Monetary Gold Mismanagement in the Twentieth Century

Summary

Much has been made of the downward plunge in gold prices during 1996 and 1997. Monetary officials as well as government officials around the world have advertised the fact and led the public at large to believe that this drop is an indication that fiat megabyte money is "King of the Hill", that all is well with our monetary system, and that we will all live happily ever after. It is the author's hope that this paper has dispelled this myth in the mind's of the people who read it. As has been shown in this paper, our system is not only not healthy, it is seriously flawed. In addition, in the minds of many of today's top thinkers, the system is inherently unstable and fragile, just waiting for a major calamity to strike that will seriously damage the system or cause its demise. When the carefully crafted post WW II economic system that was developed at Bretton Woods was superseded by the events of 1971, when practically all ties between gold and money were severed, and which debuted the development of our current monetary morass, German Chancellor Helmut Schmidt, a renowned economist and architect of the post WW II German economic miracle, called the new system, " a floating non-system". It remains so to this day, and has become a system which is out of the hands and control of government regulation throughout the world. No less an authority than Alan Greenspan has said as much in a speech he made in December, 1997, which was quoted in the main body of this paper.

So we enter 1998, with a "floating non-system" composed of oceans of unstable megabyte fiat currencies (so large that no one can truly estimate an authoritative figure of the total) , and with what appears by many criteria to be a major mania in asset values (with no apparent end in sight), and where there is good evidence that what was described as the "real economy" versus the "financial economy" in the body of this paper, have lost track of each other and greatly distorted the world in which we live. A part of the asset mania is the obsession with yield, or rate of return on investments, which has reached classic mania proportions. The combination of these manias has reached or even exceeded the magnitude of many past manias described in the recommended reading book, Extraordinary Popular Delusions and the Madness of Crowds. It should go without saying that all of this has changed the world we live in and will continue to bring changes we can only now imagine, and many we could never imagine or forecast. It is the nexus of the sum total of all of these factors that makes developing a reasonable projection for the future of money over the transition period from the Twentieth to the Twenty First Century so difficult: if you do not remember, this was a hoped for goal of this paper as stated in the Prologue.

Because the near future is as unstable and unpredictable as at anytime in the past, should we become ostriches and hide our heads? My answer is no! I feel at times like this, we should put our faith in history and review and remember the lessons to be learned there. Why, you ask? The simple but profound reason is just this, people remain the same throughout the ages. The people who participated in the Tulip Mania in Holland, or the Mississippi Bubble in France, or the South Sea bubble in England, are little different, if any different, than the people of the world who are now participating in our current bubble or mania. Fear, greed, lust, jealousy, and all of the other aspects of humankind don't change. That is one constant, if there are few others. Manias are hard to discern from within, but are painfully obvious in hindsight.

The author is of the opinion that the evidence is overwhelmingly in favor of saying we are viewing a mania from within, and the only question is, not will it, but when will it end, and how much havoc will this bring to the world? If we view history, the evidence says it will bring great change and much suffering. Will it be the end of the world? Not likely, but it will be the end of the world as we have known it in recent years; especially the monetary part. Few of us will be spared some discomfort.

Returning to the history theme, there are some additional quotes I want to remind readers about. The first is from George Bernard Shaw (1856-1950):

"(If)You have to choose between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

The next two are know as "Golden Rules". The first one does not have much direct bearing on our subject, but is worth remembering. It is from the Bible:

"Do unto others, as you would have others do unto you".

The Golden Rule that applies to our situation has been in effect as long as the biblical rule, and is this:

"He who has the gold, makes the rules".

Currently the central banks of the world have the bulk of the gold, and they are certainly making the rules. That is true of the ones who are in the forefront of denigrating, denouncing, discarding, disowning, and selling gold in a fire sale. It is my suspicion and belief that there are other central bankers around the world who are buying this fire sale gold offered by Western central bankers, and laughing all the way to their gold vaults as they store this very valuable item for future use. When the incompetent and misguided Western central bankers have finished doing their worst, the countries with the gold will then make the rules, and you can bet those rules will be greatly different. The countries that are probably doing this are in Asia, with China and India being the biggest. As an aside, I have not heard of any gold sales from Iraq, even though the gold sales would buy food for the starving population we hear and see so much about.

