For anyone who is interested to understand what money is and what’s happening to it, I strongly recommend you listen to these two presentations. [youtube height=”400″ width=”620″]http://www.youtube.com/watch?v=Ri6rIF40iSA[/youtube] [space height=”20″] [youtube height=”400″ width=”620″]http://www.youtube.com/watch?v=xoMAYAKHQqU[/youtube]
A good article from Brian Domitrovic on Forbes.com:
Let’s face it – we’ve seen what arbitrary government control and central bank manipulation can do. Namely, what the Federal Reserve has done since 2008. This is to scare everyone away from the currency such that there’s no investment, with inflation hedges (such as gold) shooting the moon, all the while stiffing the small defaulter and bailing out the biggest of the big. This kind of anti-democratic monopolism is exactly what the gold standard forestalls, and The True Gold Standard explains why, among much else, in less than a hundred tidy pages. Here’s another exquisite recommendation from the book: given gold, government bonds can’t count as bank reserves. This will do two things. First, dry up the market for government debt, an unqualified good in our age of trillion-dollar deficits. And second, release bank assets to be at the service of the real economy.
Washington, D.C.–Republican presidential candidate and former House Speaker Newt Gingrich called for “hard money with a very limited Federal Reserve” at the Republican presidential debate in New Hampshire on Tuesday. Gingrich is the third candidate to take this position. Herman Cain endorsed the gold standard at the American Principles Project Palmetto Freedom Forum in South Carolina last month and Ron Paul, who has been steadily advocating it for much of his career, raised it at last night’s debate.
If one of them disposes of Obama, this will be at the heart of any Republican agenda. When will our senior politicians start to entertain a move to honest money?
FT – Bullion bulls talk of $5000 gold Historically, gold and silver were the money of choice, freely chosen by the people as the most marketable commodities. The value of your labour was measured in these precious metals. Wicked Kings through the ages debased the people’s money for their own profit. The last English king to do this was Henry VIII. Our money was free from debasement for many years thereafter; the value of our work undebauched. Today, governments around the world assume the powers of kings of old as they embark on the “monetisation” of their debt, minting new money from nowhere. They call it QE. Since 1971, when Nixon severed the last link to gold (struggling to pay for the latest war), paper currencies have been the most extreme derivatives, resting on a mere memory of underlying value. CDO squared has nothing on paper fiat. So the people are voting with their feet, and returning to ancient currency — to gold and silver. How much does an ounce of gold buy you today? $1800 worth of goods and services. And a year ago? $1200 worth of goods and services. How much purchasing power been taken away from you? How long will governments around the world, with no political will to tackle their dangerous debts and zombie banks, be able to maintain confidence in their paper systems? I do not know, but I feel that we’re fast approaching a day when the whole western monetary system will fundamentally change. I hope the new paper will be redeemable in gold or silver. Governments can’t mint this stuff up like magic. They will be forced to raise money through taxation alone, according to what the public will bear. No longer will they be able to kick the can down the road, while stealthily confiscating the fruits of our labour. I am delighted that even the FT, that stalwart of conventional economics, is now asking ‘how high could gold go?‘. Let us hope they consider the fundamentals, and recall our long, sorry history of debasement.
I am no fan of Keynesian economics. I find most Keynesian economic theories to be just plain wrong. But for the sake of truth and accuracy, I would like to correct a terrible injustice levied upon Keynes and, at the same time, also correct an equally terrible injustice that time and again is inflicted upon gold. How many times have you heard gold described as the “barbarous relic”? It is a favorite phrase of gold-bashers everywhere who are trying to make gold the object of derision. I cringe every time I hear it, which is all too frequently, because gold is neither barbarous nor a relic, as can be explained easily by the following chart. This chart presents a base 100 analysis of crude oil prices in terms of dollars and grams of gold (goldgrams). In other words, to establish the comparison depicted above, it is assumed in this analysis that one barrel of crude oil equals $100 and 100 goldgrams as of December 1945. The month-end price is calculated afterward based on the actual dollar price of crude oil and the prevailing dollar-to-goldgram rate of exchange. The price of crude oil in goldgrams essentially is unchanged throughout the period measured. It is clear, then, that gold communicates the economic value of oil very effectively, and the communication of economic value is the primary feature of money. Because money is the tool upon which economic activity is based, which is a reality that makes money central to society, money is not barbaric. Consequently, gold cannot possibly be barbaric because gold is money.
Download the whole paper (PDF).
