Sound Money and Limited Government

March 4, 2010

I’ve written a lot in this forum/blog/spleen-venter about “hard money,” or “sound money,” which are other ways to describe a currency backed by gold and silver. I usually link sound money to the prohibition of fractional reserve banking. That gives a one-two punch to government that it cannot overcome.

Yes, friends…if you truly want a limited government, you cannot allow the State to have anything to do with the money supply. States are filled with ne’er-do-wells and criminal types who like to steal from others and spend money that doesn’t belong to them. In order to wrap your government in unbreakable chains, the monetary system must be 100% tied to gold and silver within the free market.

Why? I thought you’d never ask…

Governments throughout history have issued coins as money. But governments throughout history have also debased their money in some way. At some point, some crafty government learned that they could steal from their subjects by counterfeiting the currency. They shaved the coins or clipped them (wonder why dimes and quarters have a milled edge? That was to prove they had not been shaved. So the US Mint still produces them that way, even though the coins are not silver, but only copper and nickel. Perpetuating a hoax…) Rex also issued them in alloys or just base metals. Then they learned how to create paper money…the paradise for thieves and charlatans.

Forget all that you learned about government money from childhood until now. Most of the stuff that any person still alive has learned about monetary policy is wrong. Actually, it’s not wrong in the sense of inaccuracy…it works exactly the way THE GOVERNMENT wants it to work. But it’s criminal counterfeiting writ large and hidden in plain sight. Let me show you how it works.

The Reasons For Taxation

Governments…let’s call them “Rex,” the Latin word for ruler of a kingdom… collect assets (through taxation) from their subjects to enrich Rex and pay for its existence and functions. But it’s difficult to collect assets without a medium of exchange, since storage would be a problem for a wide variety of assets stored. So, over time, precious metals became a medium of exchange. And in order for Rex to be able to encourage commerce, they issued precious metal coins as money. Human labor creates wealth, and it’s easier for Rex to tax wealth when money exists. So Rex’s treasury would take a portion of its precious metals and mint coins. They would place those coins out into the marketplace…usually through banks…so that people could use Rex’s coinage as legal tender for commerce. In essence, Rex was investing its assets in its citizens, expecting a return on its investment.

But there is a problem. There is a limit to any money supply. Consequently, there is a limit to the tax income available to Rex. Rex cannot confiscate all the wealth, because people would stop creating wealth. Rex could recall all of the coinage back to the treasury, but then the people can’t use the money to create any more wealth. If Rex wants to spend more than it can collect from its citizens, it can (a) borrow money, (b) go to war and plunder wealth if victorious, or (c) counterfeit the money supply.

By counterfeiting the currency, Rex can issue base metal coinage or paper money far in excess of the gold in Rex’s treasury. This practice waters down the buying power of the money. Rex counts on the fact that not everyone will simultaneously present their paper money at the treasury’s withdrawal window. But counterfeiting allows Rex to borrow money and pay it back with depreciated money, making suckers of the lenders. It also allows Rex to go to war and pay for the war with depreciated money, making the materiel suppliers and soldiers suckers also. When Rex changes the convertibility of the currency away from the precious metals in Rex’s treasury (like Nixon did in 1971), the money will eventually become practically worthless. It will only buy what a buyer and seller agree to on any given day. A loaf of bread could cost a dime, a dollar or $100, depending on the confidence in the money. Confidence is directly proportional to the amount of precious metal in the money. 100% gold equals 100% confidence. Zero % gold tends toward 0% confidence.

So instead of Rex being an investor in expectation of a rate of return, Rex becomes a predator on its citizens and their wealth. It’s the difference between a voluntary transaction and robbery. It’s the difference between having a law-abiding government and a criminal ruling looter mobocracy.

The only way to insure limited government is to wrest control of the money supply away from government and make the minting of coins in precious metals a private matter in the free market. If Rex does not have the ability to devalue and debase money, it will be forced to live within its means. It could still borrow money, and still use war and plunder, but it would be forced to do so within its budget and income or risk bankruptcy.

Banks and Fractional Reserve Banking

Ever since people have been using something as a medium of exchange in transactions, there have been moneychangers. They are persons who change one form of currency into another. For example, if you lived in Egypt 3000 years ago, and you traveled to Baghdad with your Egyptian coins, the merchants in Baghdad might not accept your money in a transaction. So you would take your money to a moneychanger. He would trade your money for Baghdad coinage, and charge you a fee for doing it.

Remember the New Testament story of the moneychangers that Jesus is said to have driven out of the temple just before Passover? There were Jews from all over the known world coming to the temple, and the priests had a good little business going in which they would only accept local coinage for offerings. So anybody from out of town had to visit the moneychangers or they couldn’t make their Passover offering. The moneychangers made a tidy profit off the penitent.

