A Primer on Gold, by Javaman

I wrote the following essay five years ago. Not only are the issues presented below still relevant today, they’re more critical than ever. This is about the end of your financial world as you know it, independent of a terrorist strike

Perhaps one of the most alarming observations is that, up until our present generation, Americans were far more aware of the meaning of money and they carried gold and silver coins in their pockets. Today, the people are much too pre-occupied, distracted, or just plain na?Øve, and they don’t possess the outrage about what is happening to their money and their country.

I hope that this effort, in some way, puts our present condition into perspective. There are three things that guarantee our freedom: God – spiritual freedom, Guns – freedom from tyrants or anyone who would do you harm, and Gold – freedom from the money masters who would enslave you.

One of the laws of the Human Condition is that man must be productive in order to survive. Historically, this productivity has been measured in everything from sea shells to gold and just about every commodity in between. These commodities enabled productive man to barter or exchange his wealth for other things he desired.

The problem today is that our productivity is measured in U.S. Dollars, a currency printed at will by the Federal Reserve. Originally, the currency of the U.S. was gold and silver. With the introduction of the Federal Reserve in 1913, they established a paper currency that was redeemable in gold and silver which meant that one could take their dollars to the bank and exchange them for like value in gold or silver. Whether you were a foreigner or citizen of the US, the dollar was “as good as gold”. In 1933, President Roosevelt changed that and made it illegal for US citizens to own gold.

The Bretton Woods Agreement of July 22, 1944 replaced gold and established the U.S. dollar as the new reserve currency. After all, since the U.S. had literally saved the world during World War II, and was the only country left standing with a healthy economy in the aftermath, it was reasoned that the U.S. dollar (which was fully backed by gold of course) could and should serve as the reserve currency of the world.

Then in 1971, France became aware that the U.S. was printing dollars with abandon so they began to redeem their dollars for gold per the Bretton Woods Agreement that the U.S. had signed. President Nixon realized that this would be catastrophic for the U.S. as, at that rate of redemption, our gold reserves would quickly be depleted so he reneged on the Bretton Woods Agreement and “closed the gold window” which meant that foreigners could no longer redeem U.S. dollars for gold. In other words, they were stuck with paper dollars they had accumulated worth nothing more than the “good faith and credit of the U.S.” no longer redeemable for gold but, rather, for goods and services provided by the issuer, the United States. We and the rest of the world were, for perhaps the first time in history, on a complete fiat currency standard experiment. As a result, it would be instructive to view a chart of the volume of dollars that have been created since then with no real backing whatsoever as it is an almost vertical graph.

It might also be interesting to note that since 1971, we transitioned from a nation with the greatest trade surplus to one with the greatest trade deficit. This is not a coincidence.

So if the Federal Reserve can print dollars with no tie to redeemability to a true asset, then the measure of one’s productivity is totally arbitrary and subject to the whim and will of the Federal Reserve. Also, the freedom to print the world’s reserve currency is extremely fortunate for the U.S. (France referred to it as “exorbitant privilege”). In the words of Dire Straits, the U.S. is getting it’s “money for nothing and its kicks for free”.

Roosevelt, 1933
Going back to pre-1933, we find the ubiquitous $20 gold piece (consisting of [nearly] 1 ounce of gold) with a value of $20 dollars of purchasing power.

The US was in trouble due to the Great Depression and the economists of the day were at a loss to solve the problem so it was decided the government had to “finance” the recovery by printing massive amounts of dollars. (Actually, one must wonder what type of solution this actually is since it’s simply a hidden tax on everyone through inflation and increased taxes never help to pull an economy out of a recession / depression.) The problem was that gold was a reliable barometer for measuring inflation and if inflation was perceived to be on the rise (which it surely would) everyone would cash in their paper dollars for gold. So in the wisdom of the government, the decision was made to outlaw gold ownership by U.S. citizens.

