Value is created whenever one brings into existence a good or service in which anyone finds utility. Any surplus value (stock of value, aka wealth) accrued after income and expenses (flow of value) are netted out is most expediently stored in unencumbered physical gold (Freegold). Currency finds value in accord with its ease of exchange for gold. If a currency is valuable, it is easy to find gold bidding for it, if not then more currency must be offered until gold is coaxed out to exchange for it.
The monetary system, as the sum of its functions (unit of account; medium of exchange; store of value), is simply the system we collectively agree to use to facilitate the flow of value between individuals and groups in society (without such a flow we would all need to be completely self-sufficient individuals). As such, the functioning of the system is much easier to visualize when we consider it in terms of only the value and how the value circulates, is stored, and ultimately consumed as a sophisticated spontaneous and continually evolving arrangement of stocks and flows. Viewing money as simply currency (medium of exchange), and accounting for transactions only in nominal currency terms is misleading - currency has value in accord with the value of real goods or services for which it may be exchanged only, and this exchangeability is not fixed, but rather always in flux. Value is simply the measure of utility, and if a currency buys less or none of what one wants, then it has little or no utility, and hence little or no value. A system of account requires a unit with at least some sort of objective basis to have relevance.
To perform well, any store of value should not be used also as a medium of exchange, as at least part of the value being exchanged in any given transaction would not be kept as savings, and would need to be further exchanged to meet current expenses. This increases the velocity of the store of value, reducing its value. Gold, like any other store of value, stores value best when it lies very still.
With a Freegold Standard, only the exchange rate of a currency with Freegold need be established to find the currency’s value, as Freegold is the proxy for the stock of value, wealth.
Freegold acts like a sponge, absorbing surplus value in any given zone, and transferring it between zones through arbitrage, out of deficit zones (net value consumers) and into surplus zones (net value producers). All sovereign entities, whether individual, state, or nation, interact with this system in the same way, only on different scales (micro/macrocosm). They may have different motivations for individual transactions when storing value in or retrieving value from Freegold, but the mechanism they use will be the same - the purchase or sale of unencumbered gold in a floating free market.
The Freegold market is established by the bidding for unencumbered physical gold in preference to encumbered gold derivative products, as these derivatives are found to not perform as well as unencumbered physical in monetary crisis, and as a result are discounted by the market. This is a simple and spontaneous reaction in accord with the self-interest of market participants. When monetary confidence falters the preservation of value becomes the focus, and in this gold is the obvious focal point.
In practice, any currency is valued by the market only by that which it can be exchanged for. Under a Freegold Standard, currencies are technically, but not officially, backed by gold - a currency that cannot be exchanged anywhere anytime by anybody for gold will be avoided in favour of one that can. It is privately-held gold reserves that make themselves available for this exchange, at the right (floating) price, not Central Bank gold reserves. CB reserves are for currency credibility purposes, and a national savings reserve for facilitating international trade in times of distrust and/or great monetary stress. A Central Bank buys or sells gold to manipulate the value of its currency, buying to inject currency into circulation thereby weakening its exchange rate, and selling to remove currency from circulation and strengthen it.
The Gold Standard
The fixing of the exchange rate between gold and a given currency (aka the classic Gold Standard) is a (barbarous) mechanism which seeks to appropriate surplus value (aka wealth) into the currency rather than the gold reserves via fixing, making the value available to the issuer of the currency (ultimately the government), and obviously no longer available to the savers who stored their value there (this deception leads to bank runs and bankruptcy). Official gold reserves dwindle, while claims on them rise. Inequitable and unsustainable.
The Fiat Scam
The ruse of ceasing redemption of currency for gold leaves the creditor with no benchmark to evaluate said currency as time passes, and as such leaves them behind the curve as currency continues to be issued, now relatively unimpeded, the creditor always imputing more value to the currency than they should. Until that day when confidence is entirely lost, at which point the debtor consolidates their position by revealing that they place a very high current value on their gold reserves - one high enough that they can pay down their entire obligations with only, say, half of their physical gold reserves.
