The Dual Economy
In this chapter, we are going to look into the future and see what the world will be like under a system of legal and enforceable gold clause contracts. At first, everything will be the same, at least on the surface. When you go to the store, you will pay for your purchases in Federal Reserve notes. If you tried to pay in gold, the clerk would probably turn you down.
1. Retirement in Old Age
Where the gold coin will enter the economy will be in the area where it serves people's interests in the most important way. This is the area of long term contracts, most especially your pension or retirement fund.1
People who planned for retirement in 1932 were quite happy to provide for an income of $1,500 per year (for a single person). In 1960, it was considered adequate if you had an income of $4,500 per year. In 1995, one should expect closer to $20,000 per year. By 2010, the figure may be $40,000-$50,000. And by 2045, a modest retirement may require $500,000 per year.2
After he has done these calculations, the working American faces a serious problem. A young man beginning his working life cannot possibly earn enough to contribute a drop in the bucket toward a retirement income of $500,000 per year. Add to this the difficulty of even knowing just what goal you should be trying to meet, the general uncertainty of the future and the fact that no person knows his life span, and even with an exceptional knowledge of economics, one is sorely tempted to throw up the problem and submit to becoming a ward of the state. Except, the source of the problem is that the state is taking your earnings by means of force and fraud and giving them to the banker and his friends. Of course, if you prefer, you can always depend on social security.3
Investing at high interest rates will not solve this problem. Even though nominal interest rates get very high while the currency is depreciating, they do not get high enough to compensate. Almost everyone who has received interest over the past 50 years finds that all his accumulated interest has done is to keep pace with the depreciation of the currency.4 His buying power is the same as when he put the money away, and he has been cheated out of his true interest. Similarly, owning gold will not solve this problem. The gold will maintain its value, but it does not pay interest. Again the saver is cheated out of his interest. And slightly more than 3 1/2% interest over 40 years will quadruple your money.
There has been a substantial movement in this country since gold ownership was legalized advocating self protection via ownership of gold bullion and gold coins. Harry Browne. the leader of this movement, is an intelligent man and a good economist. Unlike the left-Keynesians and the supply siders, his disciples are sincere, and their errors, when made, are honest mistakes. But they are up against the above fact: storing gold forgoes interest. It falls into the trap set by Keynes — to deny the saver the return on his capital. In arguing that this was the least harmful alternative, followers of Browne have tried to argue that the currency would depreciate at a higher rate than prevailing interest. They thus become too alarmist and project a gloom and doom attitude which does no good for the sound money movement.
But lending gold, via the coin, will solve the problem. The price of gold will keep pace with the cost of living. Or, to put it more accurately, as the value of the paper currency depreciates with respect to all goods and services, it will also depreciate with respect to gold. 50 ounces of gold, which exchanged for almost 1000 dollars in Federal Reserve notes in March of 1933 and 20,000 dollars in Federal Reserve notes in l995 will exchange for (approximately) 40,000 Federal Reserve notes in 2005-2010 and be in the 500,000 dollar range by mid-century.5
To illustrate the principles, consider a man who invested 1000 dollars of savings into paper money bonds in 1976 at current interest rates near 7%. In 1986 this was worth 1965 paper dollars, which had the buying power of 1022 1976 dollars.6 If he bought gold in 1976 his 1000 dollars were exchanged for 8 ounces, which was worth $3200 in 1986, which in turn had the buying power of 1664 1976 dollars.6 But if he had been able to purchase an 8 ounce, 10 year gold clause bond at 4% interest, then in ‘86 he would have had 11.8 ounces of gold worth 4720 1986 dollars, which had the buying power of 2454 1976 dollars.6
|1000 dollars invested in 1976||1986 value in current dollars||1986 value in 1976 dollars|
|in paper money bonds
in owning gold coins or bullion
in a gold clause bond @4%
This study is a bit favorable to gold ownership. In a more typical period from the past half century, owning gold without interest would just about equal investing in paper money bonds (T-bills)8 without taxes. Both preserve your capital but deny you the interest.
