COMMENTARY – Fiat money must be abolished

Almost all bank profits are unearned and result from fiat money. What services do commercial banks in the U.S. provide that add value to people’s lives? For the most part, they provide cheque clearing and act as intermediaries between savers and borrowers. But certainly these functions would not yield such colossal profits in a competitive market. In 1997, U.S.

banks reaped a US$60-billion windfall because of their ability to create fiat money.

About half of bank profits result from gambling, euphemistically called trading and derivative issuance, both of which are subsidized by the public.

Certain laws outline that ordinary taxpayers guarantee the banking system’s balance sheet. Their assets are guaranteed by the so-called “lender of last resort” bailout facility of the Federal Reserve, and their liabilities are guaranteed by the Federal Deposit Insurance Corporation (FDIC). No other sector enjoys these special privileges.

In addition to these direct subsidies, there are substantial indirect subsidies. For example, in the past two years, the International Monetary Fund (IMF) has transferred about US$185 billion of taxpayer money to foreigners so they could make good on debts owed to mostly U.S. banks. In addition, all of the agreements that the IMF signs with foreign nations are secret. Since the IMF is transferring public money, shouldn’t this documentation be public?

Parenthetically, these subsidies are not consistent with the free-market rhetoric that bankers use and would not be possible if we had gold as money.

What’s more, after-tax profits tell only a small part of the story. Bank executives enjoy multi-million-dollar salaries, perks, pensions and stock options.

The relevant calculation is bank revenues less interest expenses, or the amount of interest commercial banks pay depositors of money that they themselves created. Last year, that amount was nearly US$277 billion. To put this into perspective, the Federal Reserve spends only US$3 billion to clear all the cheques in the nation. What conceivable benefit is there to the public that the banking system should take in an additional US$274 billion? Increasing gold prices threaten the financial sector’s unearned profits. A link between gold and money would mean that the central bank and the FDIC could not implement the subsidies, and unearned profits would not be possible. Those who profit from the creation of fiat money understand this, and share an interest in suppressing gold.

In addition, gold is a dagger pointing at the heart of the banking system; this is because Wall Street, the media and academia use gold as a leading indicator of inflation. Money creation (bank credit expansion) and the profits that flow from it depend on low interest rates. An increase in the gold price would signal imminent inflation, initiating a chain of events that would be detrimental to the banking system.

Simply put, if the gold price goes up, the fiat-money-induced bonanza for commercial banks and Wall Street firms, which garner transaction fees on money creation and engage in subsidized gambling, will disappear.

In my view, this is what Federal Reserve Chairman Alan Greenspan was alluding to when he testified before the Senate last year that “central banks stand ready to lease gold in increasing quantities should the price rise.”

Either gold as money prevails or fiat money prevails — there is no possible compromise. Given the amounts at stake for commercial banks and Wall Street firms that profit from fiat money, it is not surprising that they have acted to hammer gold. The gold industry is in mortal combat with the banking system over the money issue. Its product is being denigrated, its market manipulated, and the industry is increasingly being driven out of business.

For the sake of ordinary people all over the world who depend on stable money for their pensions, savings and jobs, fair-minded people must ensure that gold wins. Fiat money is succeeding because of coercion, misrepresentation and nondisclosure. Because fiat money has proved a failure in so many countries, wiping out the pensions, savings and jobs of hundreds of millions, it is exceptionally vulnerable and absolutely can be defeated.

If the gold industry wants to remain in business and prosper, then fiat money must be attacked. There is no substitute course of action.

There is a closing window of opportunity to get behind the Fight for Honest Monetary Weights and Measures. The benefits to the gold industry, and particularly the mining industry, will be beyond imagination.

Moreover, there is a moral obligation to help mitigate the damage being perpetrated by fiat money upon ordinary people. By supporting the Fight for Honest Monetary Weights and Measures, the gold industry will not only help reduce suffering; it will bring into public view an appalling injustice. For myriad reasons, this is the right thing to do.

The preceding is the second of two columns outlining gold’s decline and solutions for its recovery. The author is the executive director of the Foundation for the Advancement of Monetary Education, based in New York, N.Y.