Bankers’ Magazine Vol I April-October 1844 – H/T Sean Corrigan The author of an interesting work published a short time since, entitled “Sir Robert Peel and his Era,” in which a lively sketch is given of the chief peculiarities, external and intellectual, of the leading members of the Houses of Parliament; refers to the assertion sometimes made, that Mr. Cobden is a man of only one idea, in the following terms,—” It is a mistake; Cobden is really a man of great talent, energy, and tact, though, of course, it has been by means of his one idea at the critical time, that he has become in the compass of a year and a half, a noted public character.” Most persons know little of Mr. Cobden, except in connection with the Anti-Corn Law League, and may, therefore, feel some surprise at recognizing him in the character of a financier. But long before the Corn Law League commenced its operations, his very clever pamphlets, “England, Ireland, and America,” and “Russia, by a Manchester Manufacturer,” had shewn him fully capable of appreciating and discussing with ability, any of the intricate questions connected with our monetary system. We purpose in this paper to lay before the reader, his views on the currency, because we think it by no means improbable, that they may have considerable influence, when the subject comes under consideration in Parliament; and, further, because they are the opinions of a practical man of business who speaks to facts. We must beg to be understood as expressing no opinion ourselves, either for or against the views he advocates, by thus drawing attention to them. He gave his evidence before a select committee of the House of Commons in 1840, and it is not a little singular that he only once, and then incidentally, spoke of the Corn Laws, as interfering injuriously with our monetary system. In order to present, in a concise form, the subjects connected with the theory and practice of Banking, which were referred to in the course of his evidence, we shall arrange them under separate headings, commencing with his own statement of the character of the evidence he proposed to give. His Opinions—those of a Practical Man. I am here as a practical man, a merchant and manufacturer, and with a view to the scientific definitions of the terms to be used by bankers, I do not pretend to come here as an authority. It would very much prevent that confusion into which I fell at the close of my last examination, if I should clearly understand the practical bearing of every question, and it is only on practical subjects that I can afford any information. I make this explanation, because I find that in the attempt which I thought due to this Committee, to answer every question put to me on the last occasion, I have given some answers at the close of my examination which have been, by permission of the Committee, struck out, which are so unintelligible to me on reading them, that I think they must be incomprehensible to every living being. I do not understand the questions any more than I understand the answers at this moment, and I wish my examination to be of that practical nature, on which alone I can afford the Committee any information. Evils produced by Fluctuations in the Currency. My opinion is, that great evils have arisen to the trade and manufactures of the country from fluctuations in the currency; I believe great evils have been occasioned to the trade and manufactures of the country in 1836 and 1837, and the subsequent period, by fluctuations in the currency; greater evils, pecuniary, social, and moral, than by the direct failures of all the banks of issue since they were first established in this country. I could adduce a fact derived from my own experience that would illustrate the heavy losses to which manufactures were exposed in their operations, by those fluctuations in the value of money. I am a calico printer; I purchase the cloth, which is my raw material, in the market, and have usually in warehouses three or four months supply of material. I must necessarily proceed in my operations, whatever change there may be, whether a rise or a fall in the market. I employ 600 hands, and those hands must be employed. I have fixed machinery and capital, which must also be kept going, and therefore whatever the prospects of a rise or fall of prices may be, I am constantly obliged to be purchasing the material, and contracting for the material on which I operate. In 1837, I lost by my stock in hand 20,000/., as compared with the stock-taking in 1835, 1836, and 1838; the average of those three years when compared with 1837, shews that I lost 20,000/. by my business in 1837, and what I wish to add is, that the whole of this loss arose from the depreciation in the value of my stock. My business was as prosperous; we stood as high as printers as we did previously; our business since that has been as good, and there was no other cause for the losses I then sustained, but the depreciation of the value of the articles in warehouse in my hands. What I wish particularly to shew is, the defenceless condition in which we manufacturers are placed, and how completely we are at the mercy of these unnatural fluctuations. Although I was aware that the losses were coming, it was impossible I could do otherwise than proceed onward, with the certainty of suffering a loss on the stock; to stop the work of 600 hands, and to fail to supply our customers would have been altogether ruinous; that is a fact drawn from my own experience. I wish to point to another example of a most striking kind, shewing the effect of those fluctuations on merchants. I hold in my hand a list of thirty-six articles which were imported in 1837, by the house of Butterworth and Brookes, of Manchester, a house very well known; Mr. Brookes is now boroughreeve of Manchester. Here is a list of thirty-six articles imported in the year 1837, in the regular way of business, and opposite to each article there is the rate of loss upon it as it arrived, and as it was sold. The average loss is 37 1/2 per cent, on those thirty-six articles, and they were imported from Canton, Trieste, Bombay, Bahia, Alexandria, Lima, and, in fact, all the intermediate places almost. This, I presume, is a fair guide to shew the losses which other merchants incurred on similar articles. Conduct of the Bank of England. The great instrument in the hands of the Bank, for effecting its changes in the value of commodities, is by creating a panic; it is a process the most disastrous to the trading community; it is the most profitable to the Bank proprietors; that process was resorted to at the end of 1836, in striking a blow at the American houses, in advancing the rate of interest, and by all those means which are resorted to in the London papers, through its organ’s of the press, for exciting apprehensions in the minds of merchants and traders, that a curtailment of its securities and credit generally was to take place. The Bank ought to have contracted its issues long before, at the commencement of the drain in 1836; there was a previous drain, which was but slightly interrupted, which began as early as 1834; in fact, the Bank appears to have departed from its principle, immediately it had obtained the renewal of its charter, of keeping one-third of its liabilities in gold. If the Bank had kept its securities at an even amount, and retained one-third of its liabilities in bullion, or about that (I do not complain of a million), I feel assured there would