Thursday, January 8, 2009

Towne on Gold

Jake Towne's (JT) 26 December 2008 post on various "gold standards" blasts Zimbabwe Ben for the "Great Lie", i.e., claiming the gold standard caused the depression. I agree with JT. I had not planned to excerpt JT's article. But after a reader request, have. Link: http://seekingalpha.com/article/112309-bernanke-s-great-lie-the-gold-standard-and-the-great-depression.

"The purpose of the following is to argue that the 'gold standard,' as understood by most of the public, did not cause or worsen the Great Depression as current Fed Chairman Ben Bernanke has based many of his papers, speeches, and, to a large extent, his entire career on. I do believe this blame must be firmly rejected and monetary policy should, at the very least, be debated in a national forum. Indeed many other economists, such as the Friedman family, Anna Schwartz, Alan Greenspan, and Jeffrey 'Shock Doctor' Sachs, have all promulgated this lie. ... I charge that these renowned Keynesian and Friedmanite-Monetarist-Chicago-Shock-School economists have consistently used the term 'gold standard' to mislead their audiences and readers". I part company with JT as Uncle Miltie, when asked, said a 100% reserve gold standard would be a "pretty good system", albeit "inflexible". Friedman never thought it politically feasible to have 100% gold money. "For instance, in his 1990 NBER paper Bernanke frequently refers to an 'interwar gold standard' and in his 2002 salute to Milton Friedman he acknowledged that 'the gold standard was not adhered to uniformly as the Depression proceeded'." The various world powers contemplated abandoning gold to finance the impending Great War. "Without more ado, let's dive into 'gold standard' terminology, although if you do not understand the differences between commodity, receipt, fractional, and fiat money to please read this first 'The Money Matrix--What is Honest Money?'."
"The pure 100% reserve gold and silver standard is commodity money issued in the form of hard gold and silver coins, or receipt ... money issued in lieu of metal held in a money warehouse. The amount of coinage in circulation plus the receipt money always equals the total mass in the monetary system". This is the gold standard. People carry gold and silver coins and use them daily. Banks are just gold and silver warehouses. Like wheat warehouses, banks charge you storage fees! Any wheat, corn or soybean silo owner could run a bank under this standard.
"The 'international' or 'classical' gold standard is actually a form of fractional money. In simple terms, one can redeem paper or electronic currency for a fixed amount of gold coinage. ... The critical concept to understand here is that the monetary supply can be inflated or pyramided upon the total base amount of metal, which of course is conveniently possessed by the government. So under the 'classical' gold standard if everyone decided to exchange their paper receipts at the same time, the country would be bankrupted; not enough gold would exist for everyone to redeem their receipts". Since 1694, when the Bank of England (BofE) was formed, this is was the world's 'gold standard' for most years. A 100% gold standard is incompatible with fractional reserve banking.
JT now describes two other gold standards I ignore.
"A fiat monetary system consists of money that is declared 'legal tender' by a government with no commodity backing. ... As [Murray] Rothbard notes, if one examines both the 'gold exchange' standard and the 'gold bullion' standard closely, both are de facto fiat currencies as the people are in effect banned from possessing the backing commodity gold". This is important. Why? Because a gold coin standard takes power from the banks and gives it to the people who can get coins and force banks into bankruptcy. We are taught "bank runs" are"bad". Why?
"Now what really happened in the early twentieth century? ... Up until 1914, America and most European nations were on the 'classical' gold standard. China operated on a 'classical' silver standard. Then America brought the central bank known as the Fed into existence in 1914 via the Federal Reserve Act of 1913. Next, to finance WWI, France, Holland, Germany, Britain, Belgium, and Italy broke off the 'classical' gold standard and issued paper money to finance their military spending deficits". This explains what happened. The world's governments stole each's respective citizen's savings by inflating each's currency to pay for WWI. The world could not come leave WWI richer instead of poorer. Someone somewhere had to pay for the war in real terms. "Money" confuses the issue. As opposed to say, Germany sending police house-to-house to rob people of gold at gunpoint, it decreased the value of the people's marks by printing more of them. In effect, engaging in fraud as opposed to robbery. In about 1957, we were taught this was common in South American countries that regularly had 20-35% annual inflation rates. They were immoral. Imagine, first graders were expected to understand what Zimbabwe Ben (1590 SATs) cannot. This is very simple: all consumption is paid for.
"However, on the side of the WWI victors ... was America with its gigantic horde of gold. American Fed chairman Benjamin Strong massively inflated the dollar to prop up the [BofE's] 'gold bullion' standard with no benefit to the American people whatsover. This Great Inflation took place between 1921-1929 and the American monetary system was inflated by 62%, or 7.7% annualized". China props up our dollar today, "with no benefit to the [Chinese] people whatsoever". When hundreds of millions of Chinese peasants realize this, we could have a catastrophe an overpaid fool like Henry Paulson cannot contemplate: war with China. I'm deadly serious. That "respectable"economists do not discuss current monetary policy's war making potential show how incompetent they are. Or worse. Historical note: Strong was head of the New York Fed, not Fed Chairman.
"In 1931 all hell broke loose. ... The final descent came on September 21 [1931] when the [BofE]abruptly left its 'gold bullion' standard and depreciated madly, causing massive losses to French banks". What recently happened in Iceland?
"To make a long story fairly brief, President Hoover began the ill-fated government-assisted economy called the 'New Deal', which FDR fanatically continued. FDR ended the 'classical' gold standard with his theft by force of America's remaining coin bullion". FDR was smart enough not to send Secret Service agents house-to-house to seize gold coins. Even FDR figured out that might spark something America's bankers did not want, a revolution.
"Only until the war boom of 1942 would unemployment drop to pre-Depression levels. ... As previously claimed, Great Britain had never returned to the 'classical' gold standard, and instead had been propped up by the FED! The 'speculative attacks' were not speculative at all; they were committed by those who recognized that this Madoff-Ponzi scheme had failed!". I remember 1967's pound devaluation and the Chancellor of the Exchequer's lies about Britain's plans not to devalue the pound. I remember Mexico and dog hill, 1982. The moral of the story: government officials lie all the time. Listen to them at your own risk!
"Maybe when this depression finally ends in the hyperinflationary death of a bunch of more fiat currencies, I will write a paper to correct all the Keynesian and Friedmanite gaffes Bernanke and others continue to make. Hopefully, I can call it 'How the Austrian Standard Cured Inflation and Stopped the Financial Crisis of the Greater Depression.' I will be sure to correctly define the Austrian Standard first".

Our current monetary misadventure need not end in hyperinflation. Why? Because Unc owns 261.5 million ounces of gold. With M3, no longer published, estimated at $15 trillion, M3 can be "ratified" at $57,000 an ounce. Do I expect a gold "remoniztization"? Yes, when the "price" is high enough. When in Las Vegas, who wins, you or the house? Bet with the house, buy gold. Related posts:

4 comments:

Junior said...

This is not going to end well.

Anonymous said...

Yep... I was saying as much to a friend today...

HeliBen is playing with fire... who's getting burned?

Well it's not the banks... they sacrificed LEH and almost the entire edifice remains...

Anonymous said...

BTW... rich prediction on gold pricing there IA...

Jake Towne said...

I am really glad you found my article to be of use. Peace! Jake