Tag Archives: Gold Standard

The Lost World of the Barbarous Relic, by George F. Smith

It’s hard for a country to wage war if its government is on the gold standard. From George F. Smith at lewrockwell.com:

It’s one of the greatest ironies of history that gold detractors refer to the metal as the barbarous relic, when in fact the abandonment of gold has put civilization as we know it at risk of extinction.

The gold coin standard that had served Western economies so brilliantly throughout most of the 19th century hit a brick wall in 1914 and was never able to recover, so the story goes.  Europe turned from prosperity to destruction, or more precisely, to the prosperity of a few and destruction of others, as the Great War got underway.  The gold coin standard had to be ditched for such a prodigious undertaking.

If gold was money, and wars cost money, how was this even possible?

First, people had been in the habit of using money substitutes instead of money itself – paper bank notes instead of the gold coins for which they could be redeemed on demand.  People found it more convenient to carry paper around in their pockets than gold coins.  Over time the paper itself came to be regarded as money, with the gold it represented a clunky inconvenience from the old days.

Second, banks had been in the habit of issuing more bank notes and deposits than they had gold in their vaults and would on occasion arouse the suspicion of the public that the notes were making promises the banks couldn’t keep.  The courts sided with the banks and allowed them to suspend note redemption while otherwise staying in business, thus strengthening the government/bank alliance.  Since the deposits really belonged to the banks once they were deposited — said the courts — bankers could not be accused of embezzlement.  The occasional bank runs that erupted were interpreted as a self-fulfilling prophecy.  If people lining up to pull their money out believed their banks were insolvent, the banks soon would be.  Most people had no idea their banks were loaning out most of their deposits.  They didn’t know fractional reserve banking, a form of counterfeiting, was the norm.

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Money Does Matter: The End of the Gold Standard Led to a Lower Standard of Living, by André Marques

Fake money is not without costs, and those costs invariably lower living standards. From André Marques at mises.org:

On August 15, 1971, Richard Nixon announced that the US dollar (USD) would no longer be redeemable in gold. This was supposed to be temporary. And yet, fifty-one years later, here we are. The gold standard was gradually destroyed in the twentieth century. Now people are experiencing the consequences: less purchasing power, more economic cycles, and a weaker economy.

In the chapter 4 of his book What Has Government Done to Our Money?, Murray Rothbard goes over the steps the government took to end the gold standard over the twentieth century, from the end of the classical gold standard to the closing of the gold window in 1971.

The Classical Gold Standard (1815–1914)

The classical gold standard tended to prevent the government from running budget deficits and going into debt, as it could not easily create inflation. In 1913, the Federal Reserve (Fed) was born. When the US entered the World War I, US dollars were printed at an excess of the gold reserves. At this point, the US got off the classical gold standard and this money printing contributed to the depression of 1920–21.

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THIS DAY IN HISTORY – FDR takes United States off gold standard – 1933, via history.com

It’s a short-odds bet that they try this again. From history.com:

On June 5, 1933, the United States went off the gold standard, a monetary system in which currency is backed by gold, when Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold. The United States had been on a gold standard since 1879, except for an embargo on gold exports during World War I, but bank failures during the Great Depression of the 1930s frightened the public into hoarding gold, making the policy untenable.

Soon after taking office in March 1933, President Roosevelt declared a nationwide bank moratorium in order to prevent a run on the banks by consumers lacking confidence in the economy. He also forbade banks to pay out gold or to export it. According to Keynesian economic theory, one of the best ways to fight off an economic downturn is to inflate the money supply. And increasing the amount of gold held by the Federal Reserve would in turn increase its power to inflate the money supply. Facing similar pressures, Britain had dropped the gold standard in 1931, and Roosevelt had taken note.

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The new deal is a bad old deal, by Alasdair Macleod

The Internet’s best economist explains why the New Deal was a huge mistake, and why we’re about to repeat it, except this time only huger. From Alasdair Macleod at goldmoney.com:

So far, the current economic situation, together with the response by major governments, compares with the run-in to the depression of the 1930s. Yet to come in the repetitious credit cycle is the collapse in financial asset values and a banking crisis.

When the scale of the banking crisis is known the scale of monetary inflation involved will become more obvious. But in the politics of it, Trump is being set up as the equivalent of Herbert Hoover, and presumably Joe Biden, if he is well advised, will soon campaign as a latter-day Roosevelt. In Britain, Boris Johnson has already called for a modern “new deal”, and in his “Hundred Days” his Chancellor is delivering it.

