save in is the most important foundation of an economy.

Money needs to be two things: a means of exchange, and a store of value. We need to use it to trade and then save.

Monetary history sounds boring and dull, but as a race predisposed to social interaction and trade, it is the most important historical appreciation we should have. Yet the classical views on sound money are still under-represented in the media, in politics, and certainly in finance.

Our current financial system uses fiat money, or paper money, as its basis and we have looked before at why this is not a sound economic foundation.

Fiat money only has value by official decree, and sound money backed by commodities (typically gold and silver bullion of coin), is its antithesis. Fiat money can be printed without limit, destroying our purchasing power and savings, yet sound money is limited in its supply to the amount of commodity available.

Paper money, freedom and liberty

Why has fiat money been so problematic for our liberty and freedom?

Firstly, our money should be chosen by us to best reflect our needs. Gold, often along with silver, has been the money chosen by the collective wisdom of mankind since the dawn of civilisation. For 5000 years we have found gold and silver best suited as our money. Yet, today’s fiat system was not chosen by us, it was chosen for us by the political and financial authorities. This is the start of the abrogation of our liberty.

Central banks, are also a statist creation, and are required for the management of a fiat currency. Yet gold and silver currencies have often circulated without any need for central bankers and their political and ideological preferences.

A key event in money moving from being a good chosen by us to serve our needs, to a good used by us but controlled by the authorities occurred in 1971 when President Nixon closed the Gold Window, and removed the golden anchor to the world’s reserve currency (the US Dollar). Popular appreciation of the gravity of Nixon’s actions was low and this death knell for sound money passed with too little notice.

We have not freely chosen our current monetary system. Nonetheless we can vote out our politicians in favour of those advocating sound money. In the US Ron Paul, and potentially Newt Gingrich, seek a return to sound money, and in the UK, Steve Baker MP is well versed in monetary history.

Secondly, liberty minded individuals are naturally concerned with the size and power of the state and its ability to interfere beyond a necessary level in our daily lives.

The state in the Western world’s economies has grown to a relatively large level. America is an interesting example of this phenomenon. Often perceived as a beacon for capitalism and freedom, US public spending now accounts for over 40% of GDP.

US Government Spending As Proportion Of GDP

This spending has financed an alphabet soup of government agencies that have sprung up to manage increasing amounts of our daily lives. This is where we find another infringement on our liberty.

This has occurred across the Western world generally, and big government is never compatible with liberty and freedom.

Government spending requires taxation

Financing such a vast body of governmental agencies has required growing tax revenues and rising taxation levels. If you believe that taxation, or taxation beyond a certain level, is a form of theft and a forceful appropriation of our wealth, this is the start of another problem. When the government taxes so much of the wealth of private citizens the public loses its say over how this capital is allocated (saved, spent or invested). Not only are governments generally less efficient in how they allocate capital, but as tax levels have risen we have been losing more and more control and choice over how our money is spent.

Thirdly, the growth of the state in our lives, and the lives of others (let’s remember the cost and impact of wars  such as Vietnam, the Gulf War, Iraq and Afghanistan), has been so extensive it has not only been paid for from tax revenues. We have been spending more than we are able as nation states for many of the post-war years. This deficit spending has been financed by the issuance of debt or by printing money.

It is all too easy to issue new debt under a fiat system, because the debt does not have to be backed by anything. In a sound money system, debt, like money, would have to be backed by a tangible asset like gold (usual to a certain ratio). The lender would pass gold to the borrower in exchange for an IOU. The limited supply of gold would prevent the accumulation of unsustainable debt levels and monetary imbalances.

Today’s fiat currency system has allowed debt levels to balloon, which means we have not just spent the capital of today’s generation but we have also spent that of future generations. Debt slavery is not conducive to a life of liberty and freedom, especially if you are one of a future generation who did not decide to take on this debt. Our children, grandchildren, and beyond will be saddled with debts from our profligacy and excessive spending.

Where deficits are financed, not by debt, but by simply printing money (think the Federal Reserve buying US bonds from the US treasury), this lack of financial responsibility creates another problem. This increased supply of money means that we lose our purchasing power and savings to inflation. Although we do not believe everything espoused by Monetarists like Milton Friedman, we do agree with him when he argues that inflation is always and everywhere a monetary phenomenon”.

Inflation is an illiberal and immoral tax that redistributes wealth from the savers and productive parts of the economy to the centre and those closest to the fiat money creation. It’s another portion of our wealth over which we have lost the liberty to decide how to invest, save or spend it.

The picture that is beginning to emerge is not a pretty one. We have not chosen this form of money; we are not able to sufficiently control debt issuance; and we cannot sufficiently control the production of money.

We can vote politicians out of power in exchange for those promising a return to sound money. But, the chances of this happening are slim given lack of education about our fraudulent monetary system. This lack of understanding is compounded by the fact that too many of us have become too used to state support or subsidy.

We have a manipulated and state controlled unit of account.

Gold, silver and sound money

What students of monetary history soon realise is that sound money is essential for personal and political freedom. Gold is democracy, it is freedom and it is liberty. The soundest of money has been backed by gold and silver.

Silver has a role too, and when circulating as coin under a bi-metallic standard, may have had even more disinflationary and liberty promoting effects. Silver has often been more widely distributed amongst the population which has made it less easily controlled as a means of credit manipulation. It is this aspect of silver that excites some advocates of sound money, and what fund manager Ned Naylor-Leyland referred to when we interviewed him in 2011.

Alan Greenspan had this to say about the liberty promoting aspects of gold:

Gold and freedom are inseparable. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. Gold stands as the protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.Time and time again humans have been found wanting in the management of currency. Power and temptation too great cannot be resisted. The gold standard is about putting our money out of the reach of politics.

When assessing the liberty promoting aspects of sound money, the oft-cited leader of the Austrian school, Ludwig Von Mises, wrote the following on why we need sound money:

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the non-observance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage.By consenting to live under a fiat money system controlled by the authorities we surrender a vast amount of our liberty.

Will Bancroft co-founded The Real Asset Company to make it easier for individuals to invest in gold and silver. He is passionate about gold, silver and sound money. Read more from Will on Twitter and Facebook.

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Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.

About the Author

Will BancroftWill Bancroft is Co-Founder of The Real Asset Company, a market place for individuals to invest in gold, silver and precious metals. Will also contributes commentary and analysis to the Research Desk. His interest in financial markets and investment led to a keen interest in monetary economics, gold and silver. Will is passionate about gold’s role in a portfolio and his views appear on sites and media such as Kitco, Market Oracle, Seeking Alpha, Stockopedia, The Telegraph and Yahoo Finance. Follow Will on Google+, and get his commentary via our RSS feed.View all posts by Will Bancroft