News & Analysis
Chavez Wants Arab Backing for Petro-Currency?
Venezuelan President Hugo Chavez (pictured left)sought Arab support Tuesday for a proposed oil-backed currency to challenge the U.S. dollar in his latest swipe at Washington's dominance in global financial affairs. It's highly unlikely Chavez will gain any serious momentum for his "petro-currency" proposal at a summit of South American and Arab League leaders, but it represented another attempt to undercut the dollar's standing as the world's leading commercial currency. China has struck deals-most recently this week with Argentina-to conduct trade in currencies other than the dollar. Iran has proposed replacing the dollar with the euro or other currencies to set worldwide oil prices. Chavez plans to visit both Iran and China following the one-day Qatar gathering, whose agenda focuses on trade issues but also touches on Arab worries about rival Iran's growing influence in Latin America. – Associated Press
Dominant Social Theme: Anything is better than a fiat dollar.
Free-Market Analysis: Actually, anything is NOT better than a fiat dollar. A formal oil-based dollar would be a historical oddity. Don't take our word for it; the market has rejected such a standard and will surely continue to reject it. (We don't make the rules, the "invisible hand" does – though Chavez probably wouldn't recognize an invisible hand if it bopped him in the face.)
What are some other ideas that won't fly? A currency basket backing paper money with a collective of fiat-paper money is not going to work so well either. In fact, any backing of paper money by something other than gold and silver is not going to have much of a chance long-term. We can say that because we have studied history and understand that societies grounded in gold and silver did better financially than those that were not.
That was why, yesterday, we were happy to point out a glimmer of common sense – from a monetary standpoint – when the Russians (and maybe the Chinese) called for a quasi-gold standard. We added that the proposal might eventually evolve into a real money-metals standard.
But for any of you (any more) who are tempted to write letters to us explaining that we ought not to endorse an IMF basket of currencies that includes an element of gold – well, WE'RE ALREADY THERE as the kids would say.
In fact, we didn't think it was necessary to go through the process of explaining what a money metals standard really is, and how you get to one – it's kinda academic after all – but since there now seems to be as many ways to replace the dollar as there are world leaders, we will briefly present as best we can an academic and historical perspective on free-market money.
First of all, free-market money arises from the MARKETPLACE. It is not foisted on a grateful world by a bunch of brilliant bureaucrats in expensive clothes sitting around conference tables for a few days.
Second, free-market money historically has included both gold and silver – not just gold. That's so that if the people at the top fool around with the gold or with the silver, the ratio between the two metals gets out of wack and the common folk know it right away. That is why many market-based money standards throughout history used both gold and silver. Gold was the bankers' money because it was rare and portable. Silver was the people's money because it was less of each. The United States in its republican days recognized both gold and silver – and that was a natural and historically relevant way to create a money standard.
Third, a market-based gold and silver standard (including or excluding PRIVATE fractional reserve banking) arises out of monetary competition that took place over tens of thousands of years. Other standards rose and fell during this time including salt, sugar, rocks, beads, etc. But the gold and silver monetary standard survived and prospered and gained acceptance around the world because it was the most stable and wealth-enhancing standard.
Now in today's world, filled with very sophisticated people, it has become fashionable to say that gold and silver are relics of less civilized eras. But this is just not true. The facile arguments made for paper money have been around for thousands of years. Smooth-talking, well-educated people have always suggested that they be allowed to print (one way or another) all the money that society needs and do away with that nasty and inconvenient link to an asset. And always, those really smart people have grown very wealthy while the money they promoted eventually shriveled into nothingness. Which is what is going on today.
We are glad to see this sudden interest in money creation. After all, money, we have been assured, is a boring subject, not the stuff for debates. And if it is to be debated at all, then it ought to be debated by those among us who have gone to Harvard or are Rhodes Scholars, and have had careers in central banking, etc. But facts are stubborn things. A gold and silver money standard worked throughout history. America was founded on it – and prospered on it. There is plenty of history to show that this sort of standard is what markets select when they are left alone.
Conclusion: We are not sure if a new monetary standard will be announced following the upcoming G20 meeting. But maybe the meeting's communiqué might hint at such thing. In any event, we are sure that anything that comes out of such meeting will not be market-based. How could it be? And anything with which the International Monetary Fund is involved is bound to be questionable. The conversation itself, however, is startling. It shows how far central banking control has faded and how tarnished the fiat brand really is.