Most elderly Americans today commit a tragic error in their retirement plans. They intend to invest their life savings and live off the interest. $100,000 capital invested at 1976 rates of 7% yielded $7,000/year income. The same capital at 1995 interest rates also yielded $7,000/year income, but in real terms this was less than half as much. This is because the $100,000 capital in real terms had shrunk to $40,000 by 1995.
These elderly Americans are being deceived by the money illusion. They assume that $100,000 in 1976 is $100,000 in 1995. But in fact it will buy less than half as much. They have done something which they never would have done consciously and intentionally. They have failed to understand the concept of depreciation of the currency, and consequently they have consumed a large portion of their capital.
But a gold clause investor has it better. A person of modest income can save 6 ounces of gold per year (representing 2 months income for a secretary). Over a 50 year working lifetime lent out in gold clause bonds at a gold interest rate of 4%, this compounds to 950 ounces upon retirement (see table). Invested again at 4%, this yields a retirement income of 38 ounces per year (about $15,000 in 1995). If the same person merely accumulated gold, as per Browne, he or she would accumulate less than 300 ounces (6 oz./yr. times 50 years minus storage charges). Even if this 300 ounces were invested in gold clause bonds at 4% after retirement (which Browne does not recommend), this would yield a retirement income of about 12 ounces/year ($4,800 in 1995), and this is not an acceptable income.
|Years||3 percent||4 percent||5 percent|
So (honest) money invested at 3% over a working lifetime multiplies by over 4, invested at 4% over a working lifetime multiplies by over 7, and invested at 5% over a working lifetime multiplies by more than 11.
|Years||3 percent||4 percent||5 percent|
So a person who saves an amount of gold for each year over his working lifetime can retire, if at 3%, with over 100 times that amount, if at 4%, with over 150 times that amount and if at 5%, with over 200 times that amount.
Thus you will be able to meet the problem of saving for your retirement by having your retirement fund invested, not in dollar bonds, but in gold denominated bonds, bonds which yield interest and which are payable in a quantity of gold. That is to say, you will be able to provide for your safe retirement by writing a gold clause, and this will be safer than the paper money clause which now exists (by default) in your retirement provisions.
By now you should get the picture. Under the dual economy it is not any particular advantage for you to pay in gold. But it is in your vital interest to insist, especially in long term contracts, that the other fellow pay gold to you. Otherwise you are being cheated.
One of the characteristics which makes gold into the best money is its long term stability of value. This has been proven over centuries and is based on supply and demand — factors which are not likely to change. People tend not to throw gold away. Thus the world's supply of gold today is approximately all of the gold mined ever since the time of King Solomon. Against this hoard, the total production of all of the mines in the world for next year is only a drop in the bucket. Even if some calamity should close them all, it would not make much difference in the supply. As for demand, as gold becomes money the demand for it will become more stable. Nothing is more stable than money because it is demanded by so many people. These two factors will ensure the stability of our new gold coin as they have gold money in the past.
During the 1970s, gold was not stable. The reason is that from 1935 to 1971 the U.S. Government tried to price control it. They kept it absurdly low. From 1933 to 1970, gold only advanced 75% in price even though the average commodity advanced 200%. In 1971, when it was set free, gold had a lot of making up to do; so it put on a dramatic advance.
When a good has a strong rise, the rise usually develops a momentum of its own. People buy it on the greater fool theory, and it becomes overvalued. This is what happened to gold in 1979, with Bunker Hunt acting as the greatest fool.9 Being overvalued, it had to fall.10
To get an idea of what the price of gold should be, remember that under the traditional gold standard, which valued gold at $20.67 per ounce, basic wholesale prices remained stable for a century and a half. Since these prices are now almost 20 times as high, it is reasonable to expect that gold too should be 20 times as high, or approximately 400 dollars an ounce (in mid-1990s dollars). When gold moves above this (continually rising) figure, we might wish to back away from it. When it moves below it, we can buy with confidence.