have been no panic; there could have been no panic if that had been the policy from the time of its obtaining its charter. I consider the cause and effect in the contractions and expansions of the currency, and their influences on prices, are not to be measured in periods of six months, or even twelve months; the expansions of the Bank of England in 1835, and indeed its previous course of expansion (for I am of opinion that mischief was generating long before that), had given rise to an immense amount of speculation; and amongst other things, it had set in motion seventy or eighty joint-stock banks; forty-seven joint stock banks were established in 1836; those were in the course of formation at the very time when the Bank of England was, as it appears here, in the course of contraction, but it necessarily must have taken a considerable time to have checked the spirit which had been generated by the previous course of expansion on the part of the Bank of England. Effects of an over Issue of Paper Money. The conduct of the Bank, in inflating the currency, produces a rise of prices. The prices of all commodities gradually rise; that begets what is thought prosperity; it is in fact unhealthy excitement; this causes an extension of our commerce and manufactures; it causes an advance of prices abroad, in consequence of the advance in this market, which is the regulator of the prices abroad, and that begets a general system of over-trading. This overtrading inevitably leads in the end to discredit, and panic to a greater or less degree; it was through promoting this train of consequences by originally departing from its rule of keeping steadily to the amount of its securities, and keeping one-third of its liabilities in bullion, that the Bank, in my opinion, caused the over-trading; and the panic of 1836-7, which, I repeat, could not have happened had the Bank been true to its own principle of remaining passive, with the amount of one-third of its liabilities in bullion. Bank of England can control Issues of Joint Stock Banks. I believe it to be impossible for private and joint-stock Banks to expand the circulation, provided the Bank of England remained true to the principle it had laid down. We have had no instance of its having been so; even the Scotch Banks cannot inflate the currency, unless the Bank of England have previously set the example; that was the case from 1823 to 1825; the Scotch Banks increased their circulation from, I believe, 3,400,000/. to upwards of four millions and a half, up to the panic of 1825; I think that was about the increase of the circulation in Scotland; but the moment the screw (to use the common term) was placed upon the currency in London, that moment the Scotch Banks were compelled to restrict their issues, and the same operation went on with all the private banks of the kingdom. I have a pretty clear recollection of having seen that statement in Sir Henry Parnell’s work upon Banks. It is impossible to doubt that the Bank, having the entire circulation of the metropolis, having the privilege of a legal tender, its notes being alone receivable by the Government in payment of the revenue, and possessing altogether the prestige which the Bank of England possesses in the public estimation, and backed by the Government, it is impossible that an institution so circumstanced should be otherwise than in a position of absolute power over all other banks in the kingdom. I should not say that the country Banks contract their circulation instantaneously, on finding that the Bank of England is doing so; but the country Banks do what is of as much importance in the way of effecting a correction of the evils of expansion; they curtail their credits, they allow fewer facilities, they call up old debts, and take warning by the example of the Bank of England, to put a general restriction upon the operations of trade; I think it must be known to every one that the slightest movement on the part of the Bank of England, is watched with intense interest by every banker as well as merchant in the kingdom. What Causes should regulate the Currency. I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency, and managing the currency, I look upon to be an absurdity; the currency should regulate itself; it must be regulated by the trade and commerce of the world; I would neither allow the Bank of England nor any private banks, to have what is called the management of the currency.—Have you not stated that the Bank of England ought to regulate its circulation according to the amount of its bullion? I have stated that that is the principle laid down by the Bank of England, and that that principle has not been conformed to; I have no faith in any man or any body of men ever conforming to any such principles, and, therefore, I remarked I should never contemplate any remedial measure, which left it to the discretion of individuals to regulate the amount of the currency by any principle or standard whatever; but the Bank having laid down that principle, and having obtained its charter in consequence of Mr. Horsley Palmer’s evidence, as to the views and intentions of the Bank Directors, they have departed from that principle, and I make the complaint and charge against them of having violated a principle laid down by themselves. Upon what principle, in your opinion, ought the circulation of this country to be regulated? If we are to have paper money at all—but in the abstract I should be sorry to commit myself to the principle that there should be any paper money at all—but if we are to have paper money, it must be restricted to that amount which the precious metals would be if they circulated alone. I would not put it into the power of individuals to depart from the principle, as the Bank Directors have done, which they have once laid down; and, therefore, my idea is, that if there be a circulation of paper, the maximum amount of that paper should be settled, and that there should be such an amount as to leave still such an amount of the precious metals circulating, as would allow the operations of the exchanges to work tranquilly upon the precious metals, without ever occasioning any shock to trade or commerce.— The object you would propose is, that the paper currency should vary exactly as the metallic currency would do? I have stated that the maximum of the paper should be settled; and it should be of such amount as would require gold and silver, in addition to such an extent as would meet all the demands for exportation in case of adverse exchanges, which I maintain would never amount, in the course of trade, to any thing at all of magnitude, unless, through the operation of bad laws, such as the present corn law. I wish to be understood that the whole of the currency in circulation should vary precisely as if it were all gold and silver, and that the exchanges should operate upon the bullion,—upon the specie. Do you mean, by the maximum of the paper, a certain fixed amount to be issued on security, the remainder to be issued against gold, and vary with it? Precisely; I think there would be no harm done, if you issued a certain amount on securities beyond the amount required on bullion.—You do not mean by a maximum that a limit should be fixed, beyond which paper should not go, whatever gold might come in? By a maximum I mean, a maximum amount to be issued on securities, and any thing beyond that, issued on gold, would be represented by the gold.