Finally, it is the author's belief, based on the evidence that I have seen, that any person who does not place some of his assets and faith in gold is courting disaster to his long term wealth and well being. All of the historical records from the beginning of human history say this is true.

APPENDIX 1

SUGGESTED READING

• What Has Government Done To Our Money?, by Murray N. Rothbard Published by Praxeology Press of the Ludwig von Mises Institute 1963, 1985,1990 Auburn University, Auburn, AL 36849
• Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay, first published in 1841. Several Twentieth Century editions are available.
• The Death of Money, by Joel Kurtzman Simon & Schuster -1993
• Money in Crisis, edited by Barry N. Siegel Pacific Institute for Public Policy Research, San Francisco, Ca. 94108 - 1984
• A History of Money: From Ancient Times to the Present Day, Glyn Davies - 1996
• A History of Money: From AD 800, John F. Chown - 1994 (Hard & Soft Cover)
• Federal Reserve System: A History of the First 75 Years, Carl Moore - 1990

WEB SIGHTS WORTH VISITING

• Gold-Eagle
  https://www.gold-eagle.com
   
• Gold & Silver Reserve
  http://www.e-gold.com
   
• Ludwig von Mises Institute
  http://www.mises.org
   
• Gold WWW Virtual Library
  http://www.dpie.gov.au/resources.energy/coalmin/gold_vl/ghome.html
   
• World Gold Council
  http://www.gold.org
   
• Foundation for the Advancement of Monetary Education
  http://www.fame.org

APPENDIX 2

Folks seldom think about what they're using for money. Money is a very complicated and little-known subject. This week The Spotlight takes a look at Federal Reserve Notes and other forms of American money. You may be surprised to find out that Federal Reserve Notes were backed by gold for 20 years. After being taken off the gold standard, the notes were still redeemable in "Lawful Money." The Spotlight traces 83 years of the Federal Reserve's funny money.

- A Special Supplement to The Spotlight -
Published in Volume XXII, #6, February 12, 1996

Federal Reserve System's
Funny Money Explained

Since 1913 bankers have cheated the American
people with their fraudulent money.

EXCLUSIVE TO THE SPOTLIGHT
By Andrew Arnold

If you tell the average American on the street that the money in his pocket is no good, then you are liable to get a strange look or worse. After all, those Federal Reserve Notes serve as a medium of exchange for goods, services and in settlement of debt. And Section 411 of Title 31 of the U.S. Code establishes Federal Reserve Notes as obligations of the U.S. government. But the closer one looks at today's Federal Reserve Notes, and the sinister creation of debt-based money by banks with literally the stroke of a pen (or today, a computer keyboard), the more likely one is to conclude these notes aren't worth the paper upon which they are printed. For example, today's paper currency has "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE" inscribed on the note. But the note doesn't tell you who, or what is backing the bill.

GOLD STANDARD

From 1878 until 1938, U.S. currency was backed by gold. Before that, dating back to 1792, Congress followed a bi-metallic standard under which gold and silver served as dollars. When Federal Reserve Notes were originally issued in 1914, the gold standard was in practice. The bills were engraved on the reverse with:

THIS NOTE IS RECEIVABLE BY ALL NATIONAL AND MEMBER BANKS AND FEDERAL RESERVE BANKS AND FOR ALL TAXES, CUSTOMS AND OTHER PUBLIC DUES. IT IS REDEEMABLE IN GOLD ON DEMAND AT THE TREASURY DEPARTMENT OF THE UNITED STATES IN THE CITY OF WASHINGTON, DISTRICT OF COLUMBIA OR IN GOLD OR LAWFUL MONEY AT ANY FEDERAL RESERVE BANK.

While many debate the legality of the Federal Reserve, and consequently the lawfulness of these notes, there is no doubt that in 1914 through 1938 the notes were backed by "... gold or lawful money... " (emphasis added).

