As usual, Keith Weiner has taken a somewhat contentious area and reduced it to a simplicity. Read it all HERE.
[Editor’s note: The following is a letter written in 2004 responding to an article by Mr. Rittenouse in Countryside. This letter has been divided into two parts: Part 1 — Money and Part 2 — Conspiracy.] Thomas Allen
Mr. Rittenhouse pooh-poohs the thought that some cabal may be working to control governments and the world. Some high and mighty people disagree with him. Here is a sample of what some of these important people have said about this cabal. I dare say; these people had much more insider information than Mr. Rittenhouse.
Arthur Schlesinger, Jr.: “We are not going to achieve a new world order without paying for it in blood as well as words and money.”
Supreme Court Justice Felix Frankfurter, “the outstanding power behind the New Deal”: “The real rulers in Washington are invisible, and exercise power from behind the scenes.” At a dinner party, Frankfurter was asked who ran the United States; he replied, “The real rulers of a nation are undiscoverable.”
John F. Hylan, mayor of New York: “The real menace of our Republic is the invisible government which like a giant octopus sprawls its slimy length over our city, state and nation. . . . At the head of this octopus are the Rockefeller-Standard Oil interests and a small group of powerful banking houses generally referred to as the international bankers [who] virtually run the U.S. government for their own selfish purposes.”
After observing governmental leaders of the United States consistently making concessions to the Soviet Union, James Forrestal, the first Secretary of Defense, commented, “These men are not incompetent or stupid. They are crafty and brilliant. Consistency has never been a mark of stupidity. If they were merely stupid, they would occasionally make a mistake in our favor.”
President-elect Ronald Reagan: “I think there is an elite in this country and they are the very ones who run an elitist government. They want a government by a handful of people because they don’t believe the people themselves can run their lives. . . . Are we going to have an elitist government that makes decisions for people’s lives, or are we going to believe as we have for so many decades, that the people can make these decisions for themselves?”
A few years after resigning as President, Richard Nixon wrote, “The nation’s immediate problem is that while the common man fights America’s wars, the intellectual elite sets its agenda. Today, whether the West lives or dies is in the hands of its new power elite: those who set the terms of public debate, who manipulate the symbols, who decide whether nations or leaders will be depicted on 100 million television sets as ‘good’ or ‘bad.’ This power elite sets the limits of the possible for President and Congress. It molds the impressions that move the nation, or that mire it.”
Jim Kirk, who had been a member of the Students for a Democratic Society, Communist Party, and the Black Panthers, said about the control of radical left groups: “Young people have no conception of the conspiracy’s strategy of pressure from above and pressure from below. . . . They have no idea that they are playing into the hands of the Establishment they claim to hate. The radicals think they are fighting the forces of the super rich, like Rockefeller and Ford, and they don’t realize that it is precisely such forces which are behind their own revolution, financing it, and using it for their own purposes.”
Nicholas M. Butler, president of Columbia University, said to the Union League of Philadelphia: “The old world order died with the setting of the day’s sun and a New World Order is being born while I speak.” Butler was “J.P. Morgan’s chief spokesman for ivied halls.”
Edward Bernays, chief advisor to William Paley, founder of CBS: “Those who manipulate the organized habits and opinions of the masses constitute an invisible government which is the true ruling power of the country. . . . It remains a fact that in almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons. . . . It is they who pull the wires which control the public mind, who harness old social forces and contrive new ways to bind and guide the world. . . . As civilization has become more complex, and as the need for invisible government has been increasingly demonstrated, the technical means have been invented and developed by opinion may be regimented.”
Manly P. Hall, 33rd degree Freemason and a member of its inner circle, and probably the greatest Freemason of the twentieth century: “There exists in the world today, and has existed for thousands of years, a body of enlightened humans united in what might be termed, an Order of the Quest. It is composed of those whose intellectual and spiritual perceptions have revealed to them that civilization has secret destiny. The outcome of this ‘secret destiny’ is a World Order ruled by a King with supernatural powers. This King was descended of a divine race; that is, he belonged to the Order of the Illumined for those who come to a state of wisdom then belong to a family of heroes-perfected human beings.” He also wrote, “. . . It is beyond question that the secret societies of all ages have exercised a considerable degree of political influence. . . .”
Winston Churchill admitted the existence of conspiracy when he wrote in 1920, “From the days of Spartacus-Weishaupt to those of Karl Marx, to those of Trotsky, Bela Kun, Rosa Luxemburg, and Emma Goldman, this worldwide conspiracy for the overthrow of civilization . . . has been steadily growing.”
According to Lenin, the Communist Party could not survive without conspiracy. He wrote, “Conspiracy is so essential a condition of an organization of this kind that all other conditions . . . must be made to conform with it.”
In a speech in 1931 before the Institute for the Study of International Affairs, the historian Arnold Toynbee said, “We are at the present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world. All the time we are denying with our lips what we are doing with our hands, because to impugn the sovereignty of the local national states of the world is still a heresy for which a statesman or publicists can perhaps not quite be burned at the stake but certainly be ostracized and discredited.”
ABC commentator Cokie Roberts remarked, “Global bankers are really running the world.”
James Warburg, son of Paul Warburg, the author of the Federal Reserve System: “We shall have world government whether or not you like it — by conquest or consent.”
Benjamin Disraeli, Prime Minister of Great Britain: “The world is governed by very different personage from what is imagined by those who are not behind the scenes.”
Benjamin Disraeli: “The governments of the present day have to deal not merely with other governments, with emperors, kings and ministers, but also with the secret societies which have everywhere their unscrupulous agents, and can at the last moment upset all the governments’ plans.”