—Do you conceive that that object can be obtained by any regulations of the Banks as now constituted in this country? No, decidedly not.—How would you propose to attain that object? I think the details might be worked out with great ease, so far as the alteration of such a bank goes, inasmuch as it would require only a few men of probity to see that the principles laid down were not violated, and that the bullion of of the Bank was secure.—Would that not, so far as the Bank of England is concerned, be attained, by a strict adherence on their part to the rule of making their paper vary according to their bullion? I should be sorry to trust the Bank of England again, having violated their principle; for I never trust the same parties twice on an affair of such magnitude.—Suppose they were to adhere strictly to their principle, would not the object be obtained? The Committee must excuse my taking a hypothetical case, to give a favourable opinion. I object, moreover, to a national Bank being managed by merchants, those engaged in extensive mercantile transactions. It would be impossible, looking to the Directors of the Bank of England, to impute a want of probity; for we have had abundant proofs that the Bank of England has been conducted by men of strict personal honour; but it is quite clear that such a thing may arise as for such a bank to be under the direction of individuals as merchants, whose personal interests may be in direct hostility to their public duty. I would take, for instance, such a case as merchants having a large amount of produce coming home, previous to a glut, and previous to a panic, when it might become exceedingly important to those gentlemen that they should delay an action of the Bank, which produced a fall in prices, until they had realized on certain shipments. Such a thing is quite possible; but at the same time I should wish to be understood as not imputing any thing of the kind to such a body of men. Advantages of One Bank of Issue. Is it your opinion that nothing short of putting down all existing establishments, and establishing a Bank administered by Commissioners, will regulate the currency of the country? I repeat what I stated before, that the affairs of private banks cannot be so far wrong as to effect prices abroad, provided a bank having the power the Bank of England has had hitherto, remains steady to its principle, and, therefore, of course I must also think that a national bank having such a monopoly as the Bank of England has, if conducted on that principle, would prevent any mass of serious evils arising either from our country banks in England, or banks in Ireland and Scotland. All the evils we feel as merchants and manufacturers, arising from the fluctuations in the prices of commodities, originate, I believe, in London, with the Bank of England.—Would it answer the purpose, so far as the Bank of England is concerned, if a separation were made into two parts, the one to manage the currency, on the principle you have laid down, the other to manage the banking department in the same manner as the private Banks, not of issue, are managed? Mr. Loyd’s plan, to which reference is made, would have many advantages over the present system; but it is not a plan I should approve.—What are your objections to it? Mr. Loyd uses the term managing the currency, and regulating the currency, which I consider to be just as possible as the management of the tides, or the regulation of stars, or the winds. I have seen no plan which places the thing wholly beyond the power of a body of men to increase or diminish the quantity of money, which power is as intolerable, as that a body of men should have the power of regulating the length of the yard periodically; and it is as reasonable in the case of merchants who may manage a bank like the Bank of England, as if they should be privileged to sell by the short yard, and buy by the long one. I object entirely to such a bank being in the hands of a body of merchants; I object to any body of men having the power to increase or decrease the quantity’ of money.—Is not that power possessed to a small extent, and for perhaps short periods, by any bank of issue in the country? Not to an extent to influence the prices of commodities throughout the kingdom . I am not prepared to say whether slight perturbations might not arise in particular localities, owing to the indiscretions of individual banks; but no general derangement to the commerce of the country could arise from any such cause, in my opinion, provided an institution, possessing the important privileges of the Bank of England, were administered upon the principle I have pointed out.—Are not those derangements, to whatever extent they go, in direct contradiction to the principle on which, in your opinion, the currency ought to vary? I should consider them so trivial that they could not have any effect beyond the mere moment.—Not even if a great many banks pursued the same course at the same time? No; from the circumstance that I have already referred to, that if prices are raised generally in any particular quarter, commodities, stocks, railway shares, and other securities would flow to that quarter for sale; if they would fetch a higher price there than they would in London, they would be sold there, and a bill demanded on London, or gold demanded to be transmitted to London, and so the thing would be almost instantly corrected.—Do you find the contraction of the Bank of England, even when made, produces so speedy an effect on the circulation of private banks? No, not when made under the circumstances, to which I nave alluded in 1837; but under ordinary circumstances, it would have the power to correct, such as Mr. Samuel Jones Loyd has alluded to; but time must be taken, as a necessary ingredient, in all its operations; a time for expansion must be considered as having been necessary, and time for contraction must be given. If from any causes a disposition to speculate arose, might not considerable facilities for it be given by the issues of country banks, and considerable derangement in consequence be produced? No; I consider that no great over-trading can take place unless the prices of foreign articles are influenced; that would not be the case under the circumstances to which reference is made; at present, the Bank of England, in its variations, not only effects this market, but it effects all the markets in the world. I happened to be travelling in Turkey and Greece in the spring of 1837, and I saw in the little island of Syra, the Greek merchants there, with their telescopes in their hands, looking out as anxiously for the arrival of a vessel from Trieste, giving an account of the proceedings of the Bank of England, as a merchant on the Exchange at Manchester, would watch for the arrival of the mail, to know what the next step to be taken by the Bank Directors would be; and we know, that in the message of the President of the United States in 1837, and in the Addresses of some of the Governors of the States, New York in particular, the Bank of England was not only mentioned by name, but a considerable space given to the discussion of its policy. The operations of the Bank of England, therefore, can never be compared with the operations of a small country bank, such as have been supposed to effect the changes in the value of commodities; the country bank forms a little instrument for raising up a few more houses in a town, or giving an impulse to a small line of railroad, but it could