But what is important to note is that the gold coin is the only way you can save for your old age in our present economy. In the most fundamental sense, paper money is a privilege for the bankers which gives them unearned wealth. That wealth comes from anyone who accepts their money, and the only defense against being exploited is not to accept it at all. Indexing wages won’t work; seeking higher interest rates won t work; IRA's won t work; owning gold won’t work, and social security won’t work. Nothing will work which leaves you being paid in terms of paper money for the simple reason that, whatever system you devise (such as indexing or high interest rates), the bankers will simply turn the paper money screw a bit faster to make up for it. If workers get accustomed to a 5% annual increase in prices and demand 5% annual pay increases, then the big corporations scream about cost push inflation and demand more stimulation of “the economy” (i.e., themselves). Then the Federal Reserve and the commercial bankers increase the rate of paper money expansion, and the workers find prices going up by 10% a year. The same is true for savers, social security recipients, holders of insurance, etc. There is no protection from the bankers so long as you are accepting their money. The only solution is to demand gold.
2. Gold Checking Accounts
By denominating your bond in a weight of gold, you are using gold as a unit of account. This is its first use as money. Some of these contracts may be settled by payment of the paper money equivalent of the gold. But some of them will be settled by payment of the actual gold. Thus, it will be in your interest, after you have made a gold clause for your pension, to set up a gold checking account so you can receive gold payments. This would be nothing more than a checking account, very much like the one you currently have, in which the bank keeps gold instead of Federal Reserve notes on deposit. Of course, you should be careful to ascertain that, unlike the 17th century goldsmith-bankers, the bank you select has all of the gold it is promising to pay out on demand and is a true warehouse for money. Anything else would be starting the same fraud all over again.
3. Small Change
Under the traditional gold standard, there was a problem in making change. A gold coin small enough to buy a loaf of bread would be too small to handle properly. It would slip through your fingers and get lost. For this reason, silver and copper were used for smaller denominations. This created the problem of bimetalism, which repeatedly plagued American politics in the 19th century. Fortunately, technology has solved this problem by making it possible to deposit a thin layer of gold in a plastic container, thus allowing gold coins of very small value. Alternatively, private enterprise might issue (100% backed) redeemable gold certificates. There might be a 1/100 oz. certificate, 100 of which redeem for a one ounce coin and one of which would buy a deli sandwich,and a 1/1000 oz. certificate, 10 of which exchange for a 1/100 oz. certificate and two of which would buy your morning paper, etc.
4. Buying a Home
Savings banks and savings and loan companies (thrift institutions) suffered a terrible shock in 1980-82 when they experienced first hand the Austrian Theory prediction of an accelerating paper money expansion and rising nominal interest rates. The problem with their business is that they lend money for long periods of time (20 or 30 year mortgages) and borrow it for short periods (90 days). So when interest rates go up, they are stuck with loans on the books paying the low rates of 20-30 years ago but find that to attract deposits they must themselves pay the high rates of today. When this contradiction hit the thrift industry in 1981-82, many of the institutions went under.
Instead of supporting hard money the thrifts tried to jump on the paper money bandwagon. They received similar paper money powers to the commercial banks and went on a binge of lending in the 1980s. When they had finished, the nation was plagued with a glut of commercial real estate such that close to one-fifth of the commercial space in the U.S. now stands vacant, and the thrifts themselves were collapsing like ten pins with the taxpayer picking up an ever-increasing bill.
Unfortunately, this is not the end of the problem. Interest rates will have to go higher, as in 1980-81, to correct Volcker's massive credit expansion of the mid-'80s and Greenspan's massive expansion of the early 1990s. Then we will really have problems.
After the crisis of 1981-82, the thrifts tried to deal with the problem of high interest rates by passing it off onto you. They invented a type of mortgage where the interest rate can change after the contract has been signed, the adjustable rate mortgage. That is, they expect you to pay an amount of money which can change after you have made the agreement. My advice is not to do it. Mortgage rates could go into the high teens at precisely the time that you lose your job.