Check out The Gold Confiscation Of April 5, 1933. It became clear to the government that they could not afford to allow people to own and keep their gold. Murray Rothbard explains:

“Government could never cement its power over a nation’s currency, if the people, when in need, could repudiate the fiat paper and turn to gold for money.”

After the gold confiscation, the U.S. government immediately revalued gold at $35 per ounce. So that same $20 gold coin that was just relinquished by the good, law abiding citizens would now cost $35 dollars to repurchase…if it were legal to do so.

[JWR Adds: It was not until January, 1975, (42 years later!) that it again became legal for individual Americans to own non-numismatic gold.]

See this link for a detailed explanation: Should We Be On a Gold Standard?

From the link…

“As James Bovard observes, “citizens had accepted a paper currency based on the government’s pledge to redeem it in gold at $20 per ounce; then, when Roosevelt decided to default on that pledge, he also felt obliged to turn all citizens holding gold into criminals. [10] Roosevelt also condemned them as selfish traitors.”

One day later Roosevelt reduced the gold content of the dollar by 41%, raising the price of gold from $20.67 per ounce to $35.00 an ounce. The devaluation resulted in a $2.8 billion “bonus” for the government.” An especially tidy sum in those days.

This is clearly one of the most blatant and manipulative examples of the U.S. government reneging on a promise to it’s citizens.

And, by the way, today that one ounce of gold in a $20 gold piece is worth about $425. It’s interesting to note that, in the early 1900s, one could by a nice dress suit with that $20 gold piece and today they still can get a nice dress suite for the value of that $20 gold piece or $425. So gold hasn’t gotten more expensive, rather the purchasing power of the dollar has declined, dramatically, thanks to the Federal Reserve.

Larry Summers and Gibson’s Paradox…

For some background information on Gibson’s Paradox, go to The Golden Sextant and scroll down to the Essays section. There you will see a link to Gibson’s Paradox Revisited: Professor Summers Analyzes Gold Prices.

Then visit this article which brings it all together…

Taylor On US Dollar & Gold

From the link…

One very influential person in the Clinton Administration was very much aware of Gibson’s Paradox, which Keynes noted was one of the best documented relationships in all of economics. Gibson’s Paradox stated that if “real” interest rates decline, the price of gold will rise vis-a-vis the currency. But the Clinton Administration knew full well that a rising gold price would hurt their ability to leverage America’s future for their own political gains. Hence, the Clinton Administration began to intervene in the gold market to “cap” the price of gold, just as Lawrence Summers clearly noted they must do in a paper he co-authored while a professor at Harvard in the late 1980s.

Dollars, Oil, and the Euro
One of the keys to the success of the dollar is that all OPEC oil transactions must be denominated in U.S. Dollars. This creates an enormous demand for dollars as any country in the market to buy oil must sell their currency in exchange for dollars with which to buy the oil they need.

From the link

“But the need to dominate oil from Iraq is also deeply intertwined with the defense of the dollar. Its current strength is supported by OPEC’s requirement (secured by a secret agreement between the US and Saudi Arabia) that all OPEC oil sales be denominated in dollars. This requirement is currently threatened by the desire of some OPEC countries to allow OPEC oil sales to be paid in euros.”


“The United States has at present little reason to fear a challenge to the dollar from Malaysia. But Malaysia is an Islamic country; and the US has every reason to fear a similar challenge from the Islamic nations in OPEC, were they to force OPEC to cease OPEC oil sales in dollars, and denominate them instead in euros.”

The War Enabler
When country “A” decides to declare war on country “B”, its ability to do so is directly correlated to its ability to pay for its war machine. Troops, tanks, guns, an air force, bombs, a navy, and on and on.

When a country’s currency is tied to a real asset such as gold and there isn’t enough gold in the treasury, it simply can’t pay the expense of waging war and alternative solutions are found.