No, we don't expect miracles. Proposals such as the Russians have made are very small steps forward. But progress is progress. We are glad the conversation has started. Maybe it will prepare people for a day when the system simply can't sustain itself any longer – and a market-based money metals system returns by default. We don't wish that sort of chaos on anyone. But we would welcome the result.
Posted by Eric Babcock on 04/02/09 04:30 AM
There is momentum building in the right direction. Between now and the final collapse of the fiat money system, the cornered rats will make life very nasty for millions of people. Nonetheless,
even the rats will be forced to acknowledge their plans have failed. It will be quite a show to watch them blame each other. That
is what individuals void of conscience or principle do.
I want to be sure I stay on your list.
Reply from The Daily Bell
Thanks for your feedback. Hopefully, there is momentum along the lines you describe. But events usually do not move quickly regarding these matters. We are making preparations for a long haul, as no doubt are you. Nice to hear from you again.
Posted by Jim Lorenz on 04/02/09 03:40 AM
A minor quibble, but in Amrtican-English "wacky" implies not normal, hitting is "whacking."
Major quibble: Capital "L" libertarians are generally members of the Libertarian Party, USA. Little "l" libertarians are those who choose to express libertarian concepts. Now, if you mean to honor libertarians of the Austrian school, then I guess we'll have to accept the quiet accolade.
Libertarian emeritus LP of Utah, 2000.
Reply from The Daily Bell
Thanks for your feedback and proof-reading insights. While we were aware of the correct spelling of whack, we were not aware of the formal distinction between Libertarian and libertarian. Our style has been to upper case Libertarian as we do Democrat and Republican. However, we will lower case democratic and republican when not referring to the parties, so your point is well taken regarding libertarianism as a noun rather than nomenclature. Thanks again, and please write in with other such issues.
Posted by Judith Hempel on 04/02/09 12:27 AM
Thank you so much for that wonderful article on the Swiss Perspective on investing in gold. It answered a lot of questions for me and gave me a direction to go.
I'm a little tired of the "American Perspective" which is totally adulterated at this point. It's good to have a "neutral" opinion from which to gather strength in these times. Keep up the great work you are doing. Some of us are paying attention!!!
Reply from The Daily Bell
We are glad you enjoyed the Swiss Perspective and thank you for your feedback.
Posted by Tom on 04/01/09 04:11 PM
Great stuff today. I find it amazing that Rep Kucinich's inquiry into ML bonuses has not caught much media attention despite the total bonuses paid with "bail out cash" totaling some $3.3 BILLION!
It is incredible how idiotic congress can be - approving legislation to give billions to companies without reading the bills.
Unfortunately the more the crisis deepens the less I think of them as dumb and more as totalitarian. This recent bill Frank has proposesd falls in that line of the march of government. With the dept of homeland security, no child left behind and tarp / auto bailouts under bush, now more bailouts and even larger gov with obama, freedom is dying in the USA.
Reply from The Daily Bell
Thanks for the feedback. It is indeed curious how radical and even contemptuous the current American Congress is being. It is easy to be suspicious in such an environment. Ultimately, however, it is not so much about current political initiatives as it is about plugging away until others are educated about the things you see -- that we observe as well. Human action, and its beneficial results, may well counteract the "death of America."
Posted by Roberto Carlos Alvarez on 04/01/09 01:56 PM
The problem is that the Republicans, Democrats, and 21st Century Socialists/Communists are in the Cold War Era.
They are attempting to apply 20th Century solutions to the 21st Century. Any attempts to impose Cold War Concepts on the USA will lead to Civil War on the basis of race, ethnicity [since they use the race and ethnic card as a division], and concepts.
The other possibility is that America could end up being divided into different countries.
At the time that I am writing this comment, there are states and ethnic groups who are contemplating secession from America.
If the politicians and Unions are interested in resolving the problems facing America and the world, the Republicans and Democrats [as well as their allies in the Labour Unions and Latin America such as Chavez] should resign and give rise to a Libertarian Government and a return to the Gold Standard.
In America, the Labour Unions and Political Parties should be treated as private corporations subject to back tax. Since they talk about confiscating the salaries of the average US Citizen, maybe they can lead by example and allow their bank accounts to be frozen and nationalized.
Reply from The Daily Bell
Thanks for your feedback Mr. Alvarez. We are not so sure that America will be divided up any time soon. But we are convinced that more and more Americans, and Europeans as well, are increasingly educated about the reality of what is occurring. As you yourself observe, it is not so easy these days to fool most of the people most of the time. As the Internet continues to educate, more and more wake up and -- like us -- see much to rectify. Keep up the good work.