As summer days are turning into chilly Autumn breezes, the sunshiny days of quantitative easing (QE) are doing the same. The stage props on the centrally-run economic stage are falling and warm faith in the U.S. dollar has taken on a new chill. The BRICS nations are calling for a major monetary reform and a new International Monetary Fund (IMF). The global outlook of the once green U.S. dollar is fading to a crinkly brown, and perhaps even falling off the international currency tree altogether. Although the gold standard may never return, Austrian economist Milton Friedman expressed the possibility of gold making a comeback when loss of confidence in fiat money strikes. Since biting the forbidden apple in 1913, by which of course we mean installing the Federal Reserve, the dollar has undergone at least a 95% value debasement. Without a currency backed by a commodity, fiat, that wispy, hollowness of paper, sways without a chance against the meddling winds of central bankers.
But hope from history holds out. The gold standard of old submits a convincing resume as a dependable, truthful currency. While on the gold standard, the dollar held steady for almost a century (1834-1933) at a real value of $20.26 per ounce. What breathed life and strength into the dollar has been replaced with a system of fiat printing presses, rolling out an economy on life support. Today, that same gold ounce will cost quite a bit more paper at the going rate of about $1,300. During the first BRIC summit, the BRIC nations announced the need for a new global reserve currency, which would have to be “diversified, stable and predictable.” It is becoming apparent that the dollar can no longer safely embody such attributes. While these changes to out rule the dollar’s dominance will undoubtedly take time, there is no time like the present to review the value and history of gold.
First to skip down the yellow brick road (in the post-Middle Ages era), Britain tied the pound to gold de facto in 1717 and formally in 1819. The United States followed Britain into adopting the gold standard after the bimetallism standard proved less worthy. The switch was a divine fate for the U.S. as economist Ludwig von Mises observed: “The attempts to create a double standard of both metals, gold and silver, failed lamentably. It was this failure which generated the gold standard. The emergence of the gold standard was the manifestation of a crushing defeat of the governments and their cherished doctrines.” The U.S. switched to the gold standard de facto in 1834 with the Coinage Act and finally de jure in 1900 with the Gold Standard Act. The purer the gold standard became the more it contributed stable inflation, economic growth, and relatively free trade in capital, goods, and labor.
Longstanding majority favor famed gold as the most common and dominant commodity to arise as money. It was the freest, the most stable and secure, and the least likely to be controlled form of currency known to the ages. Preferences towards the gold standard first arose for its coinage abilities: extraordinary malleability, low chance of forgery, resistance to decay, and its inherently limited supply. Gold’s scarcity warded off many issues stemming from inflation and stunted government’s ability to expand rapidly. Without a central bank, such as our current nemesis at the federal reserve, gold inflation rode a comparatively calm tide, historically only rising an average of one percent. A fundamental key to its success, gold inherently left central planners with less to do.
A result of free market access, gold was almost always the money used by individuals. It was somewhat a private currency, held and dealt with largely by citizens and strengthened by competition. While many dispute the benefits of gold, surely it can be agreed that competition of currencies allows greater freedom, in the same way that competition in business serves to weed out those which are corrupt and unsatisfactory. The gold standard has never enjoyed a currency reign totally absent from government intervention and manipulation, but, “Governments lie; bankers lie; even auditors sometimes lie: gold tells the truth (Lord Rees Mogg).” During times of crisis, however, government found opportunity to weaken the diversity and liberty of the gold-backed dollar.
After World War I, the U.S., Britain, and most other countries abandoned the the gold standard due to inflationary financing:
“The most egregious departure from free-banking principles was the frequent suspension of specie payments: banks’ refusal to honor their obligation to redeem their banknotes for gold. These breaches of contract, which should have triggered liquidation and perhaps criminal prosecution, were in many instances tolerated or even encouraged by government authorities, especially during times of war or economic contraction” (Warren C. Gibson).i
After this temporary abandonment of the gold standard, two subsequent trial versions of the gold standard failed to grasp the power of gold in its laissez-faire form. The unhampered gold standard that would have flourished under jurisdiction of the people was first misused, then denied by government. Gold was comfortable with freedom, a friend; it was like a carpet softening harsh ground, allowing for both wealth creation and failure. Enemies of freedom sought to yank the carpet from underneath, leaving society’s feet to freeze on pavement, waiting in line for their subsidized slippers from almighty government.
