In Part 5, I explained how most of us had been seduced into giving up our gold backed money for the pure paper money issued by the Federal Reserve Bank. Actually, I’m quite sure that no one reading this has any memory at all of gold coins or gold backed money since the gold confiscation scheme occurred in 1933. However, some may recall that silver coins were still used until 1964. That is when the LBJ administration stopped producing 90% silver coins. Kennedy half dollars continued to contain about 40% silver for a few more years but that’s it. I can recall seeing a few silver dollars when I was a kid but they were rare even then in the late 40’s and early 50’s. What’s the point? The point is that the generations born after say 1950 have no recollection of using anything but paper money. When paper money is all there is and it at least appears to work, then what’s the beef?
But that is the problem; it is all just appearance. “It” just appears to work. Behind the scenes, where the government does not want us to look, see and understand, it does not work. It is all smoke and mirrors–a house of cards that must inevitably collapse. But lets continue with the story I had started.
At the end of WW 2, Bretton Woods was in place. The US was Numero Uno, hands down, no contest, no one else was even close. The US possessed the worlds largest stash of precious metals, over 20 tons of gold and over 8 billion ounces of silver. Other than the fact that our economy had been directed toward the war effort, our industry was virtually untouched by the war. The US began producing for its citizens and for other nations. The US GDP consisted of about 70% production. Made in the USA meant you had a quality product in your possession. Anyone reading this who is my age will remember when in the 1950’s “made in Japan” was an indication of an inferior product. The only things we bought which were made in Japan were cheap things, trinkets and such forth which we didn’t care if they lasted for very long. When the Honda Civic was first offered in the US, it was considered a cheap car, just barely acceptable for transportation. Ditto for the German Volkswagen. The good things, the big ticket items were made at home in the USA.
There are many factors which influenced the changes which have occurred since 1945 but this topic is about gold and money. I’m trying to stay on this topic for now and plan to go back later to fill in some blanks.
You may recall that there was a G-20 meeting recently in Pittsburgh, PA toward the end of September. The essential purpose of this meeting was to whitewash the global reactions by governments and central banks in response to the financial crisis of September 2008. A careful reading of the statement issued by this group of 20 nations will reveal just two important points. First is that governments did collectively intervene starting in late September 2008 after the Lehman collapse to prevent a much larger world financial collapse and to re-invigorate world wide economic growth. The second point made is that it worked. The collective intervention of governments and central banks did prevent the collapse and the world economy is on the virge of new growth. The concluding memorandum said in other words, ”Just trust us, we’ve got your back!”
If this is your own feeling, especially if you trust the US government and the Federal Reserve Bank to get the US economy back on track, then you are most likely going to be disappointed. If you rely on the typical financial gurus to guide your investment portfolios and prepare you for retirement, you are going to be “sadly” disappointed.
But why did we need to convene the G-20 (at great expense, I might add) in Pittsburgh to tell us these two things? I mean, after all, after August 1945, it was the G-1, the United States, Numero Uno, we were in charge. How did we lose it?
As I mentioned in Part 5, we had agreed to the use of our dollar, backed by gold at the exchange rate of $35 per ounce, to serve as an international exchange currency. This was the seal of approval. As long as we could continue to redeem dollars for gold at the agreed upon fixed rate, world wide exchange was not just possible but was, in fact, conducive to economic growth. Everyone used dollars and these dollars were “as good as gold.” Everyone could rely on excess imports being paid off with dollars which could be converted into gold any time a nation had more dollars than it needed.
The problem was that the US was not actually keeping its part of the agreement completely intact. Bretton Woods made the US dollar the reserve currency of the world. This meant that dollars were needed by all nations to settle their balance of payments. But since the US could simply print dollars, settling the balance of payments for the US did not require more production and more exports, all that was needed was more dollars. In the aftermath of WW 2 and into the 1950’s, the excess of dollar creation was quite limited. It’s true that as a country we had embarked on a program of living beyond our means but it was not a blatant or excessively expanded standard of living. The US welfare state had begun but its primary features were a social security system, some limited unemployment compensation and some other still relatively small redistribution schemes like farm subsidies. The funded US debt increased a measly $70 billion between 1945 and 1965. Since the US funded debt has just increased about $1.88 Trillion dollars between 9/30/08 and 9/30/09, it’s clear that excess money printing was quite contained in the early years of Bretton Woods.