Franklinton Delano Roosevelt: “Nothing just happens in politics. If something happens you can be sure it was planned that way.”
Franklin Delano Roosevelt: “The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the Government ever since the days of Andrew Jackson.”
Elliot Roosevelt, son of Franklin Roosevelt: “There are within our world perhaps only a dozen organizations, which shape the course of our various destinies as rightly as the regularly constitutional government.”
William Colby, CIA Director: “Sometimes, there are forces too powerful for us to whip them individually, in the time frame that we would like. . . . The best we might be able to do sometimes, is to point out the truth and then step aside.”
Gary Allen, a historian of conspiracies: “. . . many of the major world events that are shaping destinies occur because somebody or somebodies have planned them that way. If we were merely dealing with the laws of average, half of the events affecting our nation’s well-being should be good for America. If we were dealing with mere incompetence, our leaders should occasionally make a mistake in our favor. . . . we are not really dealing with coincidence or stupidity, but with planning and brilliance.”
Andre Baron: “Remember that the constant rule of the secret society is that the real authors never show themselves.”
If these quotations do not suggest a conspiratorial cabal, then the origins of the Federal Reserve System should. The essence of what eventually became the act that established the Federal Reserve System was written by Paul Warburg of Kuhn, Loeb and Co. Assisting him were Henry P. Davison, senior partner of J. P. Morgan and Co.; Charles D. Norton, president of (Morgan’s) First National Bank of New York; Frank A. Vanderlip, President of (William Rockefeller’s) National City Bank of New York; Benjamin Strong, vice-president of (Morgan’s) Bankers Trust Co.; A. Piatt Andrew, Assistant Secretary of the Treasury; and Senator Nelson Aldrich, Morgan’s leading representative in Washington. This group met in secret in 1910 on Jekyll Island and drafted what eventually became the Federal Reserve System.
The conspiratorial historians may be wrong, but the evidence strongly suggests that they are right.
Copyright © 2004, 2019 by Thomas Coley Allen.
A Letter: Money and Conspiracy
Part 1 — Money
[Editor’s note: The following is a letter written in 2004 responding to an article by Mr. Rittenouse in Countryside. This letter has been divided into two parts: Part 1 — Money and Part 2 — Conspiracy.]
The following are a few comments on Mr. Rittenhouse’s article “Commodities, Fiat, and Theories,” which appeared in the July/August issue.
In defining money, Mr. Rittenhouse gives three components that an item must meet to be used as money. It is used as a medium of exchange, a store of value, and a unit of account. Federal reserve notes, which are what passes for money today, meet only two of these three criteria. It is not a store of value. Since the beginning of the Federal Reserve System in 1914, which has a governmentally protected monopoly on issuing (creating) money, the dollar has lost 95 percent of its value. Over this period, an ounce of gold is still worth an ounce of gold. In dollar terms, an ounce of gold equaled about $20 in 1914; today, it equals about $400 [at the beginning of 2019, it buys about $1280 in federal reserve notes]. Thus, gold has retained its value. It is far superior to federal reserve notes as a store of value.
Furthermore, if federal reserve notes, which are instruments of debt, were the market’s first choice of money, the government would not have to make them legal tender. The legal tender law requires people to accept the governmentally declared money, federal reserve notes, in payment of debt or to forego payment of the debt.
What made gold and silver money, along with the other items that Mr. Rittenhouse lists that have been used as money, is that they had other uses. Gold and silver are commodities that can be used for something other than money. That they can be used for other things gives them intrinsic value. Before we became so sophisticated, people would never have thought of voluntarily using paper for money because paper has such low intrinsic value. (The paper that was used for exchange was redeemable in gold or silver.) The intrinsic value of a $10 bill is the same as that of a $100 bill. They both use the same amount of paper and ink and cost the same to make. The lack of intrinsic value necessitates legal tender laws.
Mr. Rittenhouse identifies problems with counterfeiting gold coins or stamping gold coins with a higher weight and purity than it actually has. Paper money has the same problems. There are licensed counterfeiters, which in the United States is the Federal Reserve System. There are unlicenced counterfeiters, who are the people that the Treasury Department goes after. In a society accustomed to a gold coin monetary system, detecting a counterfeit gold is easier for more people than detecting high-quality counterfeit money. (This is especially true when a situation like the one that occurred at the end of World War II. At the end of World War II, the United States gave the Soviet Union the plates and paper needed to print U.S. occupational currency.)
What Mr. Rittenhouse writes about the Federal Reserve controlling the money supply as a matter of law is true. His claim that federal reserve notes are fiat currency and that people are required to accept them under the penalty of law is also true. The Federal Reserve may be doing a good job of controlling, i.e., increasing the money supply, but any good counterfeiter could do that. However, it has been an extremely poor steward of the dollar having destroyed 95 percent of its value.
Mr. Rittenhouse goes on to describe the Kondratiev Wave. Like him, I am not sold on this theory. The stories that I read today arguing that we are in the trough the Kondratiev Wave are similar to those that I read in the 1970s. (When corrected for inflation, a bottom in real terms occurred in the 1970s, but was masked by inflation.) If the bottom occurred in the 1970s, then according to the timeline of this theory, the next bottom should not occur until circa 2020. Many of the current advocates of the Kondratiev Wave are predicting that gold like everything else, except the dollar, will decline in value.
Paper money always loses value over time and eventually becomes worth no more than its Btu content or toilet paper. (In Zimbabwe, a roll of toilet paper has 720 squares and cost 10,000 Zimbabwean dollars. So, if one changes his $10,000-note in the one thousand $10-notes, he has 720 sheets for wiping and $280 left over for spending. [This was in 2004 before Zimbabwe’s hyperinflation began really to accelerate.]) An ounce of gold remains an ounce of gold forever. Paper money loses value because the government, through its surrogate central bank, can print money easier than it can raise taxes.
