The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from THE FORGOTTEN MAN: A NEW HISTORY OF THE GREAT DEPRESSION by Amity Shlaes, Jonathan Cape, London, 2007

October 1933

They met in his bedroom at breakfast. Roosevelt sat up in his mahogany bed. He was usually finishing his soft-boiled egg. There was a plate of fruit at the bedside. There were cigarettes. Henry Morganthau from the Farm Board entered the room. Professor George Warren of Cornell came; he had lately been advising Roosevelt. So did Jesse Jones of the Reconstruction Finance Corporation. Together the men would talk about wheat prices, about what was going on in London, about, perhaps, what the farmers were doing.

Then, still from his bed, FDR would set the target price for gold for the United States – or even for the world. It didn’t matter what Montagu Norman at the Bank of England might say. FDR and Morganthau had nicknamed him “Old Pink Whiskers”. It did not matter what the Federal Reserve said. Over the course of the autumn, at the breakfast meetings, Roosevelt and his new advisers experimented alone. One day he would move the price up several cents; another, a few more.

One morning, FDR told his group he was thinking of raising the gold price by twenty-one cents. Why that figure? his entourage asked. “It’s a lucky number,” Roosevelt said, “because it’s three times seven.” As Morganthau later wrote, “If anybody knew how we really set the gold price through a combination of lucky numbers, etc., I think they would be frightened.”

By the time of his inauguration back on March 4, everyone knew that Roosevelt would experiment with the economy. But no one knew to what extent. Now, in his first year in office, Roosevelt was showing them.

Comment: In the Spring of 1922 a conference was convened at Genoa, Italy to find out ways of returning to the gold standard; this was the first attempt to do so since the Great War of 1914-1918. This conference gave birth to the “gold exchange standard”, which in truth was not really a gold standard because as James Rickards explains: “Participating countries agreed that central bank reserves could be held not only in gold but in the currencies of other nations; the word ‘exchange’ in ‘gold exchange standard’ simply meant that certain foreign exchange balances would be treated like gold for reserve purposes.” The consequence of this was that the burden of gold standard would be put upon the shoulders of those nations with the largest gold reserves, which in practice, of course, meant overwhelmingly the United States. The gold price was to be maintained at US$20.67 per ounce, and other nations held dollars as proxies for gold.

One problem with this attempt to establish the gold standard was the desire to return it to pre-War prices, which of course had been entirely set by the markets and, without government intervention or multilateral international committees, or central bank involvement, had been remarkably stable in the period of the classical standard 1870-1914.

Gold (and silver) coins and bullion had ceased to circulate with their accustomed frequency since the beginning of the war, and exchanges of paper for gold were subject to hefty minimum quantities, with the consequence that only the central banks and the commercial banks, with a few of the ultra-wealthy would be using gold bullion. Other notes would be used by everybody else, redeemable through government promises to maintain parity with gold. While this in theory meant that paper was de facto a promissory note with redeemable properties, effectively the gold itself vanished into the vaults of central banks.

And of course, central banks were now involved in gold in ways that they neither had been, nor had there been any necessary that they should have been, under the classical gold standard.

The stage was set. When FDR conceived of the idea that the dollar should be devalued against gold  almost as soon as he assumed the Presidency, “hoarding” of gold was banned. The Executive Order was issued on April 5, 1933; fifteen days later the export of gold from the U.S. was forbidden; nine days thereafter American gold mines were compelled to sell their gold only to the Treasury and at prices determined by the “customer”, the Treasury, which means that American mines were nationalized in all but name.

As of October 1933, FDR began to buy gold in the open market. He had already confiscated over 500 metric tons of the stuff from private hands, at the official price, giving America the largest “hoard” of gold in the world, and FDR’s market activities were, of course, designed to push the price up as a consequence of this monopoly.

So there we have it: a strange path indeed from the attempt to re-establish the, or at least, a gold standard, to the U.S. being given the responsibility of maintaining the price, through the Depression and the decision to devalue the dollar, the theft of private citizens’ gold giving the President an edge in the market place, thus ending up with Roosevelt sitting in bed with a boiled egg, determining the price of gold on a whimsy: monetary policy had become a bull session!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

By Mark Rogers

At the Money Week annual conference (held at Queen Elizabeth II Conference Centre, Westminster, London, Friday, 17 May, 2013), two of the speakers, Mr Dominic Frisby and Mr Simon Popple were asked the same question: was the drop in the gold price in April manipulated, and if so by whom and why? Both speakers disdained conspiracy theories as the likely answer: nothing but fruitless speculation. Mr Frisby asserted that we deal with the cards as they are on the table. Another question was however a good and intriguing one. Why is the price still down given that central banks have been buying “hand over fist”?

ETFs

As I noted in “Gold in Flux”, the main cause of the drop in price was the sudden dumping of huge quantities of paper gold. If this was because those who held these paper stocks had suddenly come to realise that they were worthless, then this was a rational thing to do, in spite of the fact that it would drive the price of gold down. Indeed, at the conference Mr Frisby pointed out that as long as the next crisis is held at bay, or indeed that the present crisis is bottoming out (he was ruefully cautious as to whether this is indeed what is happening!), then it would be reasonable to say that the current price of gold is a fair one. After all it is still high, in comparative historical terms: in 2009 it was $950 an ounce.

This does not, however, address the possibility that the price of gold has over the last year been too low. I first discussed the possibility in “The Price of Gold”. Why might it be considered that the price has been low? Those wretched ETFs. The swelling mass of ETFs had become so much papier-mâché (literal meaning: chewed paper), clogging the market. This might have had the effect of keeping the price lower than it otherwise would have been. Equally, of course, it could have kept the price artificially high.

As previously mentioned in “The Price of Gold”, the probability that the central banks’ buying of gold has been spurred by Basel III is a reasonable inference, whatever else may have caused it, though of course it does not answer the question about why the price continues low (subject to Mr Frisby’s caveat.) In passing, it is interesting to note that unlike European central banks, China did indeed start compliance with Basel III rules on January 1, 2013, when they ostensibly came into force.

DRAG ON THE PRICE

Now it is entirely plausible that the ETFs continue their drag on the price of gold: ETFs have not been abolished or abandoned, merely that a large quantity have been dumped. And the price of gold therefore inevitably mixes (perhaps confuses is the better word) physical gold and paper gold.

Clif Droke quotes Bill O’Neill, principal with LOGIC Advisors: “The biggest negative continues to be the ETFs. We’ve had steady and constant ETF liquidation,” adding that many suspect the exodus is not over, and continuing: “Further, once major hedge funds rotate away from such an asset, they typically don’t jump right back in anytime soon. The big players are going to be slow coming back into the market.”

Mr Droke comments: “The unspoken reality for gold investors is that the increasing institutional demand for equities is taking the wind out of the sails of the gold market,” and goes on to quote Kitco News on Tuesday, 14 May, 2013: “Continued exchange-traded-fund outflows, strong equities and US dollar gains are limiting the upside for gold, while recently strong physical demand and continued central-bank accommodation are providing support.”

Mr Droke elaborates: “While there has been strong demand for physical bullion since the April lows, especially in Asia, the fact that stocks are garnering an ever-growing share of ‘hot money’ flows while gold is largely ignored by institutional and hedge fund investors isn’t helping the yellow metal’s cause.

Moreover, as the value of S&P 500 Index increases while gold goes nowhere, it’s causing the relative strength for gold to actually decline. This gives the hedge fund and other sophisticated investors who look at technical indicators one less reason to invest in gold in the near term.

“Kitco reports, ‘A number of observers have cited the rotation into equities as one of the factors prompting an exodus out of gold exchange-traded funds so far this year….’”

This seems to be a very acute analysis of what is happening.