The gradual breakdown and removal of the gold standard, although beginning privately with the Federal Reserve in 1913, took a flamboyant start in 1925 with a modified system termed the Gold Exchange Standard. Quickly understood, “Under this standard, countries could hold gold or dollars or pounds as reserves, except for the United States and the United Kingdom, which held reserves only in gold.”ii In 1931, shortly after its installment, this skewed version of the gold standard collapsed in Britain in the face of massive gold and capital outflows. Two years later, U.S. President Franklin D. Roosevelt nationalized gold owned by private citizens. Free trade of currency by the people was slipping away. As if to revive and continue the gold system, between 1946 and 1971 countries operated under the Bretton Woods system.
The second and final degradation, the federally designed and corrupt Bretton Woods system, failed with disastrous effects. The United Nations and participating governments took advantage of this system to form international rules of economic conduct, including fixed rates for currencies and establishing the dollar as the monetary backbone. The Bretton Woods system laid the task of redeeming other central banks’ holdings of dollars for gold, at a fixed rate of thirty-five dollars per ounce, in the U.S. government’s hands. Proving an ineligible long-term system, constant U.S. balance-of-payments deficits steadily reduced U.S. gold reserves. It was during this shift towards globalization that the International Monetary Fund was created. From this sharp departure off the road to Oz, the gold standard met its end. Supported by the IMF, an exclusive economic club of 10 nations, called the Group of 10 (G10), signed the Smithsonian Agreement in 1971. The Smithsonian Agreement ended the Bretton Woods system of fixed currencies, as well as all remnants of the gold standard.
The trickle that burst the floodgates of fiat and central banking, both drowning and damning the gold standard, formally began with the seemingly unpretentious formation of the Federal Reserve in 1913. One of the last central banks to form, the Federal Reserve, which is neither federal nor simply a reserve, grew from of the union of corporate and elitist bankers. Despite the different modifications and interventions dooming the gold system in the United States, it would be touching on truth to say that the looming cloud of the Fed made the reign of gold only a shadow. Opening the doors at the Fed opened the door to a central bank controlled monetary policy and closed all windows to financial transparency.
The ultimate decency of gold was supported by the integrity of the free market. The qualities of gold compliment the complexity of human actions. Central planning can never take into account all the forces at play in any market. The wisdom of gold is its transparency. Inflation and deflation create a screen, masking the actual condition and trends of the economy. While the bankers play god, businessmen blindly misallocate money, time, and resources, the layman makes a bad investment and all the while the declining value of the dollar makes everyone poorer. The cost of living rises, but wages do not. This is not a call for a higher minimum wage, that has a thousand hidden pitfalls in itself. This is a call to realize the desperate state of the dollar: “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold” (George Bernard Shaw).
The rude awakening has arrived just in time for Halloween. QE’s costume has holes. The false head guiding the U.S. currency down the sewer must be pulled off and tossed away, with a stout return to methods of non-interventionism. Otherwise, zip up your jackets. The paper notes in our pockets once had power. But it’s all about to freeze over.
For a perspective on the future of global currencies and the buyer of U.S. debt read: http://alt-market.com/articles/2145-who-is-the-new-secret-buyer-of-us-debt
i Gibbson, Warren C. “Gold and Money.” : The Freeman : Foundation for Economic Education. FEE, 24 Feb. 2011.
ii Bordo, Michael D. “Gold Standard.” : The Concise Encyclopedia of Economics. The Library of Economics and Liberty.