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When people are convinced
of the superiority of a gold standard system
– not too hard considering
its 500 years of
real-world success – they
then ask: how do we get there
from here?
In principle, it is easy. We
could have a world gold standard
system up and running in 24 hours.
It is just a matter of adjusting
the monetary base according
to a gold target, rather than a Keynesian interest rate target.
The Keynesian establishment, now
in control of central banks and academic
departments worldwide, just has to say: “OK, you were right and we were wrong.
Let’s go back to a gold standard system right
away.”
Doesn’t seem very likely, does it? Alas,
in the best practical scenario, we
are likely to have a tumultuous transition period, which is necessary
to shift the political consensus from one of “the present
system is good enough,”
to “anything but this!”
At present, the best
transition path that I see is for the introduction of parallel gold-linked currencies, circulating alongside today’s existing fiat currencies. This was proposed just recently by a conservative
portion of the Swiss parliament.
Also, it is the basic idea behind the “gold dinar” project
promoted by the Malaysian
government, which has
been in nascent operation
since 2004. We are already moving along this path.
There would be no need for a government to make some dramatic
decision. Just make the
option available and let people choose
for themselves.
By the end of next year,
I would like to see the introduction of gold-linked
paper currencies. The Swiss government, or a private organization with government endorsement, might make available for sale a
simple gold-linked banknote
denominated in a unit worth
perhaps one-thousandth of
an ounce of gold (or about $1.60 in U.S. dollars today). You could redeem a thousand
of them for a one-ounce
gold coin similar to a Krugerrand.
Ideally, you could trade your
fiat paper currencies for
these gold-linked currencies at any bank that
offers foreign exchange
services.
These gold-linked currencies would be totally voluntary,
and would trade alongside existing fiat currencies.
At first, they might seem like
mostly a precious metals investment product, a speculative
vehicle, sort of like trading paper shares in a gold ETF. However, they would be
legally treated as a currency, without any trading-related taxes.
The first impulse might be
just to store them in a shoebox, like
any gold coin. But, at some point, people might like to buy something
with this alternative currency. Or, possibly, they will demand
to get paid in the
alternative currency. They
can borrow and lend using the gold-linked currency of denomination, or simply use it as a basis for pricing goods and services. Banks can offer deposit and checking accounts for the new currency, just as they do with any currency.
Once the concept is proven,
a number of these currencies could emerge worldwide. Since they are all linked to gold, they would all trade at fixed exchange rates.
In time, there could emerge a worldwide “gold
bloc” of entities that
are using some form of gold-denominated currency. These would not be countries per se,
but more like a network of
private individuals and
corporations, who prefer
to do business in high-quality gold-linked currencies. As this “gold bloc” expands,
it becomes more
attractive because there
are more and more people who are ready to do business with a
gold-linked currency.
As more and more people voluntarily enter the “gold bloc,” they
withdraw from the the fiat-currency world. Thus, the demand for existing fiat currencies would decline, accelerating their decline in value in the face of general
neglect by central banks.
Soon it would dawn on a broad swath of the public worldwide that these fiat currencies are doomed, and they would rush to the network of gold-linked
currencies. The tipping
point is reached. Governments, especially those hundred-plus governments who today depend on some sort of dollar or euro link,
would see the writing on the wall and mandate
the use of gold-linked currencies
instead of the collapsing
major fiat currencies.
The issuers of the major fiat currencies
– the dollar, euro, pound and yen – would
probably try to hold on to their fiat currency empire as long as possible, but they would soon
become irrelevant as they effectively disappear.
And thus, without a
single academic debate, without any dramatic
government actions, by way
of a transition period determined
by the people themselves at
their own pace, the world
would dispose of the Keynesians
and their funny paper.
If you were given the choice, would you rather
do business in a gold-linked
currency or fiat paper locked in a spiral of decline? When people have actually been given this choice,
throughout history, they always choose
gold.
Nathan Lewis
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