Another complicating factor is that while central banks are indeed buying up gold, some of the most important are continuing with, or continuing to threaten, more quantitative easing. This is another paradox waiting to be resolved, for as described in the Deutsche Bank, London Head Office analysis “Gold: Adjusting to Zero” (discussed in “Gold and the Keynesian Groupies”) QE pushes the price up, or is there some Mephistophelean spell that negates the gold price when it is central banks which buy it? (See “The Gold Standard: Further Encouragement from Wise Eminences”)

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

By Mark Rogers

In the Seventeenth Century, “[t]he financial system of England had staggered through the disturbances of the Civil War and had grown worse during the inefficiency and corruption of the Stuarts … the current money had deteriorated to a state of confusion.” (Louis Trenchard More, Isaac Newton: A Biography (first published 1934), Dover Publications, Inc., New York, 1962)

This state of confusion resulted from the mutilation of money, rendering its recoinage a matter of urgent necessity. In the 17th century counterfeiting and adulterating the coin of the realm was so common that a coin worth its original face value was extremely rare. Both crimes were capital offences.

Louis Trenchard More describes the debauched currency and its consequences:

“The standard currency of the country was silver; and till the reign of Charles the Second the minting of the coin had been carried on by the process introduced by Edward the First in the thirteenth century. The metal was cut with shears and then shaped and stamped by the hammer. Coins made thus by hand were not exactly round nor true in weight and, as they were neither milled nor inscribed on their rims, they were easy to clip, or file, without detection. Clipping thus became one of the most profitable kinds of fraud. The custom had become so detrimental that, in the reign of Elizabeth, it was treated as high treason [hence the death penalty M.R.]. At the time of the Restoration, a large proportion of the coins had been more or less mutilated. To remedy this condition, a mill worked by horses was set up in the Tower which stamped the coins accurately and inscribed their edges with a legend; as, however, the old money was kept in circulation, the remedy was useless. The new coins were either hoarded, or melted down and shipped abroad; the old coins persisted as the medium of business, and they continued to shrink in weight and value. In the autumn of 1695, it was found by actual and careful test that the average value of a shilling had been reduced to six pence. Every transaction was accompanied by a bitter altercation between the buyer and the seller; the former insisting on estimating the coins by tale, and the latter by weight. Every Saturday night, all over the country, was a period of riot and bad feeling between employer and employee. The labourer and the clerk might receive the stipulated number of shillings, but for their purchases they acted like sixpences or less. We have, as a startling witness of these troubles, the complaints of Dryden that his publisher, Tonson, on one occasion included forty brass shillings in a payment of clipped money, and at another time the money was so bad that all of it was returned. If the foremost writer of the day was so treated, we can easily imagine the distress of the common people. … During even a most disturbed and evil rule, the common people manage to pursue their personal affairs, but such a state of the money as then existed affected every moment and every transaction in their lives.”

The situation was worse than impossible, and in 1695 King William III, addressing Parliament, recommended that the coinage be reformed. Thus, Charles Montague, the Chancellor of the Exchequer, prepared a Bill to this effect.

Charles Montague

Montague was the fourth son of a younger son of the first Earl of Manchester; he was later ennobled as Lord Halifax. Although Isaac Newton’s junior by nineteen years, Montague struck up a deep and lasting friendship with the great philosopher, then Lucasian Professor of Mathematics at the University of Cambridge, when he, Montague, matriculated at Trinity College as a Fellow-Commoner.

Montague was a man of superlative ability and quickly impressed himself upon the political life of the nation. His highest achievement, the great recoining, came about after his appointment as Chancellor of the Exchequer in 1694. He also instituted the Bank of England, as a private body. As a result of his friendship with Newton, he secured the latter the position of Warden of the Mint in 1696. It was this partnership that was to carry out the new minting. According to Montague, the success of this project was due to the administrative work of Newton.

The Great Recoinage

The first remarkable aspect to note of the proposed recoinage, was that this was to be done at a time of war: this was the war between France and the League of Augsburg (known as the Nine Years’ War 1688-1697, or the War of the Grand Alliance), which King William III joined soon after becoming King of England with his wife Mary as Queen, on the occasion of the Glorious Revolution of 1688. The North American theatre of this war, known as King William’s War, finally settled the issue of the American colonies between France and England in the latter’s favour.

To embark on the wholesale refashioning of the national coinage, and to complete it in a short time, at a time like this was a remarkable feat and owed everything to Charles Montague’s fortitude and eloquence. Although the Jacobites tried to discredit the government and the Whigs advised half-hearted measures, Montague managed the House of Commons so adroitly that the Bill was passed into law on the King’s signature on 1st January, 1696.

It provided for the recoining to be to the old standard of weight and fineness, and for all new coins to be milled. The public exchequer was to bear the loss on the clipped coins. Most expeditiously, the time at which no mutilated money could pass ever again was set at 4th May 1696: this great task, therefore, was to be carried out in a mere four months. We must assume that such was the pressing need to address this huge task as Montague and Isaac Newton, the new Master of the Mint, understood it, that no time was to be lost.

This new coin was the cause of the window tax, which was not as unpopular as legend has suggested. It came about like this: the loss to the exchequer referred to above was not easy to estimate, but Montague obtained a loan from the Bank of England which was secured by the new tax levied on the number of windows of the houses; however, inhabitants of cottages were to be exempt from the new tax in compensation for the cruel harassment they had undergone at the hands of the assessors of the now defunct hearth tax.

A month after the bill became law, the recoining had begun. Furnaces were erected in the gardens behind the Treasury and vast quantities of mutilated money were melted in them and cast into ingots which were at once conveyed to the Tower for minting. Although there had at first been widespread panic at the thought of money, however bad, being withdrawn from circulation, its relative scarcity did not become a serious factor and the panic soon subsided.

Isaac Newton assumed responsibility for the work in March, and under his direction branches of the mint were set up in several towns, thus easing the passing of the old money in exchange for the new throughout the country.

4th May

Loius Trenchard More describes the result:

“The real agony began in May when the clipped coins were no longer received by the government in payment of taxes. There was little of the old money which would pass the test and the new money was just beginning to trickle from the Mint; but, by means of barter, of promissory notes given by merchants, and of negotiable paper issued by the Exchequer, the summer slowly wore away. It was not till August that the first faint signs of returning ease in the money situation appeared, and there is no doubt that the able administration and indefatigable industry of Newton shortened this period of distress. He wrote peremptorily to Flamsteed that he would not be teased about mathematical things nor trifle away his time while he was about the King’s business. The Wardens of the Mint had previously been fine gentlemen who drew their salaries and rarely condescended to do any work.”

But work Newton certainly did: “It had been considered a great feat to coin silver to the amount of fifteen thousand pounds weight a week; but under the energetic management of Montague and Newton, the weekly coinage soon rose to sixty thousand pounds, and finally to a hundred and twenty thousand pounds. But even this rate was inadequate, and normal conditions were not restored till the following spring.”

Thus on 4th May 1696, mutilated money was finally abandoned for true coins, which were far harder to counterfeit, and a proper system of milling and guaranteeing the standardised value of the coinage came into being, overseen by one of the greatest scientific minds of all time, Sir Isaac Newton. We shall see what he thought of debasers of currency below.

“When was the last time you read your money?”

The question is posed by the analysts Daniel Brebner and Xiao Fu in their report for Deutsche Bank, London, Gold: Adjusting for Zero (discussed here). They go on:

“It is useful to do so as it will call attention to its subtle warnings. A £20 note reads: I promise to pay the bearer on demand the sum of twenty pounds. Two immediate questions arise: 1) 20 pounds of what? 2) Who is I, and can he/she be trusted? The US dollar bill is more prosaic, its nebulous message being: This note is legal tender for all debts, public and private. Our only comment would be that since fiat money is inherently a form of obligation (liability) that it is simply a tool for exchanging debts of different riskiness and thus underscores that there is an inherent risk in such an instrument.”

That risk is well brought out in a passage I have quoted in an earlier article. It is by C.H.V. Sutherland (then Keeper of Coins at the Ashmolean Museum, Oxford, in “Gold: Its Beauty, Power and Allure”)

“Collapse of the gold standard was followed by the era of credit currency. We accept a bank-note for the payment of £1, but in accepting it we receive in fact only the bank’s promise to pay £1. We accept a cheque, similarly; but a cheque again is no more than its drawer’s promise that his bank will pay us another bank’s promises. The growth of ‘money’ in this sense – and of course it is not money at all, in any true sense, but an extension of credit – is one of the most remarkable features of economic life since 1914 [emphasis added].”