Keeping the actual quantity of the debtor’s physical reserves a mystery all the while adds to the debtors advantage, and every extra day that this scam can be kept intact in the latter stages is worth far more to the debtor than many days were in the early stages.
Debt as Wealth
Deferred payment (debt) is only able to be accumulated with accompanying deferred purchase of goods and services of real (tangible) value. In other words, if the overhanging debt (deferred purchase of tangibles) is corralled in non-tangibles like bonds and currencies.
Stored there it will have no effect upon the perceived values of real goods and services, because it is not bidding upon them. As discussed in It's the Value, Stupid, debt is synthetic/promised/yet to be created value circulating at par with real (already created) value, both in the form of currency. The difficulty in telling them apart is that you can’t, because currency is fungible. They both function equally as medium of exchange, exchangeable for either tangibles or non-tangibles.
This corralling requires inflating the credibility of the issuer of the non-tangibles. As the quantity of the non-tangibles inflates, so must the credibility of the issuer, because anyone storing their value in a non-tangible will only do so if they have confidence they can actually get the value back later, if they consider the issuer to be credible. To issue ever more non-tangibles, it follows that the issuer must have ever-increasing credibility in the face of these claims.
There are lots of savings in these non-tangibles containing almost no real value, but only the confidence of those using them to “store” their value. Of course when someone goes into debt by borrowing currency, and then uses the borrowed currency to purchase tangible goods or services, value passes into their possession. The currency was only a claim on this real value; it took an exchange of these claims for payment in full, a tangible, for actual value itself to pass into their hands. There are currently fantastic quantities of these claims corralled in non-tangibles, dwarfing the current supply of tangibles, or payment in full. When this confidence falters, it “snaps all at once” rather than unwinding smoothly.
A Freegold Standard
Unencumbered physical gold as the ultimate monetary denominator, benchmarking the value which the monetary system serves to exchange, acting as the objective reference point. From the exchange rate (price) of Freegold in any/all other items (currencies and assets alike), the relative value of any/all can be established in a completely objective fashion. In this arrangement it can be seen that it is gold valuing currencies, and therefore everything inside the monetary system, from its position as the physical wealth asset outside the monetary system. Gold is the master numeraire because it is the master proxy for value, denominating all lesser units of account, and thus providing relativity to all participants in the value-exchange (monetary) system.
This can only come about when gold is traded on a physical only basis - no form of gold derivative should ever be traded at par with physical, on the assumption that it is “as good as gold”, because any derivative is not and could never be as good as possession of the real thing, by definition. Gold is physical gold in the here and now only. Nothing more, nothing less.
Human society arranges itself in response to the monetary system it utilizes to facilitate the flow of value between its constituents. This is to say that the monetary system dictates the nature of the society, and the motivations which drive the behaviours of its individual members.
The current monetary system is completely inequitable, as can be seen in the continual movement of wealth (stored value) to the wealthiest .01% of individuals, and away from the poorest. This discrepancy has never been greater, and continues to grow. Value is liberated from its creators and spirited away through the continual depreciation of the savings medium. A Freegold Standard is a return to a fully equitable system, where the net value producer keeps the unconsumed fruits of their labour until such time as they wish to consume them, or give them away. It does not allow the government to sequester privately saved value any longer, to be spent arbitrarily by those not attributed with its creation. A great deal of certainty is found by all users of such a system.
With the benefit of a shared objective reference point to gauge relative value (the utility found in a good or service), all individuals will have the opportunity to go about producing the highest value/utility they can, in accord with this new objective data, which will result in myriad new possibilities to apply existing skills, capital and knowledge far more effectively and productively than at present.
To separate self-sufficient human beings, gold has no utility; but as part of a larger interconnected human super-organism gold has the highest utility, as the heart of an equitable value circulation system.
A Freegold Standard: elegant in its simplicity.
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