My outlook on the dollar is pessimistic. The dollar is going down and gold up. Debt is going to drive the dollar down. Before this run is over, which will last another five to ten years, gold is going to $5000 an ounce assuming things do not get really bad [my timing was off considerably for the dollar amount or for the years]. (The run is not over until the DJIA can be bought for an ounce of gold, which means stocks have a long way to fall and gold has a long way to rise.) If things get really bad, then gold is going beyond anyone’s wildest speculation. The wildest speculation that I have come across made by a person who follows the gold market is $111,000 per ounce. This should be a floor. If things get really bad, Mr. Rittenhouse is correct in that all our lives will be in great danger.
Gold is probably the hardest market to trade or to invest in. In stock, bonds, real estate, and all other markets, the trader or investor has to fight his greed or his fear — never both together. In gold, he has to fight both at the same time. When gold is sky-high, greed enters as it does in other markets. Yet, when gold is sky-high, it is there because of fear.
The bottom line is spend your federal reserve notes but save your gold. Use federal reserve notes as a purchasing medium, and use gold as a store of value.
Copyright © 2004, 2019 by Thomas Coley Allen.
We frame it that way, because nearly everyone loves to tout GDP (though some do so only when it suits their political agenda). It is fashionable to say variously that the Fed is doing a good job, Obama did a good job, and Trump is doing a good job. This is because GDP is up. It’s also because stocks and real estate are up. And because employment is up.
We have shown that assets go up because interest rates go down. We have shown that GDP is not necessarily a measure of new production, that consumption of old capital is added in as well. We have shown that consuming capital is labor-intensive. That is, consuming capital provides jobs.
Consumption of Capital
Suppose someone earns $60,000. He could spend $100,000, by withdrawing $40,000 from his savings. Next year, he could spend another $100,000 if he racks up $40,000 in credit card debt. The first year, he consumes his own capital. The second year, he consumes someone else’s capital. At best, he will have to pay this capital back by consuming less than his income for several years (and he likely will not repay it).
It is harder to see it when there are 300,000,000 people aggregated into a single statistic. A household budget is not so complicated. Macroeconomics is rather more so.
Let’s look at a simple example. Harry Hapless is sailing in the south pacific, and a storm causes his boat to run into a reef. It sinks, and he swims to a nearby island. Devastated, he doesn’t know what to do other than accumulate food. So he spends his days spearing fish, and letting them dry in the hot wind which seems to constantly blow. The first year, he catches 730 fish. He eats one every day, and dries one to keep for later.
What is the GDP of his island? The economy—such as it is, with only one person and only the one commodity—has produced 730 fish. However, it consumes only 365. Is GDP 730 or 365? We’ll get back to that.
In any case, the next year, Harry looks at his heap of dried fish, and decides he does not have to work. So he sits on a rock, staring at the horizon in despair of ever seeing a rescue ship. Each day, he eats one fish.
Gross and Production
In order to discuss GDP for this island, we need to drill down into what it means. We won’t debate this based on the conventional definition. We have already shown in prior essays that the conventional definition is, at best, misleading. We want to drill down to the root. What ought we to be measuring?
GDP contains two important concepts. Let’s look at the second one first: product. Isn’t it interesting that a concept that is nominally about production has come to mean consumption?
Anyways in year one, production is 730. In year two, it is 0.
The other key concept in GDP is: gross. Compare and contrast with net.
In year one, gross production is 730. Or perhaps in the context of national account statements, this is akin to gross revenue. This was correctly stated as 730.
And net is now clear: net income. This is what’s left after consumption. In year one, gross production is 730, and net income is 365. Simple.
In year two, gross production is 0. But the net is actually -365. That is, we did not produce but we consumed. We removed 365 fish from the balance sheet, and got poorer (and closer to the edge of starvation). It is possible for those who do not toil, to eat! To consume without producing (in the present). At least for a while. They can consume what was accumulated in happier times, while the dried fish—the accumulated capital—holds out.
If Harry’s friend, David Dismale, were to look at the GDP of the island, he might say that GDP was 365 in each year (depending on factors outside the scope of this simple example). Does that feel right? Does it pass a basic sniff test?
The Purpose of GDP: Newspeak
So back to a proper reckoning of this macroeconomic statistic in the real world. It is not precise, and not really accurate, to say our rising-GDP economy is fake. Real people are flying on real planes to real hotels and eating real food in real restaurants that employ real chefs. Now we can express it more clearly. It’s not fake, it is unsustainable, based on consumption of capital.
The GDP statistic is not fake. We are sure that the government economists who gather and tally the data do so to the best of their ability. That’s not the problem (in the US, we will not discuss the incredible nominal GDP of the nominally communist countries). The problem is that GDP is a socialist tool touted by socialist tools (in many cases, unwittingly, AKA “useless idiots” as Vladimir Lenin is believed to have sneered).
A proper accounting of economic activity does not add consumption of capital—i.e. destruction—to production. GDP could be said to be a fake statistic, in the sense that it is measuring production + destruction.
If we can distinguish gross from net, and production from consumption, we might just have something.
We might have something like a national income statement, and a national balance sheet. The income statement could account for revenue and expenses. And the balance sheet would measure changes in liabilities and assets—i.e. equity, i.e. capital.
But we live in a world where this is actively avoided. The government keeps its books on the cash basis. This is illegal for any private business of more than $5 million revenues, or any private insurance business. Yet when the government takes in a dollar of insurance premium, against a certain obligation to pay $100 next year, it blithely books only the $1 income. Thus many people will insist that the government ran a budget surplus under President Clinton. We assure you that it was no surplus, if you account for the liabilities that were accrued during that time.