The risk is presently underscored by quantitative easing and low interest rates: capital/worth is fiercely undervalued, with millions of pounds being wiped off pensions and savings.

In other words the promise on a modern English banknote is meaningless, and as such is a breach of trust with the general public. At one time the note was no more than a convenient substitute for gold and silver coins, and the strength of the currency depended on knowing that should anyone wish to hold the “I” to account, the promise on it would be redeemed in actual gold/silver coin or bullion. Knowing this was sufficient to keep the notes rather than coins in circulation; the trust was reciprocal in that the Bank of England did not dare print more of them than could be practically redeemed, thus keeping faith with the general public that the value stated on the note was a real value.

Mutilated Money Now

While the mutilation of the imperfectly guaranteed silver coinage in the seventeenth century was obvious to all, hence the squabbles in trading and on payday that an English note is itself mutilated money is not so obvious. The comparison can be made with the PAYE system: the vast majority of people in work in this country is on PAYE and as such receives their salary/wages net of tax, it having been deducted by the business they work for before the wages are paid over. In other words, not having to write out a cheque to the Inland Revenue, most people are only aware of the taxes they pay in the abstract – it is not a painful moment of reckoning each time tax is paid as it is for those of us who are business owners or freelance.

In this sense, the promise on a bank note represents mutilated money at one remove: we take it on trust that we can proffer these notes in exchange for goods and services, so we tend to think of the notes themselves as money. But they are not: I have remarked before that QE is the state forging its own currency, but without gold backing, even before QE, the actual “currency” in circulation is fake. And of course the coins we use are made of base metals and not precious ones, and are therefore far easier to forge. Indeed it was estimated earlier this year that three in every £100 pounds worth of pound coins is counterfeit.

This is the denouement of the situation described above by Keeper Sutherland.

Hang Them

As observed in above, counterfeiting and adulterating the coin of the realm were capital offences: death by hanging in these instances. It is interesting that the public did not approve: although the debased coinage was an economic disaster which enveloped everyone, the act of skimming a few shreds of precious metal from a handful of coins seemed, in itself, too insignificant for such a draconian punishment. “The sympathy of the people extended to the malefactors: juries would not sentence except in flagrant and wholesale cases, and judges would not sentence; while the evil effect of the practice spread its poisonous influence throughout the trade and life of the nation.” (Trenchard More)

The gallows did nothing to curb the practice because it was too easy to perform, thus ensuring that many people of course went undetected. While he was Warden of the Mint, Sir Isaac Newton had the fate of a counterfeiter drawn to his attention. He was firmly on the side of upholding the existing law, and the short letter in which he does so is worth quoting in full:

Newton to Lord Townshend

My Lord,

I know nothing of Edmund Metcalf convicted at Derby assizes of counterfeiting the coin; but since he is very evidently convicted, I am humbly of the opinion that it’s better to let him suffer, than to venture his going on to counterfeit the coin and teach others to do so until he can be convicted again, for these people very seldom leave off. And it’s difficult to detect them. I say this with the most humble submission to His Majesty’s pleasure and remain,

My Lord, your Lordship’s most humble and obedient Servant,

Is. Newton, Mint Office Aug. 25, 1724

Of course, the problem is in many ways worse now because whereas the counterfeiters and adulterers of yore were common criminals and ordinary folk on the make, and the problem was the cumulative result of the individual acts of hundreds of people, the debasers of the currency today are government ministers and state officials: debasement is official policy, the inevitable consequence of fiat currencies.

Is hanging too good for our lords and masters today?

A Statue Commemorating Sir Isaac’s Service to his Country as Master of the Mint on the Fourth Plinth at Trafalgar Square:

Among the ideas for a permanent memorial on the plinth at the North West corner of Trafalgar Square, there have been from time to time suggestions that the statue should be of a notable civilian.

In keeping with the other statues – one King, two generals and one Admiral – a life which contained some signal service to the country at large ought to be the guiding principle on which such a civilian should be chosen.

It is suggested here that an eminently suitable candidate for this honour is Sir Isaac Newton. Apart from Sir Isaac being universally known for his astonishing scientific achievements, his claim to notice in the context of a public statue in Trafalgar Square is the heroic effort he put into the Great Recoinage of the debased gold and silver currency which eradicated mutilated money and thus put an end to the argument and riot that habitually took place when pay day drew nigh or payments fell due.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from CURRENCY WARS: THE MAKING OF THE NEXT GLOBAL CRISIS by James Rickards, Portfolio/Penguin, New York, 2011

The continuation of the trend toward a diminished role for the dollar in international trade and the reserve balances begs the question of what happens when the dollar is no longer dominant but is just another reserve currency among several others? What is the tipping point for the dollar? […]

Barry Eichengreen is the preeminent scholar on this topic and a leading proponent of the view that a world of multiple reserve currencies awaits […] the plausible and benign conclusion that a world of multiple reserve currencies with no single dominant currency […] this time with the dollar and the euro sharing the spotlight instead of the dollar and sterling. This view also opens the door to further changes over time, with the Chinese yuan eventually joining the dollar and the euro in a coleading role.

What is missing in Eichengreen’s optimistic interpretation is the role of a systemic anchor, such as the dollar or gold. As the dollar and sterling were trading places in the 1920s and 1930s, there was never a time when at least one was not anchored to gold. In effect, the dollar and sterling were substitutable because of their simultaneous equivalence to gold. Devaluations did occur, but after each devaluation the anchor was reset. After Bretton Woods, the anchor consisted of the dollar and gold, and since 1971 the anchor has consisted of the dollar as the leading reserve currency. Yet in the post-war world there has always been a reference point. Never before have multiple paper reserve currencies been used with no single anchor. Consequently, the world […] is a world of reserve currencies adrift. Instead of a single central bank like the Fed abusing its privileges, it will be open season with several central banks invited to do the same at once. In that scenario, there would be no safe harbour reserve currency and markets would be more volatile and unstable.

Comment: It is hard to fathom such an unrealistic expectation of lead currencies, swilling about supporting each other and every other currency, as being somehow optimistic and benign; Rickards is not saying that he thinks they would be by using these terms, he is pointing up the authors of these expectations as hailing them as benign: what could go wrong, we’re all good chaps…aren’t we?

Rickards’s view is of a piece with Gustav Cassel’s point (quoted in Gold on the Outbreak of the Great War), that “the responsibility for the value of the currency, in cases where the gold standard has been abandoned, must exclusively lie with those in whose hands rests this provision of the means of payment.” The point being that this is an astonishing level of trust to put into the institutions of government, not just moral trust, but a trust that the necessary calculations, observations and measurements can be made consistently and continuously to keep things afloat and stable. The euro is a very good object lesson that both these sorts of trust are misplaced, which is putting it mildly…

From an Austrian School point of view, the goodness of the humans in charge is irrelevant: it is the utterly impossible nature of the task that is the stumbling block. But it is just there, of course, that the immoral temptation to swing things to the state’s advantage comes to the fore – again as shown up by the euro.

Where there is no reference point, no anchor, no solution is feasible… which is why we keep getting  more of the failed nostrums. Which leads on to a very interesting observation: why taxes must go up in an economic world divorced from the gold standard.

Politicians are incapable of managing monetary affairs (see the article linked to below on The Mess We’re In: Why Politicians Can’t Fix Financial Crises). The gold standard prevented them by and large from acting on economic hubris. Unconstrained by gold, bewildered by their failures, corrupted by their power, they turn to the one nostrum that lies unfailingly to their hand: taxation. That is why it is found important at times of high and progressive taxation to denounce “avoiders” as selfish cheats who won’t do their bit for their fellow citizens (see my The Moral Dilemma at the Heart of Taxation). So the gold standard not only prevented printing money, it also held down taxation. Another reason to vote for gold!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from MONEY AND FOREIGN EXCHANGE AFTER 1914 By Gustav Cassel, Constable & Co. Ltd, London 1927 (originally published Constable 1922)

ABOLITION OF THE GOLD STANDARD

The first thing that happened in the financial sphere upon the outbreak of the World War was that the existing gold standard was abandoned – not only in the belligerent countries, but also in the majority of neutral states. Upon the entrance of the United States into the War, corresponding steps were taken in that country. A realisation of this fact is of fundamental importance for a proper understanding of all the occurred later. From the moment of the outbreak of war, the various currencies had in the main to be regarded as free paper currencies, and consequently as currencies which were not limited to any metal, and therefore were not in any relation to one another. Only an economic theory which from the very outset takes cognisance of a system of free currencies can be in a position to offer a true and intuitive picture of the essential points in the development of which followed. Wherefore, it is of primary importance to realise that the value of the monetary unit in a pure paper currency can manifestly only be based upon the scarcity in the provision made by the country for means of payment, and that, therefore, the responsibility for the value of the currency, in cases where the gold standard has been abandoned, must exclusively lie with those in whose hands rests this provision of the means of payment.