A country on a fiat currency system has no problem printing the money to pay for the war machine so war it will be. For example, some say the US government has already spent $100 billion on the war in Iraq. Additional costs are estimated to be anywhere from another $50 to $200 billion. Where does all this money come from?

The simplified answer is probably something like: The U.S. Treasury prints paper Treasury Bonds that they “sell” to the Federal Reserve which prints the paper dollars required to pay for the T-Bonds. Now the government has the dollars to pay for efforts in Iraq and the Federal Reserve uses the T-Bonds as an asset against which they can print many more dollars (principal of fractional reserve) to be lent to banks across the country.

See this link for a graphic flow chart of the process.

Perhaps the most dramatic example of what this can lead to is from the Weimar Republic after World War I. It’s instructive to realize that in the beginning, the Weimar Republic’s currency was the 20 Mark gold piece, a coin about the size of one of our quarters. After World War I, the Weimar Republic was decimated and they fell into the trap of embracing a fiat alternative to honest money, the new currency became the 20 Mark paper note and as could have been predicted, the inflation began.

This was no ordinary inflation though, as the original 20 Mark paper notes eventually inflated to 4,000,000,000,000 Marks. That’s 4 trillion Marks to buy what the original 20 Mark gold piece would buy only several years earlier. I have seen pictures of women loading wheelbarrows of paper Marks into the fireplace to burn for heat and cooking because they were worth less than wood. The government was printing them so quickly and in such numbers that, to conserve the ink, they only printed one side of the paper note.

I am reminded of an exchange with a women who lived through those times in the Weimar Republic after World War I in which she was asked, “how could you possibly support someone like Adolph Hitler through his rise to power?” The lady’s response to the question put to her was quite simple, “when you have to catch rats to eat for food, any alternative appears more attractive.”

I’m not saying this will be the fate of America, but visit this link for a candid assessment of the state of matter today. This article about The $44 Trillion Abyss sheds some light on the financial mess our politicians have created. Scroll down to 12/13/2003 Interview on the left of the page for the Real Audio and MP3 links to listen.

Who is John Galt?
The former Chairman of the Federal Reserve was Alan Greenspan, who was at the time arguably the single most powerful man on the planet as he directed the monetary policy of the United States. Historically, the official reserve currency throughout the world has been gold since most if not all countries settled their trade accounts with gold. In other words, if country “A” imported more goods from country “B” than it exported, then country “A” paid the balance to country “B” in gold.

Unfortunately, President Nixon terminated the Bretton Woods Agreement by reneging on the redeemability of dollars for gold in 1971.

Today, countries have accumulated huge numbers of dollars with which to settle their trade accounts but the dollar is reaching the end of its time line. As Voltaire said: “Paper money eventually returns to its intrinsic value – zero.”

Visit Gold and Economic Freedom to see what Mr. Greenspan thought of gold and those who print paper money. Given Mr. Greenspan’s eloquent dissertation on the subject, I can only see two possible conclusions, either Mr. Greenspan has sold out and become one of the very statists he railed against in his now famous speech at the link above or he sees himself as Ayn Rand’s hero, John Galt, who’s mission it was to stop the economic engine of the world and thereby forcing everyone to come to their senses.

Time may tell.

Honest Money
The Lord admonished the Hebrews to always maintain honest weights and measures. I believe he did this because, in his wisdom, he knew that any system that was based on dishonesty of economic standards was destined to become further corrupted morally and ethically and lead to its eventual downfall.

Fiat currency is the antithesis of honesty.

Today, the Arab world is moving toward commerce and settlement in the Islamic dinar, a gold coin, in there attempt to break away from the U.S. dollar hegemony even as the U.S. demonstrates via Iraq how such efforts will be met. Europe had a chance to do likewise but they decided on just another fiat currency, the euro. Yet these developments bring us ever closer to the possibility of a universal currency.