never influence the prices on staple manufactures, provided the great Central Bank was governed by a principle precisely the same as if we had a metallic currency. In the case of a central bank administered on the principle you have mentioned, on what footing do you think country banks ought to be placed? I am as much opposed on principle to country banks of issue, as to the Bank of England; I know, in talking of remedial measures such as we wish in Manchester, such as men of business wish, in order to be saved from losses such as we have experienced, we must be practical, and rather look to what is expedient than what is wholly desirable; and, therefore, I confine myself chiefly to the removal of the great grievance, the power of influencing the prices in the hands of the Bank of England; but I should be as glad to see the power withdrawn from every other bank in England, and I believe that is a rapidly increasing opinion on the part of the trading community among whom I am accustomed to mix in Manchester. Do you conceive it to be an increasing opinion that all power of issue should be confined to one bank, under the management of Commissioners? I believe it is. Do you contemplate that a bank so constituted should perform any other functions than those of the issue of money? None whatever; to remain wholly passive, and not to dream of regulating the currency. You do not contemplate its making advances to Government or other parties? Oh no, not at all; there is an end to its usefulness if that illicit intercourse is kept up; there is money raised without the advances of bank notes in America, by means of post notes; and if the Government were in great distress they might borrow, perhaps, upon post notes from merchants, without going to the Bank of England for advances. Exchequer Bilk. I have been extensively engaged in business for twenty years, and I never saw an Exchequer Bill in my life; it is a singular fact, that I once mentioned the same thing at our Chamber of Commerce, in the presence of a dozen individuals, all very largely engaged in business, and not one of them had ever seen an Exchequer Bill; there is an immense amount of this paper afloat, but they do not enter into commercial transactions; and the reason they do not enter into commercial transactions is, that they pay interest, and, therefore, it is profitable to the holders to keep them, instead of passing them away. Bankers’ Magazine Vol I April-October 1844
Edited remarks from a speech given by Tony Deden at the annual meeting of the Spanish Precious Metals Association (AEMP) in Madrid on 25 November 2010. Also available in PDF. Ladies and Gentlemen, Gold is no longer the four-letter dirty word of years past. People see it with a mixture of unbelief, curiosity, greed and emotional animation. Yet, despite its five-fold increase in price in a decade, not to speak of the amount of press it has received, it is, in my view, largely misunderstood by most observers and participants alike. Those who own gold are often torn as to when to sell it to capture the unrealized profit. Those who do not own it, agonize on whether they should buy it at this price, or when they should buy and what they should pay for it. The problem is that the value of gold does not neatly fit within the customary valuation models of our day. This is part of the reason for the cynicism it has attracted. Agnostic as I may be about the price of gold, and unable to prognosticate or give you hints of advice about whether you should own some or not, I propose to share my own subjective views on its meaning. The rising price for gold (and silver for that matter), is not the answer to any of the ills that burden our world, but only a symbol of the flight from dishonesty. Such symbolism possesses important clues with respect to capital and its role in economic life. There is no argument in that we live in dismal times. The subprime crisis was merely the prelude of the financial chaos that has ensued. Yet, it is not the consequences of such financial crises that matter as much as the recognition that we are suffering from a deeply-rooted moral crisis. The subject may be scholarly but its impact affects us all. I point you (again) to Guido Hülsmann’s The Ethics of Money Production as a primer on the genesis of our global ailment. From a capital owner’s perspective, this moral crisis has considerable implications since its economic consequences arise from a larger framework of structural malaise. Four such characteristics are pertinent: fraud, illiteracy, lawlessness and poverty. Fraud defines every aspect of our modern life. From government to finance, to family, to accounting, law, medicine, to the church and from the highest officials in the land to the lowliest day-labourer, fraud characterizes our human interactions today more than in other periods in history. Madoff’s fraud pales into insignificance when viewed against the intellectual fraud that causes far greater damage. But we seem to accept it. Fraud is tolerated, expected and in fact, generally rewarded. In contrast, trust, that human condition that binds families, communities and builds societies, has just about vanished. Illiteracy is also a trait of our age. Even at a time of portable computers, instant communication, fancy cell phones and the miracle of the internet, and even when surrounded with more information than any of our ancestors ever dreamed of, we as a society remain in utter darkness. Compared to our ancestors, we are intellectually bereft. We know nothing of our own history, of money or capital. We see money and credit as the source of wealth. We embrace financial engineering while being uninterested in or ignorant about its economic impact. We embrace the idea of wealth with-out work and even demand it. We buy other people’s debts and we call them assets. We demand real goods and plentiful credit to pay for them. We look at rising asset prices and reckon them to be wealth. We vote idiots into high office. We hail economic growth, as measured by GDP and by the clipped coins of our times, and hail it as progress. We are a society of idiots. Even more so, lawlessness is the third characteristic. The law has become distorted, ambiguous, uncertain and subject to the whim of the ruling elites. In the name of security or by reason of the abominable idea of social justice, the sanctity of property, the sanctity of contract and the rule of law have been seized. And finally, poverty. We have an abundance of money and credit but a shortage of capital. We have sought to substitute form over substance, credit over savings and consumption over production. We have eaten our capital. As a result, both current and subsequent generations will fail to match their parents’ economic standing. Yes, we live in dismal times and we suffer from a moral crisis, both being consequences of a 40-year old experiment in dishonest money. Again, from the perspective of a capital owner⎯us, the issues are daunting and very real. Dishonest money not only destroys capital, the saver and the economic calculation of entrepreneurs. It chiefly destroys the soul of a society. It begets a dishonest under-standing of risk which begets dishonest accounting, dishonest objectives, dishonest business endeavours, dishonest securities, a dishonest financial system and ultimately, a dishonest managerial class. Under these circumstances, I propose to you that the idea of finding value or of valuing assets becomes unimaginably