In 1938, President Franklin Delano Roosevelt issued an executive order to recall all gold and gold certificates. A year later, Congress passed the Gold Reserve Act which modified the gold standard with a devalued dollar. FDR then issued a proclamation reducing the gold content of the dollar to 59 percent of what was established by the Gold Standard Act of 1900. A statement on the front of 1950 series Federal Reserve Notes says:

THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE, AND IS REDEEMABLE IN LAWFUL MONEY AT THE UNITED STATES TREASURY, OR AT ANY FEDERAL RESERVE BANK

A statement at the bottom of the note says: WILL PAY TO THE BEARER ON DEMAND (followed by the denomination). These notes were known as credit money - paper money backed by promises by the issuer to pay an equivalent value in the standard monetary metal. Soon thereafter, the Federal Reserve stopped any pretense of backing the notes with "lawful money." By 1963, the U.S. Treasury and Federal Reserve quit promising to pay anything. The 1963 series Federal Reserve Note declares: THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.

This is what is known as fiat money--paper money that is not redeemable in any other type of money. The problem with today's fiat money is that it is certificates of indebtedness--promissory notes issued as payment for government bonds which fraudulently require taxpayers to pay annual interest. Yes, that's right. Politicians require taxpayers to pay interest on their own money. No greater fraud can be imagined. As Thomas Edison once said, "if the government can print bonds, it can print currency." The nation is, conservatively speaking, nearly $5 trillion in debt, and the Federal Reserve creates "money" out of this debt. Since Congress handed over the responsibility of making money to the central bank, and the dollar has been taken off the gold standard, nothing backs Federal Reserve Notes. Around the same time bankers ceased redeeming lawful money, Congress was thoughtful enough to add "In God We Trust" to Federal Reserve Notes. Politicians, if not bankers, want money to have some auspices. The Treasury still creates coins, but no longer prints U.S. Notes, according to a historian with the Bureau of Printing and Engraving. Some old U.S. Notes are in stock. These, combined with coins, are about the only real money left in circulation (which leads to the conclusion that since coins are issued by the Treasury, and thus carry no debt, a one-dollar coin would be a blessing to the economy. But it is anathema for bankers for that reason. No wonder newspapers and pundits regularly condemn a one dollar coin.) The philosophical question for the day is: If you own a promissory note to pay nothing, what will you do when the plutocratic powers that create and control our money supply decree that nothing is exactly what you will get?

APPENDIX 3

VALUING THE DOLLAR

Endeavoring to place a value on a fiat megabyte currency, such as the dollar, is a very difficult problem. There are at least five methods in use by central bankers to place a value on the dollar. The following table lists these five with a brief description of their construction.

As if the above variables are not enough, there are still other variables that can and do go into these calculations. Another big difference in calculating this type of number is whether you use nominal or real values. Chart 2 shows the values for the last two years using the Federal Reserve Board's method of calculation. It is no wonder it is so difficult to accurately gauge the value of a currency. The reason governments and central bankers want to use trade weighted measurements of the type listed above is very simple. They measure one fiat megabyte currency against a basket of other fiat megabyte currencies, rather than something real like gold or silver. In a situation such as this, if your currency goes down in value relative to all of the other currencies in the basket, it means you are in really big trouble because your fiat megabyte currency is so bad that it can not maintain its value even against other fiat megabyte currencies. A truly sad situation. If your currency rises above the basket, it just means your currency is not being depreciated quite as badly or as quickly as the other currencies in the basket used for comparison. I think it is obvious that each of the five methods listed above will give a slightly different picture of value, helping to confuse the public.

Chart 1 has been included because it gives an entirely different picture of what is happening to our currency than does the trade weighted method. In Chart 1, the value of the dollar from one year to the next is based upon its purchasing power going up or down as inflation goes down or up. Chart 1 clearly shows how the US Dollar has lost purchasing power since the early nineteen hundreds when the FED was placed into existence.

It seems to the author that Charts 1 and 2 clearly show two important facts; one that the dollar has fallen drastically in value in the last 100 years, and two, that there is a very good reason why central bankers do not want us to see the picture in Chart 1 and use the more advantageous method for their propaganda war against gold and in favor of fiat megabyte money which Chart 2 depicts.

ABOUT THE AUTHOR

The author earned a Bachelor of Science degree from Marshall University in Huntington, West Virginia, and a Masters degree in Business Administration from the University of Chicago. In 1965 he became a member of the Chicago Mercantile Exchange. He was active in the exchange during the time currency futures and interest rate futures were introduced by the exchange, and served on the Board of Governors of the exchange for ten years during the nineteen seventies and eighties. He is now retired.