I do not profess that the main structural arguments of the following essay are mine. Rather they belong to a rather famous former Chairman of the U.S. Federal Reserve named Alan Greenspan as noted in his rather seminal 1966 essay titled “Gold and Economic Freedom”. However, I have taken the specific arguments of that very prescient essay and modified and reinterpreted them to fit into the contemporary situation of our current global and financial crisis.
It is clear that at some point after his appointment to the Chairman of the U.S. Federal Reserve in 1987, Alan Greenspan turned his back on the very structural beliefs about gold’s inextricable connection to freedom that he championed some twenty years earlier. However, Greenspan’s failure to uphold the ideals he once championed does not invalidate their keen insight and validity. Today, these very ideals are especially pertinent to the impending economic catastrophe we face today, despite the continued three-ring circus of government, Central Bankers, & corporate executives that continually tell us that the financial crisis has bottomed.
Today, due to the proliferation of fragile and confusing financial instruments called derivatives and the fraudulent nature of our fractional reserve banking system, hundreds of billions, and more likely, trillions of more dollars exist than claims on real assets and goods.
The comparable analogy would be if, as an Apple (NASDAQ:AAPL) store owner, I sold the same 100 Apple desktop computers to 10,000 clients. As long as no more than 10 of my customers required delivery in any given year, then my business could operate for many years without this fraudulent scheme ever being exposed. However, the instant my clients collectively decided they wanted to take delivery of all 10,000 computers in the same month, my ruse would be exposed and my business sentenced to a fate of bankruptcy.
Almost all of us would agree that this would be an insane way to run a business, yet we readily accept the fact that all major banks in every modern, developed nation run their businesses in this very manner. However, the development of such a situation would be next to impossible with the institution of a true gold standard and this is why Alan Greenspan once made the timeless statement that economic freedom and gold are inseparable.
A true gold standard would operate as follows. The introduction of any new supplies of money into the global economy would necessitate the equivalent purchase of gold to be stored as reserves to back them. Thus, if the power to print money was returned to the U.S. government as explicitly stated in the U.S. Constitution, Article 1, Section 8, and the U.S. Treasury wished to print $1 trillion new U.S. dollars, such an action would require the purchase of an additional $1 trillion of gold to back the new dollar supply.
Of course there is not enough gold in the world to back all the trillions of dollars that exist in our current monetary supply unless gold were to be revalued somewhere in the vicinity of USD $10,000 an ounce, or perhaps even north of this figure. Or perhaps the standard would have to be a silver standard or a hybrid gold / silver standard. For the sake of a hypothetical argument, however, let’s examine how a gold standard keeps money “honest”. Once a new supply of $1 trillion was printed, every new dollar would be a claim on a portion of the U.S. Treasury’s gold reserves, not just an empty piece of paper backed by the “full faith and credit” of the U.S. government, as is the case today.
Because there is a cost to printing new supplies of dollars under a gold standard, the primary driver of monetary supply expansion would consequently become the sustainable expansion of real goods and services, NOT the speculative whims of a few powerful banking families that wish to drive up prices of unsustainable assets such as subprime mortgages, derivatives, dangerously overvalued stock markets, and rigged commodity markets for their own benefit. Inevitably, under our current fraudulent monetary system, such actions occur and lead to what the media erroneously terms as “bubbles” and which financial “experts” misinterpret as natural economic cycles.
In reality, “bubbles” are grossly distorted unsustainable valuations of assets driven by the speculation and the monetary policies of the financial oligarchs that control the U.S. Federal Reserve, the Bank of England, and the European Central Bank. This is why “bubbles” always burst. By the purposeful creation of bubbles, the financial oligarchs that create them increase their riches, and then plunder the wealth of their fellow citizens when these bubbles inevitably burst. This accomplishes two important goals for the financial oligarchs.
(1) Since they create every capital market bubble in every major economy, inevitably, they understand exactly how to profit from these markets, and they increase their wealth and power substantially as these bubbles grow;
(2) Since most citizens don’t understand the extreme fragility of the bubbles the financial oligarchs create and instead interpret the bubbles as bull markets that cannot end, when the bubbles inevitably burst, this action conveniently strips wealth and power from the classes that reside below the financial oligarchs and stifles any chance for real opposition and dissent to their power.
It is the perfect con game.
A monetary system that is backed by a true gold standard, however, would never sustain an expansion of monetary supply to fund risky assets that have a high risk of blowing up and becoming worthless, because in doing so, the financial oligarchs undermine their own assets. This is why they killed the gold standard in 1971.
