June 29, 2010

Frequently Asked Questions

Filed under: Uncategorized — admin @ 2:50 pm

Q: I’m not a financial person, however I save and study ALL of your excellent articles. Please explain in layman’s terms the meaning of “Gold is not someone else’s liability”. If I have 10,000 in currency why is that also NOT someones else’s liability? A simple explanation will get the cobwebs out of my head. Thank you. Ted Sylwester

A: Hi Ted,
I am happy to answer to your question, why gold is not someone else’s liability while paper money or ‘currency’ as you put is someone’s liability. In the US currency, that is US Dollar bills, is issued by the Federal Reserve Bank. All money the Fed issues is recorded in its books, in the liabilities column. To balance this liability, the Fed holds equivalent Treasury bonds or other debt in the asset column. Thus the books of the Fed always balance… The way it works is the Treasury sells a bond to the Fed, and the Fed creates the money to pay for the bond… and the transaction is duly recorded. Then the Treasury uses this newly created money to fund US government deficit spending. Today, the Fed is also buying debt from other less secure sources than the US treasury, but the creation of money process is the same… the Fed creates money to buy commercial paper, then keeps the paper in the assets column… while the newly created money is recorded in the liabilities column.

The same holds for any other country that uses fiat or paper money (today they all do!); some entity issues the notes, and this entity is liable for their value. Of course, in previous times gold was used to back paper currency, at least in a fractional sense, that is every dollar bill issued by the Fed had 25 cents worth of gold behind it… in the Fed vault. This meant that one could redeem the dollar bills in gold… the ultimate money. Clearly gold is not issued by any bank or any other financial entity. Gold cannot be ‘created’… it must be dug out of the bowels of the earth, refined, then struck into coins or cast into bars.

The problem is that the treasury bonds that ‘back’ the US dollar are simply more paper, that is IOU’s… that is, promises to pay, backed by the ‘full faith and credit’ of the US government. When this faith is broken, as is happening now, there is seen to be nothing of true value backing the dollar; if there was gold behind it, there would be no loss of faith, and so no financial crisis. In effect, the ability of the US to pay the interest on the bonds it has issued is being questioned. In fact, today the US treasury borrows money just to pay interest on its outstanding debt… not a good thing, this is called a Ponzi scheme.

Worse than all this, however, is the unfortunate fact that the Treasury bonds can actually never be repaid; remember, the bonds are used to back the Federal Reserve Notes, that is US dollars; if the bonds were actually paid back, the dollars created to buy them would have to disappear! This is the dreaded deflationary crash, as money (currency) vanishes. Contrarily, gold never vanishes; just as Gold is not created, it will not vanish; surely no one will take gold and stuff it back in the mines it came from!

The mission of The Gold Standard Institute is to bring these fact to public attention, and to promote an unadulterated gold standard as the basis of world finance. An unadulterated gold standard has no borrowed or ‘printed’ money at all, only money 100% backed by gold or silver, or by Real Bills that mature into gold in not more than 91 days. An unadulterated gold standards does not allow for politically motivated manipulation of the money supply… thus it preempts credit cycles, eliminating booms and busts… the so called ‘business cycle’.

Follow-up note from: Ted Sylwester

Dear Mr Fritsch; WOW, WOW !!!! What a terrific and clear answer. You have removed the cobwebs from my head relative to this subject. Thank you very much. I’m printing-out your reply to me, making copies of it and giving it to friends who often ask me about gold verses fiat money. I have printed out most of Professor Fekete’s articles and re-read them frequently.

Sincerely, Ted Sylwester

No Comments

No comments yet.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.

Powered by WordPress