From Making Economic Sense

“For a half-century, the Keynesians have harbored a Dream. They have long dreamed of a world without gold, a world rid of any restrictions upon their desire to spend and spend, inflate and inflate, elect and elect. They have achieved a world where governments and Central Banks are free to inflate without suffering the limits and restrictions of the gold standard. But they still chafe at the fact that, although national governments are free to inflate and print money, they yet find themselves limited by depreciation of their currency. If Italy, for example, issues a great many lira, the lira will depreciate in terms of other currencies, and Italians will find the prices of their imports and of foreign resources skyrocketing.”

“What the Keynesians have dreamed of, then, is a world with one fiat currency, the issues of that paper currency being generated and controlled by one World Central Bank. What the new currency unit is called doesn’t really matter; Keynes called his proposed unit at the Bretton Woods Conference of 1944, the “bancor”; Harry Dexter White, the U.S. Treasury negotiator at that time, called his proposed money the “unita”; and the London Economist has dubbed its suggested new world money the “phoenix.” Fiat money by any name smells just as sour.”

Then consider this quote from one of history’s most notorious bankers:

“Give me control of a nation’s money and I care not who makes the laws.” – Mayer Amschel Bauer (Rothschild)

It may not be a one world government we have to fear, but rather a one world currency. The good news is that, today, gold is readily available to those interested in purchasing it.

In closing, I would like to share this link to Running On Empty by Mr. Pete Peterson that speaks to the subject. What I find refreshing is that he is someone from the Republican Establishment, Nixon Secretary of Commerce, a personal friend of the Alan Greenspan, secretary Snow and others and yet he has the integrity to articulate and explain the very dangerous road we are on, i.e. a $44 trillion debt in unfunded liabilities. His motivation for writing the book was “to protect our children”. I don’t know about you but that catches my attention.

He holds the Republican and Democratic parties equally responsible yet I wonder if, like Mr. Kotlikoff who wrote The Coming Generational Storm, Mr. Peterson isn’t just another “voice crying in the wilderness”. And isn’t it interesting that you don’t hear much about this crisis in the popular media.

So where does all of this leave us? It leaves us in the clutches of government doing what government does best. Government has a propensity to grow. Our founding fathers where well aware of this and it is exactly what they wanted to prevent. As government grows, it expands not only its reach into the individuals life but it also exacts a tax in doing so. This tax together with all the other sources of revenue have a limiting effect on government as they can only extract so much in the form of taxes. So in order to circumvent this limitation, government simply prints more dollars. Note that this solution was not available to the statists while under an honest money regime of a gold-backed currency. This point brings, full circle, the question and answer of why our elected representatives have brought us to this point in time. They relish the ability to curry the favor of their constituency, and thus their votes, by being able to provide spending programs for which there is no money.

This is the logical progression: tax business and the citizens to pay for votes. Increases taxes until it becomes politically unpopular to do so. Then inflate the currency (hidden tax) by creating money to finance spending.

Between August and the end of October the government must sell $300 billion in Treasury bonds (loans) to finance a government lifestyle that is spending way beyond it’s means. And here is the key note: foreign countries, the major investors of US Treasury bonds, are growing increasingly concerned that their investments are diminishing in value because the US is printing excessive amounts of dollars, consequently devaluing their investments. As they buy fewer US Treasury bonds (loans), the unsold Treasuries will have to be bought and this can only be done by the US printing dollars and buying its own debt. This mechanism is called “monetizing the debt”. It signals the beginning of the end because once the US begins to monetize the debt, the consumers of US Treasury bonds will reduce their consumption for fear of loss of value due to the US dollar printing. This will cause the US to have to print more dollars to buy up the Treasury bonds the rest of the world shunned. And this, in turn, creates even more reluctance by the rest of the world to finance our debt and the death spiral of hyper inflation is launched. In case you’re not aware, this process began several months ago with a Federal Reserve announcement of intent to purchase $300 billion in Treasuries. And that’s why you need gold. – Javaman