After President Kennedy was assassinated, LBJ took over and quickly began expanding the war in Southeast Asia. Then in 1964/65 the Great Society programs were introduced. Taxes on Americans could not be increased enough to cover the added costs without the creation of a backlash from the US population. Thus, now the incentive to crank up the printing presses was greatly encouraged. At the same time, the economies of our allies were gaining strength. Under de Gaulle, the French economy was doing quite well. In addition, de Gaulle was a hard money individual. He began to suspect that the US was using the preferred position of the US dollar to take advantage of other nations involved in international trade. Thus, since France was running a positive balance of payments surplus, he began taking the excess dollars France possessed to the US to get gold as required by the Bretton Woods agreement. A few other nations began doing the same thing.
In the late 1960’s, the US began meeting with England and Germany, as they were our two main allies most closely aligned with US views in the post war period, to establish procedures and policies to maintain confidence in the international trade agreements. Thus, Numero Uno became the G-3. The financial dominance of the US had begun its journey down hill. The US actually had several viable options in 1969/70. First it could just stop printing excess dollars and start living within its economic means. Second, it could do option 1 at a slow pace, slowly devaluing the dollar until it reached parity with the “price” of gold which many estimated to be about $100 per ounce at the time. Third, it could choose to ignore all the warnings and continue on a course of profligacy, spending more than it produced and exported, thus forcing ever more dollar creation.
Nixon was elected in 1968 and moved into the White House in January 1969. So we went from a Democrat president to a Republican president. The fundamental economic and financial policies did not change. No one would stand up to say “We are spending too much money!” Because of the Bretton Woods agreement, the US was bleeding tons of gold to foreign nations who were redeeming their excess dollars. By 1971 the US gold holdings had been reduced to only about 10 tons; Nixon and his advisors realized they could not keep redeeming gold at the current pace for very long. His administration tried to implement some wage and price controls which was not effective because markets, even when they are interfered with by governments, are more powerful than governments as discussed earlier. Then Nixon took the step of unilaterally abrogating the Bretton Woods Agreement in August 1971. The drain on the US gold holdings stopped but the excess spending did not.
But now there was a new dynamic at play, a situation which had never at any time existed in all of the previous recorded history of man. Since the world had been converted to a dollar standard and every government in one form or another, working with its central bank, had removed the idea and reality of gold as money, the entire world market was now just one big floating casino. Under both the gold standard and the gold exchange standard (Bretton Woods) each currency could be valued against gold and thus valued against each other. Now for the first time ever, no currency, no monetary system in the world had any connection to gold. In the past during times of crisis, war and upheaval, individuals could find some way to protect themselves financially. They could move their wealth to other currencies tied to gold or into gold itself. Because gold had been and continues to be much maligned by politicians, bankers and even investment brokers, gold is no longer regarded as money or even (by a very large segment of the population) as a valid investment vehicle.
We have answered the question posed by the title of this on going series of comments. Gold = Money? Emphatically, NO! There are still more pieces of information that need to be filled in so we must press on.
I am not going to catalogue them all, but all of the financial disturbances and economic calamities that have occurred since 1971 can be laid at the door step of eliminating the gold standard or any substitute which even resembles such a standard to keep money honest. Paper is not honest money, gold is honest money. Paper money can be easily created and manipulated; this is the reason that central banks and governments have been slowly moving individuals to accept paper money rather than honest money.
The Rothschild family has a long history of banking in Europe. This family established branches in England, France, Spain, Germany and Italy. They helped to finance many of Europe’s wars. One of the patriarchs of the family, Meyer Amschel Rothschild, is often given credit for this quote or some variation of it:
Permit me to issue and control the money of a nation, and I care not who makes its laws.
If you are not familiar with the Rothschild name or the family history, I strongly suggest spending a few minutes with a Google search. Wikipedia probably has the most concise set of data, but data on the whole family is easily assessable.
