EFFECTS OF TRANSITIONING TO A FULL RESERVE GOLD BANKING
As you can see, there are many recommendations and/or suggestion how to switch from a fiat money system into a 100% gold money system. These are just two them. The problems created by such a tectonic shift would be gigantic, and new and creative ways to deal with them would have to be devised. But not everything is bad news; some are mixed, some good and then we have the prize: a stable and prosperous economy for all.
Issues
Foreign debts. As the exchange ratios are upset by the new gold system, some countries will find themselves much better off than others. Many investors in such debts may find themselves immensely poorer than before. Would debts be re-calibrated to the new exchange ratios? Would they retain their old ratios between currencies? How will this impact debt repayment? This is not clear at all.
Bankrupt countries. Whichever foreign debt arrangement is finally arrived at, many countries will simply be unable to face even interest payments on debts. They will be instantly bankrupt. In principle, this would seem as a catastrophe, but it is not. The concept of zombie-countries is a recent one. Up to WWII countries went bankrupt all the time without any major consequences. Creditors were partially paid off from government properties, debts were erased and life went on. Average recovery time? A few years (think 2 to 10). Governments going bankrupt would actually be a gigantic benefit for most of the under-developed ones (the vast majority of countries in the world) since it would finally! relieve them from paying ridiculous loans that were incurred by either corrupt politicians or dictators. People in those countries will finally! be able to reconstruct their lives.
Banking. Banks will be one of the most severely impacted sectors. This will be so for two main reasons: loss of inflation capability and de-regulation. Banks will not only be unable to inflate to lend but they will be facing new, renewed and dynamic competition from new arrivals. This will produce a Scottish-like effect which will only benefit customers and honest bankers.
First transitioned country. We also have the issue of Gresham’s law which states that “bad money drives out good”. If the switch is performed by one country at the time, the country that goes first will find itself out of gold very quickly. Redeemable notes will be traded with fiat currencies from other countries. Most foreigners will exchange these currencies for redeemable notes and hoard gold. Gold will leave the country by the metric ton. This will create a true liquidity problem, precipitating an economic recession and forcing people to use foreign fiat notes for commerce.
Psychological issues. People have been brainwashed for so long into thinking that money is what it is printed on the note instead of the weight in gold it represents, that people may not get used to the new way of thinking, preferring fiat over gold (at least in the beginning). The events in Somalia proved this point as people continued to use fiat money instead of reverting to gold.
Vested interests. Such a gigantic move into hard currency will inevitably upset a large number of vested interests (i.e. friends of Central Banks and governments), which stand to lose all their ill-gotten privileges. They won’t accept a 100% gold standard without a fierce battle in all fronts. Always remember, cui bono? (who benefits?).
Derivatives. To a degree, derivatives depend on volatility which is caused in significant part by fiat money booms and busts. Remove all these fiat-based volatility factors and a great deal of money is released from these speculations with no place to go… other than real investments!
Government bonds. They are simply devices to allow for budget spending beyond normal means. Borrow and spend. These bonds have another deleterious effect: they remove money from the market. Money that would normally go into productive investments, it is lent to the government for political spending. A full reserve system would in practice end this process since now governments would be expected to pay in full in non-counterfeitable money. If governments want loans, they will need to demonstrate they can pay them back. If they cannot do this to the satisfaction of lenders, then they will either not lend or raise interest rates exorbitantingly (with the same effect).
Real Estate. As the real estate prices are fueled by two elements: desire to protect against inflation and ultra-low interest rates, in the event of a transition they would both change. As inflation will become zero, there will be no interest into real estate on this account. However, in terms of interest rates on mortgages, these would probably go up from current ridiculous levels. It is anybody’s guess which one of these two tendencies will win in the beginning. However, over time, as the economy restarts on a sound footing and higher employment takes hold, we fully expect that the combination of stable money and relative low interest rates will allow for a booming real estate market, critically without their notorious boom and bust cycles.
Exports. Due to the significant amount of rules, regulations, subsidies, and import barriers, exports will suffer an upheaval until a new status-quo is achieved. Subsidies will be gone due to lack of budget. Rules and regulations will probably be lessened to foster exports and so increase tax revenue. Import barriers may even be raised creating temporary trading wars. However, as time goes by and prices begin to reflect true costs and profits; exports (and imports) will stabilize. Eventually, they will become irrelevant because of the increase pressure of using money for investing as opposed to speculation. Investing means increasing market share and this means exports.
Agriculture. Today agriculture throughout the world is in either two situations. It is either being exploited by governments through taxation due to budgetary issues or it is heavily subsidized by governments because of political issues. In the event of a transition, all subsidies will most likely disappear for lack of budget. As governments struggle for more taxes this will affect the other half. This means that all farming will find itself in hardship. Farming will stop in many places and will be moved to cheaper lands and lower taxation levels. Until this transition is complete, commodity prices will rise. However, once the transition is complete, a new farming process will take hold. One that is fully independent from government subsidies and can take full advantage of real commodity prices. Once this happens, commodity prices will begin their inevitable decrease.
Large Industries. The few subsidized ones will be hard hit once the subsidies are removed for lack of budget. However, the remaining industries will benefit because long term interest rates in bond will oscillate between 3 to 5% for very long periods (think loans to 100+ years!). Compare these values today with bonds to 5 years oscillating anywhere between 5 to 50%!! (depending which country you look into). Furthermore, these industries will benefit from a migration of money from speculative investments no longer functioning to plain investments.
Small companies and business. As money is released from no-longer-profitable speculative endeavors, it will turn into investing into small companies and business. Furthermore, a great deal of money now released from government bonds, will be available for investments. In part the so-called underground economy will become mainstream since their reasons to exist are inflation and taxation. The former will disappear and the latter will be severely restricted.
And so on. There are just some of the many, many issues that economies world-wide would experience.
The days where we could just flip a switch and become 100% gold-based overnight are gone. Things are too complex now to prevent a significant amount of pain. This fact needs to be absolutely clear. However, we must also make absolutely clear that past the conversion point, it is all benefits for everybody.
The issue is not that we can’t do it. Of course! we can. The question is will they let us? We don’t control our own destiny; they do. And as they do, why would they willingly cancel a system that benefits them? They would not. It is up to us to take our freedoms back!
The Prize
Is it worth it? As humans we shun change. We don’t like unknowns. This is hard-coded in our DNA. And so. Is it worth it? In a word, YES!
Or, if you prefer the long answer, definitively, positively, absolutely, terminally, conclusively and with extreme prejudice, YES!
After the transition we are looking at a new age of prosperity, high real economic growth, low levels of unemployment, no inflation, no booms and busts, confidence in the economy, gently falling prices, sound savings and investments, extended peace (minimum or no wars) and highly curtailed government intrusion in our lives.
In summary, Full Reserve Gold Banking would bring peace, prosperity and severely diminished governments; what more can you ask? All for the small, small price of a few months (maybe a year) worth of economic upheaval.
CONCLUSION
We have taken you through a journey of the possible. It was short and bumpy but it didn’t even scratch the surface of this issue. To be modestly thorough we would have to write a 20 or 30 volume index just to list all the truths, half-truths and silly arguments that over time had been said about gold as money. We don’t have that kind of time, and we are also sure you don’t have either. Our purpose is to make you aware that contrary to what the mainstream economic and political brainwashing machines are doling out day and night, there is better option and no, it is not a “barbarous relic”; it is just old gold plain and simple. It is now time to make up your mind. Make it a golden one… or a fiat one. Your choice.
Note: please see the Glossary if you are unfamiliar with certain words.
