Hot Money

Column by Jim Davies.

Exclusive to STR

It's now 100 years since fiat money was introduced to America, by the Federal Reserve Act. In that century, over 98.5% of its value has been destroyed.

Suppose you found a counterfeit bill in your wallet. Would you spend it? The recipient would hand over something valuable in exchange, but when he came to deposit the bill, it would be rejected, so he'd swallow the loss. So your action would hardly be ethical. Equally however, somebody did that to you; the bill didn't reach your wallet by magic. Why should you be the one to swallow it? It's like a game of musical chairs. Get rid of the bad money if you can, while you can, that's the game.

So in general, there's not much resistance to the use of bad money such as the Legal Tender Notes (LTNs) which are in your wallet and mine, by those who spend it; the problem comes from those who receive it, in exchange for useful goods. That's why LTNs are decreed to be valid and compulsory for acceptance; as it says in the Concise Oxford English Dictionary (1934) and elsewhere, "Legal Tender" is a term that means "currency that cannot be refused in payment of a debt." When some country's government decrees that specific kinds of currency are “legal tender,” those laws compel its acceptance by their use of that term. Surprisingly, the current Wikipedia entry about the term quotes the US Treasury as saying there is no statute on the books to compel the acceptance of LTNs; that may be quite true, but in making “dollars” “Legal Tender,” that's exactly what Congress did because that's the meaning of the term. Even so, it leaves open the question of why the Treasury should be interested in disguising the ugly truth. Are they ashamed of it? Do they plan some even more deceptive form of ”money”? Stay tuned.

Recipients are kept in business by the same decree. The banker with whom he deposits the accepted, bogus note is also compelled to accept it, and round and round it goes; everyone pretends bad money is good, to avoid getting stuck with it.

I have some coins upstairs, collected during my travels; a Swiss Franc or two, a French one, a Deutschmark (RIP), a Pound, some Kroner including a Danish one with a hole in it, etc. If I were to offer a Pound in payment of a $1 debt here in the USA, it would probably be refused--even though it's currently “worth” $1.60 or so--primarily because Her Majesty's corresponding Legal Tender decree doesn't run in these former colonies. The vendor could accept it, but probably wouldn't. The choice would be his. But if I offered a fine picture of George Washington, the choice would not be his. It's a wonderful thing, when the counterfeiter decrees acceptance and owns the courts and the prisons. Making money was never simpler.

The big spender who owns both bogus notes and real silver (or real silver certificates) could offer either, in payment of debts. But because he knows the worthless money must be accepted, he will certainly get rid of that first, and that's the paradox known as Gresham's Law: bad money drives out good, when its acceptance is mandatory. Once repeal the legal-tender status of the LTNs, however, and the situation is reversed; nobody aware of the repeal will accept them any longer and will sell useful goods only for real money, like silver. Bad, hot money will be driven out by good money – not by the spender but by the receiver.

Government is never going to repeal its legal-tender laws, for then its immensely useful fiat money scam would disappear and it would have to raise some serious taxes instead, and that would lose it the next election; so isn't the foregoing rather academic? Not quite. Repeal won't happen, but effective enforcement of those laws will cease – and that will have just the same effect.

Their enforcement will cease when any or all of four things takes place:

Those things will take place when a significant minority of the population has been re-educated. A minority will suffice (e.g., one in twelve on a jury will cause a mistrial and so terminate enforcement), but the re-education must be quite thorough and it must reach at least that many.

The only way that, in turn, can happen is for a freedom school to grow the number of its graduates exponentially--say, to double them annually. In that case, one or more of those four conditions will apply during the final four years of the Age of Government, as is easy to see; four years from the end one person in (24 =) 16 will inhibit enforcement, at three years out one in (23 =) 8 will do so, etc; so to empanel a compliant jury of twelve will become impossible between four and three years prior. Prosecutions for “victimless crimes” will then cease, like those for alcohol trading did around 1930.