And we live in a world where credit is deemed to be money, where credit taken without means or intent to repay is called borrowing, where an increase in all asset prices due to a drop in the interest rate is deemed to be increasing wealth, where an endless game of musical chairs, each party buying the same chairs from the previous at higher prices is deemed to be investment, where eating the seed stocks is deemed to be economic growth, where the central bank’s interference in the market is deemed to be stabilizing the economy.
It should not be a surprise that those who profiteer on this system have developed a language to reinforce it. George Orwell was on to something, when he coined the term Newspeak. According to Wikipedia:
“…Newspeak limits the user’s communications (thought, spoken, and written) with a vocabulary that diminishes the intellectual range allowed…”
We propose to induct the word “GDP” into Newspeak. If one is limited to arguing if GDP has gone up or down, then one is left to assume up is good. At least it’s good, if the one double-plus-ungood thing does not occur: inflation. Rising prices are the one thing of which Newspeak allows criticism, or we should say, to which Newspeak deflects all would-be critical thought.
Keynes and Orwell would be looking at us, smiling, “good, good…”
And this is why we need to return to the gold standard: to return to honesty in credit.
Supply and Demand Fundamentals
Well, wasn’t this an interesting week! The price of gold was up a pedestrian $10, mere noise in the long-term signal. But in silver, we see plus one dollar. It was practically inevitable with the gold-silver ratio at an all-time high, after a big run up in the gold price with no corresponding run in silver. When the silver speculators get their game on, they can push the price up far more in percentage terms than in gold (which is a much larger, deeper, more liquid market).
This will be a short Report, due to Keith’s challenging travel schedule.
Monetary Metals is excited to be bringing the first gold bond to market. Please contact us if you are interested in investing.
Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio dropped substantially this week.
We see little change in the scarcity of gold (i.e. cobasis), and the price did not change that much either.
The Monetary Metals Gold Fundamental Price fell $4 to $1,403. We note that the fundamental is below the market price for the first time since the end of 2017 (which was a brief spike down in the fundamental, a flash in the pan).
Now let’s look at silver.
With silver, we can see the scarcity continuing to follow the dollar price. That is, silver becomes scarcer when it sells, and more abundant when it is bid up.
The Monetary Metals Silver Fundamental Price moved up just as much as the market price, one dollar: from $15.52 to $16.50.
The Monetary Metals calculated fundamental gold-silver ratio fell from 90.6 to 85.0. If this, too, is not just a flash in the pan, watch out!
© 2019 Monetary Metals
In 2018, central banks bought over 650 Tons of Gold; a 74% increase over Gold purchases by central banks in 2017. I wonder why… especially as Mr. Bernanke, on being questioned ‘why do central banks hold Gold?’ answered that this was ‘simply a matter of tradition’.
Mahathir Mohamad, Prime Minister of Malaysia, speaks out for a Gold ‘pegged’ currency as a ‘return to Asian values’. When Muammar Gaddafi of Lybia and Saddam Hussein of Iraq tried to replace Dollars with Gold, they were ‘bombed back to the stone age’ by the Fiat loving Washington deep state. Will Malaysia be next to be bombed? Or is the Great Satan running on Fiat fumes?
Elvira Nabiullina, President of the Central Bank of Russia is not only buying Gold hand-over-fist, while dumping Dollar denominated treasury debt, but is ‘investigating’ the possibility of creating a Gold pegged crypto currency.
The Chinese government is buying Gold, encouraging Chinese citizens to hold Gold, is guaranteeing Gold as support for oil purchases denominated in Yuan rather than US (Petro) Dollars. Not declaring that Yuan is redeemable in Gold… another kettle of fish entirely… but still another step towards Gold.
Just a few years ago Central Banks were busy selling Gold rather aggressively. Now, with the Basel III (Guidelines for banking issued by the Bank of International Settlements… the central banker’s central bank) decree in force, Gold has been reclassified as a ‘secure asset’ allowing banks to use Gold as first tier base capital… a recognition of Gold’s unchallenged record of holding value.
Times do change. Surely instead of zigging away from Gold, the world is now zagging towards Gold. The current undeniable rise in the value of Gold vs. US Dollars… and vs. other Fiat currencies… makes this perfectly clear. Gold is rapidly replacing the US Dollar as most desirable reserve asset.
The question is, are these truly the portents of a return to the ‘Gold Standard’… or simply glitches, rough spots in the process of the ‘Fiatization’ of the world economy? If the Gold Standard is actually on the way back, then how could this proceed, how could a return to Gold be achieved?
To see into the future, it is desirable to first look into the past. A quick review of the history of the Gold Standard and of its destruction is in order. First, recall the three fundamental qualities of real money; first and foremost, long term retention of value. Second, its use as a medium of exchange. Third, last but not least, money is the numeraire; the universal unit of value.
The first and most important quality is a no brainer; Gold has been of supreme value since long before recorded Human history. Thousands of years before the invention of money (Gold coins) and indirect trade, Gold was valued, hoarded, even worshipped… The BIS has just recognized this undeniable fact.
With the invention of the coin, Gold transitioned from being simply a store of value to circulating money; Gold coins could be counted as ‘one coin two coins three coins’… a great advance over having to weigh and dispense bits of Gold of uncertain fineness, perhaps chopping bits from a bigger ingot. Indeed, the modern economy began to take shape with the invention of coins, coins wrought from refined Gold and certified by the issuer; whose chop was embossed into the coin.