When I say that the gold standard was abandoned, I refer to an actual fact. Its form one has everywhere sought as far as possible to avoid, and it may, therefore, be possible to assert, with a certain amount of plausibility, that the gold standard has not been abandoned – nay, even that it still obtains. But from an economic point of view that has no meaning. Economics have only to reckon with facts. When the essential conditions for a gold standard are removed, then the gold standard, as viewed from an economic standpoint, is abolished.

Comment: These are the first two paragraphs of Cassel’s book, and what follows is a dense and, at times, difficult to follow analysis of the convolutions that followed when the Great War was over: the institution of the gold exchange standard, free floating currencies and floating exchange rates. One of the reasons that the analysis is hard is that Cassel shows that throughout the period he deals with – 1914 to 1922 – there were great misunderstandings, misapprehensions, misassumptions and false assumptions of which few had a practical, factual grasp. The form of the abandonment allowed merchants, financiers, bankers and politicians to avoid realising its consequences, and to pretend that not only had the gold standard been maintained in its pre-War form, and but to also pretend that it was remotely possible to return to pre-War prices and values. The classical gold standard was not re-introduced, and it was, in the circumstances, impossible to return to pre-War values, indeed the attempt to do in the light of the wartime inflation, or indeed, the pretence that this had been done, was in no small measure responsible for the economic chaos that dogged Europe in the aftermath of the War and in a way continues to confuse and confound the economic managers of the global economies ever since. If one allows that the pegging of the dollar to gold at Bretton Woods was not a true gold standard, not even a gold exchange standard, but a continuation of those post Great War pretences, then it has been almost a century since the world abandoned gold and abolished the gold standard.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from THE COMING COLLAPSE OF THE DOLLAR AND HOW TO PROFIT FROM IT by James Turk and John Rubino, Doubleday, 2004

Why does gold – or any other successful money – hold its value? Not because it has “intrinsic” worth. Given its other uses in today’s economy, mainly jewelry and a few electronic niches, gold as a purely industrial commodity would be worth far less than indispensable substances like oil or wheat. But gold isn’t an industrial commodity. It is money, which is accumulated, not consumed like other commodities. As such, its value depends on our belief in its ability to function as money. We trust sound money because it exists in limited supply and is, by definition, not subject to government manipulation. Fiat currencies, in contrast, are controlled by governments, which are … fundamentally incapable of managing their monetary affairs.

Comment: The suggestion that gold has no intrinsic worth is of course true in the strictest sense that any value is, through prices, what is agreed to be acceptable. As they emphasis, it is “our belief” that it is sound money that facilitates is function as money, which they correctly define in their book as a real asset, as opposed to a money substitute, like paper – which may be a substitute in the sense that it represents the value of the real asset to make transactions easier to carry out, i.e. that the paper is a promissory note redeemable against the hard asset; or it may be a substitute in the entire sense that it has replaced the real asset, which, after the abandonment of gold, is what our current fiat money is, a mere bookkeeping exercise.

However, given it’s unique qualities, its rarity, its durability, its malleability, gold goes a long way in claiming intrinsic worth, which it is why it has been uniquely valued for over 6,000 years!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

By Mark Rogers

When buying numismatic rare gold coins, it is well to remember that many of them were minted for use, as currency. For example, one of the perennially popular collector’s coins, the South African Krugerrand is minted in two kinds. The South African Mint strikes proof Krugers, while bullion Krugers are struck at the Rand Refinery. Proof coins are issued in smaller quantities for the collectors’ market. They are important to collectors who are interested in “a perfect uncirculated” coin; when the Krugerrand was first struck the bullion coins were intended to circulate as currency.

While currency wars and devaluations are very much a thing of today, it is worthwhile taking a look at the origins of one of the first real currencies… and who knows, one that may take its place once more as a trusted, true exchange of value.

Money, a concept born out of necessity

Before money existed, goods were traded in the form of exchange and bartering. There were obvious difficulties because in the long term it is perhaps impossible to equate the value of items in terms of each other, oxen for example in proportion to wheat or potatoes.

A popular and plausible hypothesis by H. Hauser (Gold, Vuibert & Nony, Paris, p.307) is that as gold was also being traded against various goods, its weight was ultimately agreed upon as the unit of exchange. It cannot have been longer before people realised that gold was easily divisible into a variety of weights which equated to multiples of its value and therefore the value of other commodities. This led to the concept that of weights of gold were indeed useful “units of value” and quickly prices for oxen, sacks of wheat etc became equivalent to a certain weight of gold.

Gold is ideal for this purpose because it is easily divisible and impossible to fake and is a store of real value being a precious and rare metal.

The birth of gold coins

In Egypt, gold was exchanged against goods in the form of rings which had fixed weights and therefore different multiples of value could be used for pricing goods. Elsewhere however, gold stayed in the form of ingots for a long time but their weights were often variable, that is, there was no standard size of bar, so bars would naturally be of different weights depending on how much gold was in them. Trading was difficult and tedious because of these discrepancies. Weight variations meant that trades were seldom a direct equivalent to the goods being traded and so much haggling ensued.

In search of something more convenient, reliable and safe, small gold discs of a fixed weight were made and each one had a value struck on it. They were easier to carry around and allowed trade to be more flexible, retail as well as wholesale. Thus the first gold coins were born and indeed the first recognisable currency. This took place around 700 BC according to Erik Chanel.

Whilst gold was not the only metal used for coins – silver has been widely used as well- gold, however, was the ideal metal because of its unique combination of properties such as: it is stainless, rustproof, divisible, malleable, ductile and of course rare, which made it from the outset a symbol of riches.

Is Money as good as Gold?

The Gold Specie Standard was a system that associated units of money to gold coins in circulation or when lesser metal coins drew their reference of monetary value from a circulating gold coin.

The Gold Exchange Standard was when circulating coins made of various metals such as silver and copper drew their reference monetary value from a fixed value of gold independent of their own metal value.

The Gold Bullion Standard did not involve circulating coins. This was when governments had agreed to sell gold bullion at a fixed price in exchange for a quantity of circulating currency. In other words, each unit of currency effectively had a value related to gold. This allowed the mass introduction of paper currency, which was easily transportable and practical for payments.

So far so good; but more and more governments after 1914 disassociated themselves from gold standards of any kind, seeing how easy it was, from their point of view, to inflate their “wealth” by simply printing more and more pieces of paper, which led to the credit creation system, fractional reserve banking, loans and mortgages.

Without Gold, Money is Debt

The Gold Bullion Standard ended in 1971 when Nixon decided to deal with the economic strain of expenditure on the Vietnam War and so untied the value of the dollar from gold. This therefore effectively untied all the other currencies which had been part of the Bretton Woods Agreement to form the IMF (International Monetary Fund) in 1944.

Thereafter currencies were and are not covered by a relationship to gold or any other fixed unit of reference so they can become extremely volatile, easily devalued and printed at infinitum. The problem is that today’s money is based on pieces of paper that are printed with a nominal value. What this means is that currency value is nowadays derived from economic confidence. When there is none the currency becomes worthless and it is not because the central bank has printed a number on a piece of paper that it becomes meaningful. While it is true that Human Action is the ultimate source of value, human confidence is a much more precarious matter, easily swayed, easily duped.