At about the same time, LTNs will be losing value like there's no tomorrow – and for them, there won't be. The loss will result from a catastrophic reduction of tax receipts--which will happen when taxpayers realize that collections too are becoming unenforceable--followed by large-scale printing to make up the shortfall. Notice that this hyperinflation will not itself cause the demise of the LTN, but in that way will rather be a symptom or result.

There will even be ways to use the spiraling inflation to hasten the collapse of government and its banker friends; nominally large home mortgages may be paid off in full with a mere sack of paper, and any payments to the government may be made using paper checks (possibly post-dated?) sent by government mail. The delay of several days will slash the value, which will cause increased money printing, which will . . . .

As re-educated free marketeers (the “White Market”) discover each other in this exciting period, we will hasten the rout of fiat money; we'll try to trade with each other rather than with the rest of the world, and will use only real money – because, as the Legal Tender law is seen to be unenforceable, recipients in that market will decline to accept it and payers will understand and support that choice by spending paper money only where it is still, foolishly, accepted.

It will be a fun time, and one of its effects will be the very strange one that real money like gold and silver will dramatically increase its purchasing power, as I suggested here in “M” back in 2009. Not just their dollar exchange rate, but their value against real goods; and that will be an historic first-ever.

My Transition to Liberty predicts that these events will happen a lot sooner than some pessimists suppose. I wish they could happen sooner yet.

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Jim Davies's picture
Columns on STR: 243

Jim Davies is a retired businessman in New Hampshire who led the development of an on-line school of liberty in 2006, and who wrote A Vision of Liberty" , "Transition to Liberty" and, in 2010, "Denial of Liberty" and "To FREEDOM from Fascism, America!" He started The Zero Government Blog in the same year.
In 2012 Jim launched , to help lead government workers to an honest life.
In 2013 he wrote his fifth book, a concise and rational introduction to the Christian religion called "Which Church (if any)?" and in 2016, an unraveling of the great paradox of "income tax law" with "How Government Silenced Irwin Schiff."


Thunderbolt's picture

Thanks, Jim. As always, you are on target. Reputedly, the Spaniards and Italians, and others of the European nations which are melting, have discovered Bitcoins, which enjoy two advantages over silver and gold. That is, bitcoins are encrypted and anonymous, and can be quickly moved out of one's banking system and political boundaries. It is much more complicated and costly to move silver and gold out of reach of governments. It is nearly impossible for the government mafias to confiscate or track. Like gold and silver, bitcoins progressively increase in value. I honestly think that bitcoins will become the unofficial reserve currency of the world. Each person owns his own bank, without a need to report his funds. I can move ten million dollar-equivalents to a person in China in just a few minutes, quietly.

Jim Davies's picture

Thanks, T-bolt, for repairing the omission in my article. Bitcoins ought indeed to have been mentioned, especially as STR recently announced it's on-board.
My feeble excuse is that I can't understand them.  Can you recommend a childs' guide to Bitcoins?
Meanwhile perhaps when you next move a few million to China, might you drop a few off over NH?

Thunderbolt's picture

Your I.Q. is at least twice mine, so I worry when you do not understand something. LOL. http://www.weusecoins dot com/.
Bruce Wagner is a big player in this game and has a site that moves coins around for free. The only glitch in his system is that he presumes you have a camera and can upload a picture of a deposit slip.

Jim Davies's picture

One way to resolve your worry is to recognize that your assessment of our relative IQs is mistaken :-) If is a "child's guide" to Bitcoin there must be some smart kiddies around. It's way over my head. Random example: in the "top questions" on "Security" come these first three:
Why is 6 the number of confirms that is considered secure?

Have any cryptography experts vetted the bitcoin source code?