In the thirties, prices fell, only offset by the dollar’s devaluation in January 1934. This time, monetary inflation knows no limit. The wealth destruction through monetary inflation will be an added burden to contend with compared with the situation ninety years ago.

Introduction

Boris Johnson recently compared his reconstruction plan with Franklin D Roosevelt’s New Deal. Such is the myth of FDR and his new deal that even libertarian Boris now invokes them. Unless he is just being political, he shows he knows little about the economic situation that led to the depression.

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Time to learn about money, by Alasdair Macleod

Alasdair Macleod, the best monetary economist on the internet and probably on the planet, writes long articles that are well worth taking the time to read. In this one he explains how currencies collapse: slowly, and then very fast. From Macleod at goldmoney.com:

An unexpected destruction of fiat currency has been advanced by the monetary and fiscal response to the coronavirus. Financial markets have yet to discount the possibility of such an outcome, but in the coming months they are likely to awaken to this danger.

The question arises as to what will replace fiat currencies. In the past the answer has always been gold but today there are cryptocurrencies as well, whose enthusiasts are more aware than most of fiat money’s failings.

This article describes the basics about money, what it is and the role it plays in order to understand what will be required by the eventual replacement for fiat. It concludes that gold will return as the world’s medium of exchange, and secure cryptocurrencies, unable to provide the scalability and stability of value required of a medium of exchange will be priced in gold after the demise of fiat. But then the rationale for them will be gone, and with it their function as a store of value.

The destruction of fiat money

These are strange times. Circumstances are forcing governments to destroy their money by debasing it to pay for their obligations, real and imagined. If central bankers had a grasp of what money really is, they wouldn’t have got into a position where they are forced to use their seigniorage to destroy it. They are so ignorant about catallactics, the fundamentals behind economics, that they cannot see they are destroying the means of exchange they have imposed upon their citizens with far worse consequences than the abandonment of the evils they are trying to defray.[i]

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How to return to sound money, by Alasdair Macleod

Alasdair Macleod outlines how the US could return to gold-backed money. From Macleod at goldmoney.com:

Given the current fiat money system is on a path towards its own destruction it is not surprising that there has been increasing talk of a monetary reset. Without a completely different approach and by retaining the same institutions and macroeconomic concepts, any such reset is bound to fail.

This article provides a template for an enduring sound money solution that will deliver economic progress while eliminating destructive credit cycles. It posits that a properly constructed gold and gold substitute monetary system, which also includes the removal of bank credit inflation as a means of providing investment capital, is the only way that lasting stability and prosperity can be achieved. As well as the establishment of an incorruptible monetary system, the state’s role in the economy must be curtailed, budgets always balanced, banking reformed, and the private sector allowed to accumulate the wealth necessary to provide the investment for producers to produce. 

Monetary reform involves a clear understanding of why free markets succeed and why socialism, together with neo-Keynesian macroeconomics, are responsible for the impending monetary and economic collapse. It will require a complete change of socio-political and economic cultures, but properly approached it can be done.

Introduction

There has been very little commentary in recent years about the benefits of sound money, being limited almost entirely to followers of the Austrian school of economics. Even less has been written about how to back out of inflationism, end unsound money and return to a monetary arrangement which cannot be corrupted by governments and the banking system.

The most notable attempt was by Ludwig von Mises who appended a chapter on the subject in his updated 1952 version of The Theory of Money and Credit[i] The circumstances were very different from that of today. At that time, the US had corrupted its gold exchange standard to progressively exclude the ability of individuals to demand gold for paper dollars. And both Keynesianism and socialism, in the West at least, were in their earlier days. Today, we face more of an end game where considerable damage has been done since to the status of circulating money, and we face the prospect not of reform but of a collapse of the entire fiat money system.

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Fiat’s failings, gold and blockchains, by Alasdair Macleod

Alasdair Macleod is the best writer on monetary economics on the Internet. From Macleod at goldmoney.com:

The world stands on the edge of a cyclical downturn, exacerbated by trade tariffs initiated by America. We know what will happen: the major central banks will attempt to inflate their way out of the consequences. And those of us with an elementary grasp of economics should know why the policy will fail.

In addition to the monetary and debt inflation since the Lehman crisis, it is highly likely the major international currencies will suffer a catastrophic loss of purchasing power from a new round of monetary expansion, calling for a replacement of today’s fiat currency system with something more stable. The ultimate solution, unlikely to be adopted, is to reinstate gold as circulating money, and how gold works as money is outlined in this article.