As Detlev Schlichter argues in his immensely important book (Paper Money Collapse, John Wiley & Sons, Inc., New Jersey, 2011):

“Large sections of the public today embrace a strong and interventionist state. They consider the government a magic cure-all and the answer to everything. Given […] the consistently devastating historical record of state paper money, it is remarkable that those who advocate commodity money today are either marginalized as slightly eccentric or made to extensively explain their strange and atavistic-sounding proposals while the public readily accepts a system of book entry money in which the state can create money without limit. […] The result has been and will continue to be yet more money printing, more debt, more privileged treatment of banks and more government intervention in the economy. Given the interests of the political establishment, the views of the mainstream media, the vested interests of the financial industry, and the state zeitgeist, a timely return to hard money can almost be ruled out.”

Note that Schlichter says “timely”. Earlier in his book, he had noted that the “Achilles heel of this system may then be seen, more accurately, not in a fickle public but instead a banking sector that issues uncovered claims against itself.” Such a system was bound to cause panics from time to time, or what politicians and bankers saw as panics, but which were rather “attempted shifts by the public out of uncovered fiduciary media issued by the banks and previously accepted by the public, into money proper.”

That is, people looking for ways to protect their wealth outside of paper money.

Gold as a future currency?

Gold as a currency of the future may seem far-fetched but given the state of paper money and the increasing interest in gold who knows, it is already being planned as an alternative stable money in certain places. Even if gold coins do not re-enter circulation they are being used as a more certain tangible investment, thus protecting and covering other forms of wealth.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

The role of the Dollar in the Bretton Woods Agreement

The decisive change that led to the Jamaica agreement was President Nixon’s suspension on 15 August 1971 of the convertibility of the dollar into gold. Until then this had been the keystone of the financial system created in July 1944, the Bretton Woods Agreement, the chief architects of which had been Lord Keynes (despite his distrust of gold) for the British and Harry Dexter White for the Americans.  On 1 October 1971 the general assembly of the IMF asked the board of trustees to study and propose a comprehensive reform of the international money system.  This would be adopted by member States during a meeting held in Kingston, Jamaica on 7-8 January 1976, and included a set of provisions which put an end to the reign of gold.  The decisions taken focused on two main points:

1. The new exchange rate system

Member countries had to refrain from manipulating their exchange rate for competitive reasons and had to choose between three possibilities:

1. Not to assign parity to their currency which was to float freely on the foreign exchange markets;

2. To fix the value of their currency by pegging it to another currency or a Special Drawing Right* not to gold;

3. To link the value of their currency to one or various other currencies as part of cooperative mechanisms.

2. The role of gold

The solution presented was a compromise between the French argument that pushed for gold to remain part of the organization and running of the international monetary system and the American policy that had for a long time wanted gold to be withdrawn from its supreme position.  The agreement withdrew the status of the IMF and all references to gold and replaced it and its core functions with SDR whose dollar value is posted daily on the IMF website.  The consolation for gold was that central banks were given back the freedom to carry out transactions with metal without restrictions on them or the market.

This desire to remove gold as the standard of parity and to abolish the official price of the metal was completed by abolishing obligatory payments in gold for operations between the IMF and member countries and obliging the IMF to get rid of a third of its gold holdings (50 million ounces) by returning half to member states at the old price ($35 an ounce) and by selling the other half through public auctions.

Again we must add that the abolition of the official price of gold resulted in central banks being able to carry out transactions at a price derived from the market and to reassess metal stocks in their possession (as was very quickly the case with France and Italy).

Even if the United States made it known that they would continue to assess their reserve at the old official price of $ 42.22 an ounce and even if the first auction by the IMF lowered the price of gold on the world markets, at least for short periods, we can say that in the fact the results expected by the American policy and the IMF were a long way from being achieved.  The price of gold and gold itself still remain important elements of a vast political game: all things considered, if gold has survived, it’s because it has not stopped being the official metal that governments didn’t want it to be and wanted to forget.

Today, the dollar struggles and the new gold giants Russia, China and India are all looking in different ways towards gold as the international medium to back commitments or in the long term to oust the dollar as the international reserve currency. Closer to home the crisis that rose to the surface in 2008 has caused us to once again look at the stabilisation that resulted in the Bretton Woods agreement, which collapsed, partially due to economic expansion in excess of the gold standard’s funding abilities on the part of the United States and other member nations.

However, the problems of currency systems not pegged to gold lead to economic problems far worse.

Both France and Britain have envisaged such a stabilization. French President Nicolas Sarkozy and British Prime Minister Gordon Brown were recalling the previous success and called for a “new Bretton Woods” agreement in October 2008. What Sarkozy and Brown envisaged was a new multilateral agreement to stabilize international finance in the 21st century, the way the 1944 conference, which established the International Monetary Fund and the World Bank, stabilized financial relations among countries in the second half of the 20th century. The summit meeting of world leaders held in Washington, D.C., in November 2008 started a process that could lead to such an agreement. What would that take to succeed? What kind of leadership, and what kind of commitment, would be needed? History offers some useful lessons.

On several occasions throughout the Twentieth Century, political leaders in major countries sought international agreements on the global economic or financial architecture. Many of those efforts failed, Bretton Woods being the major exception. The central lesson that emerges from these efforts is that successful reform in response to a crisis requires three ingredients:

1. Effective and legitimate leadership combined with inclusive participation;

2. Clearly stated and broadly shared goals

3. A realistic road map for reaching those goals.

Of these desiderata, only number two, of course, is feasible: many things are easily said and agreed to, goals have a marvelous capacity for being broadly shared – at conferences. While these may be the central lessons learned by advisers and politician, because for such people diplomacy is all (as indeed witness the inability of the eurocrats to get beyond agreements and actually act to solve the eurocrisis); indeed it is possible that diplomacy in itself generates the lack of concerted action because there always has to be something to discuss at the next summit.

Gold the Real Lesson

The most obvious question to arise is: why in Kingston was a decision made to undo the successes of the Bretton Woods system? The immediate answer would probably be that the dollar was able to behave in ways that undermined other nations – but this was entirely because the gold-dollar peg was not a true gold standard even if it seemed to act like one most of the time. Nevertheless, this link did cause imbalances in favour of the United States, which the French, de Gaulle in particular, drew attention to during the sixties.

In spite of the success of Bretton Woods, that success was insufficient to prevent unilateral action by the American government, culminating in Nixon’s decision to abolish what was left of a gold standard in 1971. Henceforth, the goals and achievements of the new system, as much as what was deferred became dependant overtly on the behaviour of the participant countries. New rules in finance can only be devised by those who are the major players in the financial, industrial and emerging markets. Therefore any pretence of stabilizing the world economy was in fact abandoned in favour of powerful nations and cliques, the perfect recipe for currency wars.

In other words the lesson of Bretton Woods which ought to have been learned was that financial stability can only come about with a return to the classical gold standard (1870-1914). Kingston, Jamaica was a staging post on the way to the brink, the edge of which came into sight in 2008.

* The SDR is an international reserve asset, created by the IMF in 1969 to supplement member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (equivalent to about $ 321 billion). It should be borne in mind that this is a paper reserve, and for that reason is liable to all the defects of paper money.

This is a revision by Mark Rogers of an article posted earlier on this site by Maurice Hall redacted from L’Or [Gold] by Jules Lepidi and an article by J.M. Boughton (IMF Historian).

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

Review by Mark Rogers

Gold, A Different Point of View by Paul McGowan

With a Preface by Bill Bonner

Published by Ferrington in association with LinGold.com

Following the drop in the price of gold a few weeks ago, record sales of gold coins were reported (see here, and here for a rise in its price). The publication of this little book is therefore timely and pertinent.

There may be many people who would like to hold some gold but are dissuaded by the thought of large and expensive ingots. But bullion is not the only way in which to invest in or purchase gold. Yet as the author states: “Gold is not just ingots. The common response to gold is that it is only for the wealthy: those heavy bars, alluring though they may be, are simply unaffordable.”

This book argues that this view of gold is misguided and misinformed: there are affordable routes to investment in gold.

Although short the book contains a wealth of information. There is an introductory chapter giving a brief history of gold’s 6,000 history, which includes its denigration by politicians and academics in the twentieth century; Keynes for example thought it a “barbarian relic”. Proudhon, Marx, Lenin, Hitler all denigrated it, and to this day it troubles the likes of Ben Bernanke and George Soros.