Home mortgages are traditionally the safest form of lending. But the coming high interest rate period will prove the adjustable rate mortgage to be one of the least safe. Homeowners will walk away from their mortgages, and a blow will be dealt to the American dream.
It is much better for the savings bank to denominate home mortgage in ounces of gold and charge a respectable gold interest rate of 5½-6%. In this way it can pay its depositors a gold interest rate of 3½-4% and continue on in its good work of financing the American dream.
The customer of a thrift which gives gold mortgages will also experience the following advantage. In the 1980s, many young couples are forced out of the home market by high nominal interest rates. In the long run, they will more than make up for these high rates by the nominal gain in the price of their house. They may pay a 10% mortgage rate while their house advances in price by 8% per year. This is not a bad deal. Their real interest rate is 2%. However, they don’t see it that way. They still have to take 10% out of their meager income. True, they will get 8% back when they sell the house. They are forced to scrimp at present and get their return in the future. In essence it is forced saving.
True, saving is a good thing. But some people can’t afford it at the present time. It should be done when you can afford it and not be imposed on people through the fluctuations of a depreciating currency. Young people, not in a position to appreciate forced saving, will flock to gold mortgages and their low nominal interest rates.
5. Selling a Home
How about this? You buy a home in 1975 for $50,000 and sell it 11 years later when the currency has fallen in half. The home has the same value that it had when you bought it, but this value, expressed in 1986 dollars, is $100,000. Along comes the IRS and says, “Hey, man. That is one big capital gain.” In vain you try to explain that the house has not gone up; the paper currency has gone down and you have no real profit at all. They just can’t see it your way. Your decision to rely on the wisdom and fairness of our Government employees is shaken to the core. So try it this way next time. Buy the house for 300 ounces of gold, and sell it for 300 ounces of gold. No profit. No capital gain. You may still have a problem with the IRS, but, if you denominate in the eagle coin, you will be legally right.
6. Should You Buy Insurance?
Right now the insurance business is languishing for a very good reason. People don’t want to buy insurance because it is all paper money insurance, payable in a fixed number of paper dollars. Everyone knows that this will be worth much less when payment comes due. Instead of trying to revive their business by raising their premiums to the sky and attacking our right to sue for pain and suffering, insurance companies would do better to offer gold clause insurance, which they could do if they invested their premiums in gold clause bonds.
7. Gold Clause Money Managers
Under the dual economy, there will be a need for a class of entrepreneurs to educate the public about gold clause contracts and to show them the advantages of using gold as money. Wall Street is so biased against gold that it is doubtful that it can perform this function. Conventional bond portfolio managers are obedient serfs of the paper aristocracy and have been losing money for their clients for the past 50 years without saying a word of protest. There is a need for gold clause bond funds and for gold money warehouses issuing gold checking accounts and gold certificates. The entrepreneurs who are in these fields firstest with the mostest will make a lot of money.
8. Your Salary in Gold
As gold goes into more and more hands and is more widely used as money, it will become more stable (in terms of its paper money price). Then it will become suitable for shorter term contracts. Labor unions, negotiating three year contracts for example, will find it in their interest to stipulate wages in ounces of gold. When prices rise by 10% a year, labor needs more than a 30% increase in paper money wages just to stay even. (Because of compound interest, 10% increase a year for 3 years is 33.1%.) But if labor asks for 30%, the employer, the media and the public go berserk. They claim that labor, not the banker, is causing prices to go up. There is tremendous resistance. It is quite a change from the heyday of the gold standard when the wages of the average working man would rise by 60% in a 30 year period (in real terms). A 2% increase in gold wages will give you more than a 30% increase in paper money wages if you are smart enough to ask for it.
For the above reasons, more and more people will start to use gold as money and less will use paper. Although knowledge of the eagle coin is not yet widespread, some banks with connections to the mining industry are making gold loans at about 2%. Freeport McMoran has issued a preferred stock, which is actually a bond; it yields 3½% interest in gold and can be redeemed for 1/10 ounce of gold in 2003. This is the beginning of the dual economy, the period when both gold and paper are used as money. Gradually, gold will win out so that everyone is using gold, and no one is using paper. The paper money will lose all its value, and prices expressed in terms of it will be infinite.11 The dual economy will serve as a transition to a full gold standard. Then the period of the bankers’ exploitation will be over, and the country will be saved from the chaos which befell revolutionary France and Weimar Germany. By acting in your own self interest and protecting your rights, you will be doing your part to save America.
