If you’re been following us for any time you’re likely wondering, “What cons could he be talking about?” While we maintain that the pros overwhelm the cons, there is still the monumental challenge of how to get there from here.
It’s not a simple matter of saying, “Okay, buy new gold coins with your old fiat dollars.” There’s not enough gold in the U.S. coffers to do so. The only way that would work is if massive amounts of dollars were taken out of circulation so that the dollar value matched the gold reserves. Otherwise, a gold purchasing campaign would have to be launched in an effort to accumulate enough gold to match the number of dollars in circulation.
Of course, silver could be used too. But at what value? With silver trading around 1/53rd the price of gold, the ratio is severely lopsided; especially in light of supply. However, a campaign to purchase vast amounts of silver in order to establish a hard asset standard in the U.S. would certainly drive the price higher, offering an opportunity for a more historically consistent ratio of 15-20/1.
Another problem is simply the designation of the dollar. Why bother with using the term, “dollar”? As many approach this subject they attempt to figure out how to make a monetary standard that deals in dollars. To do so, you need consistent prices in whatever asset the dollar is pegged to. If it’s only one asset, then it simply moves with that asset. But if we had gold and silver coins, then any shift in the value ratio would cause distortions in the dollar value. Simply put, it’d be a mess.
One possible solution is a mixed asset bag, where a certain percentage of the value is tied to certain assets. Again, we run into some challenges. They’re not insurmountable, but certainly challenging. For instance, you cannot put a value percentage on the currency according to the asset. If we say the dollar is valued at 50% silver and 50% gold this year, then the ratio changes by 25% next year, how do we figure out the value?
For instance, assume a new currency unit is worth $100, half silver and half gold. If gold rises from $1000 dollars to $2000 as silver rises from $25 to $100, the balance shifts. Now the same amount of silver in that currency unit is worth twice as much as the original amount of gold. For such a currency to work, it would have to be weighted. Such weighting would need to be monitored constantly as the value would shift according to supply and demand in each weighted asset.
But there’s still something that’s not being considered in this thought process. Much of the reason we see such great shifts in the values of so many asset classes is because of the shifting value of fiat currencies. But if we had no fiat currencies and assets themselves were traded as money, what would be our reference point?
In a way it’s funny, because we have such a hard time thinking outside the bounds of fiat dollars. We price everything in terms of dollars. Even in my illustration above we priced the hypothetical currency assets denominated by dollars. We’ve been brainwashed into thinking in terms of an empty promise. How will we possibly think when that promise bursts, as all fiat promises eventually do?
This is what brings us to the “pros” side of the discussion. If we learn to think in terms of real value in association with particular assets, then we are no longer tossed to and fro by every breeze coming out of New York or Washington D.C. Instead we become grounded in thinking in terms of real value.
When it comes to this, I really don’t care if it’s gold, copper, silver, platinum, palladium or any other base metal. For obvious reasons of value, limited availability, durability, divisibility and portability, metals make the best currencies, so we maintain that standard. But we can learn to think in terms of any, or even all, of them.
This is where we need to depart from a dollar denomination. Rather than issuing a $100 gold piece and a silver dollar, why not simply designate them by weight? Then the mint could issue 1oz, ½oz, ¼oz and 1/10oz coins in both gold and silver. Furthermore, less valuable metals such as nickel or copper could be used in similar fashion.
After a generation we would adapt and learn to think in terms of the value of each asset and trade accordingly. Transportation of wealth could be done in the more valuable assets (or by simply electronically transferring holdings from one vault to another). And any shifts in markets would automatically be priced into assets, regardless of how their ratios shifted in relation to one another.
No more wild swings based on central bank generated inflation or even deflation. The assets would move with the markets, often negating much of the larger moves. In such a scenario the markets could once again return to moving with the real and natural forces of supply and demand. Inflation and deflation would still occur, but would be absorbed into the system and adjustments made in the short term, rather than kicking cans down the road of inflation until the road ends and all collapses.
Now the question, “Is it possible that any of this will ever happen?” It’s a good question for us to ponder tomorrow.
For your prosperity,
J. Keith Johnson
The Gold Informant