Going back to the primary thread idea of this set of comments, the period of time following Nixon’s action in 1971 was a period of financial turmoil as nations sought to establish relative values for their currencies. Remember that nations still are trading with each other. Even though no nation could now get excess dollars turned into gold, they continued to use US dollars as the reserve currency. The US made a strategic decision in the early 1970’s by making an important bargain with Saudi Arabia. The arabs agreed to accept only US dollars in payment for their oil and in exchange, the US agreed to provide strategic military protection to the Saudi government and its oil fields. This agreement helped to set the post Bretton Woods period into a de facto Bretton Woods with no gold backing. Instead, the world currencies were allowed to float in value against each other on a daily basis and the US dollar continued to be the vehicle used to settle accounts. The bank for International Settlements (BIS) helped to sort out the arrangement but since 1971, trading has become very often a roulette wheel. Since currencies float, it is difficult to know for sure that the balance of payments are being correctly compensated when US dollar exchanges are made.
Another insidious feature of this system is that some nations may find it advantageous to slowly lower the value of their currency to enhance their exporting ability. In 1975, the first big inflationary bout arising from Nixon’s 1971 action began to unfold with a wold wide rash of inflation. The G-3 was expanded to the G-6 with the addition of Japan, France and Italy. The goal of the G-6 was to give international prestige and cover for the continued monetary excesses. By now, all nations were involved in creating excess paper money. Some printed lots more than others. In 1976, Canada was added to create the G-7 thus continuing to dilute US financial control. But the mission of the group remained the same: convince people around the world that central banks and governments are in control and there is no need to fear. The BIS and the International Monetary Fund (IMF) are doing the work required (under supervision of the G-7) to keep international finances on an even keel even though some perturbations occur from time to time. But on the inside, excess money was still being created by virtually all governments and their central banks so the real situation continued to deteriorate.
Through the rest of the 70’s and for most of the 80’s there was currency crises or a banking crisis or an economic crisis just about every year. In the US, a serious crisis occurred in 1979 and continued through to 1981. Gold hit $850 per ounce (even though gold was not money) and interest rates exceeded 20% for a period of time while the stock market slumped. In 1987, there was another major stock market crash. Just about every country had some type of problem. The G-7 acted as a united front to keep up the façade that everything was just A-okay. The collapse of the Soviet Union in 1989-1990 provided a nearly two year respite before the financial problems continued displaying themselves. In 1994, Russia was granted observer status to the G-7.
In 1997, Russia was added to the group to create the G-8. But this time there was a major difference. Russia was not a major world trader at the time so why should they be invited to join the exalted group who influence and monitor world trade activity? What had happened was that Russia announced it was in default on its sovereign debt. This sent perturbations around the world. A nation that announces that it can’t pay its debt throws fear into the hearts of traders and financial markets everywhere. If one nation is in default, others could be also. This lion had to be tamed. Russia joins the group, the prosperous nations are in control. The crisis abates and markets are stabilized yet again. The façade continued.
The past decade has continued with constant financial disturbances, some of them quite noticeable. Obviously, 2007 and 2008 were two of the more notable years. And now, if you are following this, the recent G-20 meeting I mentioned toward the beginning of this section comes back into play. The G-20 has been around for a few years, actually since about 1999 when it met with regard to the Asian monetary crisis. Still, its meetings were limited to the finance ministers and central bankers. Heads of state of the G-20 were not involved until November 2008. The heads of state met again in the spring of 2009 and now they have recently concluded their meeting in Pittsburgh. But the Pittsburgh meeting marks a new level. The G-8 has been superseded by the G-20. The statement issued by the G-20 clearly indicates that this expanded group of nations will continue to collude in the future as the G-8, G-7, G-6, G-3 and Numero Uno have done in the past to insure that the façade of safety and security of the international financial system is maintained. As I said at the beginning, this is smoke and mirrors, it is not reality. Danger lurks and we cannot be sure what events the next dawn will bring. Stay alert. Read the news headlines but be aware that what you are seeing in the news is probably not the reality. Federick Bastiat is famous for remarking about the difference between that which is seen and that which is not seen.
The problems created from many years of excess money production have not gone away. Again, there is more to discuss but since we have answered the question “Gold = Money?”, perhaps it is time to change the title.
Stacey Derbinshire on 10.05.2009
Great post. I will read your posts frequently. Added you to the RSS reader.