Now Gold was (and is) the very best money; but that does not mean it is perfect. There is no perfection except perhaps in human imagination. Gold coins, even the smallest ones practical to hold, are far too valuable to serve for ordinary day-today transactions, such as buying a loaf of bread or a jug of wine… accordingly, Gold had a ‘junior‘ monetary partner, Silver.
Historically Silver had a specific value of about 1/12 that of Gold; that is, it took 12 one ounce Silver coins to buy a single one ounce Gold coin. This ratio reflected the relative abundance of Silver in the earth’s crust vs. the abundance of Gold.
Even so, the value of a small Silver coin was still a bit too much to account for smallest transactions; copper was used to make the least valuable coins, pennies; these subsidiary coins were used by kids to buy ‘penny candy’… and to make change for other transactions.
These three metals well fulfilled the needs of commerce for stable, reliable money. But commerce… and society… does not run on a cash only basis. Credit is essential to any society; indeed, credit predates coinage. A farming community gets together for a ‘barn raising party’, helping some up and coming young family to get a start. This is credit on the most basic human level.
No borrowing, only credit, based on the firm belief that one day the family helped out will in turn help the community by participating in some other barn raising party. The young family deserved the credit given. Same for a threshing party; helping each other, no borrowing, but simply credit granted. You scratch my back and I scratch yours.
Now mind you, there was also borrowing before coinage; like one farmer lending seed corn to another, with the expectation that once the crop was in the seeds would be returned… in spades, with a bonus; return more than borrowed. If you wish to be cynical, you could call this ‘bonus’ interest on the borrowed item.
Once coins (money) were in general circulation, credit and borrowing were refined and clarified. For sure, just as there was borrowing of stuff in a barter society, so there was borrowing in a society with money; but the borrowing tended towards borrowing/lending money rather than borrowing/lending stuff… just as indirect trade using coins is far more efficient than direct barter, so borrowing /lending money is far ahead of borrowing/lending ‘stuff’.
Indeed, ‘borrowing’ money could actually be called ‘renting’ money; just as one could rent a car, a special tool, or an apartment… so one could rent money, and put it to any desired use; hopefully to invest in a venture that would return more than the cost of rental.
Here a small digression; unfortunately, the rental cost of money is usually called ‘interest’… and is confused with usury. Renting (real) money is no more ‘usurious’ than renting a car or a chain saw; what is usurious is printing fake (Fiat) currency, calling it ‘money’ and charging (real) interest… Fiat paper lent out for real interest, the sweat of someone’s brow… that is usury.
Getting back to the point Gold, Silver and Copper filled the need for money; and paper instruments denominated in Gold units filled the need both for borrowing/lending and for pure credit, credit granted with no borrowing. The borrowing/lending aspect of credit evolved into the bond markets.
Bonds are instruments that promise to pay rent (interest) to the lender, in return for money lent to the borrower. The lender presumably has cash in surplus of current needs, and desires to use his cash to earn income. The borrower has need for cash (capital) in order to fund a profitable enterprise.
The two side’s needs match… and money is lent (long term) with the expectation that the borrowed money will eventually be paid back, and in the meantime the lender receives payment (rental fee) for lending his cash.
The other form of credit… with no borrowing/lending and no ‘rental fee’ (interest) was provided by Bills of Exchange. Not by Bonds and not by Notes (will touch on Notes a bit later) but by Bills; instruments drawn against goods already produced… something like today’s invoices.
The key is that Bills of Exchange were drawn against actual merchandise already produced; not like Bonds at all… Bonds are issued with the expectation of eventual payback and a stream of rental or ‘interest’ income… Issued vs. drawn against is crucial…
Something amazing and spontaneous happens with Bills; those Bills drawn against consumer goods in high demand (like food products, fuel in winter, and all sorts of consumables) will be put into circulation as instruments with important monetary properties. Note that Bills of Exchange mature into Gold coin in 91 days or less (that is, will be paid off in Gold on the due date).
To put this simply, an invoice or Bill drawn on bags of flour delivered to a bakery with payment due in 91 days has market value. The redemption of the Bill depends on the consumer; and surely, flour baked into bread will sell to the consumer for Gold coins… and the flour invoice (Bill) will be paid with the coins.
So will sell fuel in winter, beer in summer and socks that wear out… while bricks in a warehouse may or may not sell… thus bills drawn on bricks will not circulate. That is, they will not be accepted as payment… because they may not mature into Gold coins by their due dates.
If the bricks don’t sell by the due date of the Bill, the brick retailer will have to use other means to pay… using either his own capital, or borrowed money. Thus Bills drawn against less urgently needed goods are not as secure as Bills drawn on goods in acute demand. Only the most secure, the most desirable Bills will circulate…
Now all this may sound interesting but you may say ‘so what’? Who cares, and why talk about Bills of Credit at all? Well, historically… under the Classical Gold Standard… the Bill market was huge; bigger than the stock market, bigger even than the bond market, and more liquid than either. Bills in circulation did most commercial clearing; Gold hardly ever moved, except at the last transaction in the chain of production… at the consumer level.
Virtually all business to business and wholesaler to jobber to retail transactions were cleared by the transfer (endorsement) of Bills. Note that Bills circulate at a discount; the baker was willing to pay the flour bill early, for a consideration; a discount.
The holder of the bill (in this case the flour mill is the initial holder) would also be willing to give a (modest?) consideration for early payment… and thus the Bill would change hands at a discount. Bills do trade at a discount, but are redeemed at full face value on the due date.