Gold’s function as a stabiliser of value and its use over time as actual currency coin in circulation suggest that gold is today an alternative currency, and this first chapter ends with a comparison of gold with modern economies, noting that the latter are not working, while attempts to remonetize gold are afoot in, for example, Utah.

There is also discussion of the vexed problem of clean extraction with some useful information about the certificating process that reassures investors that their gold has been mined under the highest standards.

Chapter Two, “Gold, the last bastion of individual freedom”, examines the role that gold may play in hedging one’s investment portfolio, as well as its potential as a regulating device, controlling the whims of politicians and central bankers. This chapter contains a concise guide to the problems of paper currency unsecured against tangible value, with the inevitable consequence that savings are eroded and destroyed and more and more paper is required to purchase fewer and fewer goods. In other words, paper currencies are a direct attack on people’s individual control of their lives, rendering it harder and harder for them to provide for themselves, their families and their futures. We have been here so many times in history, with the latest example being the eurocrisis, that it is nothing short of scandalous that the political and academic classes cannot see the lessons to be so plainly learned.

Gold on the other hand “observes a constancy. With one ounce of gold you can almost buy today the same quantity of basic goods as at the time of the Roman Empire or Egyptian civilization. Inder the Pharaoh Tutmosis III, one needed the equivalent of 2 ounces of gold to buy an ox. Today, 2.5 ounces would be needed. Inflation has been rather weak in 4,000 years!”

This is a salutary reminder of gold’s stabilising power, which is just the very thing that the modern politician resents about it.

A strong bullish potential

The importance of gold in the contemporary world is underlined by an examination of those countries which invest heavily in it, both at the national as well as the individual level. Russia, China and India are at the forefront of this investment, with others, such as Vietnam, making significant moves in this direction. There is a useful digest of information about these countries, the role gold has traditionally played in them and how they are managing their portfolios at present. This analysis clearly establishes trends which are not going to vanish: China indeed buys enormous quantities of it, even though she also produces it.

These markets ought to assure the potential gold investor that while prices do indeed fluctuate, bullish potential is always there in gold, and has been for most of human history. Any falls in the market have identifiable causes – for example, the wedding season in India sees a rise in prices. Indeed, this analysis is testimony to the fact that we have had 6,000 years to observe people’s behaviour with gold and make it one of the easiest assets to manage.

An Investment Portfolio

Nevertheless, the author does not argue that gold should be the sole asset in one’s portfolio, far from it. Instead it should be looked on as the preserver of a portfolio’s value, that depending on the scale of one’s other investments a relevant proportion should always be kept in gold to support the rest of the portfolio.

There is a very useful chapter on investments other than gold, such as arable land and forestry, fine art and fine wines. These all have valuable potential (after all, we all need to eat), but each has significant drawbacks which are clearly and carefully spelled out. Gold’s position as being free of such drawbacks means that it is essential to invest in it, as a hedge against the dormant disasters in the rest of one’s investments.

And gold enjoys an enormous potential over any other investment, including in things such as diamonds that might seem to share some of gold’s economic potential. Gold is superbly versatile. Cut a diamond, and much of it is waste; melt an ingot of gold, and you still have the same amount of gold.

Gold Coins

The heart of the book is in its last chapter which really gets down to brass tacks – or gold coins! Coins represent gold at its most versatile, allowing even those who do not have huge fortunes to start saving in gold. While one ingot is beyond the reach of most, a single coin, perhaps purchased at the rate of no more than one a year, is a realistic and feasible option.

The book contains a wealth of information on tax regimes; storage; what to do and what not to do in actually physically handling coins and how to transport them; what to look out for as enhancing a rare numismatic coin’s value and what depletes it – all fascinating information in itself, and eminently practical.

“If we had to state only three reasons to buy: gold is a recognized and accepted safe haven throughout the world, demand from the emerging countries is strong and the total demand over the mid to long term is reliably forecast as being higher than the supply.”

By Mark Rogers

I looked here at the recent drop in the price of gold, and suggested that the problem lay not so much in the price itself as in the perception of the value of gold. This is always a problem with prices; as James Rickards has accurately noted, market transactions (in context, he is discussing financial markets, but the observation applies to all types of market) consist of price discovery between bid and offer. (I first reviewed his exceptionally informative book, Currency Wars, Portfolio/Penguin, New York, 2011 here.) There is an important sense, therefore, in which prices as such are never stable except on the transfer of the asset at the eventually agreed price. This is one of  the senses in which Hayek refers to prices as information.

Rickards goes on to point out, in the context of gold, that the massive gains in stocks and gold in both 1933 and 2010 (85% in the latter year) were just “the flip side of trashing the dollar. The assets weren’t worth more intrinsically – it just took more dollars to buy them because the dollar had been devalued.” That is, consider the price of gold not as a price but as information indicating the present worth of the currency; not what gold is worth but what gold is telling us about the price of the dollar.

His book is an examination of the ways in which governments wage currency wars in order, they think, to increase domestic prosperity, by deliberately devaluing their own currencies. Short-term gains, if any, are rapidly exhausted, and the ill effects for the long term soon emerge. And yet, politicians and central bankers remain oblivious to these effects – and the recent quantitative easing is, once again, the result of that purblindness.

The German Inflation

At the time of the German depression, when the Reichsbank engaged in the biggest currency devaluation in history to date by attacking the value of the Reichsmark, the German people saw prices going up but did not equate that with the realisation that the currency was collapsing; similarly, we see prices increasing without realising that the paper money we hold in our hands is depreciating in value all the time: we moan about “capitalist exploitation”, “wicked bankers” and “supermarket greed”, or we talk knowingly about “inflation” as if the latter was like the weather. Seldom or never do we stop to consider that what is actually happening is that our governments are of set purpose devaluing the currency: the mutilation of our money is hidden from us (see here, here and here).

The Gold Price

One result of currency depreciation is capital flight, and the recent drop in the price of gold could be looked at in this light. Just as paper money is suddenly recognised as worthless, causing the flight of capital, so the sudden flight from ETFs in gold, another form of ultimately worthless paper, is in the same order of events. In fact, the gold price can be seen as operating both ways: the purchases of gold which pushed the price up over the last two years were a capital flight caused by quantitative easing as that devalued the pound and the dollar. And now, the plunge in the price of gold is also a capital flight because, whatever else may be going on, it is a flight from the ETF paper gold (the source in more ways than one of the market manipulation that may have been the immediate cause of the price drop) into physical gold, in this instance into gold coins.

Thus, one way of looking at the price of gold in a volatile paper money system is as an indicator of the current levels of volatility and a measure of what at any given moment should be done about.

As noted at the beginning of this article, prices are never stable and in terms of market transactions and international trade are in need of an anchor to make it easier for bidders and offerers to discover the prices at which they are willing to settle. The classical gold standard was just such an anchor. In the absence of a return to that standard, gold nevertheless still performs as a bellwether.

NOTE: “volatile paper money” is of course a tautology!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

By Mark Rogers

The recent drop in the price of gold has had commentators mocking those who hold gold to be a safe haven: the collapse in the price to something like it was over two years ago, it is held, shows that gold is no safer than other types of investment. There have also been digs that this sort of price instability, if that is what this recent fall actually amounts to, also makes a mockery of those of us who call for a return to the gold standard.

And some are pointing at people like John Paulson, who reputedly has lost just under one billion on his gold investments. This, though, would only be true if he actually sold his gold. As it is, he started investing in gold in 2009, when gold was at around $950 an ounce. In other words the reputed “loss” is being measured at a notional value in terms of recent prices. As the story linked to goes on to report: “Sources at Paulson said that the hedge fund group had started investing in gold four years ago when the gold was around $950 an ounce, so the funds are still in profit.”

Dirty Work at Comex and in Cyprus

But what has caused such a large drop in the price? There are several possibilities, but one of the most obvious ought to be noted immediately: there is a great deal of confusion in pricing gold because of the admixture of paper gold, the exchange-traded funds (ETFs) that are not actually physical gold and whose relationship to the precious metal is tenuous to say the least. One of the problematical effects of paper gold has been to suppress the price of gold: without the paper clogging the market, the price of gold, physical gold, ought to have been much higher. And it is the paper gold that has been dumped, thus pulling the price of all gold down, true gold and paper gold. Indeed, it is reported that “investors have fled gold exchange-traded funds. Holdings of major global gold ETFs are at their lowest since late 2011.”