Under a true gold standard, it would have been impossible for this current global financial and monetary crisis to materialize, and here’s why. If banks continue to print new dollars backed by gold to support the purchases of risky assets, bank loans are inevitably paid back either slowly over time or not at all. Consequently, under a gold standard, banks curtail new lending by raising interest rates because they understand that the dollars they currently hold have greatly increased in risk in comparison to the real gold that backs them. Thus a gold standard successfully limits the greed driven behavior of banks and actually successfully stops further creation of ticking time bomb financial assets such as subprime loans.
In the case where a bank refuses to curtail its risky behavior and continues to finance new loans for the purchase of risky assets, then a gold standard allows for their bluff to be called by any dollar owner. In other words, if a bank continues to expand the monetary supply to such an extent that many more dollars exist than claims on real goods, as people realize that banks are creating new money to finance risky assets that are likely to blow-up, people will either
(1) Demand gold in exchange for their dollars, or presuming that all other major global currencies are also backed by a gold standard;
(2) Exchange their dollars for another currency that they deem has not been diluted by the gold standard upon which that particular currency operates.
If scenario one materializes, and people demand gold in return for their dollars, the bankers realize that they will be granting a real asset to the people in return for receiving a devaluing asset that they are helping to devalue. Under this scenario, banks will do everything in their power to retain their gold reserves and thus will increase interest rates to contract monetary supply and renew the currency’s strength. Such actions would then serve to stop the run on their gold reserves.
If scenario two materializes, and people flood the market with U.S. dollars by selling them to purchase other currencies that have maintained an honest gold standard, then again, banks would combat the devaluation of their own dollar holdings by raising interest rates, contracting the U.S. dollar supply, and ensuring that the dollar’s strength returns to the equivalent strength of its rival currencies.
Thus, a gold standard automatically regulates monetary supply and monetary strength and there is absolutely no reason for Central Banks to exist and to allow Central Bankers to artificially deflate and inflate money for their own self-interests to the detriment of all other citizens. If one can understand that gold helps establish a free market where growth in sustainable goods and services drives monetary expansion, and not greed and speculation as is the case today, then it is easy to realize that not only is gold linked to economic freedom as Alan Greenspan stated, but that it is also inseparable from the much broader concept of freedom itself.
However, a true gold standard is not even necessary to regulate integrity and honesty in the global monetary system. The world gold standard that existed before it was ended by President Nixon in 1971 under the advice of then deputy under-secretary of monetary affairs Paul Volcker and U.S. Treasury Secretary John Connally, was in fact, not a true gold standard, but a “pseudo” gold standard. It was a “pseudo” gold standard because banks were allowed to create more dollars than the value of their gold reserves.
However, even under a “pseudo” gold standard, the above principles I described above would still automatically regulate free markets with little need for monetary policy decisions from Central Banks. In the event that banks attempted to execute fraudulent schemes under a gold standard, their scramble not to lose their gold reserves could still cause sharp recessions, but these recessions, due to the self-regulatory nature of such a monetary system, would likely be very short in nature and consequent economic recovery quick. Thus, a “pseudo” gold standard or “pseudo” gold / silver standard, though far from being perfect, is still much more preferable than the fraudulent monetary system we currently utilize today that allows financial oligarchs to create prolonged deep depressions and to destroy the wealth of the middle class.
People, ignorant of gold’s long history as a store of money, still erroneously believe gold to be a barbarous relic with zero intrinsic value. Today, hundreds of millions of people still ask, “What makes gold so valuable that it should back our monetary system?” Again, the lack of understanding about gold’s role in creating a free and honest monetary system is due to the fact that gold can call the bluff of the financial oligarchs, and they have done everything in their power, including the purposeful spread of misinformation about gold to prevent people from calling their bluff. The spread of this knowledge threatens the very power of the financial oligarchs so they ensure that people do not understand the basic tenets of Greenspan’s “Gold and Economic Freedom” essay.
It is not by mistake that gold has been used as a form of money for centuries and that, as a form of money, it has outlasted numerous other forms of paper money and even numerous other commodities once employed as money. Whereby ancient civilizations have used many different commodities over time such as corn, wheat, beads, clothes, etc. and instituted them as a means to barter for goods and services, it is by no mistake that ancient Egypt and the Roman Empire, civilizations that endured for long periods of time and required a more efficient form of money, eventually settled upon gold.
