"Pass the Parcel" Money

By Alf Field June 7 2002

If Winston Churchill had been an observer of the past several decades of economic and monetary affairs, he might have commented as follows: "Never in the field of economic and monetary endeavour has so much damage been done by so few words uttered by a single man as when John Maynard Keynes called gold a "barbarous relic"."

These two words have reverberated down through the decades and distorted the thinking of three generations of economic and monetary teachers and scholars. As a consequence, the modern generation has no idea what real money is, nor do they know what the basic attributes of money are. We have inherited possibly the most barbaric system of all, a worldwide economy based on fiat (paper) currencies, that seems doomed to end in the type of chaotic disaster that has befallen all previous experiments of this nature.

In all previous fiat (paper) currency systems the ruling politicians have been unable to resist the temptation to create money to their hearts content, eventually making it obvious to all citizens that the fiat money was just worthless paper on which a number of zeroes had been printed.

Our worldwide experiment with fiat currencies is now in the "pass the parcel" stage. What is meant mean by this? The idea is derived from the children's game where a parcel is passed around in a circle while music is played. When the music stops, the person holding the parcel is eliminated from the game.

This is exactly what is happening at the moment with the US Dollar in foreign exchange markets. The trade deficit run by the USA requires foreign creditors to receive US Dollars that they are increasingly reluctant to accept. When they sell the US Dollars, that currency declines relative to other currencies. The important point is that the US Dollars do not disappear. When they are sold, someone else buys them. Someone is still left holding the "parcel".

With each passing day over $1.0 billion of new dollars are "exported" to cover the daily US trade deficit. The parcels are getting bigger and, as with the children's game where the parcel is passed faster and faster the longer the music has been playing, the US Dollar parcels are being passed around faster and faster and at lower prices. The music will stop when enough people finally lose confidence in "pass the parcel" money. Those left holding the parcels will be "out of the game", having lost their capital.

It is only a trickle of people who understand what is going on and an even smaller trickle that know what to do about it. The remedy is for investors to protect themselves by moving a portion of their assets into real money as an insurance. The problem is that hardly anyone knows what attributes are required for a substance to be regarded as "real money". It is a long time since I saw these attributes in print and they are certainly not taught in Universities today. Relying on my increasingly suspect memory, a substance must satisfy the following conditions to be regarded as "real money":

1. It must be a medium of exchange. It must be suitable for use in the exchange of goods and services, to keep the wheels of commerce and industry turning.
2. It must be a store of value. This means that it is a suitable repository for long-term savings. An amount invested today should still purchase the same quantity of goods and services in 10 years time.
3. It must be incapable of being reproduced at will by politicians
4. It must be something that people immediately recognise as having value.
5. It must be incorruptible and be capable of lasting virtually forever.
6. It must be sub-divisible.
7. It must be an asset in its own right and not rely for its value on a third party's promise. Thus it must not be the liability of a third party.
8. There must be a small involuntary increment to world stocks each year (limited to, say, about 2%) to allow population and economic growth to be accommodated.

There are probably other attributes that I have overlooked, but these are enough to go on with. What is obvious is that fiat (paper) currencies, the "pass the parcel" money, does not qualify as "real money". Gold, which possesses all the above attributes, has been regarded as "real money" throughout the ages. Until something better comes along, gold will remain the ultimate money and the final store of value.

It should also be noted that real money acts as a discipline on politicians. This is why the policies propounded by Keynes have been popular amongst politicians around the world because that discipline was eliminated. What is surprising is that Central Bankers, supposedly independent guardians of their nation's real money international reserves, have become puppets of their political masters. They have been selling off real money reserves in exchange for "pass the parcel" money, a seriously misguided policy.

In order to excise the "barbarous relic" tag from the gold lexicon and to make investors understand the difference between real money and "pass the parcel" money, the proponents of gold as real money need to embark on a major educational campaign. The World Gold Council (WGC) would appear to be exactly the right organisation to undertake such a campaign.

If anyone reading this article has any influence at the WGC, perhaps you might like to suggest to the WGC that it puts its efforts into the following:

1. Propagating the attributes of "real money" and highlighting the qualities of gold in this regard;
2. Publishing a chronology of all previous experiments with fiat "pass the parcel" money, with an emphasis on the unhappy consequences that resulted.
3. Start a campaign to persuade investors to take a small position in gold bullion as an insurance against the eventual failure of "pass the parcel" money.
4. Start country specific advertising campaigns (in the local languages) in those countries that have been selling (and leasing) their gold reserves while accumulating "pass the parcel" money. The objective being to alert the citizens of those countries to the folly of this policy.
5. Create a "Think Tank" to explore and develop a proposal for a new international monetary system based on sound "real money" to replace the existing system before it is too late.

If the WGC does not follow through with a pro-active program similar to that outlined above, those gold mining companies providing the financial support for the WGC may wish to question the reason for the organisation's existence.

If Lord Keynes could have such an enormous influence in uttering a two word fallacy, then hundreds and thousands of people telling the truth about the difference between real money (gold) and "pass the parcel" money will have a massive impact. The trickle of people who presently understand what is happening will become a stream, then a torrent and finally an unstoppable flood.

Things can be changed. A disastrous systemic monetary failure can be avoided if enough people are aware of the dangers and demand that a better and safer system be introduced.

If you agree with these sentiments, then I invite you make your voice heard, to tell everyone in your circle of influence about the dangers of "pass the parcel" money and the attributes of gold as
the quality real money.

Alf Field

Disclaimer: The author's objective in writing this article is to invoke an initial interest on the part of potential investors in this stock to the point that they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock.