The Gold Standard
Content
The Gold Standard
Issue #5 ● 15 May 2011
The Gold Standard Institute 1
Editorial
Betrayal of the People The die has been cast all over the world. Save the financial sector, throw the people overboard. The result will be that most people will drown. The anger of people when they fully comprehend the manner of their impoverishment (and one day they will) will be immense and without parallel, except for possibly the French revolution. The economists who have allowed all this to happen, who have provided the intellectual flimflam that justified the government and central bank actions, are beneath contempt. Not to beat around the bush, they have been bought off; in return for their loyalty they have been granted a cloistered existence financially immune to the ever greater hardships being endured by real producers in the real world. For many decades the clear majority of mainstream economists have obsequiously supported one whacko theory after another; all the while displaying an indifference to the suffering the theories have caused. Do they have no professional pride and, come to that, what about personal and intellectual pride? How will they look their grandchildren in the face? Do they close their eyes when they walk past shuttered-up stores and foreclosed houses, or when they see people queuing for food handouts? Do they pretend that all this has nothing to do with the cult of Keynesianism and its docile and compliant adherents? Their ivory tower speculations, untroubled by even a hint of monetary, economic or historical reality, have allowed the world to be brought to the brink of ruin. And how big is the problem? Suffice to say that it is inversely proportional to the amount of gold in the monetary system. As the era of Keynesian economics draws to its gruesome, yet always inevitable, denouement, I really do wonder how these peoples sleep at night. Maybe at the moment they don‘t. Possibly, belatedly, they are starting to sense that their own personal immunity to the unfolding tragic events is almost at an end.
The journal of The Gold Standard Institute Editor Regular contributors Occasional contributors Philip Barton Rudy Fritsch Sandeep Jaitly Louis Boulanger Publius Justin Downie Thomas Allen
The Gold Standard
The Gold Standard Institute
The purpose of the Institute is to promote an unadulterated Gold Standard www.goldstandardinstitute.net Patron President Vice-President & Treasurer Editor-in-Chief Senior Research Fellow Membership Levels Annual Member Lifetime Member Gold Member Gold Knight €75 per year €2,500 €25,000 €250,000 Professor Antal E. Fekete Philip Barton Thomas Bachheimer Rudy Fritsch Sandeep Jaitly
Contents
Editorial ........................................................................... 1 News ................................................................................. 2 False Belief #4: Currencies Are Money ...................... 3 Money and Marketability............................................... 4 From London.................................................................. 5 What the heck, if anything, does 'backing' a currency mean?................................................................................ 5 When Will the Stock Market be Worth Your Gold? 7 Gold Confiscation .......................................................... 9 What Is the Real Bills Doctrine? ................................ 10 Follow Up on Reserve Bank of Australia‘s 1997 gold sale .................................................................................. 11
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This crisis will eventually impact everyone… even the economic charlatans who allowed it to happen. These people didn‘t even receive thirty pieces of silver for their betrayal, let alone any gold, just titles and bits of paper. They really are contemptible.
Green Bay Press Gazette reports Steve Forbes saying that within the "next five years, for the first time since the 1970s, the dollar will be re-linked to gold." ≈≈≈ Congressman Paul announced from Iowa (CBS News) that he is opening an exploratory committee to run for President of the United States. For the first time, I can confidently say, ―it is going to happen.‖ And from every indication I have received, this time Ron Paul is in it to win it. Even better, he stated at his press conference today that it is the "young people that generally lead a revolution‖. ≈≈≈ Xinhua April 23: “China should reduce its excessive foreign exchange reserves and further diversify its holdings”, Tang Shuangning, chairman of China Everbright Group, said on Saturday. “The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars”, Tang told a forum in Beijing, saying that the current reserve amount is too high. ≈≈≈ PvC from Belgium comments on Wall Street Journal Blog: “It seems to me that the war in Libya is not only an oil grab anymore, but a gold grab as well. It is reported that Libya's central banks are hoarding 140+ tons of gold. The central banks are in three locations. Two of them were attacked. Too many coincidences piling up here...” Additional comments on GoldSilver.com video: "Some believe it is about protecting civilians, others say it is about oil, but some are convinced intervention in Libya is all about Gaddafi’s plan to introduce the gold dinar, a single African currency made from gold, a true sharing of the wealth." ≈≈≈ This link is an excellent article in Forbes about what it was that Bretton Woods was supposed to achieve.
News
At the General Assembly of The Gold Standard Institute on April 29th 2011 Philip Barton was elected as President, Thomas Bachheimer was elected as Vice-President and Treasurer and Rudy Fritsch was elected as Editor in Chief. ≈≈≈ G.S. from Australia noted this in a Martin Armstrong piece (seems like someone has picked up on Professor Fekete‘s thesis!): "Chronically lower interest rates destroy capital formation because they reduce the worth of capital (interest rates) artificially, removing the incentive to lend and thereby contributes to the economic destruction." ≈≈≈ Earlier this month, University of Texas made headlines after disclosing that its Endowment Fund had taken delivery (stored in a bank warehouse in New York) of 6,643 gold bars, worth close to US$1 billion. On why gold, CEO of University of Texas Investment Management Co Bruce Zimmerman said on a recent CNBC: “The role gold plays in our portfolio, is as a hedge against currencies. The concern is that we have excess monetary and fiscal stimulus. I noted a couple of days ago, I think there was a story out about Bernanke mentioning that while they may not increase quantitative easing, they may not necessarily reduce their exposure either. So I think that may be a signal that will continue to have a good deal of monetary stimulus. We read every day what's going on in DC and across the states. We'll see what fiscal policies look like. It remains a concern for us.” ≈≈≈ Wall Street Journal Editorial calls for a Return to a Gold Standard
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≈≈≈ Real Clear Politics video of Herman Cain on ―Return To The Gold Standard‖: "Yes I believe in the gold standard. We should have never gotten off the gold standard because when we got off the gold standard, that then allowed Congress to inflate our currency whenever they overspent. Now look at the mess that we have." ≈≈≈ Forbes Blog: "Ben Bernanke‘s Lone Positive Legacy: A Return To The Gold Standard"
but of the government), can also represent fiat money. But how can money also be debt? Who pays the government debts if not the people with their hard earned ‗money‘ in the form of taxes?? I know; the mind boggles. When I came to that realisation, a few years ago now, I suspect I felt like the character Neo in the film The Matrix did when Morpheus asked him: “You think that’s air you’re breathing now?” This monetary system we have is so unsound, so debilitating, that the mind is filled with fear, doubts and false beliefs. You think that‘s money you‘re using now? Free your mind! Realise that it is only pretence for the real thing. But do use it; don‘t save it. Use it wisely by exchanging it, as it is meant to be. After all, that is all currencies are good for now: as a medium of exchange. None are good as a store of value. All currencies are losing purchasing power relative to their original standard of value: gold. What about being useful units of account? Well, that they are. But are they any good at it? Arguably they are, but only if you are content with an unstable or unreliable unit of measure for your assets and liabilities. A fourth function of money is to act as a standard of deferred payment or a unit in which debts are denominated. How do currencies now stack up to that? That depends whether you owe the debt or you own it... There lies all the difference. You see, currencies are becoming more and more unstable with the ever increasing amount of debt in the world and so, less and less reliable or even suitable as fair standards of deferred settlement of debts. If the currency in which the debt is denominated does not maintain its value or purchasing power, and the debt amount is not adjusted accordingly, you gain if you owe and lose if you own. Well, guess what? Our current monetary system is predicated on ever increasing debt, on monetary inflation where money itself IS debt. How nonsensical is that?! Yet, here we are: debt addicted. How could we not be? As long as this chimera posing as money continues to pervade our economic
False Belief #4: Currencies Are Money
NO, they‘re all imposters! The delusion is so deep and ingrained in our current economic thinking that it is very difficult to foresee exactly what it will take to wake people up from the deceitful postulation that currencies are money. Maybe, once upon a time, they were. But that is no more the truth than the fact that they remain accepted as money. And that acceptance is no more than the result of another quiet assumption operating in our minds thanks to the persistent deceit we are all subjected to. Of course, we all use currencies as money, yours truly included. How else could we survive? By law, only currencies are legal tender in most places around the world. We use currencies because there is no choice in the matter. When it comes to monetary matters, there is no freedom of choice. Or, if you prefer, the choice is just an illusion. All currencies today have the same fundamental characteristic that limits their true nature to being just legal tender and prevents them from being real money: irredeemability. Because currencies are not redeemable on demand for a set unit of weight in gold, as would be the case if we did have sound money and freedom of choice, currencies are simply bank notes or debts of the central bank that issues them. Currencies only represent credit money or, if backed by the credit of a government (in which case the debt is then no longer that of the central bank that issues the notes
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thinking, we can expect to continue being addicted. Ah, the insidious effects of inflation! William Rees-Mogg tackled inflation most insightfully, in my opinion, in his book published in 1974: The Reigning Error – The Crisis of World Inflation. In it, he postulated that inflation is a disease of inordinacy. Like anarchy represents the inordinacy of the people and tyranny the inordinacy of the ruler, inflation is an inordinacy of money. It is money without order. He argued then, that the problem of inordinacy, like the problem of inflation, is not a new one: “it is rooted in the nature of man, as inflation is rooted in the nature both of man and of money”. He also argued that because the inordinate is always insane and always ends in destruction, the insanity of inflation leaves a mark of insanity on society: “it changes a good society into one which, so long as inflation lasts, is wholly and fraudulently unjust.” Such wisdom! He nailed it. It is the disease of inordinacy which monetary inflation is, that explains why policy makers keep trying to fix the problem of too much debt with more debt. Insanity, after all, can manifest as doing the same thing over and over again and expecting a different result. Well, where does that leave us? Do you want to rely on such madness to determine your actions as an economic unit? I hope not. All human institutions, including our current system of fiat only currencies we inherited from past economic hubris, require a limit if they are not to become inordinate. There is no limit to the amount of currencies in circulation today, nor is there any standard to maintain their value. For the restoration of monetary order, we must first recognise that currencies are no longer good money. For currencies to be good money again we must accept the idea of a limit for money; we must reject this Keynesian idea that there is no need for discipline in money. It is true that much damage has already been done and that economic hubris in the political and banking class still persists. But we can still exchange our currencies for real money, gold. Let us do so then, while we advocate for a return to sound money and the restoration of sanity.