This graphic should make the process clear; goods move from right to left, payment from left to right. Note Gold is only used in the retail sale to the ultimate consumer, and in payment on due date to whoever the Bill has last been endorsed to; all other payments are made via Bills in circulation. Gold is put to far better use than to simply clear COD transactions…
The modern economy has transactions much more complex than this. Consider for example a car; it may be assembled in Florida… but engine, transmission, wheels, seats ad infinitum are sourced from the supply chain; and engine parts used to build the engine are further sourced. Bills will pay all these complex international transactions; not Gold… and with no need for banker controlled Fiat currency.
Bills circulate horizontally as well as vertically; that is, a Flour bill may be used in the milk industry, or a bill drawn on sugar may be used to pay the brewery… endless variations. This is why Bills are an essential component of an honest Gold standard.
The Bill system was highly successful; multilateral trade cleared by Bill circulation was so large that after the destruction of the Bill system at the end of WWI, it took half a century to re-establish international trade to pre-war levels.
Indeed, just as Gold is the very best money… the best store of value, the best medium of exchange and the best numeraire… so Bills of Exchange were the very best paper; lowest possible risk, maximum liquidity, and an earning asset. A product of natural, historical market forces… the best asset next to Gold. Unlike Gold, Bills could be bought at a discount, and Bills matured into Gold at full face value in not more than ninety one days.
Thus the three legs of the Unadulterated Gold Standard;
Leg one; Gold coins in circulation, with subsidiary Silver and Copper coins; the foundation of sound economics and the foundation of honest society.
Leg two; Gold Bonds for borrowing/lending; debt instruments that facilitate long term capital accumulation. Low risk income producing assets held by widows, orphans and retirees.
Leg three; Bills of Exchange clearing commercial transactions at the lowest possible cost, credit without borrowing. Lowest risk, lowest transaction cost, income producing and in great demand. Discount rate is the best ‘signal’ given by markets; far more responsive than interest rates or prices.
If a Gold Standard is ever to be reintroduced successfully, these three legs must be reproduced in one form or another. Bills of Exchange are an essential part of a viable Gold standard; they provide the flexibility demanded by commercial activity, flexibility that is NOT provided by a ‘hard’ currency such as Gold.
Without Bills in circulation, the first Christmas buying spree would put so much pressure on circulating Gold that the system would collapse; as it collapsed after WWI. Furthermore, the discount rate’s instant response to consumer demands is a far better market signal than the interest rate… never mind the wildly manipulated rates now in effect.
The discount rate gives much faster feedback than the slow to respond price structure. Fast feedback lends stability to the system; slow feedback leads to wild economic oscillations…
The Gold Standard stabilizes interest rates and thus stabilizes Bond capital values. Gold bonds, especially when their capital value is protected by sinking funds (money set aside to buy Bonds back in case of loss of market value) will no longer be useful for speculation (interest rate speculation) but will once again be held by widows and orphans… and retirees, savers, rather than big time speculators… speculators like Deutsche Bank.
When Gold is the numeraire, there is no Forex… rather than ‘floating’ (sinking) Fiat currencies, there is only ONE universal ‘currency’; Gold. With no Forex, there is no Forex speculation. If there is no speculation then no need to ‘regulate’ speculation. No regulation; no corrupt regulators.
No derivatives in the quadrillions, no banks ‘too big to fail’, no need for CB’s… no Deutsche Bank, no Lehman Brothers… no massive never to be paid back deficits… no impossible balances of payment between countries. Just a monetary Nirvana!
So how… and why… was this time proven, highly effective monetary standard destroyed? It took many years indeed centuries to do so, and I will not here speculate on who the culprits were or why… that is for another article. The reader may apply the time proven concept of Cui Bono… and figure this out for himself. Let’s focus on how the destruction took place.
First blow was eventually fatal to not only the Gold standard, but to human freedom. This was a legal decision made by a British court in favor of Banks. The fatal decision was that money deposited in a Bank account is no longer the property of the depositor, but becomes the property of the bank.
Does this sound innocuous? Hope not. It is the basis of today’s ‘bail in’ legislature; a bank or a bank system in trouble (bankrupt) will confiscate (steal?) the depositor’s money to liquefy the Bank; but if deposited money is (legally) considered the property of the bank, where is the theft?
No, the real sin is the original court decision; the depositor loses ownership, and gets demoted to an ordinary creditor of the bank. Of course, creditors will be paid… unless the system goes down, in which case creditors get pennies on the Dollar… if anything.
Once the Bank is the legal owner, it can do pretty much what it desires with the deposits; had the depositor retained ownership, no bank operation could go against the desires of the owner; the depositor.
Thus speculation (gambling in derivatives) with depositor’s money is now rampant; estimates are that derivatives in existence have a ‘notional’ value of one and a half quadrillion Dollars… one thousand five hundred trillion Dollars! Check out Deutsche Bank financial statements for the latest scary example of this insanity… and remember Lehman Brothers, Bear Sterns, the 2008 Great Financial Crisis etc…
This becomes clear when we compare money to other ‘stuff’; after all, no warehouse has the privilege of declaring ownership of the ‘stuff’ it stores; no indeed, the owner remains the owner… and bankruptcy of the warehouse will not lead to the deposited items being confiscated (stolen) or ‘bailed in’.
All items stored in the warehouse will be returned to their rightful owner… and only assets that actually belong to the warehouse will be subject to liquidation. Why not when it comes to money? Why is depositor’s property seized… why not only the actual property of the Bank… the vault and real-estate and computers? Because of an ancient British court decision. Deposits are declared as belonging to the bank. The warehouse owns the bicycle you store there.
The second blow was the creation of the so called bimetallic system; rather than allowing natural market forces to determine the relative value (purchasing power) of Gold and Silver coin, Government decreed a fixed Gold/Silver ratio. This is like the Government decreeing the price of a pair of shoes… or a pint of beer.
