"Give me the right to issue and control a nation’s money and I care not who governs the country.” Meyer Amschal Rothschild, International banker

“It is well enough that the people of this nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford

"Those that create and issue the money and credit, direct the policies of government and hold in their hands the destiny of the people." Richard McKenna, former president of the Midlands Bank of England

"The governor of the Bank of England…dictates the terms upon which alone the government can obtain borrowed money." Sir Drummond Fraser, vice president of The Institute of Bankers, England

"Powerful individuals and forces are making enormous fortunes out of the ruin of Australia." B. A. Santamaria

"We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. Some people think the Federal Reserve Banks are U.S. government institutions. They are private credit monopolies; domestic swindlers, rich and predatory money lenders which prey upon the people of the United States for the benefit of themselves and their foreign customers. The Federal Reserve banks are the agents of the foreign central banks. The truth is the Federal Reserve Board has usurped the Government of the United States by the arrogant credit monopoly which operates the Federal Reserve Board.” Congressman Louis T. McFadden, Chairman of the House Banking and Currency Committee, addressed the House on June 10, 1932. 75 Congressional Record 12595-12603

"The Federal Reserve banks are privately owned, locally controlled, separate corporations." Who says so? In Lewis v. United States, the Ninth Circuit Court says so. (June 24, 1982)

“...bank records are not the depositor’s private papers and having given the information to the bank, the depositor has no legitimate expectation of continued privacy...” United States Supreme Court in U.S. v. Miller

“...100% of what is collected is absorbed solely by interest on the Federal Debt...all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government.” 1984 Grace Commission report submitted to President Ronald Regan

"All the perplexities, confusion and distress in America arise, not from the defects of the Constitution or confederation, not from want of honour or virtue, so much as from the downright ignorance of the nation, of coin, credit and circulation." John Adams 2nd President of the USA

"The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than the aristocracy, more selfish than the bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes." Abraham Lincoln 16th president of the USA

"The international bankers swept statesmen, politicians, journalists and jurists all to one side and issued their order with the imperiousness of absolute monarchs.” Lloyd George, Former British Prime Minster

“If all bank loans were paid...there would not be a dollar of coin or currency in circulation. Someone has to borrow every dollar we have in circulation. We are absolutely without a permanent money system.” Robert Hemphill, Federal Reserve Bank in Atlanta, in foreword to “100% Money” by Irving Fisher

“Democracy is a form of government that cannot long survive, for as soon as the people learn that they have a voice in the fiscal policies of the government, they will move to vote for themselves all the money in the treasury, and bankrupt the nation.” Karl Marx, 1848 author of “The Communist Manifesto”

“Capital must protect itself in every possible way, both by combination and legislation. Debts must be collected, mortgages foreclosed as rapidly as possible. When through the process of law the common people lose their homes, they will become more docile and more easily governed through the strong arm of government applied by a central power of wealth under leading financiers. These truths are well known among our principal men who are now engaged in forming an imperialism to govern the world. By dividing the voter through the political party system we can get them to expend their energies in fighting for questions of no importance. It is thus by discreet action we can secure for ourselves that which has been so well planned and so successfully accomplished." - 1924 US Banker’s Association Magazine

"When Rothschild said, "Let me issue and control a nation’s money and I care not who writes its laws", it was the beginning of the modern era’s financial, political, social, commercial, and military strife and subversion." - perfecteconomy.com

"The financial system has been turned over to the Federal Reserve Board. That board administers a finance system by authority of a purely profiteering group. That system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money.

This (Federal Reserve) Act establishes the most gigantic trust on earth. When the president signs this bill, the invisible government by the monetary power will be legalized. The people may not know it immediately but the day of reckoning is only a few years removed, the worst legislative crime of the ages perpetrated by this banking bill." - Charles A. Lindbergh, R-MN

"We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the money vultures who control it. A superstate controlled by international bankers and international industrialists acting together to enslave the world for their own pleasure." - Louis McFadden, D-PA

"Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve system have never been audited. It operates outside the control of Congress and manipulates the credit of the United States." - Barry Goldwater, R-AZ

“The whole aim of practical politics is to keep the populace in a continual state of alarm (and hence clamorous to be led to safety) by menacing them with an endless series of hobgoblins, all of them imaginary." - H. L. Mencken

"I have unwittingly ruined my country." - W. Wilson, upon passage of Federal Reserve Act, 1913

"If one understands that Socialism is not a “share the wealth” program but is in reality a method to consolidate and control the wealth, then the seeming paradox of super rich men promoting Socialism becomes no paradox at all. Instead it becomes logical, even the perfect tool of power-seeking megalomaniacs. Communism, or more accurately Socialism, is not a movement of the down-trodden masses but of the economic elite." - Gary Allen

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." - James Madison

"It (the Great Depression) was not accidental; it was a carefully contrived occurrence. The international Bankers sought to bring about a condition of despair here so that they might emerge as rulers of us all." - Louis McFadden


"You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you to vote for gold." George Bernard Shaw

by John Browne Euro Pacific Capital

Most consider the New York market ‘spot’ price for an accurate indication of the true price. However, investors now buying buy physical or ‘fabricated’ gold, are paying a premium of between $20 and $30 per ounce. When these gaps existed in the past, major increases in the price of gold were imminent.

For much of the 20th Century, gold continuously defied global government efforts to restrain its price. The premium currently in place may be evidence of the latest round of such policies.