Louis Boulanger
Louis holds a B.Sc. from Laval University in Canada; is a Fellow of the Canadian Institute of Actuaries and the New Zealand Society of Actuaries; and is a Chartered Financial Analyst. Prior to coming to New Zealand in 1986, Louis worked for nine years with a global consulting firm based in Montreal, Canada. In New Zealand, Louis worked for another global consulting firm for 18 years, including as Chief Executive of New Zealand operations for five years. In 2006, he launched his private practice. Louis is also Founder & Director of LB Now Ltd, which provides independent investment advice to private and institutional clients, facilitates the purchase of bullion for private and institutional clients as an authorized dealer for BMG BullionBars and also helps firms comply with GIPS. For more information of LB Now's services or to subscribed to Louis' e-letter ‗Prosper!‘ see the contact details below.
P.O. Box 25 676, St Heliers, Auckland 1740, New Zealand Ph: +64 9 528 3586 Mob: +64 275 665 095 Email: [email protected] www.lbnow.co.nz
Money and Marketability
Does being money cause a commodity to become the most marketable commodity? Or does the most marketable commodity become money? Which comes first? Money or marketability? According to the former, money is the independent component, and marketability is the dependent component. A commodity becomes the most marketable commodity because it is money. According to the later, marketability is the independent component, and money is the dependent component. The commodity that is the most marketable becomes money. Does marketability make the money? Or does money make the marketability? Thomas Allen
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From London
The relentless rise of gold and silver against the United States Dollar hit a bit of a roadblock in the last days of April. Silver – flavour of the month amongst the arrivistes – showed just what she can be capable of by falling 12% in a matter of minutes – silver and gold are never a one way bet, especially for the foolishly under-margined. The gold/silver ratio, which reached an intermediate low of 30.47 on 25th April, has turned around and is marching higher – currently at 37. The rate of the ratio‘s ascension is threefold the rate of its prior decline. If there were to be a text book example of a crowded trade, it would be this one. Were Gold Basis Subscribers forewarned of this potential reversal in the gold/silver ratio? They were. 2011 has arrived, and the COMEX exchange has not defaulted – against the expectation of many bullion followers. How can this be after nearly a decade of notice? Thy dynamics of the futures exchange is not as simple as many run-of-the-mill commentators assume. Is there going to be a resumption of the current decade long trend in gold and silver? For sure, but when is another matter…
What the heck, if anything, does 'backing' a currency mean?
The word 'backing' has been bandied about for a while now, the implication being that if paper 'money' is 'backed' by something real, then that 'money' will somehow be perceived as being 'real money'. Of course, the less welcome implication is that unbacked 'money' is less than real! This statement is really an understatement, but what does 'backing' actually mean? Today there is talk about 'backing' currency with a 'basket' of commodities. There is even talk of 'backing' currency with... gasp... Gold. But all this is meaningless until we know what 'backing' means. The historical record is less than encouraging; for one good example, under the auspices of John Law, the French treasury, which was under great duress due to over spending, decided to issue Assignats, a form of paper currency, 'backed' by confiscated church lands. Now clearly, land is a real and valuable asset, after all, 'they ain't making any more of it', so the idea sounds reasonable. In any case, the French Treasury went ahead and issued several million newly created Assignats, backed by the land. The deal worked so well, helping to restore the solvency of the treasury, that within months... guess what.... several million MORE Assignats were duly printed, and backed by, the very same lands. This, in spite of solemn promises to issue a 'limited quantity' of the new currency. Soon the pressure became irresistible... and still more bank notes were printed. Of course, the cat was out of the bag; the quality of the currency was perceived to be falling as new issues were made against the very same backing and the paper started to depreciate. In fact, the situation was now worse than before the paper was issued; instead of staying within budget, the promise of the paper allowed even more profligacy to prevail.
Sandeep Jaitly
The ‗Gold Basis Service‘ is a monthly subscription newsletter that describes movements in the gold and silver bases. The service offers forewarning of potential exchange default - as well as of significant changes likely in the gold price and gold-silver ratio from movements in the bases. Along with the monthly gold basis service is the quarterly ‗Course of the Exchange‘ economic commentary. This commentary relates to general observations from a Mengerian perspective on the current market place for global equities; government paper and other goods. The cost of the subscription is US$490 per annum. Full details can be found at Bullionbasis.com.
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If you know history, you know that soon enough the French public was ready to lynch Mr. John Law. He attempted to flee the country, disguised as a woman, in a carriage packed with no, not bags full of Assignats, but with bags full of real money: Gold! In fact, the idea of backing money with a commodity is absurd to begin with, not just if the number of notes can increase on a whim. For example, the idea of backing currency with crude oil is talked about; imagine one of the most volatile commodities being used to 'back' money?! The value of the backing will vary with extreme volatility, and the value of the money with it. Of course, if Gold is used as backing, then this problem of volatility disappears as the stock to flows ratio of Gold is enormous; that is, there exists above ground Gold bullion in the quantity of at least eighty years worth of primary (mine) production. In contrast, the stock to flows of all other commodities (except Silver) is measured not in years, but days. Like one hundred or so days for the stock to flow of crude oil or platinum. So, if Gold is great money, how about using it to 'back' a currency? Only one problem remains, the same one Mr. Law faced; the inevitability of more paper being created, backed by the same quantity of Gold. Indeed, this is what happened to the US Dollar once Gold coin circulation was replaced by the circulation of paper 'backed' by Gold. As more paper was printed, President Nixon had a choice; to admit this, and devalue the Dollar vs Gold... that is, admit that more Dollars were now backed by the same quantity of Gold... or simply refuse the international obligations of the USA and refuse to exchange American Gold for Federal Reserve Notes; and we all know what he decided to do, he 'closed the Gold window'. Sometimes silence is louder than words; while 'backing' is being loudly debated, there is another far more meaningful word that is not even being whispered, not even a faint echo of it may be heard... yet. That word is 'redeemable'. Unlike backing, which is very vague and essentially meaningless, redeemable is indeed very precise and full of meaning. The meaning of redeemable is that
the owner of a redeemable Dollar bill may exchange his paper for the defined quantity of Gold at any time, no limits. The US Dollar was redeemable before President Roosevelt defaulted on the domestic obligations of the US Government; an obligation to redeem Federal Reserve Notes, aka Dollars, in Gold. The paper notes are promises, a future good. The Gold they are redeemable in is a present good, actual money in the hand. Think how absurd it would be to make a currency redeemable in crude oil; go to your friendly bank to redeem your notes and walk away with a couple of barrels of crude? I don't think so. Same with the Assignat; if the thousands of acres of confiscated land are used to 'back' millions of paper notes, will the holder of the paper walk up to a bank and walk away with a title deed for 1/100 of an acre of land? Bah. Of course, redeemability in Gold or Silver only works if the Government forbears from printing more paper notes than it has Gold or Silver to back them with... thus the deafening silence on redeemable currency. Until people at large come to understand this, there will be no solution to the current Global Financial Crisis. To be more specific, we need to look at the balance sheet of the Federal Reserve... or of any Central Bank. The liability side of the bank's balance sheets contain all the bank notes it issues, ie Dollar bills, Pounds Stirling, etc. The asset side, that which in reality backs the liabilities, or more precisely balances them, are today simply more paper... paper promises in the form of Treasury bonds, commercial paper, and 'toxic waste' ie other promises, but promises that even our decrepit media admit are worthless. For a truly sound currency to exist, the asset side of Central Bank's balance sheets must contain nothing but cash Gold, and Real Bills that mature into cash Gold in not more than 91 days. If this is done, we will in effect establish an Unadulterated Gold Standard... something like what the world was on during the nineteenth century... a century fondly remembered as the Golden Years of Peace and Prosperity.
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Before the evil of WWI, the German Reichbank had guidelines for its banks; assets to be 1/3 Gold and 2/3 Bills of Exchange. Note that 'bills of exchange' are Real Bills, and Real Bills mature into Gold in not more than 91 days. If the bank does not actively discount (purchase) new bills, in 91 days its balance sheet assets will be 100% Gold. End of problem. Finally, note that there is actually no need for Bank notes, that is Dollar bills or any other form of currency; Gold coins will circulate just fine, along with smaller denomination Silver coins, and actual Real Bills to fund the flow of consumer goods on the way to market. Bank notes are simply a convenience; after the World Financial Crisis plays out, paper money may be so hated that no one will accept any! No problem, the world economy did just fine before the introduction of circulating bank notes, and will do just fine again. Even better, as no government or Central Bank can print Gold, or create Real Bills.
When Will the Stock Market be Worth Your Gold?
Perceptive gold owners understand their metal was the once and future money, and follow Professor Fekete‘s advice to ―measure personal net worth in gold ounces‖ rather than in dollars. These enlightened people must now confront the question of when to convert metal into income-producing assets. Some of the better financial commentators suggest a simple trader‘s approach. Buy an asset when no one else wants it. This will increase the chance of getting in near the bottom. Although it is hard to argue with that elegant logic, a contemplative reader may prefer a more rigorous process. It is tough to find someone more rigorous than Rob Arnott. Past editor of the Financial Analysts Journal, author of numerous penetrating articles on the proper valuation of stocks, and currently the manager of $50 billion, he represents much of what is still right and admirable about the existing professional establishment. The originality of his ideas and insights commands our attention. I don‘t think Arnott would label himself a gold supporter. Nevertheless, he draws attention to post1970s equity market behavior, revealing the impact of gold‘s absence from the monetary system. The dramatic expansion of earnings multiples after 1982 provides a check on the reasoning of sound money advocates. It is no surprise for us that the easy credit of central banking lead to a bubble in stocks, but still nice to see some independent confirmation. Arnott has brought together the best of the relevant research, added some new conclusions, and produced something very useful to gold owners. His superb article Earnings Growth: The Two Percent Dilution (FAJ, Sep/Oct 2003) set out to answer the question of how most financial experts missed the warning signs during Dot-Com Bubble. But Arnott‘s methodology and line of reasoning are helpful for a different purpose – understanding the true fair value for the broad stock market.
Rudy Fritsch Order Rudy‘s Beyond Mises now.
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Tying in some important work on the natural growth rate for corporate earnings with more accurate estimates of the true earnings levels at the peak of the bubble in 1999/2000, Arnott exposes the two components of a critical fact. First, when aggregate trailing 12-month GAAP earnings for the S&P 500 are cleansed of the upward biases of: a) overly optimistic Defined Benefit pension return assumptions; b) improperly recognized stock option issuance; c) earnings ―smoothing‖ and other questionable / fraudulent accounting; and d) the effects of the genuine economic boom then taking place; the true reported earnings picture emerges. Instead of the official $54, it was more like $33. Second, rather than accepting the usual optimistic expected growth estimates for earnings (which, even to this day, still materially exceed expected GDP growth), Arnott shows the historical record: earnings growth for the broad stock market actually lags GDP growth by 2%. This is because of the impact of the hard to measure, but impossible to dismiss, entrepreneurial activity of newly formed companies. Much of the growth of a new enterprise typically takes place before its stock is even publically traded, let alone added to any market index. When these two sources of distortion are taken together, it is easy to see how the market at the beginning of the 21st Century got extremely overvalued. But the critical fact for our purposes emerges because we can take the next logical step. Thanks to the work of Arnott and his associates, we now have a carefully established reference point for future comparison when valuing the S&P 500. A rough calculation of the index earnings suggested today by this method yields some interesting results. Even if GDP growth had averaged 3.5% for 10 years since 2000, earnings growth should only have
averaged 1.5%. The index earnings today should therefore be: $33 x (1+1.5%)^10 = $33 x 1.16 = $38.30 Arnott notes that before the 1980s, earnings multiples only ranged from 12 to 16. In the absence of a fiat system with easy credit, this is what we can reasonably expect. Taking a mid-point of 14, this suggests an expected 2011 fair value for the S&P 500 of 536. This P/E multiple ties in nicely with the assumption that stocks should return 7% per year (of which 5.5% is dividend yield and 1.5% is earnings growth, with no allowance for expansion of the earnings multiple). In a more stable monetary system, this performance by equities is an intuitive level of return relative to historic rates for Real Bills, long-term bonds, and real estate net of rental income. To this estimated natural index level the reader can make his own downward adjustments for the following contingencies flowing from a fiat money crisis and/or resumption of a gold/silver standard: 1) compression of earnings multiple due to uncertainty of earnings outlook; 2) reduction (or disappearance) of earnings due to consumer fatigue/fear; 3) outright bankruptcy of selected companies in the index; 4) substantial dilution of equity holders in many other cases, forced by firms‘ creditors or pension participants; and 5) ―blood in the streets‖… etc. It is difficult to quantify the effects of any of the above factors, except to say they would take the index lower. A point at which to begin some dollarcost-averaging purchases might be 250, from which we could eventually expect a long run 15% earnings yield once earnings to return to the $38 level. The S&P 500 might bottom below 250, but probably even the smartest buyers will be feeling their way in the dark.
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If the monetary authorities do not surrender unconditionally by opening the Mints to unlimited free coinage of gold and silver, the calculations above will be less helpful. This is because there is no telling how quickly a new easy-credit-fueled stock bubble may follow any partial surrender (dollar devaluation). But converting the above figures to gold ounces gives as reliable a tool as can be hoped for. This would mean, at $1,500/oz gold, that if the S&P 500 were trading at 0.167oz, it would represent a good value. But the dynamic nature of this last ―scientific‖ calculation process almost brings us full circle to the traders‘ ―art‖ of simply buying an asset when it is in disrepute. The missing piece here is some sort of estimate of gold‘s true purchasing power relative to its value today. But that is a topic for a different essay. Publius
Gold Confiscation
Many American buyers and potential buyers of gold express concern about the U.S. government confiscating gold. This fear is legitimate because rogue governments like the U.S. government can be highly unpredictable and destructive. It can steal not only gold but any thing else that the rulers want. Nevertheless, gold confiscation is not likely. Today‘s monetary system differs greatly from that of 1933 when President Roosevelt‘s great theft occurred. Then gold was the money. Gold coins actually circulated and were used for buying and selling. Federal reserve notes, U.S. government notes, and national bank notes were redeemable in gold coin on demand. Today governments officially shun gold and poohpooh it as money. Although their central banks hoard large quantities of gold, governments deny that it has any monetary value. It is a barbaric relic that used to interfere with their fiat monetary dreams and deserves to be banished forever from the monetary system. To confiscate gold today would be an admission that they have been wrong for the past eight decades. Moreover, today people who distrust government hold most of the gold outside investment houses, banks, and industry. They would not likely surrender it to the government. When Roosevelt stole the people‘s gold, his theft was easy. The U.S. government and the Federal Reserve held 93 percent of the country‘s monetary gold as trustees for backing gold certificates, federal reserve notes and national bank notes. With the $100 exemption, he did not have to take any gold coins held by individuals. The monetary statistics presented in this article are from Banking and Monetary Statistics, 1914-1941, published by the Board of Governors of the Federal Reserve System. Section 11, ―Currency,‖ Table No. 110, ―Currency in Circulation — By Kind, Monthly, 1860-1941,‖ page 412, gives the total currency in circulation for February 1933 as $6258 million. Of this amount:
New Austrian School of Economics
Announcing the third session of Professor Antal E. Fekete‘s New Austrian School in Munich, Germany. Dates: 20-29th August, 2011 Venue: Maria-Theresia-Str. 20, Munich Speakers: Prof A.E. Fekete (Hungary), Sandeep Jaitly (UK) and Keith Weiner (USA). Subjects to be covered include: The unadulterated gold standard. Inflation versus deflation – simple terms for non-simple action. The gold/silver market, the gold/silver basis. The creation of the interest rate spread. Gold against other assets. The future of the bond market. For further information regarding this event, please contact the organiser Mr. Ludwig Karl at [email protected]
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Gold coins Gold certificates United States notes Federal Reserve notes National Bank notes
$284 million $649 million $301 million $3405 million $861 million
or silver coins. Consequently, gold ceased being a medium of exchange in the United States. Thomas Allen
Thomas Allen has been a student and adherent supporter of the gold standard and the real bills doctrine since 1972. In 2009, he wrote and published Reconstruction of America‘s Monetary and Banking System: A Return to Constitutional Money. Many of his writings on money and other subjects can be found on his blog http://tcallenco.blogspot.com/ (index to these blogs here). Notes: 1. Franklin D. Roosevelt, 34 ‒ Executive Order 6102 ‒ Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government, April 5, 1933 from John T. Woolley and Gerhard Peters, The American Presidency Project, Santa Barbara, CA. Available here.
On page 506 of Section 13, ―United States Government — Treasury Finance and Government Corporations and Credit Agencies,‖ the gold reserves for backing United States Notes are $156 million. Table No. 156, ―Analysis of Changes in Gold Stock of the United States, Monthly, 19141941,‖ page 537, gives a monthly average gold stock of $4093 million for February 1933. For February 1933, then: Gold backing Gold certificates Gold backing United States notes Gold backing Federal Reserve notes $649 million $156 million $3004 million
Thus, individuals held $284 million in gold; the U.S. government $805 million; and the Federal Reserve Banks the remainder, giving a total monetary gold stock of $4093 million. Of the $4093 million of the monetary gold, the U.S. government and Federal Reserve held $3809 million in gold or 93 percent of the country‘s monetary gold. The people held $284 million in gold coins or about 7 percent of the monetary gold. If the coins were roughly evenly distributed among the population, each person would have had between $2 and $3 in gold coins (c. 123 million population). At this time the smallest gold coin in circulation was $2.50. As Roosevelt‘s confiscation order allowed each person to keep $100 in gold coins, he did not have to steal any coins that the public held. Between the Treasury and the Federal Reserve, he already had nearly all the gold. All he needed to do, and what he did do, was to violate the U.S. government‘s, the Federal Reserve‘s, and national banks‘ contracts with the people by voiding the redemption clauses in the law and on the paper money. Since the U.S. government made using gold coins and gold certificates as money illegal, if a person who held them wanted to spend them, he had to exchange them for federal reserve notes, U.S. notes,
What Is the Real Bills Doctrine?
Antal Fekete1 describes a real bill as follows: A real bill is a bill of exchange drawn by the producer (the drawer of the bill) on the distributor (the acceptor of the bill) specifying the kind, quality and quantity of merchandise shipped by the former to the latter, and specifying the sum (the face value of the bill) and the date on which the bill is payable (the maturity date of the bill, in any event, not more than 91 days after the date of billing). In order to be valid, the bill has to be accepted by the acceptor, by writing across its face and over his signature “I accept.” Nelson Hultberg2 describes real bills as “temporary bills of exchange that appear simultaneously with goods that are being produced to aid such goods in further transportation along the production/ consumption chain. These bills of exchange then go out of existence once the goods have cleared the market.” Real bills are clearing instruments because they allow time for merchandise to be sold to the ultimate customer. The heart of the real bills doctrine is the real bill of exchange. A real bill of exchange (a real bill) is drawn on real goods that are ready to be sold (sitting on the retailer‘s shelf) or are on the way to the retailer to be sold. A real bill of exchange is a self-liquidating, short-term credit instrument. It is self-liquidating in that when the consumer buys the product, the consumer provides the money for the seller to use to
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Notes: 1. Antal E. Fekete, ―Monetary Economics 101: The Real Bills Doctrine of Adam Smith,‖ Lecture 2, July 8, 2002. 2. Nelson Hultberg, ―Cranks in the Gold Community‖ July 11, 2005.
pay the bill. It is short-term in that the bill has to be paid off in 91 days or less. When the retailer accepts the bill of exchange, a real bill or commercial money has been created. Now the supplier can use the bill to pay his creditors or sell it to a bank or an investor. If a bank buys the bill, it converts the bill to bank notes or checkbook money. For example, when a supplier sells his goods to a retailer, the retailer usually does not pay for the merchandise then. Instead, the suppler draws a bill of exchange (a real bill) on the retailer to pay within 91 days. When the retailer accepts the bill, commercial money has been created. The supplier can now use this bill to pay the manufacturer. He can sell it to an investor or a bank. If the supplier needs money immediately to pay his employees and utility bills, he sells the bill to a bank at a discount. The bill becomes the property of the bank, and the retailer pays the amount due at maturity to the bank. If he sells it to a bank, the bank converts it to bank notes or checkbook money. A bank never creates money; it only converts one form of money (commercial money) to another form (bank notes and checkbook money). In effect, the bank has converted the bill into conveniently denominated money recognized and accepted in the community. When people buy the products represented by the bill, the retailer pays the holder of the bill. When the bill is paid off, it ceases to exist. If a bank has bought the bill and has converted it to bank notes or checkbook money, that bank money is removed from circulation and cancelled when the bill is paid. Thus, the money created when the retailer accepts the bill goes out of existence when the retailer pays off the bill. Banks do not create any money. Banks merely convert it from one form (real bills or commercial money) to another (bank notes and checkable deposits) as they do when they put gold coins in their vaults and issue gold certificates in place of the coins. All money creation is left directly in the hands of the people. Although credit is involved, no borrowing or lending is involved in the creation of this money. Thomas Allen
Follow Up on Reserve Bank of Australia’s 1997 gold sale
This is a follow up to my article in the March Newsletter, in which I expressed the view that the RBA gold sales in 1997 were to extinguish a portion of the large amount of Australian government debt outstanding at the time of the Asian Financial Crisis. The government was forced to extinguish debt rather than roll it over - issue new debt - or suffer significant devaluation of the Australian dollar, a 'sovereign debt crisis' if you will, as occurred in several nations to our north at the time. Graph 1 on the following page shows how the central bank moves the interbank rate with the growth, or lack thereof, of Broad Money, the broadest measure of financial system credit. Broad Money falling is equivalent to widening credit spreads, a falling (or flailing) stockmarket, higher government bond prices, bankruptcies.... in other words, a debt crisis or economic recession. As credit spreads widen the central bank lowers its 'target' rate in an attempt to bring rates down across the spectrum, from junk to 'AA' bank debt. Government debt of longer duration is moving along with the shorter term debt. I am only speculating here but the long term trend in the 10 year yield may be an arbitrage or 'risk free' profit for those borrowing short and lending long. The 'profit' is driving longer term yields down as central banks lower the interbank rate. Graph 2 is the monthly issuance of Treasury notes1 and bonds, to show the response of government to debt crises. If you read my March article you know the end result of government responses and I can only sit gobsmacked the current level of debt
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outstanding – it is not as if it is any more likely to be repaid than in 1997. One thing to note is the 10 year yield around the time of the Asian Financial Crisis in 1997. There is nothing that would indicate problems in the government bond market, in fact just the opposite; the 10 year yield was more or less falling throughout that period. I think that those looking for a rise in interest rates to signify the beginning of a crisis are looking in the wrong direction. The crisis is already here, has been for some time and is reflected in the price of the only extinguisher, thus arbiter, of all (including if not especially, government) debt... Gold. Justin Downie
Notes: 1. Data for Treasury note issuance is not available pre 2001 but I think it safe to assume that Treasury notes were being issued pre 2001.
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Editorial
Betrayal of the People The die has been cast all over the world. Save the financial sector, throw the people overboard. The result will be that most people will drown. The anger of people when they fully comprehend the manner of their impoverishment (and one day they will) will be immense and without parallel, except for possibly the French revolution. The economists who have allowed all this to happen, who have provided the intellectual flimflam that justified the government and central bank actions, are beneath contempt. Not to beat around the bush, they have been bought off; in return for their loyalty they have been granted a cloistered existence financially immune to the ever greater hardships being endured by real producers in the real world. For many decades the clear majority of mainstream economists have obsequiously supported one whacko theory after another; all the while displaying an indifference to the suffering the theories have caused. Do they have no professional pride and, come to that, what about personal and intellectual pride? How will they look their grandchildren in the face? Do they close their eyes when they walk past shuttered-up stores and foreclosed houses, or when they see people queuing for food handouts? Do they pretend that all this has nothing to do with the cult of Keynesianism and its docile and compliant adherents? Their ivory tower speculations, untroubled by even a hint of monetary, economic or historical reality, have allowed the world to be brought to the brink of ruin. And how big is the problem? Suffice to say that it is inversely proportional to the amount of gold in the monetary system. As the era of Keynesian economics draws to its gruesome, yet always inevitable, denouement, I really do wonder how these peoples sleep at night. Maybe at the moment they don‘t. Possibly, belatedly, they are starting to sense that their own personal immunity to the unfolding tragic events is almost at an end.
The journal of The Gold Standard Institute Editor Regular contributors Occasional contributors Philip Barton Rudy Fritsch Sandeep Jaitly Louis Boulanger Publius Justin Downie Thomas Allen
The Gold Standard
The Gold Standard Institute
The purpose of the Institute is to promote an unadulterated Gold Standard www.goldstandardinstitute.net Patron President Vice-President & Treasurer Editor-in-Chief Senior Research Fellow Membership Levels Annual Member Lifetime Member Gold Member Gold Knight €75 per year €2,500 €25,000 €250,000 Professor Antal E. Fekete Philip Barton Thomas Bachheimer Rudy Fritsch Sandeep Jaitly
Contents
Editorial ........................................................................... 1 News ................................................................................. 2 False Belief #4: Currencies Are Money ...................... 3 Money and Marketability............................................... 4 From London.................................................................. 5 What the heck, if anything, does 'backing' a currency mean?................................................................................ 5 When Will the Stock Market be Worth Your Gold? 7 Gold Confiscation .......................................................... 9 What Is the Real Bills Doctrine? ................................ 10 Follow Up on Reserve Bank of Australia‘s 1997 gold sale .................................................................................. 11
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This crisis will eventually impact everyone… even the economic charlatans who allowed it to happen. These people didn‘t even receive thirty pieces of silver for their betrayal, let alone any gold, just titles and bits of paper. They really are contemptible.
Green Bay Press Gazette reports Steve Forbes saying that within the "next five years, for the first time since the 1970s, the dollar will be re-linked to gold." ≈≈≈ Congressman Paul announced from Iowa (CBS News) that he is opening an exploratory committee to run for President of the United States. For the first time, I can confidently say, ―it is going to happen.‖ And from every indication I have received, this time Ron Paul is in it to win it. Even better, he stated at his press conference today that it is the "young people that generally lead a revolution‖. ≈≈≈ Xinhua April 23: “China should reduce its excessive foreign exchange reserves and further diversify its holdings”, Tang Shuangning, chairman of China Everbright Group, said on Saturday. “The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars”, Tang told a forum in Beijing, saying that the current reserve amount is too high. ≈≈≈ PvC from Belgium comments on Wall Street Journal Blog: “It seems to me that the war in Libya is not only an oil grab anymore, but a gold grab as well. It is reported that Libya's central banks are hoarding 140+ tons of gold. The central banks are in three locations. Two of them were attacked. Too many coincidences piling up here...” Additional comments on GoldSilver.com video: "Some believe it is about protecting civilians, others say it is about oil, but some are convinced intervention in Libya is all about Gaddafi’s plan to introduce the gold dinar, a single African currency made from gold, a true sharing of the wealth." ≈≈≈ This link is an excellent article in Forbes about what it was that Bretton Woods was supposed to achieve.
News
At the General Assembly of The Gold Standard Institute on April 29th 2011 Philip Barton was elected as President, Thomas Bachheimer was elected as Vice-President and Treasurer and Rudy Fritsch was elected as Editor in Chief. ≈≈≈ G.S. from Australia noted this in a Martin Armstrong piece (seems like someone has picked up on Professor Fekete‘s thesis!): "Chronically lower interest rates destroy capital formation because they reduce the worth of capital (interest rates) artificially, removing the incentive to lend and thereby contributes to the economic destruction." ≈≈≈ Earlier this month, University of Texas made headlines after disclosing that its Endowment Fund had taken delivery (stored in a bank warehouse in New York) of 6,643 gold bars, worth close to US$1 billion. On why gold, CEO of University of Texas Investment Management Co Bruce Zimmerman said on a recent CNBC: “The role gold plays in our portfolio, is as a hedge against currencies. The concern is that we have excess monetary and fiscal stimulus. I noted a couple of days ago, I think there was a story out about Bernanke mentioning that while they may not increase quantitative easing, they may not necessarily reduce their exposure either. So I think that may be a signal that will continue to have a good deal of monetary stimulus. We read every day what's going on in DC and across the states. We'll see what fiscal policies look like. It remains a concern for us.” ≈≈≈ Wall Street Journal Editorial calls for a Return to a Gold Standard
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≈≈≈ Real Clear Politics video of Herman Cain on ―Return To The Gold Standard‖: "Yes I believe in the gold standard. We should have never gotten off the gold standard because when we got off the gold standard, that then allowed Congress to inflate our currency whenever they overspent. Now look at the mess that we have." ≈≈≈ Forbes Blog: "Ben Bernanke‘s Lone Positive Legacy: A Return To The Gold Standard"
but of the government), can also represent fiat money. But how can money also be debt? Who pays the government debts if not the people with their hard earned ‗money‘ in the form of taxes?? I know; the mind boggles. When I came to that realisation, a few years ago now, I suspect I felt like the character Neo in the film The Matrix did when Morpheus asked him: “You think that’s air you’re breathing now?” This monetary system we have is so unsound, so debilitating, that the mind is filled with fear, doubts and false beliefs. You think that‘s money you‘re using now? Free your mind! Realise that it is only pretence for the real thing. But do use it; don‘t save it. Use it wisely by exchanging it, as it is meant to be. After all, that is all currencies are good for now: as a medium of exchange. None are good as a store of value. All currencies are losing purchasing power relative to their original standard of value: gold. What about being useful units of account? Well, that they are. But are they any good at it? Arguably they are, but only if you are content with an unstable or unreliable unit of measure for your assets and liabilities. A fourth function of money is to act as a standard of deferred payment or a unit in which debts are denominated. How do currencies now stack up to that? That depends whether you owe the debt or you own it... There lies all the difference. You see, currencies are becoming more and more unstable with the ever increasing amount of debt in the world and so, less and less reliable or even suitable as fair standards of deferred settlement of debts. If the currency in which the debt is denominated does not maintain its value or purchasing power, and the debt amount is not adjusted accordingly, you gain if you owe and lose if you own. Well, guess what? Our current monetary system is predicated on ever increasing debt, on monetary inflation where money itself IS debt. How nonsensical is that?! Yet, here we are: debt addicted. How could we not be? As long as this chimera posing as money continues to pervade our economic
False Belief #4: Currencies Are Money
NO, they‘re all imposters! The delusion is so deep and ingrained in our current economic thinking that it is very difficult to foresee exactly what it will take to wake people up from the deceitful postulation that currencies are money. Maybe, once upon a time, they were. But that is no more the truth than the fact that they remain accepted as money. And that acceptance is no more than the result of another quiet assumption operating in our minds thanks to the persistent deceit we are all subjected to. Of course, we all use currencies as money, yours truly included. How else could we survive? By law, only currencies are legal tender in most places around the world. We use currencies because there is no choice in the matter. When it comes to monetary matters, there is no freedom of choice. Or, if you prefer, the choice is just an illusion. All currencies today have the same fundamental characteristic that limits their true nature to being just legal tender and prevents them from being real money: irredeemability. Because currencies are not redeemable on demand for a set unit of weight in gold, as would be the case if we did have sound money and freedom of choice, currencies are simply bank notes or debts of the central bank that issues them. Currencies only represent credit money or, if backed by the credit of a government (in which case the debt is then no longer that of the central bank that issues the notes
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thinking, we can expect to continue being addicted. Ah, the insidious effects of inflation! William Rees-Mogg tackled inflation most insightfully, in my opinion, in his book published in 1974: The Reigning Error – The Crisis of World Inflation. In it, he postulated that inflation is a disease of inordinacy. Like anarchy represents the inordinacy of the people and tyranny the inordinacy of the ruler, inflation is an inordinacy of money. It is money without order. He argued then, that the problem of inordinacy, like the problem of inflation, is not a new one: “it is rooted in the nature of man, as inflation is rooted in the nature both of man and of money”. He also argued that because the inordinate is always insane and always ends in destruction, the insanity of inflation leaves a mark of insanity on society: “it changes a good society into one which, so long as inflation lasts, is wholly and fraudulently unjust.” Such wisdom! He nailed it. It is the disease of inordinacy which monetary inflation is, that explains why policy makers keep trying to fix the problem of too much debt with more debt. Insanity, after all, can manifest as doing the same thing over and over again and expecting a different result. Well, where does that leave us? Do you want to rely on such madness to determine your actions as an economic unit? I hope not. All human institutions, including our current system of fiat only currencies we inherited from past economic hubris, require a limit if they are not to become inordinate. There is no limit to the amount of currencies in circulation today, nor is there any standard to maintain their value. For the restoration of monetary order, we must first recognise that currencies are no longer good money. For currencies to be good money again we must accept the idea of a limit for money; we must reject this Keynesian idea that there is no need for discipline in money. It is true that much damage has already been done and that economic hubris in the political and banking class still persists. But we can still exchange our currencies for real money, gold. Let us do so then, while we advocate for a return to sound money and the restoration of sanity.
Louis Boulanger
Louis holds a B.Sc. from Laval University in Canada; is a Fellow of the Canadian Institute of Actuaries and the New Zealand Society of Actuaries; and is a Chartered Financial Analyst. Prior to coming to New Zealand in 1986, Louis worked for nine years with a global consulting firm based in Montreal, Canada. In New Zealand, Louis worked for another global consulting firm for 18 years, including as Chief Executive of New Zealand operations for five years. In 2006, he launched his private practice. Louis is also Founder & Director of LB Now Ltd, which provides independent investment advice to private and institutional clients, facilitates the purchase of bullion for private and institutional clients as an authorized dealer for BMG BullionBars and also helps firms comply with GIPS. For more information of LB Now's services or to subscribed to Louis' e-letter ‗Prosper!‘ see the contact details below.
P.O. Box 25 676, St Heliers, Auckland 1740, New Zealand Ph: +64 9 528 3586 Mob: +64 275 665 095 Email: [email protected] www.lbnow.co.nz
Money and Marketability
Does being money cause a commodity to become the most marketable commodity? Or does the most marketable commodity become money? Which comes first? Money or marketability? According to the former, money is the independent component, and marketability is the dependent component. A commodity becomes the most marketable commodity because it is money. According to the later, marketability is the independent component, and money is the dependent component. The commodity that is the most marketable becomes money. Does marketability make the money? Or does money make the marketability? Thomas Allen
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From London
The relentless rise of gold and silver against the United States Dollar hit a bit of a roadblock in the last days of April. Silver – flavour of the month amongst the arrivistes – showed just what she can be capable of by falling 12% in a matter of minutes – silver and gold are never a one way bet, especially for the foolishly under-margined. The gold/silver ratio, which reached an intermediate low of 30.47 on 25th April, has turned around and is marching higher – currently at 37. The rate of the ratio‘s ascension is threefold the rate of its prior decline. If there were to be a text book example of a crowded trade, it would be this one. Were Gold Basis Subscribers forewarned of this potential reversal in the gold/silver ratio? They were. 2011 has arrived, and the COMEX exchange has not defaulted – against the expectation of many bullion followers. How can this be after nearly a decade of notice? Thy dynamics of the futures exchange is not as simple as many run-of-the-mill commentators assume. Is there going to be a resumption of the current decade long trend in gold and silver? For sure, but when is another matter…
What the heck, if anything, does 'backing' a currency mean?
The word 'backing' has been bandied about for a while now, the implication being that if paper 'money' is 'backed' by something real, then that 'money' will somehow be perceived as being 'real money'. Of course, the less welcome implication is that unbacked 'money' is less than real! This statement is really an understatement, but what does 'backing' actually mean? Today there is talk about 'backing' currency with a 'basket' of commodities. There is even talk of 'backing' currency with... gasp... Gold. But all this is meaningless until we know what 'backing' means. The historical record is less than encouraging; for one good example, under the auspices of John Law, the French treasury, which was under great duress due to over spending, decided to issue Assignats, a form of paper currency, 'backed' by confiscated church lands. Now clearly, land is a real and valuable asset, after all, 'they ain't making any more of it', so the idea sounds reasonable. In any case, the French Treasury went ahead and issued several million newly created Assignats, backed by the land. The deal worked so well, helping to restore the solvency of the treasury, that within months... guess what.... several million MORE Assignats were duly printed, and backed by, the very same lands. This, in spite of solemn promises to issue a 'limited quantity' of the new currency. Soon the pressure became irresistible... and still more bank notes were printed. Of course, the cat was out of the bag; the quality of the currency was perceived to be falling as new issues were made against the very same backing and the paper started to depreciate. In fact, the situation was now worse than before the paper was issued; instead of staying within budget, the promise of the paper allowed even more profligacy to prevail.
Sandeep Jaitly
The ‗Gold Basis Service‘ is a monthly subscription newsletter that describes movements in the gold and silver bases. The service offers forewarning of potential exchange default - as well as of significant changes likely in the gold price and gold-silver ratio from movements in the bases. Along with the monthly gold basis service is the quarterly ‗Course of the Exchange‘ economic commentary. This commentary relates to general observations from a Mengerian perspective on the current market place for global equities; government paper and other goods. The cost of the subscription is US$490 per annum. Full details can be found at Bullionbasis.com.
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If you know history, you know that soon enough the French public was ready to lynch Mr. John Law. He attempted to flee the country, disguised as a woman, in a carriage packed with no, not bags full of Assignats, but with bags full of real money: Gold! In fact, the idea of backing money with a commodity is absurd to begin with, not just if the number of notes can increase on a whim. For example, the idea of backing currency with crude oil is talked about; imagine one of the most volatile commodities being used to 'back' money?! The value of the backing will vary with extreme volatility, and the value of the money with it. Of course, if Gold is used as backing, then this problem of volatility disappears as the stock to flows ratio of Gold is enormous; that is, there exists above ground Gold bullion in the quantity of at least eighty years worth of primary (mine) production. In contrast, the stock to flows of all other commodities (except Silver) is measured not in years, but days. Like one hundred or so days for the stock to flow of crude oil or platinum. So, if Gold is great money, how about using it to 'back' a currency? Only one problem remains, the same one Mr. Law faced; the inevitability of more paper being created, backed by the same quantity of Gold. Indeed, this is what happened to the US Dollar once Gold coin circulation was replaced by the circulation of paper 'backed' by Gold. As more paper was printed, President Nixon had a choice; to admit this, and devalue the Dollar vs Gold... that is, admit that more Dollars were now backed by the same quantity of Gold... or simply refuse the international obligations of the USA and refuse to exchange American Gold for Federal Reserve Notes; and we all know what he decided to do, he 'closed the Gold window'. Sometimes silence is louder than words; while 'backing' is being loudly debated, there is another far more meaningful word that is not even being whispered, not even a faint echo of it may be heard... yet. That word is 'redeemable'. Unlike backing, which is very vague and essentially meaningless, redeemable is indeed very precise and full of meaning. The meaning of redeemable is that
the owner of a redeemable Dollar bill may exchange his paper for the defined quantity of Gold at any time, no limits. The US Dollar was redeemable before President Roosevelt defaulted on the domestic obligations of the US Government; an obligation to redeem Federal Reserve Notes, aka Dollars, in Gold. The paper notes are promises, a future good. The Gold they are redeemable in is a present good, actual money in the hand. Think how absurd it would be to make a currency redeemable in crude oil; go to your friendly bank to redeem your notes and walk away with a couple of barrels of crude? I don't think so. Same with the Assignat; if the thousands of acres of confiscated land are used to 'back' millions of paper notes, will the holder of the paper walk up to a bank and walk away with a title deed for 1/100 of an acre of land? Bah. Of course, redeemability in Gold or Silver only works if the Government forbears from printing more paper notes than it has Gold or Silver to back them with... thus the deafening silence on redeemable currency. Until people at large come to understand this, there will be no solution to the current Global Financial Crisis. To be more specific, we need to look at the balance sheet of the Federal Reserve... or of any Central Bank. The liability side of the bank's balance sheets contain all the bank notes it issues, ie Dollar bills, Pounds Stirling, etc. The asset side, that which in reality backs the liabilities, or more precisely balances them, are today simply more paper... paper promises in the form of Treasury bonds, commercial paper, and 'toxic waste' ie other promises, but promises that even our decrepit media admit are worthless. For a truly sound currency to exist, the asset side of Central Bank's balance sheets must contain nothing but cash Gold, and Real Bills that mature into cash Gold in not more than 91 days. If this is done, we will in effect establish an Unadulterated Gold Standard... something like what the world was on during the nineteenth century... a century fondly remembered as the Golden Years of Peace and Prosperity.
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Before the evil of WWI, the German Reichbank had guidelines for its banks; assets to be 1/3 Gold and 2/3 Bills of Exchange. Note that 'bills of exchange' are Real Bills, and Real Bills mature into Gold in not more than 91 days. If the bank does not actively discount (purchase) new bills, in 91 days its balance sheet assets will be 100% Gold. End of problem. Finally, note that there is actually no need for Bank notes, that is Dollar bills or any other form of currency; Gold coins will circulate just fine, along with smaller denomination Silver coins, and actual Real Bills to fund the flow of consumer goods on the way to market. Bank notes are simply a convenience; after the World Financial Crisis plays out, paper money may be so hated that no one will accept any! No problem, the world economy did just fine before the introduction of circulating bank notes, and will do just fine again. Even better, as no government or Central Bank can print Gold, or create Real Bills.
When Will the Stock Market be Worth Your Gold?
Perceptive gold owners understand their metal was the once and future money, and follow Professor Fekete‘s advice to ―measure personal net worth in gold ounces‖ rather than in dollars. These enlightened people must now confront the question of when to convert metal into income-producing assets. Some of the better financial commentators suggest a simple trader‘s approach. Buy an asset when no one else wants it. This will increase the chance of getting in near the bottom. Although it is hard to argue with that elegant logic, a contemplative reader may prefer a more rigorous process. It is tough to find someone more rigorous than Rob Arnott. Past editor of the Financial Analysts Journal, author of numerous penetrating articles on the proper valuation of stocks, and currently the manager of $50 billion, he represents much of what is still right and admirable about the existing professional establishment. The originality of his ideas and insights commands our attention. I don‘t think Arnott would label himself a gold supporter. Nevertheless, he draws attention to post1970s equity market behavior, revealing the impact of gold‘s absence from the monetary system. The dramatic expansion of earnings multiples after 1982 provides a check on the reasoning of sound money advocates. It is no surprise for us that the easy credit of central banking lead to a bubble in stocks, but still nice to see some independent confirmation. Arnott has brought together the best of the relevant research, added some new conclusions, and produced something very useful to gold owners. His superb article Earnings Growth: The Two Percent Dilution (FAJ, Sep/Oct 2003) set out to answer the question of how most financial experts missed the warning signs during Dot-Com Bubble. But Arnott‘s methodology and line of reasoning are helpful for a different purpose – understanding the true fair value for the broad stock market.
Rudy Fritsch Order Rudy‘s Beyond Mises now.
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Tying in some important work on the natural growth rate for corporate earnings with more accurate estimates of the true earnings levels at the peak of the bubble in 1999/2000, Arnott exposes the two components of a critical fact. First, when aggregate trailing 12-month GAAP earnings for the S&P 500 are cleansed of the upward biases of: a) overly optimistic Defined Benefit pension return assumptions; b) improperly recognized stock option issuance; c) earnings ―smoothing‖ and other questionable / fraudulent accounting; and d) the effects of the genuine economic boom then taking place; the true reported earnings picture emerges. Instead of the official $54, it was more like $33. Second, rather than accepting the usual optimistic expected growth estimates for earnings (which, even to this day, still materially exceed expected GDP growth), Arnott shows the historical record: earnings growth for the broad stock market actually lags GDP growth by 2%. This is because of the impact of the hard to measure, but impossible to dismiss, entrepreneurial activity of newly formed companies. Much of the growth of a new enterprise typically takes place before its stock is even publically traded, let alone added to any market index. When these two sources of distortion are taken together, it is easy to see how the market at the beginning of the 21st Century got extremely overvalued. But the critical fact for our purposes emerges because we can take the next logical step. Thanks to the work of Arnott and his associates, we now have a carefully established reference point for future comparison when valuing the S&P 500. A rough calculation of the index earnings suggested today by this method yields some interesting results. Even if GDP growth had averaged 3.5% for 10 years since 2000, earnings growth should only have
averaged 1.5%. The index earnings today should therefore be: $33 x (1+1.5%)^10 = $33 x 1.16 = $38.30 Arnott notes that before the 1980s, earnings multiples only ranged from 12 to 16. In the absence of a fiat system with easy credit, this is what we can reasonably expect. Taking a mid-point of 14, this suggests an expected 2011 fair value for the S&P 500 of 536. This P/E multiple ties in nicely with the assumption that stocks should return 7% per year (of which 5.5% is dividend yield and 1.5% is earnings growth, with no allowance for expansion of the earnings multiple). In a more stable monetary system, this performance by equities is an intuitive level of return relative to historic rates for Real Bills, long-term bonds, and real estate net of rental income. To this estimated natural index level the reader can make his own downward adjustments for the following contingencies flowing from a fiat money crisis and/or resumption of a gold/silver standard: 1) compression of earnings multiple due to uncertainty of earnings outlook; 2) reduction (or disappearance) of earnings due to consumer fatigue/fear; 3) outright bankruptcy of selected companies in the index; 4) substantial dilution of equity holders in many other cases, forced by firms‘ creditors or pension participants; and 5) ―blood in the streets‖… etc. It is difficult to quantify the effects of any of the above factors, except to say they would take the index lower. A point at which to begin some dollarcost-averaging purchases might be 250, from which we could eventually expect a long run 15% earnings yield once earnings to return to the $38 level. The S&P 500 might bottom below 250, but probably even the smartest buyers will be feeling their way in the dark.
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If the monetary authorities do not surrender unconditionally by opening the Mints to unlimited free coinage of gold and silver, the calculations above will be less helpful. This is because there is no telling how quickly a new easy-credit-fueled stock bubble may follow any partial surrender (dollar devaluation). But converting the above figures to gold ounces gives as reliable a tool as can be hoped for. This would mean, at $1,500/oz gold, that if the S&P 500 were trading at 0.167oz, it would represent a good value. But the dynamic nature of this last ―scientific‖ calculation process almost brings us full circle to the traders‘ ―art‖ of simply buying an asset when it is in disrepute. The missing piece here is some sort of estimate of gold‘s true purchasing power relative to its value today. But that is a topic for a different essay. Publius
Gold Confiscation
Many American buyers and potential buyers of gold express concern about the U.S. government confiscating gold. This fear is legitimate because rogue governments like the U.S. government can be highly unpredictable and destructive. It can steal not only gold but any thing else that the rulers want. Nevertheless, gold confiscation is not likely. Today‘s monetary system differs greatly from that of 1933 when President Roosevelt‘s great theft occurred. Then gold was the money. Gold coins actually circulated and were used for buying and selling. Federal reserve notes, U.S. government notes, and national bank notes were redeemable in gold coin on demand. Today governments officially shun gold and poohpooh it as money. Although their central banks hoard large quantities of gold, governments deny that it has any monetary value. It is a barbaric relic that used to interfere with their fiat monetary dreams and deserves to be banished forever from the monetary system. To confiscate gold today would be an admission that they have been wrong for the past eight decades. Moreover, today people who distrust government hold most of the gold outside investment houses, banks, and industry. They would not likely surrender it to the government. When Roosevelt stole the people‘s gold, his theft was easy. The U.S. government and the Federal Reserve held 93 percent of the country‘s monetary gold as trustees for backing gold certificates, federal reserve notes and national bank notes. With the $100 exemption, he did not have to take any gold coins held by individuals. The monetary statistics presented in this article are from Banking and Monetary Statistics, 1914-1941, published by the Board of Governors of the Federal Reserve System. Section 11, ―Currency,‖ Table No. 110, ―Currency in Circulation — By Kind, Monthly, 1860-1941,‖ page 412, gives the total currency in circulation for February 1933 as $6258 million. Of this amount:
New Austrian School of Economics
Announcing the third session of Professor Antal E. Fekete‘s New Austrian School in Munich, Germany. Dates: 20-29th August, 2011 Venue: Maria-Theresia-Str. 20, Munich Speakers: Prof A.E. Fekete (Hungary), Sandeep Jaitly (UK) and Keith Weiner (USA). Subjects to be covered include: The unadulterated gold standard. Inflation versus deflation – simple terms for non-simple action. The gold/silver market, the gold/silver basis. The creation of the interest rate spread. Gold against other assets. The future of the bond market. For further information regarding this event, please contact the organiser Mr. Ludwig Karl at [email protected]
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Gold coins Gold certificates United States notes Federal Reserve notes National Bank notes
$284 million $649 million $301 million $3405 million $861 million
or silver coins. Consequently, gold ceased being a medium of exchange in the United States. Thomas Allen
Thomas Allen has been a student and adherent supporter of the gold standard and the real bills doctrine since 1972. In 2009, he wrote and published Reconstruction of America‘s Monetary and Banking System: A Return to Constitutional Money. Many of his writings on money and other subjects can be found on his blog http://tcallenco.blogspot.com/ (index to these blogs here). Notes: 1. Franklin D. Roosevelt, 34 ‒ Executive Order 6102 ‒ Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government, April 5, 1933 from John T. Woolley and Gerhard Peters, The American Presidency Project, Santa Barbara, CA. Available here.
On page 506 of Section 13, ―United States Government — Treasury Finance and Government Corporations and Credit Agencies,‖ the gold reserves for backing United States Notes are $156 million. Table No. 156, ―Analysis of Changes in Gold Stock of the United States, Monthly, 19141941,‖ page 537, gives a monthly average gold stock of $4093 million for February 1933. For February 1933, then: Gold backing Gold certificates Gold backing United States notes Gold backing Federal Reserve notes $649 million $156 million $3004 million
Thus, individuals held $284 million in gold; the U.S. government $805 million; and the Federal Reserve Banks the remainder, giving a total monetary gold stock of $4093 million. Of the $4093 million of the monetary gold, the U.S. government and Federal Reserve held $3809 million in gold or 93 percent of the country‘s monetary gold. The people held $284 million in gold coins or about 7 percent of the monetary gold. If the coins were roughly evenly distributed among the population, each person would have had between $2 and $3 in gold coins (c. 123 million population). At this time the smallest gold coin in circulation was $2.50. As Roosevelt‘s confiscation order allowed each person to keep $100 in gold coins, he did not have to steal any coins that the public held. Between the Treasury and the Federal Reserve, he already had nearly all the gold. All he needed to do, and what he did do, was to violate the U.S. government‘s, the Federal Reserve‘s, and national banks‘ contracts with the people by voiding the redemption clauses in the law and on the paper money. Since the U.S. government made using gold coins and gold certificates as money illegal, if a person who held them wanted to spend them, he had to exchange them for federal reserve notes, U.S. notes,
What Is the Real Bills Doctrine?
Antal Fekete1 describes a real bill as follows: A real bill is a bill of exchange drawn by the producer (the drawer of the bill) on the distributor (the acceptor of the bill) specifying the kind, quality and quantity of merchandise shipped by the former to the latter, and specifying the sum (the face value of the bill) and the date on which the bill is payable (the maturity date of the bill, in any event, not more than 91 days after the date of billing). In order to be valid, the bill has to be accepted by the acceptor, by writing across its face and over his signature “I accept.” Nelson Hultberg2 describes real bills as “temporary bills of exchange that appear simultaneously with goods that are being produced to aid such goods in further transportation along the production/ consumption chain. These bills of exchange then go out of existence once the goods have cleared the market.” Real bills are clearing instruments because they allow time for merchandise to be sold to the ultimate customer. The heart of the real bills doctrine is the real bill of exchange. A real bill of exchange (a real bill) is drawn on real goods that are ready to be sold (sitting on the retailer‘s shelf) or are on the way to the retailer to be sold. A real bill of exchange is a self-liquidating, short-term credit instrument. It is self-liquidating in that when the consumer buys the product, the consumer provides the money for the seller to use to
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Notes: 1. Antal E. Fekete, ―Monetary Economics 101: The Real Bills Doctrine of Adam Smith,‖ Lecture 2, July 8, 2002. 2. Nelson Hultberg, ―Cranks in the Gold Community‖ July 11, 2005.
pay the bill. It is short-term in that the bill has to be paid off in 91 days or less. When the retailer accepts the bill of exchange, a real bill or commercial money has been created. Now the supplier can use the bill to pay his creditors or sell it to a bank or an investor. If a bank buys the bill, it converts the bill to bank notes or checkbook money. For example, when a supplier sells his goods to a retailer, the retailer usually does not pay for the merchandise then. Instead, the suppler draws a bill of exchange (a real bill) on the retailer to pay within 91 days. When the retailer accepts the bill, commercial money has been created. The supplier can now use this bill to pay the manufacturer. He can sell it to an investor or a bank. If the supplier needs money immediately to pay his employees and utility bills, he sells the bill to a bank at a discount. The bill becomes the property of the bank, and the retailer pays the amount due at maturity to the bank. If he sells it to a bank, the bank converts it to bank notes or checkbook money. A bank never creates money; it only converts one form of money (commercial money) to another form (bank notes and checkbook money). In effect, the bank has converted the bill into conveniently denominated money recognized and accepted in the community. When people buy the products represented by the bill, the retailer pays the holder of the bill. When the bill is paid off, it ceases to exist. If a bank has bought the bill and has converted it to bank notes or checkbook money, that bank money is removed from circulation and cancelled when the bill is paid. Thus, the money created when the retailer accepts the bill goes out of existence when the retailer pays off the bill. Banks do not create any money. Banks merely convert it from one form (real bills or commercial money) to another (bank notes and checkable deposits) as they do when they put gold coins in their vaults and issue gold certificates in place of the coins. All money creation is left directly in the hands of the people. Although credit is involved, no borrowing or lending is involved in the creation of this money. Thomas Allen
Follow Up on Reserve Bank of Australia’s 1997 gold sale
This is a follow up to my article in the March Newsletter, in which I expressed the view that the RBA gold sales in 1997 were to extinguish a portion of the large amount of Australian government debt outstanding at the time of the Asian Financial Crisis. The government was forced to extinguish debt rather than roll it over - issue new debt - or suffer significant devaluation of the Australian dollar, a 'sovereign debt crisis' if you will, as occurred in several nations to our north at the time. Graph 1 on the following page shows how the central bank moves the interbank rate with the growth, or lack thereof, of Broad Money, the broadest measure of financial system credit. Broad Money falling is equivalent to widening credit spreads, a falling (or flailing) stockmarket, higher government bond prices, bankruptcies.... in other words, a debt crisis or economic recession. As credit spreads widen the central bank lowers its 'target' rate in an attempt to bring rates down across the spectrum, from junk to 'AA' bank debt. Government debt of longer duration is moving along with the shorter term debt. I am only speculating here but the long term trend in the 10 year yield may be an arbitrage or 'risk free' profit for those borrowing short and lending long. The 'profit' is driving longer term yields down as central banks lower the interbank rate. Graph 2 is the monthly issuance of Treasury notes1 and bonds, to show the response of government to debt crises. If you read my March article you know the end result of government responses and I can only sit gobsmacked the current level of debt
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outstanding – it is not as if it is any more likely to be repaid than in 1997. One thing to note is the 10 year yield around the time of the Asian Financial Crisis in 1997. There is nothing that would indicate problems in the government bond market, in fact just the opposite; the 10 year yield was more or less falling throughout that period. I think that those looking for a rise in interest rates to signify the beginning of a crisis are looking in the wrong direction. The crisis is already here, has been for some time and is reflected in the price of the only extinguisher, thus arbiter, of all (including if not especially, government) debt... Gold. Justin Downie
Notes: 1. Data for Treasury note issuance is not available pre 2001 but I think it safe to assume that Treasury notes were being issued pre 2001.