Gresham’s law shows that bad money drives good money out of circulation; and so it was. As the natural relative value of Gold and Silver fluctuate, so one or the other is hoarded; the coin with the most real value stays in the pocket, and the artificially up-valued coin is spent… a more serious problem than over/under priced shoes or beer. After all, money affects the whole economy not just a small niche.
Typically Government did not recognize that their policy was causing a problem; instead of honestly admitting that the decree was wrong, that it causes harm and retracting the decree, a new law was brought in to ‘solve the problem’. Instead of allowing market forces to manage the Gold/Silver ratio, Government ‘demonetized’ Silver.
To understand the enormity of this action, realize that most day to day transactions used Silver; thus removing Silver’s monetary status was amazingly deflationary… (as well as unconstitutional in the US) the circulating monetary medium available was drastically reduced… and consequently the (rich 0.1%) holders of Gold were further enriched; as Silver faded in value, the relative value of Gold rose. Average middle class person’s savings were decimated… the destruction of freedom and equality began.
Furthermore, this demonetization had other consequences; again, Government doubled down. To solve the problem created by the demonetization of Silver, rather than backtrack, another step was taken towards the destruction of the Gold standard.
Remember I mentioned Notes along with Letters of Credit; just as Letters of Credit were written to facilitate the movement of large quantities of Gold, so large denomination Bank Notes did facilitate Gold movement in the large. However, while Letters of Credit were specific to a single holder (the signer) who deposited Gold and paid a fee for the letter, Bank Notes were bearer instruments.
Rather than being specific to one person, Bank Notes were redeemable by the bearer; anyone who showed up at any bank could redeem his note for Gold. This made it simpler to transfer large sums, with no need for signatures; simply use Gold to buy a Bank Note, take the Note to any bank, and redeem it for Gold.
Unfortunately this ‘innovation’ opened a can of worms… and these particular worms led to the collapse of the Gold standard. As Silver was demonetized, there was a need for more circulating money; rather than restore Silver to its natural status as junior money, small denomination bank notes were created and put into circulation along with Gold.
The newly printed Notes had to be redeemable in Gold; indeed they were, at least for a while… till the average user of paper notes came to accept the concept that these Notes were ‘as good as Gold’… sound familiar? Of course, they were not. Gold is a shiny, heavy, yellow metallic substance, of great value for thousands of years; paper Notes are just… paper promises. No way are Notes as good as Gold; Notes are but claims on Gold… and how good a claim? This is the sticking point.
Indeed, the onset of WWI gave impetus to this dilution of the circulating medium; as the pundits predicted, no major war could last for more than a few months, as there was not enough Gold in the (British) treasury to finance one; so, small denomination Notes were printed in quantity… along with war bonds. A Gold standard does not support war.
In order to redeem Notes, it is not enough for the bank to have its assets match its liabilities… a fact that should be clear enough. Balance sheets must balance… but liquidity of assets vs liabilities must also balance; this fact is ignored or well hidden.
Clearly if a Bank holds 1,000 Oz of Gold coin, it could issue 1,000 Oz worth of redeemable Bank Notes; a no brainer. Assets balance liabilities, and liquidity also balances; cash notes vs cash money in the vault.
Now suppose instead of 1,000 Oz of Gold in the vault, the bank holds 500 Oz gold… and also holds 10,000 Oz of Silver. At the historic value of Silver vs Gold, before demonetization, the assets over-match the liabilities; 10,000 / 12 = 833 Oz equivalent Gold… plus 500 Oz Gold means the asset side has 1,333 Oz and the liability side 1,000 Oz; clearly safe and prudent.
But how about liquidity? Not a problem; simply change Silver for Gold… about like changing $10.00 bills for $100.00 bills today; easy and natural. On the other hand, suppose the assets are not Silver coin, but blacksmith anvils with retail value of 600 Oz of Gold… does this work?
Not very likely is it… the market for blacksmith anvils is not the most liquid! Long before the bank is able to sell (not exchange) the anvils for Gold, the depositors at the teller window demanding their Gold would be screaming… and what came to be called a ‘run on the bank’ would be well under way.
So, once again, instead of backtracking and erasing errors the Government produces another destructive response to ‘fix the problem’; the creation of Central Banks, ‘lenders of last resort’ designed to lend money to banks experiencing runs… with apparently no thought given to what happens when the ‘lender of last resort’ is itself tapped out… like we see happening today.
Under the Gold Standard, a match between liquidity as well as value of assets and liabilities was assured. Bank assets would consist of bullion, and up to forty percent Bills of Exchange; nothing else was eligible for the balance sheet.
The Bill market was the biggest and most liquid; and the undeniable fact is that all Bills mature into Gold in ninety one days or less. Therefore, to keep forty percent of its assets in Bills, the bank had to keep buying new Bills, replacing those that mature, to keep the bullion/Bills ratio constant.
If there was a growing demand for Gold coin at the teller, the bank would simply buy fewer Bills; if demand for Gold dropped, more Bills needed to be purchased; after all, Bills were an earning and maturing asset… unlike bullion. A reduction in the quantity of Bills on hand would hit the profitability of the Bank.
At the extreme, if there was an overwhelming demand for Gold for whatever reason, Bills in the portfolio were exchanged for Gold in the Bill market… at no loss. There is no spread (difference between buy and sell price) in the Bills market; Bills trade at the discount with no further loss… (The discount varies from maximum on draw day to zero on maturity day) another reason why Bills were so valued. Bonds have a spread; the difference between bid and ask prices. Even Gold has a (small) spread.
Silver has a somewhat higher spread than Gold; cost of transportation is higher, as the specific value is lower. Gold and Silver also have a carry charge; capital cost of the vault, security, insurance; once again, Bills have no cost of carry, and are earning assets. Their value grows as due day approaches.