Gold has many qualities that make it ideal for use as money that other valuable commodities such as diamonds, platinum, rhodium, wheat, rice and oil all lack. Gold is a sufficiently rare enough metal to command a high value, it is extremely malleable and therefore easily divisible for use as money, it is uniform in quality, it is durable so retains its quality over time, and it has very little industrial use and thus is not consumed in any significant quantity over time.
Though gold’s detractors continually spread misinformation about gold having zero intrinsic value and the U.S. dollar as the only valid form of money, this argument is actually backwards. It is the dollar that has zero intrinsic value while the intrinsic value of gold has been well defined for centuries. All fiat money, whether the U.S. dollar, the Japanese yen, the Euro, the Pound Sterling, the Icelandic Krona, or the Brazilian real, only has value because it is backed by the full faith and credit of their respective governments. Today, we know that the counterparty risk of all major global currencies is tremendous. Gold, however, has zero counterparty risk.
Ever since the financial oligarchs convinced U.S. President Nixon to end the pseudo gold standard in 1971, there have been no limitations on any Central Bank in the world in regard to their ability to increase monetary supply, and to deflate and inflate currencies at will. Translated another way, this means that there is no way for any citizen of the world to ensure that their Central Bank does not enact monetary policies that unfairly tax and devalue their savings. Quite literally, our modern monetary system allows no means for citizens to prevent the theft of their savings by Central Banks. If one had $1,000,000 in their bank account in 2001, and today, in 2009, could only purchase half of the goods and services that he could have purchased with that money in 2001, it matters not if
(1) the $1,000,000 retained the same purchasing power up until now but half the purchasing power was lost as a result of a 50% tax imposed by the government today, or
(2) if the 50% loss in purchasing power was a result of a 50% devaluation of the U.S. dollar during the last 9 years.
Central Banks don’t want you to understand that their devaluation policies are equivalent to robbing citizens of their wealth. Alan Greenspan himself stated in 1997 U.S. Congressional testimony that “price increases are really the same thing as depreciation of the currency.”
Various arguments that have been levied against gold’s relevancy as a form of money, such as gold is worthless because one cannot eat gold if one is hungry, or Warren Buffett’s infamous statement that gold is a terrible asset because “it won’t do anything between now and then except look at you” are arguments devoid of any logic. One cannot eat U.S. dollars either if one is hungry, and diamonds won’t do anything other than glitter and look at you either.
I imagine that Buffett’s statement about gold is a jab at gold’s extremely limited usefulness in industrial applications, yet it is this very “limitation” that has led multiple civilizations over many centuries to adopt gold as a form of money. To the very contrary of Buffett’s core argument against holding gold, why would anyone would want to own a fiat monetary asset that has a value not determined by the sustainable growth of societal goods and services, but a value determined by the whims of financial oligarchs that can deflate and inflate it at will? Maintaining your hard earned money in the form of dollars, pounds and Euros and allowing Central Banks to devalue them day after day, year after year, is truly an argument devoid of all logic.
When considering the recent International Monetary Fund [IMF] request to Asian Central Banks to flood their markets with liquidity, the heads of Asian Central Banks would be well served to become a student of the Great Depression before making any decision to do so. After World War I, Great Britain began to lose excessive amounts of its gold reserves due to the Bank of England’s refusal to revalue the British pound - gold conversion rate despite greatly expanding British pound monetary supplies during the war. Explained simply, in order to finance the war, the Bank of England had printed massive supplies of British Pounds without an equivalent increase in their gold reserves. Consequently, when the war ended, Britain had the same amount of gold backing a greatly increased supply of British pounds.
Simple math dictated that Britain had to devalue their pound or commit fraud by maintaining the same British pound-gold conversion ratio that existed pre-WW I. The Bank of England chose fraud over honesty, and citizens in turn, called the Bank of England’s bluff and began to convert their pounds into gold. When this happened, the Bank of England called on their sister Central Bank, the U.S. Federal Reserve, for assistance. Rather than raising interest rates to contract their own monetary supply and strengthen the British Pound in this manner to restore the pre-WWI British pound-gold conversion ratio, the Bank of England call upon the U.S. Federal Reserve to flood the United States with dollars, much as the IMF is now calling upon Asian countries to do.
According to Alan Greenspan, “The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The Fed succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process.”
Today, if the Asian Central Banks comply with the IMF’s request, since we are not on a gold standard and there are no runs on a country’s gold reserves to prevent, the IMF’s request is meant to stop the rapid devaluation of the Euro, the British Pound and primarily the U.S. dollar. If the Asian Central Banks foolishly comply with the IMF’s request, they should be forewarned that the end result of their actions will be to destroy their own economies as well.
