Opinion of Alan Greenspan on Gold and Economic Freedom

Here is the opinion of Alan Greenspan about the gold and economic freedom. Alan Greenspan is the former governor of the Fed period from 1987 to 2006.

In his essay was originally known, entitled "Gold and Economic Freedom" deals with the gold when used as a currency / investment instruments can serve as a means to achieve economic independence, which is economic independence is the loss of the ability of government to take a forced some of the property wealth of its citizens in the form of excessive taxes and inflation caused by deficit spending policy.

Free translation of some excerpts from an essay written in italics.


Introduction

Gold Standard is a monetary system where the medium of exchange (money) that is used is supported by a number of gold deposits of the same. Money is essentially a claim for a valuable asset.

In the Gold Standard is a valuable asset in the form of gold. So that when the government printing money of Rp 1 trillion, and determined that 1 gram gold price is USD $ 1 million so the government issuing the currency must have gold reserves as much as 1 ton.

In this case, the government can not just print money for various purposes in the form of interest really useful for society or for the interests of the government itself.

Laissez-faire (derived from French that means "let it happen" is a kebjiakan which prohibited government interference in market economic activities.

In other words the government should not intervene to regulate the economy. It's up to whatever the market does, good or bad, beneficial for society or not, just government should not intervene.


"They (opponents of the gold standard) seems to judge that gold and economic freedom are two things that can not be separated, that the gold standard is an instrument of laissez-faire policy, and both (gold standard and laissez-faire) is the same meaning and need each other. To can understand the reasons for their opposition, it first needs to understand about the specific function of gold in a free society. "


Gold as a currency

"Money is a means for the implementation of all economic activity. Money is a commodity that serves as a medium of exchange (medium of exchange), accepted by all participants as a tool of economic activity pemabayaran on goods and services, and therefore can be used as a standard in the market pricing and as a store of wealth (store of value) is as a means of saving money. "

"Money could be the shape of gold, silver, shells, cattle or tobacco depends on the context and economic development. In fact, all of which mentioned above was once used as money in different period of time."


Banking System

Banking system without interest is a system that benefits the community as a means to solve the economic transactions in large numbers. Initially the banking using 100% reserve system where the number of loans issued does not exceed the amount of bank reserves.

Reserves are meant was a number of all existing public deposits in banks. But at this moment using Fractional Reserve Banking Banking where the bank only has an obligation to have a spare part, for example 10%, of the number of loans issued. With Fractional Reserve Banking is the bank has the ability to create money.

"If all goods and services paid for in gold, large payments to be difficult to implement and this tends to limit the development of the division of labor and specialization within a society.

Thus, as a logical continuation of the use of gold as money is dikembangkanlah a isntrumen banking system and credit (bank notes and deposits) which act as substitute for gold, but can be exchanged for gold. "

"While banks make loans on productive business activities and profitable, the bank loan repayment smoothly and as a result the bank loans will always be available.

But if business activities by the bank a little ddanai profits and repayment of debts choking the bankers soon realized that their loans outstanding exceeds the amount of the existing gold deposits, and bankers began to hold back in lending, usually by raising interest rates .

This will limit the discharge of bank loans for new business activities and requires that business activities already underway to increase its profits as a requirement to obtain additional bank loans. Thus, in the Gold Standard system, the banking system can function as a protector of stability and balanced growth of an economic activity. "


"A banking system truly free of government intervention and that is perfectly consistent with standard gold system has never existed. But before War I, America's banking system is based on gold and even though governments intervened occasionally, banking system is still virtually free.

Each period, due to the rapid credit expansion, the capacity of banks to provide the maximum loan is equal to the gold deposits, the bank's interest rate jumped up, new loans ekonomipun canceled and a sharp decline but short.

Was limited gold reserves that stopped the expansion of business activities that are not balanced, before the expansion has developed into a disaster as happened after World War I. Walked a short adjustment period and immediately put the economy back to a strong foundation for continued expansion. "

"But the healing process is one diagnosed as a disease: if shortage of bank gold reserves led to an economic downturn - so the argument proponents of economic intervention - why not find some way to supply additional reserves to banks so that banks will never reserve shortage.

If banks can provide loans forever - so they thought - then there would be no reduction in economic activity. And thus, the Federal Reserve System was established in 1913. "


Evidence of history: bad result from the abandonment of Gold Standard

"When in 1927 the business activities in the United States experienced a mild contraction, the Fed creates more reserves of paper (fiat money) in hopes of preventing the occurrence of bank reserve shortage. However, a more dangerous again is the Fed's efforts to help the British moved to the gold deposits Americans for the Bank of England refused to raise interest rates while the market wants.

