I don't agree with this. A gold coin is debt free money. A paper note, whether backed by gold, some other commodity, land, a government promise to ensure value through use of force, or anything else for that matter is money backed by a promise to pay - i.e. debt.
Debt money naturally arises from fractional reserve banking (which is by definition the creation of debt notes beyond the underlying quantity of money) and initially causes price increases as the quantity of money (now including this debt money) in circulation increases. The effect of allowing banks to create money this way is to transfer wealth to the creators of the money as they get to buy goods at the prevailing price before the money is created, and as the money circulates the price of the acquired goods then rises so it is worth more than the debt incurred to create the money to originally purchase the good. In other words this is simply a subtle mechanism for theft.
The charging of interest by the federal reserve bank is red herring. Yes they repay the interest - but they don't need the interest in order to make money - they make money purely through the process of money creation and consequent asset inflation.
The problem with all this from the banks' perspective is that the system I have described is naturally an oscillating system. That is, after a period of expansion there will be a period of contraction, during which time the process works in reverse and banks lose money. It is for this reason, that banks have had to ensure that the politicians create a legal structure which allows them to hang on to their ill gotten gains.
Firstly corporations must be legalized to shield bankers from their obligations. This allow bankers to pay themselves during the expansion stage, and having paid themselves all the artifical "profits", they are sheltered by the law from making good on the debts when the bank goes bust.
Secondly, regulation and licensing must make it very difficult for most people to print money. Only the special interests can be allowed access to this tool.
Thirdly politicians must directly intervene to protect banks from failing either by bailing them out, or allowing them to default on their obligations (e.g. suspension of payment in specie) until another round of inflation can be generated.
Fourthly, the mechanics of how all this works must be hidden from observation so people don't get angry.
There are additional issues with our current system that make it even worse than gold backed government debt money, but they are incidental to my main point.
So the problem with debt money is not that the government pays interest to the federal reserve bank - it doesn't - or rather all that money is repaid by the fed as has been noted here. It is that the business cycle inherent in fractional reserve banking, together with the political environment that has been created around the banking system, acts to transfer money to those special interests who have managed to acquire banking licenses.
Well that's a pretty big difference isn't it? Money serves three basic purposes.
1. Unit of exchange.
2. Store of value.
3. Unit of account.
In order to serve as a store of value it is important that whatever is used as money is not subject to arbitrary increases in supply. Government money fails this test. Any government money fails this test, but government gold is much harder for governments to manipulate than government paper, precisely because it is much harder for goverments to create more of it - so government gold is better than government paper, but free market money is better than either - because the free market will naturally choose whatever commodity best fits the purpose.
Money will naturally evolve from a free market - it does not require government intervention for people to freely select one or more commodities to use as money. Historically they have usually chosen precious metals when and where they were available - because these substances best provide the essential qualities that money needs to be useful (per Aristotle: durability, fungibility, portability and intrinsic value, where it is the last that encapsulates the problem of government assigned value to a coomonly available underlying commodity). Other commodities have also been used as money in different places and times (corn, whiskey, cattle, cigarettes, sardine cans, seashells), and gold may not always be the best money. Cerainly if science discovered a way to create gold cheaply from some other more common metal (e.g. lead - the legendary alchemist's dream) then it would likely cease to be used as money.
For your friend who wants to know why gold is more useful than paper as money, there are three approaches you might use to make him think (I doubt you'll convince him in the first discussion).
The one I use on my children is to invite them to play a game of monopoly. I tell them I will be the banker and we will make one rule change - that I am allowed to print as much money as I like. Even my five year old understands what will happen - and it illustrates very clearly the problem of paper money - if someone gets to make a lot of it, they get to own everything. From my perspective there is no difference between me jumping over your orchard wall and stealing five apples and me disappearing into my basement, printing some dollars and buying your apples - except that I am less likely to get caught because instead of robbing one person, my counterfeiting has socialized the loss across the entire population of money users who each bear an almost imperceptible cost, most of whom never see me or my crime.
You could ask your friend whether he believes in free markets and why they are better than regulated markets. then ask him why he feels that the same arguments don't apply to money. Obviously if your friend doesn't believe in free markets then this isn't going to work, but then I think you are also starting in the wrong place. If somebody does not understand and believe in freedom in general, then you will never convince them that free money is a good idea. You need to convince them of the value of freedom and free markets in general first.
You might also ask him whether, if he possessed an ounce of gold, whether he would be willing to swap it for a quantity of paper equal in size and weight to eighteen hundred dollar bills. If he declines, point out to him that he is making a value judgment about which good he'd rather have and ask him why he assigns more value to the gold. Then ask him what he uses money for - prompt him if necessary to get the store value answer - saving for a rainy day or something similar. Then ask him which has a better track record of storing value over the last 1,000 years - gold (which has never failed) or paper money which has failed hundreds of times... But you should also admit that in this modern day and age - their might be better alternatives than gold. Perhaps bitcoins - although I personally doubt it. We will never know without a free market to choose.
Above all you need to read, read and read more. I could give you a long list of authors - and you should read widely - it's interesting for one. But if you are short on time - then just stick to Rothbard. He explains everything you need to know and he explains it more clearly than anybody else I have read. You could start with "What has Government Done to Our Money?". "The Ethics of Liberty" is also a great read, although only tangentially related to the monetary topic. The other books I have read which most influenced my early opinions and helped ready me for further reading were Bastiat's "The Law" and Ayn Rand's "Philosophy who needs it?" - although again not directly related to the topic at hand..
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Originally Posted by The Gold Standard