In 1998, Mr. Greenspan stated, “You don’t have a free market. Central banks determine the money supply, not the market…We are not on a gold standard because leaders of the 20th and 21st centuries don’t want a market that functions in that manner.” The IMF’s request is driven by the desire of the world’s financial oligarchs to keep a fraudulent monetary system alive so that they can retain their power. Were the world to return to a gold standard or a combined gold / silver standard today, increases in global supplies of major currencies would be dictated by real sustainable economic growth of global economies and claims on currencies would be backed by real assets, not the untrustworthy empty promises of governments today.
If we educate millions of people regarding gold’s central role to freedom, Central Banks cannot continue to keep financing bailout plans that ultimately steal significant wealth from their citizens. In fact, because there is no gold to lose under our current unsound monetary system, this is precisely the reason why large U.S. banks had no problem continuing to feed growing bubbles of fraudulent assets such as subprime mortgages, asset backed commercial paper, etc. In the end, they knew that they would be bailed out with taxpayer money, and there was no “house gold” to lose. Thus, billions of profits could be made by risking not their own assets, as would be the case under a gold standard, but by risking only the assets of the people.
French philosopher Voltaire once said that as long as people believe in absurdities, they will continue to commit atrocities. Belief that freedom and an unsound fiat monetary system can coexist is one such absurdity. As result of this absurd belief, atrocities, such as the major media’s continual refusal to provide adequate coverage to the current global catastrophe of more than one billion hungry people, can materialize.
Under our current fiat monetary system, the financial oligarchs that control the world’s central banks will continue to feed speculative bubbles because there is no way for the people to call their bluff other than exchanging one form of fraudulent money for another form of fraudulent money. People that tried to protect themselves from dollar devaluation through the use of currency hedges discovered the futility of doing so at the end of last year and the beginning of this year when Euros, British Pounds, and Australian all plummeted by 25% to 30% in a matter of weeks.
If the World Series of Poker operated under the same rules as our current monetary system, the richest man or woman to enter the tournament would win every single tournament. No matter his hand, if there was no way to call his bluff, he could raise the pot every round to such rich levels that he could force all other players to fold even under the occasions when he held the weakest hand. Even a poker game is more honest than our monetary system for it allows other players to expose bluffs and walk away victorious.
Under our current monetary system, there is no means to call the bluff of Central Bankers by using other forms of fiat money. The only way to call the Central Bank’s bluff is to buy gold and silver. Understanding this, it is easy to deduce why Central Banks, despite holding loads of gold in their own private reserves, continually attack gold, discredit its role in our monetary system, and seek to drive its price down. If masses of people were to discover and understand the true value of gold in a sound monetary system, then calling the bluff of our current fiat monetary system and causing it to collapse would be possible.
Disclosure: The author is currently long various gold and silver majors and junior stocks, and has been since 2006. However, his positions are subject to
change at anytime, including temporarily going short gold and silver at
various points in time.
Alan Greenspan and the Gold Standard, by Stephen Williamson: Speaking of weird monetary economics. Maybe everyone knows this, but a commenter on the last post led me to some details about Alan Greenspan's past that I did not know about.
First, Greenspan puts Paul Ryan to shame in the Ayn Rand department. Greenspan was not just a casual reader of Rand, but was in her inner circle while she was writing Atlas Shrugged. Greenspan was, or is, a committed Objectivist and wrote an essay, "Gold and Economic Freedom," for Rand's book Capitalism, the Unknown Ideal. That essay is described in the link as being influenced by the ideas of Murray Rothbard, whose ideas also have a bearing on what Ron Paul thinks. Like Rothbard, Greenspan thinks ... that the "golden" age of monetary arrangements existed prior to the existence of the Federal Reserve System. Most monetary historians think of the National Banking era (1863-1913) as a period when the financial system of the United States was fatally flawed, as it produced repeated banking panics. Not Greenspan apparently.
Here's an excerpt from "Gold and Economic Freedom":
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
You could put those two paragraphs in Ron Paul's "End the Fed," and no one would notice. The use of "insidious" is interesting. That's the same word that Paul Ryan used to describe QE3.
The amazing part of this story is that Greenspan served as Chair of the Fed for a long time, and didn't seem to screw up (though some people lay some of the blame for the financial crisis at his doorstep, I'm inclined not to). If I had read "Gold and Economic Freedom" before his appointment I would have been in a panic. Maybe this means we could appoint Ron Paul to replace Bernanke, and everything would be fine. No, never mind.
For your entertainment, here's a 2007 interview with Greenspan on the gold standard. Apparently his views have not changed much.