What can an attacker with 51% of hash power do?
The second is intelligible, though the answer offered leaves me hanging. The first and third questions, I do not begin to understand - so the answers are moot. I'd never have thought to ask them.
Supposedly, Bitcoin is a form of money. Yet (am I right?) it has no substance, nor therefore any intrinsic value. Its value is, happily, outside of government control but is also completely variable and supply is limited only by some kind of computer algorithm, unless penetrated by some hacker. Perhaps its use is beyond the ability of government to track, though governments have a nasty record of simply criminalizing the ownership of an account.
Doug Casey (who is admittedly not disinterested) offered a critique of Bitcoin here a while back, and the article reminds us that Artistotle held that good money should be durable, divisible, convenient, consistent, and have value in itself. Casey reckoned Bitcoin stacks up well on some of those criteria, but badly on others. Meanwhile gold and silver coin provide a strong alternative.

Thunderbolt's picture

Some of the obvious hazards of buying gold/silver lie in the area of privacy and safety. Large purchases are difficult to hide and transport with anonymity. Germany, for example, is beginning to think (discover) that there is no German gold in Ft. Knox. Surprise, surprise, as Gomer Pyle would say. Doug Casey has an intellect similar to your own, so I hesitate to criticize. Nonetheless, Michael Suede has responded to his criticism of Bitcoins here:
The obvious weakness of bitcoins lies in the entry and exit points of the system. I, for example, had ten bitcoins confiscated without cause or explanation, by the bitcoin exchange called Mt. Gox. Those coins would now be worth about $ 130 FRN's. Theft, pure and simple. If The Online Freedom Academy + Bitcoins does not remedy our slavery, then we are left with only Jim Bell's solution. I have hope for the former.

Jim Davies's picture

What a very interesting discussion!  Suede's article is well written; I especially like his "Casey is essentially making the claim that because Bitcoins have no uses outside of acting as a money, they are inherently worthless.... This is a fallacious argument." Damn, this strains the brain. I still yearn for a true childs' guide to Bitcoin.
He is right too about GoldMoney, or any other dealer  or expediter whose operation is vulnerable to government thuggery. You are right about the difficulties of private transfers of large quantities of gold, and of course our hearts all go out to you. Some of us however are interested only in small quantities, and local coin dealers can provide an excellent level of privacy.
The further into the future one tries to peer the foggier it gets, but my perception is that as resignations from government service gather pace, the resulting free or "White" market will rush to the use of gold and silver because the residual thugs will become exponentially less capable of enforcing whatever regulations against such money they then have on the books. Large electronic transfers will still be hard (because the residue will focus on impeding them) but progress will be so fast that a couple of years later the residue will have vanished and all sizes of gold transfer will be safe. I'm not clear therefore that the single key advantage of Bitcoin will ever become critically important.

Marc's picture

While looking up some information at Wikipedia today I ran into a featured article about the Assay Commission. It met between 1792 and 1980 to test the purity of gold and silver. In 1980 the commission was officially abolished because there was no more precious metal to assay :

A friend of mine is a small dairy farmer. He recently mentioned that his late father paid $1,100 cash for a new Allis-Chalmers tractor in 1936. That tractor is still being used today, by the way. I used the CPI inflation calculator to determine what the equivalent purchasing power would be in today's dollars. It gave me a figure of a little over $18,000.

Billions of dollars worth of residential real estate is being transferred to the elite through what amounts to a few computer key strokes. Thanks to fiat the country is being rapidly transformed into feudal estates owned by the upper one percent while average Americans are becoming serfs.

Glock27's picture

It is my understanding that there is no gold at Fort Knoxx, Kentucky and I just recently heard that the Germans want their gold back from America. If we have no gold and Germany wants hers back what will be the results?

Marc's picture

I've been following that story too. Germany is supposedly going to get half of its American held gold back within seven years. The hoard was originally placed in an underground vault in New York. My guess is that most of it has since been leased (rented for melt) and won't be easily replaced. Something tells me the shelves at Fort Knox are probably just as bare. Submitizen's aren't allowed to know what, if anything, is in the facility. It's "secret knowledge". Have you ever noticed that our "open society" is literally riddled with official mysteries and improbabilities?