Instead, central banks will struggle for fiat-based solutions, which are bound to face a similar fate with or without the blockchain technology being actively considered. The Asian and BRICS blocs have an opportunity to do something with gold. But will they take it?

Introduction

Central banks around the world are praying that there won’t be a recession, and if there is that a further monetary stimulus will ensure economic recovery. Their problem is Keynesian theory says it will work, but last time it didn’t. In fact, it has never worked beyond a temporary basis. The big surprise this time was the lack of officially recorded price inflation. But this is due to the system gaming the numbers, making it appear there has been some moderate growth when a proper deflator would confirm most Western economies have been contracting in real terms for the last ten years.

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The Return To A Gold Exchange Standard, by Alasdair Macleod

Unbacked currencies will sooner or later go up in flames, as they always have. The general solution, then, will be obvious: some sort of gold-based monetary system. From Alasdair Macleod at goldmoney.com:

This article makes the obvious point that a return to a gold standard is the only way nations can contain the interest cost of servicing debt, given the alternative is inflationist policies that can only lead to far higher interest rates and currency destruction. The topic is timely, given the self-harm of American economic and geopolitical policies, which are already leading America into a cyclical slump. Meanwhile, American fears of Asian domination of global economic, monetary and political outcomes have come true. The upcoming credit crisis is likely to kill off the welfare state model in the West by destroying their unbacked paper currencies, while China, Russia and their Asian allies have the means to prosper.

The fragility of state finances

In my last Goldmoney article I explained why the monetary policies of inflationist economists and policy makers would end up destroying fiat currencies. The destruction will come from ordinary people, who are forced by law to use the state’s money for settling their day-to-day transactions. Ordinary people, each one a trinity of production, consumption and saving, will eventually wake up to the fraud of monetary inflation and discard their government’s medium of exchange as intrinsically worthless.

They always have, eventually. This has been proved by experience and should be uncontroversial. For the issuer of a currency, the risk of this happening heightens when credit markets become destabilised and confidence in the full faith and credit, which is the only backing a fiat currency has, begins to be questioned either by its users or foreigners or both. And when it does, a currency starts to rapidly lose purchasing power and the whole interest rate structure moves higher.

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The Fed Is Now Addicted to Easy-Money Policy, by Thorsten Polleit

The Fed will have a tough time curing its own addiction to easy money, much less the economy and financial markets’. From Thorsten Polleit at mises.org:

“I think we have much more of a Fed problem than we have a problem with anyone else”, said US President Donald J. Trump on 20 November 2018. While the press, mainstream economists, and bankers cry wolf, the US President hits the nail on its head: The Fed is the source of significant economic and political trouble. By issuing US dollar out of thin air, it sets into motion unsustainable booms, which sooner or later turn into bust.

What is more, the Fed, expanding the US dollar quantity through credit expansion, nurtures the “deep state”: Providing it with the financial means to buy voter consent; to increase its impact on all walks of peoples’ lives; to make possible its aggressive military adventures on a world-wide scale; and to keep alive and kicking its monetary system – that couldn’t survive without an ever deeper state.

Viewed from this perspective, is it not good news that the Fed wants to tighten its policy further? Well, the truth is that Fed interest rate changes do not and cannot solve any problems caused by the Fed’s meddling with interest rates in the first place. By its very nature, monetary policy inevitably creates economic distortions – which appear in the build-up and bursting of speculative frenzies and the notorious boom and bust cycles.

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China’s monetary policy must change, by Alasdair Macleod

China would seize innumerable advantages if it was to put itself on the gold (aka Real Money) standard. Its government has a big enough stockpile of gold to do so. From Alasdair Macleod at goldmoney.com:

The next credit crisis poses a major challenge to China’s manufacturing-based economy, because higher global and yuan interest rates are bound to have a devastating effect on Chinese business models and foreign consumer demand. Dealing with it is likely to be the biggest challenge faced by the Chinese Government since the ending of the Maoist era. However, China does have an escape route by stabilising both interest rates and the yuan by linking it to gold.

But will the Chinese have the gumption to take it? This article examines the challenges and the possible solution. It concludes there is a reasonable chance China will embrace sound money, because it is in a position to do so and the dangers of not doing so could destroy the State.

Are the Chinese Keynesian?

We can be reasonably certain that Chinese government officials approaching middle age have been heavily westernised through their education. Nowhere is this likely to matter more than in the fields of finance and economics. In these disciplines there is perhaps a division between them and the old guard, exemplified and fronted by President Xi. The grey-beards who guide the National Peoples Congress are aging, and the brightest and best of their successors understand economic analysis differently, having been tutored in Western universities.

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