Paper, Gold and Wisdom

“All the perplexities, confusions and distresses in America arise not from defects in the constitution or confederation, not from want of honor or virtue, as much as from downright ignorance of the nature of coin, credit and circulation.”

- President John Adams       

I think that 200 years ago John Adams had it right. Whenever I mention the insidious impact that paper money has on all our lives, I seem to be met with blank expressions, a nervous laugh, or a quick change of subject. I suppose that at this stage our paper money is so deeply ingrained in all of us that no-one wants to think about it, let alone question it. Paper money has survived for decades and throughout most people’s financial lives and so it is understandable that it is taken as a given.

Understandable, but it makes a huge difference. Very few people seem to be aware that the monetary system plays a key part in the incentives and structure of a society. A different monetary system would reward and punish very different behaviour, and it would create a very different state structure and relationship with its citizens. It is also hard to believe that good durable financial decisions can be made without a clear understanding what of money is and its track record. Any examination of monetary history over the ages reveals a broad range of choices and consequences, with many lessons to be learnt. This is best explained by looking at the timeless wisdom of the great minds of the ages. There is also nothing like first hand experience of different types of monetary system.

Founding Fathers hated paper money

One thing is very clear. The founding fathers hated paper money with a passion. Indeed if you read what they had to say I believe it is more than likely that they would object to being placed as a symbol on any form of paper money. That they have subsequently been honoured in this way is a strange quirk of fate, almost a subversion of their true principles. Here are their quotes;

“Paper money will invariably operate in the body of politics as spirit liquors on the human body. They prey on the vitals and ultimately destroy them."

"Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." (letter to J. Bowen, Rhode Island, Jan.9 ,1787)

"If ever again our nation stumbles upon unfunded paper, it shall surely be like death to our body politic. This country will crash.”

George Washington

“I sincerely believe ... that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”

I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labours of the people under the pretense of caring for them, they will be happy.

"The Central Bank is an institution of the most deadly hostility existing against the principles and form of our Constitution."

- Thomas Jefferson

"To emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor even hereafter to be employed; being, in its nature, pregnant with abuses, and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people."

- Alexander Hamilton

"If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations.”

“The bold efforts that the present bank has made to control the government and the distress it has wantonly caused, are but premonitions of the fate which awaits the American people should they be deluded into a per-petuation of this institution or the establishment of another like it...If the people only understood the rank injustice of our money and banking system there would be a revolution before morning."

- Andrew Jackson

There are many more quotations that I could cite but I believe that these few quotes are already very clear. It is indeed a testament to the deception of paper money in the US, that the personal symbols we all admire are used to apparently endorse the paper money that they themselves so clearly denounced.

No surprise perhaps as this is the nature of paper money. The real underlying truth has to be disguised. As John Kenneth Galbraith once said “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.”   

Relevance today

The confusion and contradictions of paper money are just as alive and well today as they have ever been. They are no more clearly embodied than in Alan Greenspan himself. Indeed when you consider that he orchestrates the paper money system as nobody else ever has, it is remarkable what he stated some years ago as a private economist:

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.... Deficit spending is simply a scheme for the "hidden" confiscation of wealth.... [Gold] stands as a protector of property rights."

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

- Alan Greenspan

Perhaps it is because he understands the shortcomings of paper money that Greenspan has been so able to manage it, but even so he seems to have been able to promote and build on a system he was in principle clearly opposed to. Such is the foundation of our current system.

In terms of our financial decisions, though, the great quandary we face today is that although paper money has never survived in the long term, it is all most people know and it is now deeply entrenched in our society. It is therefore a system that will be defended and extended for as long as possible. In this sense we should not expect a sudden change. Then again the strains and contradictions are rising along with spectacular debt creation throughout the economy. With growing economic competition from emerging markets and an aging population with escalating entitlements it is very hard to see the system surviving in its current form in the long term. In a paper money system, politicians will end up debasing the currency sooner or later as it is always the easiest way out of problems, and fewer people seem to notice.

So in order to prosper financially we need to understand the existing system without forgetting about its shortcomings and be aware that in the long term we may need to be ready for a different system. This is quite a challenge, but as it will most likely be spread out over a period of several years, should be manageable, particularly if we have a good awareness of the nature of different monetary systems.

The main alternative to paper money is, of course, the gold. As Bernard Baruch said “Gold has worked down from Alexander's time...When something holds good for two thousand years, I do not believe it can be so because of prejudice or mistaken theory.”  Indeed the gold standard has been closely linked with successful civilizations throughout history and the principles are well understood. If you would like to review the arguments I would recommend “What has government done with our money?” by Murray N. Rothbard. 

The short argument for the gold standard is well put by Rep. Howard Buffett when he said: "The gold standard acted as a silent watchdog to prevent 'unlimited public spending.' Our finances will never be brought in order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion."

". . . when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty. Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom.”

Summary

As John Adams clearly understood many of today’s confusions, contradictions and excesses stem primarily from the paper money system that we have adopted. However, very few people make this connection.

Although our founding fathers are displayed on our paper currency this is not an endorsement by them. Indeed, the founding fathers were universally hostile to paper money and all that came with it.

Although, the current paper money system is deeply entrenched and will most likely be sustained for several more years, the markets may well transition well in advance, most likely towards the tried and true gold standard. Indeed as gold has recently broken out to multi-year highs in terms of Yen, Euros, and even the relatively strong dollar, it is likely that some people have already begun to make that choice.

 

 

 

 

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