Reports here and here of how the price of gold was forced down in an artificial manner. And rumours of the possibility of Cyprus selling off all or part of its reserves to patch up its banking crisis cannot be discounted as causing the price drop: the situation in Cyprus is serious, and dumping its gold into the market, as Gordon Brown did with British reserves, is an entirely plausible escape route for the Cypriots. Gold is, amongst other things, a commodity, and would respond to an expansion of its availability in the same way any other commodity would.

Gold Not Just a Commodity

Of course, gold is not just a commodity like any other: it is also a store and backer of value such as no other commodity is or can be. And one of the consequences of the recent collapse in the price has been a surge in the purchase of physical gold – and in particular gold coins:

“Buying took off on Monday when 35,500 ounces of coins were sold – that’s more than 10 times the daily average at 3,250 ounces in the first three months of 2013 – and accelerated on Tuesday with 42,000 ounces sold. If the pace of buying continues, April’s sales are likely to beat January’s total of 150,000 ounces, which was the highest in three years. Collectors typically snap up the newest mint in the first month of the year, but dealers also said lower prices had attracted buyers earlier this year. American Eagle silver coin sales was at 503,000 ounces on Monday, nearly three times higher than the daily average in the first quarter.” (This is from the report linked to above which describes the flight from gold exchange-traded funds.)

The Gold Standard and the Price of Gold

Some of the silliest comments referred to the dashing of the hopes of those who champion the return to the gold standard. For they forget that, in the strictest sense, a gold standard has nothing to do with the price of gold. The purpose of the gold standard is to facilitate international trade and hold governments to account in keeping currency stable. Whatever the current price of gold, it will always have those functions as a standard.

James Turk, who always has sensible things to say about gold as a safe haven, is particularly illuminating on this function of value as distinct from price: read his article “What’s next for gold?” here.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

We here at Goldcoin.org have expressed the opinion that debt will drown economies as indeed it has been so in the cases of Portugal, Ireland, Spain, Italy and Cyprus. The banks have yet to fully acknowledge their off balance sheet losses that they are too scared to mention as the magnitude could certainly lead to several high st bank collapses.

Sovereign debt is also an issue as countries continue to increase their spending partly due to the crippling interets repayments they are already making.

Imagine when we can no longer repay the interest or the debt. Imagine when the country being spoken of is no longer a distant one on the news but the place where you live, work and raise your children.

Well be ready as that country will soon be the UK on Spanish Tvs, Portuguese TVs etc.

Here is an extract from an excellent analysis done by the MoneyWeek team and there is a full and coherent expalanation as well as some home truths about where we are heading and how we got there. Please do click the link and read the full text (or watch the video) – it will wake you up to the facts and maybe action.

“In Britain, interest rates on government borrowing now stand at record lows. If we’re not at rock bottom, then we’re incredibly close.

That means the most important trend of the next twenty years is almost certainly rising interest rates.

Debt has been getting cheaper for thirty years. Now it’s about to start getting much more expensive.

We’re now facing an unprecedented crisis.  As interest rates rise, our record debts will become impossible to bear.

No one can say how quickly things will escalate. Interest rates could rise overnight. Or they could slowly and inevitably push higher, taking years to slowly strangle the economy, the housing market, the stock market… stripping us all of our wealth one day at a time.

What we can say with certainty is that sooner or later interest rates WILL rise. We’re approaching the day when foreign investors realise the scale of our problems, and demand higher interest rates… or stop lending to us altogether.

When that day arrives, we are certain things will get nasty“  ………… read more here

Remember that the effects of debt and crisis ultimately brings inflation/deflation and even hyperinflation very quickly. Your cash currency can lose value in hours such that it becomes worthless paper.

Now you know that the economic storm is coming back with a vengeance what have you done to protect your wealth against the effects of crisis? Nothing? Because your investment is inflation- proof?

You have shares that cannot lose value in volatility or a crash? Hardly as by their nature shares will suffer during recession and crisis.

Whenever there is a bank run or collapse of a currency people immediately rush for anything tangible they can buy in order to rid themself of the paper fiat currency with something of inherent value that may be useful to trade for survival.

We have covered the exact effects on real people in our article on Belarus

Basic human nature is very hard to change especially when survival is at stake and as more of us understand the lies and deceit of our upstanding pillars of society and the lengths to which they will go to make more money, the more likely that it will be real people who start the next revolution and not some obese deranged egotistical psycho in the north of Korea.

Crisis insurance is gold – buy some now before it’s too late for the insurance.

As previously stated and warned of here on Goldcoin.org here is a taste of what the EU and its bureaucrats have in store for you.

Remember, your money belongs to you even when you pay it into the bank. Right?

Amidst the panic and confusion surrounding recent events in Cyprus it is worth noting the possible implications for the rest of us.

Jeroen Dijsselbloem is the new President of Eurogroupe which has the responsibility for overseeing the EU bailouts and defining the terms and conditions applied to each country. He is a Dutch national and little known to almost everyone.

However, in a recent interview with Reuters and the Financial Times he raised eyebrows by declaring that the Cyprus solution represented a new model for the resolution of banking crises in the EU.

He stated that “If a bank is not capable of recapitalising itself we will ask shareholders and bondholders to contribute to the recapitalisation but if necessary we will ask depositors of non-guaranteed funds too.”

What should worry us all is the lengths to which Governments will be pushed to go in order to avoid bankruptcy and this will not be the last we hear of this type of pillaging of bank accounts.

It is also the speed at which events happen as some contacts in Cyprus have told me. One minute life is normal and the next you can’t even get food or petrol as no-one accepts cards and you’ve run out of cash. Life is no longer normal very quickly and in the space of one week life was turned upside down for most of the people. Limiting cash withdrawals restricts everything you do and survival is the essential task. Despair sets in quickly but what bewilders people is the inane sense of powerlessness to do anything about such a dire situation.

We hear that the markets are calmed and reassured by the bailout plan and so life for them has returned to normal. Gold has slipped below $1600 on the strength of this miracle in Cyprus such is the level of complete normality that has been restored. How is our world dependent on such idiots with such delusion?

However, Cypriots are left in misery and guaranteed a bleak unprosperous, future governed by debt repayment and economic collapse. The levy on large investors will drive their best investors away and so collapse the structures put in place to support their “off-shore” haven financial services sector. This means job losses, office closures, office cleaners gone, lunchtime cafés closing etc etc. Ironic that income from these departing investors was the main stay of Cyprus’s economy meaning it is now even weaker than before it was doing so badly it needed a bailout. So how is crippling it further supposed to make it better. If you believe the “markets” Cyprus is back to where it was when life was fine. It’s a joke this fickle nature of markets toing and froing to keep the newspapers and news channels full of experts talking rubbish because the truth is being conveniently hidden and never sees the light of day on a TV programme because it would scare the population and they would react making posh buys and girls nervous for their cushy politocrat lifestyle and club. Priority number one for a politician is to keep their seat and the lifestyle they have become accustomed to – I just resent the way they appear to believe it is their right and that they are somehow better than me or you because they understand all our problems and have all the solutions we need – impossible anywhere, anytime for such arrogant presumptions. We elect them and they stop listening – maybe we can help or have a collective idea – they never ask so how would they know.

One dimensional democracy rules our world and it is an outdated useless model.

I despair at the intellectual incompetence of bureaucrats, politicians and the financial sector – for supposedly clever upstanding people they behave like a bunch of reckless schoolboys who know that Daddy will pick up their bill forever and so they’ll always be alright.

UK political rhetoric insults the intelligence of the nation and the prefabricated personas of party leaders more useful as comedy material than at running the country. Watch them on Question Time, performing as prepared like party puppets made of wood and full of arrogance.

What do any of them know about hardship, unemployment, rent, unpaid bills, poor accommodation, lack of heating and social terror. Absolutely nothing they haven’t read in a book or on an iPad!

