Today I have something a little different for you.
I’m not going to forecast the gold price. I’m not going to tell you about a mining company I like the look of. I’m not even going to remind you that house prices have fallen by 75% (if you measure them against gold).
It’s something much bigger than that.
Today I want to tell you why I think our system of money is failing us so badly. And what that means for you, me, and everyone else in the country. How it affects every aspect of our lives.
And also – let me hide nothing from you – how I’ve come to write a book about it.
A big topic – but here goes…
How inflation benefits a very select group of people
We’ve grown used to inflation. Our central bank explicitly wants prices to rise by 2% a year. Deflation – when prices fall – is deemed a threat to economic growth.
Yet when gold and silver were officially used as money, prices were constant. In fact, according to the wholesale price index, prices actually drifted lower through the 19th century at a time when the western world was enjoying great economic growth and prosperity.
They remained constant until the First World War. Then Germany, France and the UK abandoned the gold standard, and prices shot up.
In 1971, the world made its final move away from gold. The modern system of government fiduciary money – fiat currency – became the global norm. It wasn’t planned to any great extent. It happened out of political expediency. The US had issued more dollars than it had gold to back them, and was facing a run on its gold.
How have prices changed since then? In 1971, I could have taken my son to the FA Cup Final for £2 (now over £100). The Mars Bar I bought him at half-time would be 2p (now 60p). The beer I bought myself would be 11p (now £5 a pint at Wembley). The gallon of petrol I needed to get me there and back would be 33p (now £7). And the house we went home to would be something like 40 times cheaper. One forgets the scale of the robbery.
Average earnings have increased too, but not by the same multiples. They have risen from around £2,000 to about £25,000 today. The differential has been covered up by more debt, longer working hours, more women in the workplace and so on.
Why does everything – except mass-produced goods – relentlessly rise in price? It’s this system of fiat currency. There is almost no limit to how much can be created. And the more money there is, the more diluted its purchasing power becomes, and the higher prices will rise.
Some benefit hugely from this system: those who control it, and those who are at or near its point of issuance. Governments and banks, in other words. As well as enjoying a monopoly, they have the power to create money (whether by printing or through lending) and to charge interest on it. They also get to buy assets with their share of the newly minted money, before prices rise to reflect the new money in circulation.
Meanwhile the rest of us find that our savings or wages buy less and less, so we have to take on debt, and then pay interest on that debt, to be able to buy the things that we, or our parents, were once able to afford to buy outright.
There is a constant transfer of wealth and it compounds over time. The few benefit at the expense of the many. This is why the state and financial sectors have grown so disproportionately large.
It’s led to the horrendous gap between the so-called 1% (the super-rich) and everyone else. It’s responsible for this gap in the wealth between generations. It’s why we have a culture based on debt and spending, rather than saving and investment.
And it will only get worse as this transfer-of-wealth cycle repeats and repeats.
A radical yet simple idea that could make the world a better place
Because it’s so blatant – yet invisible – I see this money creation process as possibly the most insidious force in the world today.
That’s a pretty big statement. But I stick by it.
We have no choice but to accept, use and, ultimately, be robbed by this money.
But what if we could change that?
I want you to think about something for a moment.
Gold and silver are one form of independent money – though by no means the only one. (A gold standard is sort of, but not quite, independent).
Let me give you an example. In 1914, when gold was official money, neither Britain nor Germany had enough to pay for the world war. Once they’d spent their gold, the war should have ended.
But both governments took their countries off the gold standard, ran up huge deficits and printed the money they needed. They passed the bill onto their people. This was an essentially fraudulent action made to suit a political agenda.
Over 16 million were killed in the war, another 20 million wounded. Then came the waves of consequences: German reparations, Weimar hyperinflation, the rise of Hitler, and the Second World War.
If governments hadn’t held the monopoly on money, none of this – what was, essentially, hideous mal-investment – could have happened.
That’s an astonishing thought. It’s why many praise gold for its ‘restrictive force’ on governments.
The monopoly that governments and banks hold on money gives them too much power. Whether through incompetence or worse, that power will inevitably be abused. The best way to stop the abuse of power is to spread it as widely and thinly as possible.
Governments and banks should operate by the same rules as the rest of us. No bail-outs, no deficit spending, a need to live within your means, real risk of failure forcing prudent conduct – all that kind of stuff.
In my Brave New World there is no monopoly on money. We restore choice. We restore transparency. We use whatever money we like. We have independent money.
What do you fancy using, sir? Gold, silver, Bitcoins, paper issued by a farmer against stocks of grain in his barn, Brixton Pounds, Dominic Frisby’s currency (the ‘Dominus’, I think I’ll call it, since you ask), pounds, dollars? You name it, you can use it.
Payment with these alternative currencies is as easy as clicking ‘pay’ on an app on your phone or on a website.
Governments can go on issuing their money and debasing it. They can do whatever they like to it, as long as the rest of us have other options. In such a liberated market place, there would be a flight to better-run currencies, the true value of government money quickly exposed, and better practices pushed through.
Multiple currencies can work on a practical, day-to-day basis. I’ve just come back from Istanbul. Traders in the Grand Bazaar will accept dollars, euros, Turkish lira, pounds, Russian rubles – anything, as long as it means trade for them. The complications arise with taxation – but that’s a subject for another day.
And if, in your foray into the market place, you don’t feel comfortable storing your wealth in Bitcoins, ‘Domini’ or that paper issued against Farmer Giles’ grain stock, then stick with the government money you know. Or, better still, go for something tangible, something you know is actually there – gold and silver, for example. That’s what most people will do.
Most people spend a lot of time thinking about how to make more money. But not many people think about how money actually works – or how our system of money could be improved. I believe it’s time that happened.
So I would be delighted if you read my book, which is called Life After The State. In it you’ll discover:
• How this system of money came about
• Case studies: the hidden, destructive effects of this system on the city of Glasgow, on the health service and on education.
• How government spending and subsidy actually cause poverty, rather than prevent it.
And I’ve already had some very complimentary remarks about the early drafts:
“Suddenly stuff started to make sense. Bells were going off. This book reminds me of Malcolm Gladwell. We’re really excited about it. We think it’s going to do very well.” Dan Kieran, Director, Unbound Publishing.
“A real eye-opener. Given what I’ve seen, that’s saying something.” Jimmy Leach, Former Head Of Digital Communications, Prime Minister’s Office.
I’ve decided to publish the book with Unbound, which is changing the traditional publishing model. You can find out more and pre-order my book here.
Changing the way money works is simple. It’s not electorally unpalatable. And it would make a huge, dramatic improvement in all of our lives. Read Life After The State and you’ll see why.
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
Our recommended articles for today
Autumn is usually a tough season for investors. But with Spain on the verge of meltdown, this October promises to be especially bad, says Bengt Saelensminde. Here’s how to profit.
More than one in five of the world’s countries have suffered hyperinflation in recent history. And with ‘QE infinity’ around the corner, that does not bode well for your wealth, says Merryn Somerset Webb.