Part II – 41 years since we all became Keynesians

An honestly governed gold standard eliminates “discretionary” monetary policy by centralized authorities (i.e., central banks).

Gold is an honest check on the amount of leverage that can build in the financial system and it limits the amount of money the government can borrow. A government that does not have a captive central bank and fiat paper currency cannot borrow massive amounts of money (think Greece). Fiat paper money managed by complicit central banks remove any discipline of free-spending politicians. Thus, central banking and huge deficit spending go hand in hand.

Let’s turn to a former Chairman of the Fed to give some added explanation:

“Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.

They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of society lose value in terms of goods.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold [in 1933]. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Alan Greenspan, 1966

When Greenspan later rose to a position of prominent political power when named Chairman of the Fed, he disavowed his essay about gold. However, that disavowal does not detract from the truth of his written word. His words stand on their own. (What changed since 1966 was Mr. Greenspan and not the truth.)

We are currently witnessing in both Europe and the U.S. a crisis relating to the financing of the modern-day Social Welfare State that goes to the core of the generally-accepted political philosophy upon which they rest. The resolution of the problem is therefore not as simple as coming up with a new policy that is a derivation of previous ones (e.g., using debt to solve debt). The real resolution will come only after a major shift in political power, if seen at all, that results in a significant reduction in spending of the respective governments. Otherwise, it will be more of the same: a continued decline in living standards and individual liberty in countries experiencing this rot. Profligate central banks are a symptom and enabler of the political rot. They are not the cause.

The chart 2 (above) shows the gold content of one U.S. dollar. Today, one dollar buys a pitiful 0.0006 ounce of gold, which compares to about 0.05 ounce a hundred years ago just before the Fed existed. The deprivations that Mr. Greenspan wrote about are illustrated in the sharp decline in the gold content of the dollar.

For point of historical reference, Chart 3 (above) shows the silver content of the Roman Danarius between 64A.D. and 270A.D. You can draw your own conclusions.

Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”

George Washington, in letter to J. Bowen, Rhode Island, Jan. 9, 1787

Sadly, few people understand the process by which paper money leads to “fraud and injustice” as President Washington accurately warned in 1787. If they did, then perhaps days like Aug 15, 1971 would never have happened.

To end with one last quote, this time from a Socialist who knew the importance of gold:

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

Shaw wanted to end the Capitalist system and knew, like Greenspan, that gold stood in the way of a Socialist government from achieving its objectives.

August 15, 1971: A day that will live in infamy.

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