Well, two strikes hit the Gold Standard; one more strike, and it’s out? After WWI, Britain made a (faint) effort to ‘go back on Gold’ mainly because people still understood that Gold was real money, and they expected their Notes to be redeemable.
Two things went wrong here; first, an attempt was made to re-establish the Gold value of Notes at the pre-war level. This was clearly impossible, as vast numbers of Notes had been printed… and there was no more Gold than before the war to ‘back’ the new notes. The Pound note should have been devalued to accept and account for this reality… but no.
Second, even worse (recall that the Gold Standard survived the demonetization of Silver, and could just as well have survived the false valuation of Notes) the Bill of Exchange market was NOT restored. This meant that the most prolific instrument used to clear commercial transactions no longer existed… forcing all transactions to either cash only, or to use borrowed currency… a good excuse to print ever more paper currency, to benefit the printer… namely the G’man… and the lender, namely the Banks.
Borrowed funds are quite more costly than discounted Bills. Furthermore, unlike the discount rate and honest interest rates, the cost of Fiat (interest) was decreed by the Central Bankster. Power over the economy was drawn to politician’s hands. Consumers be damned.
The US introduced its own central bank; the Federal Reserve. Mind you, the original legislature called for the Fed to hold only Commercial paper; that is, Bills of Exchange. This limitation reflected reality; Bills were desirable assets, Bonds not.
The reason is simple; bonds are issued, and Bills are drawn. Issued by any entity able to convince the market that it is dependable… while Bill are drawn against goods already completed, on their way to the eager consumer. Furthermore, like anvils, Bonds cannot simply be exchanged but must be sold, at fluctuating market prices. No need to convince anyone to hold Bills…
Crucially, the nominal quantity of Bills in circulation depends directly on the quantity of consumer goods on their way to the consumer; more consumption, more bills may be drawn. Retrenchment in consumption, Bills mature and fewer new ones can be drawn. The Bill market is self-limiting, and entirely consumer driven.
By contrast, Bonds can be issued in virtually unlimited quantities… mainly by Governments. Unlike commercial Bonds that are at least scrutinized by the market, to determine if the borrower has the means to pay, Governments rely on ’faith and credit’… are you rolling on the floor laughing? Furthermore, Bonds cannot be ‘redeemed’ but, like anvils, must be sold. Sales are subject to buyers… and the price of Bonds is thus volatile.
Soon enough, the Fed did start to hold Government debt… and of course, today the Fed holds Trillions of Dollars of Treasury debt on its balance sheet; so do other Fiat loving CB’s. So much for Commercial paper, prudent banking, and freedom. Hi Ho Banking Casino; privatize profits, and let the depositor cover losses.
Next, President Roosevelt by decree confiscated US citizen’s Gold… stole it? He gave out small denomination Bank Notes in return; US Dollars. Within a few months, he raised the price of Gold by almost 50%; that is, the non-redeemable paper Dollars now held by Americans were devalued. Once again, like with demonetization of Silver, the saver was screwed.
More nails were quickly hammered into the Gold Standard coffin; after WWII, the US had the most Gold in the world, over 22,000 Tons of it. Thus at Bretton Woods, the US Government decreed that henceforth the Dollar was as good as Gold (sound familiar?) and other nations will henceforth use Dollars as reserves, not Gold. Only Uncle Sam was entitled to use Gold.
The US agreed to redeem Gold for Dollars at a fixed rate… but only for international purposes. Foreign states (central banks) retained this privilege, but US citizens were out of luck… as were other citizens.
Bretton woods did not last long; by 1971, so many excess US Dollars had been printed that foreign governments started to redeem their Gold big time; soon the US had only ~8,000 Tons left from the 22,000… Again, rather than admit the truth and devalue the Dollar, President Nixon ‘closed the Gold window’… a euphemism for breaking promises. Bretton Woods was the last official link to Gold.
Was that the nadir for Gold? Or was the nadir the subsequent Gold selling by Central banks? No matter; today the zig has ended, and the zag begun. Selling of Gold replaced by buying… hoarding of Dollars replaced by dumping; the big question is what will replace the Dollar as the world’s reserve currency?
Surely American foreign policy is speeding up the destruction of the Dollar based system; the ‘weaponization’ of the Dollar proceeds apace, and so grows the inevitable blowback. Why should any sovereign nation accept Dollars, if Dollars are not honest money, but are weapons used for enforcement of the hegemon’s desires? The broken promise of Bretton Woods is only one of many; no promise given by Washington is to be trusted.
Recalling again the three important qualities of money; Gold has long term value… no question. It needs to be put into common circulation; will this be through Gold Coins in consumers’ pockets, through a fully redeemable (paper) currency, or through a Gold pegged crypto? Maybe all three? Time will tell.
Finally there is the gorilla in the room; there needs to be a new international numeraire… to replace the US Dollar. The question is what will be the new numeraire? Will it be SDR’s… a basket of Fiat currencies? Or will it be Yuan, Gold backed? A simple ‘Gold backed currency’ is only the first baby step towards a real Gold standard.
Perhaps it will be a Gold Redeemable Yuan… or a Gold Redeemable Ruble? For a real Gold Standard, Gold needs to become the numeraire once again… and this can only happen as the US Dollar loses its international standing.
Once all hurdles are cleared, Gold will retake its place as the Queen of assets; as honest money in an honest society. Now, I will not hold my breath on how long all this takes to play out, nor speculate on what crises the world will first go through; but it certainly behooves us to remember the Golden Rule;
He Who Has the Gold Makes the Rules.
Do you own any?
Rudy J. Fritsch