During this time the paper aristocracy will not be idle. They will be using every bit of their power to restore their privileges. If you wish to protect your savings, you must not only use gold clauses, as we have described, you must become politically active to combat their power. You must demand that corporations issue gold clause bonds and refuse to buy paper money bonds. You must reject magazines and newspapers which parrot the banker line, which tell you that the paper money interest is the entire economy and that the gold standard is a right wing proposal. You must vote against politicians who take their advice from the banker agents and who do not read legislation for which they vote.12 You must be an informed and active citizen. Most important, you must be informed about economics, and you must never again accept the word of higher authority on a subject as important to your life as the money in your pocket (or about another other subject for that matter). Otherwise you will continue as a sheep to be sheared for the benefit of the power structure.
As was explained at the beginning, a door was opened for you on February 12, 1982. It was opened by a tiny handful of activists who fought a dogged battle against these vested interests for your rights. You now have an opportunity to escape through that door to the land of freedom, the land where the value of your labor cannot be stolen from you by our paper money system. The path to that land is to demand gold.
Then America can enter another period of peace and progress as existed during the time we were on the gold standard.
Political Agenda for the Gold Standard Movement in the 21st Century
- elimination of the 50 dollar face value on the gold coin;
- elimination of the banker economists in Government posts;
- campaigns against congressmen who support the bankers;
- elimination of legal tender laws (31 U.S.C. §5103) and establishment of the principle that the legal tender may be what the parties to the exchange agree upon as a tender;
- abolition of the Federal Reserve System;
- defeat, by boycott and other means, of corporations which support paper money, such as corporations which oppose gold clause bonds, which are economically dependent on paper money or show a hostility to the gold standard (e.g., Chrysler, Exxon and Chase-Manhattan Bank);
- punishment of all Federal Reserve officials in proportion as they have stolen the wealth of the people by helping to issue legal tender paper money;
- abolition of the principle that banks can create money by making promises beyond their ability to keep, abolition of any restriction on entering the field of banking (such as charters) and punishment of all officials sitting on charter commissions for restricting freedom of entry and granting special privileges;
- impeachment of all judges who abrogate the Constitution and uphold the paper money privilege.
- Pension funds are normally invested in bonds, which are long term contracts.
- Austrian theory teaches us that a paper money expansion accelerates on the upside, requiring bigger and bigger issues of money as it goes along. The longer it operates the faster it has to go to make the same profits for the paper aristocracy. Prices took 20 years to double during the 1950s and 1960s. They took about 15 years to double in the ‘70s and ‘80s. Perhaps they will take 10 years to double in the early 21st century, etc. (Or at least this is what will happen if people do not switch over to the new gold coin.)
- In the 1970s, Congress raised the payments on social security to keep up with the depreciation of the currency; since the Government invests our social security money in fixed income obligations (i.e., its own bonds), income did not keep up with outgo, and social security went broke. It is precisely this kind of “generosity” which characterizes the welfare state in the late 20th century.
- This is because Federal Reserve intervention in the bond markets keeps interest rates below their free market level.
- assuming again that everyone does not switch over to the gold coin
- using the not very satisfactory Consumer Price Index
- This is taxed by the IRS as though it were a gain.
- T-bonds (i.e., long term instruments) do yield a positive real rate of return (as opposed to T-bills (short term instruments). This is because T-bonds fluctuate so widely in price nowadays that they are no longer riskless investments.
- Hunt is known for his speculation in silver, but there was also buying in gold as well.
- Which I predicted in February 1980. See The Gold Bug, February 1980.
- So the previous price projections in this book are only theoretical.
- [Note missing.]
This material is made available with the generous permission of Howard Katz (1931-2012).