difficult. The use of standard metrics in valuation is fraught with falsehood. And so, the notion of value becomes polysemantic and detached from the orthodoxy of modern finance. If we are to address honestly the financial implications our moral crisis, we must begin to think differently. To say that we wish to preserve our capital is, at best, very difficult. It requires that we find honesty and permanence. It requires that we extract ourselves from the very system to which we are tethered, and that we look at capital very differently. It requires that we become utterly distrustful. It demands that we think outside of the metrics used by our contemporaries and outside the jargon of finance that is used to sustain the ignorance and stupidity of our times. If you insist on asking how high the price of gold might go or whether you should buy or sell, my only answer is that you have the wrong question. The price of gold in money cannot be calculated with the formulas of financial analysis. What is the price of something when measuring it with something whose quantity is purposefully dishonest? Mr. Bernanke is wilfully trying to debase the dollar. He will succeed. His colleagues at the ECB purport to be against such measures. This will not last long for they, too, will resort to coin clipping. They too will fail. Today is Greece and Ireland. Tomorrow is Spain. Next month is Britain, France and a host of others. The following month is China, Japan, America and so forth. It may take years but the whole culture of credit and debt will fail. This is reality. We just do not know how or when. In the end, the consequences of monetary folly have not been addressed but only postponed. The errors have not been cleared but merely covered up with money and false accounting. Money printing can buy time but not wealth. All roads lead to default and impoverishment of some sort. The only question that remains is what road will be taken. The relevance of gold is not in its price but in its ownership. This is precisely important for those who wish to make a profit from gold by purchasing certificates, ETFs and the like. Participating in a price movement is not the same as owning an asset. Owning a piece of paper and thinking you own gold is no different to a farmer who insists to being in the dairy business by owning cattle futures. As I said earlier, gold is not a drug that cures the disease but merely a symbol of the flight from dishonesty ⎯a symbol of independence, honest money and permanence. We value it subjectively and we ought to be concerned with the motivation of its ownership more so than that of its price. The same must be the case for our general pre-disposition to our capital pool. Our investment portfolio should not be a function of the last bid on some stock exchange. It should not be merely promises or claims on uncertain events. It should be tangible and have economic value. It should not be hope, illusion or euphoria. Our purpose in the ownership of assets should not be that of making money but simply the very ownership in tangible and economic goods in itself. That is the essence of wealth. Far more importantly than financial calculation, the judgement that is necessary in any honest investment practice presupposes, in my view, a thorough understanding of economics, history and a sense of substance. Economics gives us tools with which to think. History gives us a sense of perspective, and the focus on substance is but a moat to separate us from our own folly. Economics, the classical and honest variety, is vital when reflecting on money, credit, banking, saving, investment, entrepreneurship and a host of other topics. At the minimum and for no other reason, having a modicum of literacy in economics helps us to avoid being fooled by economists. A sense of history is indispensable. History shows us with unmistakable clarity all of man’s folly throughout time. It is dotted with the failure of experiments in economics, money printing and man’s desire to consume without first producing. We may think of ourselves as being more sophisticated, but we end up making the same errors our forefathers did, albeit with greater gusto and efficiency. Having a sense of history reinforces the theory of such sapient observers such as Ludwig von Mises who wrote in 1949: “Money and credit growth can never make a nation prosperous. It may bring about a shift in income and wealth from some groups to other groups, but it inevitably tends to impair the prosperity of the whole nation.” History is a record of man’s failure to understand the difference between money and capital. He seeks the former while all the while he needs the latter. Thus, understanding history helps us avoid our fellow man’s inescapable habit of putting his fingers on a hot stove. And finally, our focus on substance sets us apart. Dishonest money has created a culture of speculation out of ordinary producers and savers. As a result, we confuse financial markets for the source of wealth. Our time preference has been altered so that we seek returns incompatible with the real risks we take. We focus on market activity rather than on the substance that it fails to imply. Substance is something that is real. It does not necessarily have to be tangible, but that would be preferable. Whether it is in gold⎯a form of money⎯or honest entrepreneurship, substance is rooted in economic reality. And so, understanding sub-stance, whether it is in money or in entrepreneurial and wealth creating activity, is the most important practical skill we must acquire. Indeed, the price of gold in money may increase. It may also decrease. When do you sell it? You ought to first decide why you own it. But even then, let me ask: “What sort of substance will you acquire with the proceeds from the sale?” One of the greatest lessons in classical economics is that value is subjective. It is subjective to the aims and criteria and judgement of the person doing the valuing. And frankly, in our dishonest world, such subjective value is the cornerstone to what kind of capital you are likely to command in the future. I trust that I have given you some objective arguments to help with your subjective assessment of such value. Thank you.
Many of the authors and Cobden Centre advisory board members (including some distinguished academics) would like to see money eventually re-rooted back into some kind of commodity backing. Why? Simply put: the record of government control of the peoples’ money has been catastrophic! I have said here before:
One ounce of gold today is worth $1,093.40 and 1/20 oz therefore $54.67 but the dollar pre World War I was just a name in the USA for 1/20 of an ounce of gold: what would have cost $1 before World War I would cost $54.67 today. The dollar has lost its purchasing power. In fact it has lost 98.17% of its purchasing power in 100 years. One dollar today should buy something like a single person’s weekly food shop, not a single daily newspaper. The fate of the pound sterling has been even worse than that of the dollar. One ounce of gold today is £692.26. So if a pound sterling pre World War I was just a name in the UK for 1/4 of an ounce of gold, it would imply that the pre World War I purchasing price was 1/4 of £692.26 or £173.06. In fact the pound sterling has lost 99.42% of its purchasing power in 100 years. One pound should buy something like a good week’s food shop for a family of four and not just one daily newspaper like it would today.