Trust them at your peril and remember what they promise – and then what they do – and then what they do or don’t achieve. Every budget forecast has been over optimistic and is always revised down – this is incompetence for economic experts and gurus surely? Why should we ever believe what they say when they never get anything right – predictions or results.

And to top it all they’re untouchable for their errors and will blame their own mother first.

My worry is that these British politicians wouldn’t think twice either if they had to rob us to save their own bacon and of course their banker friends again. It’s the same in Spain, Italy and France.

Be aware- Politicians are bereft of ideas and economies and banks still hide huge debt clouds that remain under the carpet and off the radar for now.

This situation is unsustainable and when the real facts emerge we will see runs on the banks, empty supermarket shelves, Government interference in ways we cannot imagine right now and all in all a restriction of freedom we have not known before.

A week can be a long time – for an economy, in politics or to be hungry.

Move your wealth to a safer place before it’s too late and choose a safe country and a safe non-bank storage system. Banks always collude with governments because they are so tightly related. Keeping your savings elsewhere avoids this style of confiscation.

Preserving wealth in gold coins gives protection, liquidity, dual leverage and peace fo mind – and it’s always performs better than bullion bars:-)

Here at Goldcoin.org we try to provide a cross section of views from different sources to keep track of unfolding events and clues as to what might happen next.

The articles may help give an insight as to how gold fits into to the current picture and as the first one illustrates so well, countries hit by economic crisis and its effects often have internal sanctions imposed by the Government to restrict monetary flow and also show how ordinary people turn to gold as a protection of their wealth.

Many thanks to each of the authors for their insight and please do let us know if you have any suggestions of interesting articles.

Argentina Turns To Gold As Inflation Tops 26%

“Argentines are buying more gold than ever to protect their savings from the Western Hemisphere’s fastest inflation reported Bloomberg.”

“Argentines are utilizing gold to hedge their savings as economists forecast the peso will lose more value than any currency in the world, and President Cristina Fernandez de Kirchner forbids dollar purchases.

The nation’s inflation rate of 26% is also eroding Argentina’s peso- denominated bonds to fall 5.5% ytd.

“I’m buying gold every chance I get,” Guillermo Acosta, a 27-year-old security guard, said inside a branch of Banco Ciudad in downtown Buenos Aires. “With this inflation, I feel like my savings will evaporate if I keep them in pesos.”

Gold Holds Above $1,600 as Fed Keeps Printing $85 Billion Monthly

By Eric McWhinnie

“Both precious metals held steady as the Federal Open Market Committee decided to keep its current quantitative easing programs in place. The central bank will continue to purchase $40 billion in agency mortgage-backed securities and $45 billion in longer-term Treasury securities each month.

With high unemployment levels, and low inflation according to the Federal Reserve, the central bank believes the benefits of QE still outweigh the risks.”

I’m betting that gold will hit £1,600 an ounce by the end of next year

Says Dominic Frisby

“I’m saying all this for a reason. I am getting increasingly excited about gold’s prospects against the pound.

‘The bigger the base, the higher in space’, runs an old stock market saying. Another version is, ‘the longer the wait, the bigger the break’.

As we know, gold has been trading in a range for some 18 months now since its high in September 2011 at $1,920 – or £1,206 – an ounce.

The wait is getting longer and longer – and the base is getting bigger and bigger. $1,520 to $1,550 – or £960 to £990 – marks the bottom of the range; $1,800, or just below £1,140, the top.

When a market is making a sustained move in a certain direction, you tend to see the moving averages – the average price over a previous period – aligned in a certain way. If a market is trending up, you will see the price sitting above the 20-day moving average (the average price of the previous 20 days). This in turn is above the 50-day, which is above the 200-day.”

We speak often about the continuing crisis and that contrary to the general media and politicians we believe that we have never left a state of global crisis. Governments try to push issues under the carpet but eventually it becomes too big and they lose control.

A snippet from the news in France today reveals that 3 million less people will take a holiday this year and medical supplies are out of stock in certain areas. These are symptoms of a deepening crisis as the squeeze bites hard across households. Also it shows business is running on lower and lower stock because of cash flow issues and this in turn can lead to shortages of necessities.

We do not try to be alarmist here – we are interested in the reality which so often escapes comment or reporting.

The crisis is long from over and the  year ahead will be difficult for increasing numbers of people. When the reality of Greece, Cyprus, Spain etc arrives in the UK, France, Germany maybe more people will take notice and believe that reality is not rose tinted.

Prepare to protect your savings and preserve your wealth by buying gold as this will hold value while currencies and economies collapse.

Hardly a surprise to find these four words together in the same phrase and the evidence to support this keeps arriving.
They seem indelibly linked together but then again they are as the politicians need the financial giants to get into power in the first place. No surprise that the politicians will repay the favour whenever they can.
Gordon Brown rescued the banks RBS, Northern Rock and Lloyds TSB by using taxpayers money that they had no opportunity to agree or disagree to.

What’s different to that and the current crisis in Cyprus?

Stealing honest citizens money by stealth or plain in your face – it’s still stealing our money to pay for the mistakes of casino bankers, traders, hedgers and of course the completely incompetent politicians.

Take George Osbourne (preferably far away) who by his own Bertie Wooster proclamations has been a complete and utter failure? He hasn’t managed the economy. He is doubling the UK debt. He is talking austerity but spending more than the previous Government. He will try to hoodwink us all again today with his carefully choreographed Budget speech.
Before announcing any new words of wisdom he may well explain how it is that all his GDP forecasts were wrong (artificially high to fit his story but in reality all rounded down) –his forecast for this year has just been revised down by 50%.
In fact none of the previous Budget forecasts have ever been correct or even near. They are always rounded down. This begs the question what is the point of guessing the initial figure anyway.
It also proves how incompetent the Minister and his department of “experts” are at running our economy.
However, like all his predecessors he doesn’t have to worry as none of this affects him personally and often by the time we have assessed the real damage at some point in the future he will be long gone and still living like a millionaire without a care in the world. No accountability for total incompetence – just a seat in the House of Lords for another twerp posh boy who has the audacity to lecture us when he has no idea about real life, real hardship, real people and quite obviously real economics.

Wake up before it’s too late!

When will we wake up to career politicians hijacking our country, our prosperity, our children’s education, our relatives’ health, our future and our hope for a brighter future? We pay for their mistakes and often through generations.
If our politicians are so worthy why will they never answer a direct question from a member of the public such as on Question Time? After all us members of the public are the electorate, we are taxpayers & voters, we keep them in a cushy job and they treat us like economic morons – constantly talking down and lying to us.
Enough of this insulting behavior.
Just look at politicians recent record and we’ll see there aren’t so many upstanding members of society. A former Minister Chris Hulme blatantly lied consistently on TV to protect himself. He is not alone as we have seen over recent years when scandal after scandal surrounding MPs emerges.

It’s about time the public took the power back from a jumped up Illuminati who think that they are beyond the law and beyond reproach for failure.

How about performance related pay for politicians?

Penalties for ruining our economy, education, energy revenues etc etc?
Politicians act with impunity and that in other countries is labeled corruption.
Remember when Gordon Brown deliberately sold off UK gold at a loss and weakened price losing millions of value for taxpayers? Well not to worry we still won’t get it back but he did it as a favour for the ECB in order to support banks that had overplayed the derivatives market and were hedging too far. The gold price needed to drop in order to arrange these banks’ balance sheets and so Uncle Gordon duly obliged. The banks got off once again from casino activities and the taxpayers paid with the countries gold.

When we realise that this happened before any of the bailouts for RBS, Lloyds etc we can see there is a cosy pattern of politicians looking out for the bankers. This ensures a cosy retirement of bank directorships for politicians all paid for by us.
It is also worth noting that in the current context of the Cyprus crisis, Governments will stop at nothing and are capable of anything just to save their own face and certainly to save their buddies in the banks.
Gordon Brown should stand trial for his mismanagement of our economy and for bankrupting the country.
He never will as he is too protected but one day we may revert to the good old days of putting incompetent politicians heads on stakes across the bridges of the Thames – then at least we would need a bridge building programme to restart the economy as we’d need more to create enough space for all the crooked politicrats.