At some point, moneychangers started accepting coins as a deposit held in safe keeping. The moneychangers issued receipts for the coins, much like a bailee receipt (a “bailee” is a person with whom some article is left, usually pursuant to a contract, who is responsible for the safe return of the article to the owner when the contract is fulfilled). That’s just like what happens when you take your shirts to the cleaners and then take the ticket back to pick up your shirts.

Zoom forward in time to the 15th Century. This is the first time the word “bank” began to be used to describe moneychangers. The word came from the Old Italian word “banca” or the Middle French word “banque,” both meaning “table” (the moneylender’s exchange table).

At some point, people began to accept the moneychanger’s receipts as tender that could be used in transactions. Both parties knew that whoever held the receipt could present it at the moneychanger’s table (the bank), and he would receive the coins. The reason it worked is “redeemability”; the ability to redeem the receipt for hard money.

At some other point, bankers figured out that only a small percentage of depositors or receipt-holders were withdrawing their gold on a daily basis. So the bankers began lending a small portion of the stored gold at interest. Depositors could lend their gold to the bank for a time specific. The bank could lend out the gold at interest to be paid back before the underlying loan came due. If it all worked out, both the depositor and bank made interest on the loans. Peachy!

This system relied on the deposits in the bank’s safe. The system would work perfectly today, just like in olden days. But government got involved and began regulating banks. At some point, Rex told bankers that they had to maintain only a certain fractional percentage of assets in the safe. Over time, that percentage has dwindled to about 15% in 2010.

As the currency has been cut loose from any underlying precious metal, and convertibility has been ended, now bank vaults are stuffed with paper money and base metal coins.

That is Fractional Reserve Banking. Banks are able to make loans and issue other credit instruments out of thin air. Combine this practice of creating money from nothing with Rex’s practice of printing legal tender currency with no convertibility and you have the recipe for disaster and economic collapse.

In a world with honest bankers it would work this way. A person could start a bank by placing assets at loan for interest. It could offer a vault for safe keeping for depositors of hard money, issuing deposit (bailee) receipts. It could borrow hard money from investors and lend it at interest to others. Then, it could pay its expenses and hope for a profit. If it chose to do so, it could retain some profits and lend out some portion of those profits at interest. It could perform other services for customers and charge fees for the services. But it could not create credit from nothing. And if the bank did anything wrong, the criminal statutes would apply for embezzlement or fraud. Pretty simple, isn’t it?

Private Minting

The law of the land must permit the private minting of gold and silver coins as legal tender. Because legal tender relies upon the confidence of the user for its value, the mints would be encouraged by the free market to produce the finest coins. The mints would fully disclose the weight and fineness of their products and the coins would be judged in the court of the free market.

I used to think that government might have a useful function if it set the purity and weight of the coins in circulation. But I’ve had a recent change of heart. I now believe that government should be allowed no input whatsoever in monetary policy for a nation.

I used to think that Rex might just set the weight and fineness under the Weights and Standards. But then I considered small transactions. Gold coins are presently minted in various weights, the smallest being one-tenth ounce and one-twentieth ounce coins. These coins are very, very small. But with the price of gold above $1,100 an ounce, even a twentieth-ounce coin would be worth about $55.00 or higher.

What if you wanted to buy something for a 25 or 50 cents? Even a twentieth-ounce silver coin would be worth over 80 cents.

Having some larger coins, something approximating the coins presently used in the USA, would be advantageous for small transactions.

So, here is how the market could meet the demand for small coins down to one cent. The private mints could produce alloy coins. The alloy coins would have enough precious metal in them to equal the face amount value of the coin.

These coins, privately minted as legal tender, would be the size and value necessary to facilitate very small transactions and making change. And the mint would fully disclose the fineness of the coin, so any person holding those coins could redeem a quantity of them for a coin of higher purity.

Everybody wins, and the government has no influence whatsoever.

Electronic Currency

Electronic currency is a variant on private minting and banking. Place your gold and silver coins on deposit with the E-gold company. Then, you could use a debit card to make transactions against your account balance. This would facilitate the smallest transaction, even down to tenths of a cent, since gold and silver are weighed in grains.


The Government and its willing accomplices and shills, the banks, have created the most colossal bubble of all time, and the grandest worldwide swindle in human history. And, because human history can be studied to learn lessons, we know that no government in human history has debased its money and survived.

The United States of America is no different. Neither is any seceding state.

So my message today is for those who are interested in liberty in their lifetimes, or within the lifetimes of their children. My message is for those looking very seriously at state secession as the only true choice for liberty on the North American continent.

You must be 100% committed to sound money and the prohibition of fractional reserve banking if you have the slightest hope of success. Limited government cannot exist without sound money, and the existence of sound money must remain within the free market for its viability.

Secession is the hope for mankind. Who will be first?

DumpDC. Six Letters That Can Change History.

© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.