This was written at the start of this year, so the figures are actually even worse now! Governments do not like the gold standard as it forces them to be honest with our money. Thus, if they have created the conditions for a credit induced boom, they hope a bust can be worked out of the system, for example, by the currency depreciating against other currencies. Under a gold standard, gold (money) would exit the country and cause a deflationary correction by forcing prices down to their real market clearing levels. Politicians do not get re-elected telling voters the unfortunate truth that they have been living beyond their means and that there is no magic fix to the prior problems created by excessive credit expansion. The basic needs of human society are often mediated via the price mechanism. By this, I mean virtually all our essential goods and services that sustain our needs are transacted via the medium of money. This allows entrepreneurs to allocate resources where they are most urgently needed. Artificial bubbles in the price mechanism prevent this smooth allocation from happening. The Greenspan bubble in the USA and the Brown bubble here are testament to the power of governments to be popular while sowing the seeds for the actual destruction of our wealth. With the retail price index at nearly 5%, we are having a sizeable potion of our wealth confiscated each year, silently and by stealth, as the biggest single indebted entity being the State itself, engineers, lower real repayments of capital and interest. Never in our lifetime have we seen such distortion and such uncertainty. Why did we leave honest money behind? How often are you told you are swivel-eyed, mad-eyed or a loony tune when you ask “what about linking money back to gold?” Indeed, Robert Zoellick dared to ask that when he suggested that gold may well form a small part of a new world-wide money system, and was roundly and rudely sounded down. The pundits remind us that during the 1930s the recession was deepened massively by the gold standard, and some even argue it caused the recession! Revisionist history is fashionable, as we know, but I would encourage a look at the facts.
Churchill, posturing and the overvaluing of GBP when returning to the gold standard
Churchill as Chancellor of the Exchequer had his moment when sadly for us, he contributed massively to the Great Depression. During World War I, the expenditure on the military was facilitated when the payment of promissory notes (redeemed in gold) was suspended, leaving bank-created credit unconstrained. If you borrowed at a rate that was $4.87 and could pay your government debt back at a rate of $4.87 even though the real worth had now fallen to $3.40, you are paying back much less. Under some odd posturing suggesting there was a need to establish pre war parity with our great trading partner and lender, seeming to hang onto the notion that we might still be their equal, Churchill, in his worst economic act, sought to mis-price money at an overvalued rate.
None was more open to the thought of these past glories than the then Chancellor of the Exchequer, Winston Churchill, for whom the past was part of life itself and also a rich source of family prestige and personal income. His address to Parliament on 28 April 1925 announcing the return to gold was a Churchillian occasion. The self-governing dominions, he observed, had moved or were moving to re-establish the gold standard, so over the whole of the British Empire there would be ‘complete unity of action’. The success of the step was being ensured by American support – $200 million from the Federal Reserve Bank of New York, $100 million from J. P. Morgan. The consequence would be a great revival in international and intra-imperial trade. Hence-forth nations united by the gold standard would ‘vary together, like ships in harbour whose gangways are joined and who rise and fall together with the tide’. As a minor defect, gold could be had only for export. There would be no more gold coins. The New York Times reported next day that, according to opinion expressed in the lobby’, the Chancellor’s speech was one of the ‘finest in a long line’ and ‘fully up to his own high reputation as a parliamentary orator’. Its headline said that Churchill’s proposals had carried ‘PARLIAMENT AND NATION TO HEIGHTS OF ENTHUSIASM’.( New York Times, 29 April 1925) Sixteen years later Churchill would be well cast; no man was so well equipped to make the lion roar. In 1925, both he and oratory were, without doubt, a misfortune…… The error they defended was in restoring the pound to its pre-war gold content of 123.27 grains of fine gold, its old exchange rate of $4.87. In 1920, the pound had fallen to as low as $3.40 in gold-based dollars. Though it had since gained and was still gaining, the pre-war gold content and dollar exchange rates were far too high. That was because, for these rates, British prices were far too high. Because of this high British prices anyone possessed of gold or dollars could do better by exchanging them for the money of one of Britain’s competitors and buying there. And Englishmen likewise could do better by exchanging pounds for dollars, gold or other currencies at the favourable Churchillian rate and buying abroad. In 1925, the price advantage in doing so was about 10 per cent. Exports, as always, were essential for Britain. So, other things equal, British coal, textiles and other manufactured tools could only become competitive at the new exchange rates if their prices were to come down by approximately 10 per cent. A very uncomfortable process” (Background and consequences of Winston Churchill’s House of Commons “Gold Standard budget Speech”, from “Money: Whence it came, where it went” by John Kenneth Galbraith (First Published 1975), Page 174 to 178)
when Britannia ruled the waves and the pound was regarded with respect and awe in all the world’s money markets. They assumed that the restoration of the pound’s parity with the American dollar would re-establish Britain’s pre-war prosperity. None seemed to realize that England had squandered its wealth between Sarajevo and Versailles, or that the country’s shrunken export trade could no longer provide the surplus needed to re-establish London’s fiscal ascendancy over the rest of the world (The Last Lion: Winston Spencer Churchill Visions of Glory 1874-1932″ by William Manchester, Copyright William Manchester 1983, Sphere Books Ltd, 1984. pp 568-570. , Pages 645 to 649)
What we can learn from this is that just like the despotic Nero or Henry VIII who debased their currency to enrich their Treasury, Churchill through vainglory and a puffed-up belief in the importance of the role of our nation in the world, sought to overvalue money, leading to a massive outflow of money as people would move their gold to where it was sold for more purchasing power, as Gresham’s law dictates. Also, with all our exports being greatly overvalued, large sections of industry became uncompetitive. Much as I acknowledge Churchill’s greatness in his leadership during the War, his conduct during the Great Depression made it deeper and longer than it should have been via his misuse of the people’s money. Governments have a truly appalling record at pricing money, this is but one example. Glory the gold bugs and we will celebrate the day when hapless politicians have nothing to do with our money. The one thing for sure is that government itself if not responsible enough to have this unique control of our money.