The mind of the authorities involved at the time was: if the Fed to pump up the paper / paper reserve (fiat) that many of the American banks, interest rates in the U.S. will fall to a level comparable to that of England; this will result in cessation of movement of gold from England to America and the British government terhindarnya from shame at having to raise rates. "

Gold background English emigration to America was before World War I U.S. dollar to British pound is $ 1: £ 0.20. After the Dunai War I, the British wanted to return to the Gold Standard and at that time the dollar exchange rate to sterling has become a $ 1 = £ 0.23. This exchange rate decline due to inflation in the UK.

However, the British government wanted to return to the Gold Standard in the comparison condition of the dollar to soften pundsterling the same before the war that is 1: 0.20. This requires deflation / general decline in prices in the UK due to the price of export goods worth $ 1 which can be sold before the price should come down £ 0.23 to £ 0.20.

Market in order to accept this deflationary policy, bank interest rates in the UK should be increased so that if the bank interest rate rises and the money will go to the bank, as a result, the amount of money (claim) in circulation decreases, because the claims on goods and services reduced the price of any goods and services will fall.

Meanwhile, interest rates higher in America than in England. Because the interest rate in America's higher then the owner of gold in the UK moved to the U.S. gold in the bank for America to earn a higher interest rate.

"As a result, American economic collapse. England fared even worse and rather than face the consequences of his stupidity, instead leaving England in full Gold Standard in 1931, destroy the remnants of confidence and encourage banks fall all over the world. The world economy was in free fall into what the so-called Great Depression of 1930. "

"By the logic that will remind the older generation, advocates of the welfare state / welfare state argue that the Gold Standard most to blame for being the cause of excessive credit expansion, so there was the Great Depression.

Furthermore they argue if only English was never applied Gold Standard, the stopping of English make payment in gold will not cause the downfall of banks around the world. "

Welfare State

The concept of the State Welfare / Welfare State is the concept of a state where the state must take full responsibility for welfare guarantees. How to create social programs that help poor people. Source of funds for these programs comes from government income earned through the sale of natural wealth, tax levies and other levies.

To consider the concept of the welfare state is the way to collect funds and implementation of the distribution of these funds in order not to place fraud in the collection and distribution of funds will only benefit certain groups.

"Without academic jargon, the welfare state / welfare state is nothing more than a mechanism by which the government forcibly taking property productive members of society to support a variety of welfare schemes. The greatest part of the decision is forced through taxation.

However, supporters of welfare state can quickly recognize that if they want to retain political power, the amount of tax that is taken must be limited so they must create new ways of deficit spending programs on a large scale, by way of borrowing money by issuing government bonds, for welfare programs financed expenditures in large scale. "


"By applying the Gold Standard, the number of credits that can be supported is determined by the amount of intangible assets / tangible assets owned, because basically every credit instrument is a claim for tangible assets. However, government bonds are not backed by tangible assets, only supported by the government's promise to pay from the results of future tax revenues, and these bonds can not be easily swallowed by the financial markets.

The new government bonds issued can only be sold to the public in the interest rate is higher. Thus, deficit spending by the government in the Gold Standard system is very, very limited. "

"Termination of Gold Standard allows the application of welfare state advocates to use the banking system as a means of credit expansion without limit. Were created paper reserve in government bonds that after going through several complex steps banks accept them as tangible assets and treat as actual savings deposits is the same as that used of gold deposits.

Holders of government bonds or bank deposit created by paper reserve was finally convinced that he has a legitimate claim on real assets. But the fact now there are more outstanding than Kalim real assets that are available. "


Inflation

The correct definition of inflation is increasing the money supply in the community resulting in general price increases. However, the current definition of inflation growing and the most frequently cited is the rising prices of goods and services in general, whereas the price increase is the effect of increasing the money supply in the community.

Therefore, today there are two kinds of definition of inflation is monetary inflation increase the money supply and price inflation is rising prices of goods and services in general.

"The law of supply and demand is not for the game. Along with the increased supply of money / claims are not accompanied by the addition of asset supply, prices must eventually rise.

Thus the earnings saved by the productive members of society down in value. "

"Without a Gold Standard, there is no way to protect savings from making forced through inflation."

Conclusion

"Deficit spending is simply forced wealth-making scheme. Golden prevent this evil process. Gold stands as a protector of property rights. When people understand this, are not difficult to understand the antagonism against the Gold Standard."

Source: Writing Dadang Farhan's father Facebook Group: Gold Investment for the Future Gold