A great article by Lew Rockwell:
John Maynard Keynes thought he had pretty well killed gold as a monetary standard back in the 1930s. Governments of the world did their best to help him. It took longer than they thought. Gold in the money survived all the way to Nixon, and it was he who finally drove the stake in once and for all. That was supposed to be the end of it, and the beginning of the glorious new age of paper prosperity. It didn’t work out as they thought. The 1970s was a time of monetary chaos. What was worth a buck in 1973 is worth only 20 cents today. Stated another way: a dime is worth 2 cents, a nickel is worth a penny, and a penny is worth…nothing at all. It is an accounting fiction that takes up physical space for no reason. Welcome to the age of paper money, where governments and central banks can manufacture as much money as they want without limit. Gold was the last limit. Its banishment as a standard unleashed the inflation monster and leviathan itself, which has swelled beyond comprehension. But guess what? Gold actually hasn’t gone anywhere. It is still the hedge of choice, the thing that every investor embraces in time of trouble. It remains the most liquid, most stable, most fungible, most marketable, and most reliable store of wealth on the planet. It has a more dependable buy-sell spread than any other commodity in existence, given its value per unit of weight. But is it dead as a monetary tool? Maybe not. Whenever the failures of paper become more-than-obvious, someone mentions gold and then look out for the hysteria. This is precisely what happened the other day when Robert Zoellick, head of the World Bank, made some vague noises in the direction of gold. He merely suggested that its price might be used as a metric for evaluating the quality of monetary policy. What happened? The roof fell in. Brad DeLong of Keynesian fame called Zoellick “the stupidest man alive” and the New York Times trotted out a legion of experts to assure us that the gold standard would not fix things, would hamstring monetary policy, would bring more instability rather than less, would bring back the great depression, and lead to mass human suffering of all sorts. One thing this little explosion proved: newspapers, governments, and their favored academic economists all hate the gold standard. I can understand this. The absence of the gold standard has made possible the paper world they all love, one ruled by the state and its managers, a world of huge debt and endless opportunities for mischief to be made from the top down. One of the funniest explosions came from Nouriel Roubini, who listed a series of merits of gold without recognizing them as such: gold limits the flexibility and range of actions of central banks (check!); under gold, a central bank can’t “stimulate growth and manage price stability” (check!); under gold, central banks can’t provide lender of last resort support (check!); under gold, banks go belly-up rather than get bailed out (check!). His only truly negative point was that under gold, we get more business cycles, but here he is completely wrong, as a quick look at the data demonstrates. And how can anyone say such a thing in the immediate wake of one of history’s biggest bubbles and its explosion, which brought the world to the brink of calamity (and it still isn’t over)? Newsflash: it wasn’t the gold standard that gave us this disaster. As Murray Rothbard emphasized, the essence of the gold standard is that it puts power in the hands of the people. They are no longer dependent on the whims of central bankers, treasury officials, and high rollers in money centers. Money becomes not merely an accounting device but a real form of property like any other. It is secure, portable, universally valued, and rather than falling in value, it maintains or rises in value over time. Under a real gold standard, there is no need for a central bank, and banks themselves become like any other business, not some gigantic socialistic operation sustained by trillions in public money. Imagine holding money and watching it grow rather than shrink in its purchasing power in terms of goods and services. That’s what life is like under gold. Savers are rewarded rather than punished. No one uses the monetary system to rob anyone else. The government can only spend what it has and no more. Trade across borders is not thrown into constant upheaval because of a change in currency valuations. Of course the World Bank head was not actually talking about a real gold standard. At most he was talking about some kind of rule to rein in central banks that attempt what the Fed is attempting now: inflating the money supply to drive down the exchange-rate value of the currency to subsidize exports. Still, it’s good that he raised the topic. The Mises Institute has been pushing scholarship and writing about gold since its founding. To be sure, the issue of the gold standard is largely historical, but no less important for that reason. The people who hate the gold standard of the past have no desire for serious monetary reform today. We should be thrilled should the day ever come when monetary authorities really make paper money directly convertible into gold (or silver or something else). I doubt we can look forward to that day anytime soon. But one thing they could let happen right away: free the market to create its own gold standard by permitting true innovation and choice in currency. It’s a fair guess that opponents of the gold standard would oppose that too, because, as Alan Greenspan himself once admitted, the people who oppose gold are ultimately opposed to human freedom. This debate isn’t really about monetary policy, much less the technical aspects of the transition. It is about political philosophy: what kind of society do we want to live in? One ruled by an ever-growing, all-controlling state or one in which people have freedom guaranteed and protected?
Martin Wolf asks “Could the world go back to the gold standard?”
During any period of monetary disorder — the 1970s, for example, or today — a host of people calls for a return to the gold standard. This is not the only free-market response to the current system of fiat (or government-made) money. Other proposals are for privatising the creation of money altogether. (See, on this, Leland Yeager, professor emeritus at the University of Virginia and Auburn University, in the latest issue of the Cato Journal.) But the gold standard is the classic alternative to fiat money. It is not hard to understand the attractions of a gold standard. Money is a social convention. The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government. The aim, then, would be to “de-politicise” money. The argument in favour of doing so is that in the long-run governments will always abuse the right to create money at will. Historical experience suggests that this is indeed the case.
Wolf’s answer is predictable, but the whole article is worth reading.