In 1934, President Roosevelt devalued the U.S. dollar by some 75 percent by raising the official price of gold from $20 to $35 an ounce. This opened the door to the first great wave of inflation of the 20th Century. Following World War II, national governments, particularly the American Treasury, held the vast bulk of the free world’s gold. The official $35 price was maintained, almost by official dictate.

However, in the 1960’s, a ‘free’ market gradually developed that traded gold at a premium to the official $35 price. In response, the London Gold Pool, a central bankers’ gentlemen’s agreement led by the Bank of England and the New York Fed, was established to hold the so-called ‘free’ market price of gold “to more appropriate levels” … to “avoid unnecessary and disturbing fluctuations in price” which could erode “public confidence in the existing international monetary structure.” The agreement lasted until 1968. Thereafter, the price of gold was set solely by the free market.

As the inflationary financing of the Vietnam War began to filter into the international economy, private investors and nations with trade surpluses began to buy gold to protect their wealth. The ‘free’ market price began to soar above $35 an ounce. Far from reducing the demand for gold, as many esteemed Keynesian economists had predicted, this free market price increased the demand for gold.

Surplus nations demanded gold from the American Treasury at the official price. Experiencing a serious run on the national official gold reserves, President Nixon broke the U.S. dollar gold exchange link in August 1971. It unleashed a wave of competitive international currency devaluations and the second great inflation of the 20th Century. Subsequently, the U.S. dollar was devalued further, by some 20 percent, as gold officially was revalued to $42 an ounce.

However, led by America, the central banks then made a determined attempt, through the IMF, to “demonetize” gold. Central banks agreed not to fix their exchange rates against gold and agreed ‘voluntarily’ to the removal of their obligation to conduct transactions between themselves at the official price.

In addition, the IMF was persuaded to ‘distribute’ some 153 million ounces of gold into the market and to minor nations. This had the perverse effect of greatly increasing the interest in owning gold.

An even stronger ‘free’ market began to operate alongside the official price. As inflation continued to clime, so did gold. In the early 1980’s the free market price reached $850 an ounce, while the official price remained at $42 an ounce.

In 1999, the Central Bank Gold Agreement (CBGA), also known as the Washington Gold Agreement, led to the coordinated sales of central bank gold via the IMF. Clearly designed to depress the free market price, it is widely believed that the IMF sales were timed to magnify volatility in the free market price in order to destroy gold’s perceived worth as a ‘store of value’. The CBGA was renewed on September 27, 2004, for a further five years.

More recently, market dealers have become increasingly aware of a covert official ‘blessing’ for large naked short positions opened by major ‘bullion’ banks. These bets are designed to force down the free market price of gold.

In the mainstream investment community, gold has been consistently scorned as an investment. Many respected analysts have even suggested that gold’s allure is wholly based on perception and that the metal lacks intrinsic value. And yet, in terms of U.S. dollars, gold returned about 5.8 percent in 2008, following a 31.4 percent return in 2007. Thus far in the 21st Century, gold has delivered an average annual return of some 16.3 percent.

Despite the powerful attempts of governments to eradicate gold’s role in monetary affairs, the free market price has risen continuously. Today, although the possibility of global depression act as a head wind, the existence of an “above market” premium for fabricated gold, may foretell a major threat to the credibility of paper currencies, a major U.S. dollar devaluation and a consequent strong rise in the price of gold in the months ahead

from the West Australian

The Reserve Bank of Australia’s controversial decision to sell two-thirds of its gold reserves nearly 12 years ago has robbed it of nearly $5 billion.

As gold prices yesterday closed at $US856.25 an ounce, WestBusiness calculations showed that the 167 tonnes the RBA sold as part of a shake-up of its international reserves in 1997 would have been worth $7 billion.

At the time it pocketed about $2.4 billion, with gold trading between $US332/oz and $US416/oz.

The RBA shocked world markets and enraged the gold industry in July 1997 when it revealed it had dumped the bulk of its gold reserves.

The decision sent prices tumbling to $US315/oz as then-Federal treasurer Peter Costello argued that gold no longer played a significant role in the international financial system.

Both the RBA’s decision and Mr Costello’s comments drew angry responses from many senior industry figures, who claimed the comments had done more damage than the sale itself by fuelling an atmosphere of uncertainty.

While the RBA’s sale followed similar moves from European central banks, it also triggered another wave of selling, with the Swiss central bank offloading half of that country’s gold reserves and abandoning the gold standard.

One of those critical of the decision at the time was mining veteran Ed Eshuys, then Joseph Gutnick’s right-hand man and now the outgoing chief executive at St Barbara.

Twelve years and a near trebling of the gold price later, Mr Eshuys yesterday conceded a certain degree of schadenfreude at the RBA’s missed opportunity.

“The issue was that Australia was the third largest gold producer at the time and for the Australian government to sell out its gold holdings, particularly in that climate, gave all the gold buyers some food for thought,” he said.

“I don’t know if it precipitated it or it was a catalyst, but the gold price kept falling from then on. (The comments) certainly didn’t help.

“Exploration stopped after that — 1997 was the peak for exploration and after that it declined.”

An RBA spokeswoman said yesterday the central bank’s policy had not changed since it decided to readjust the percentage of reserves held in bullion in 1997, justified at the time as a move towards diversification. She said the bank had no intention of selling its reserves down any further.

The global financial crisis has seen gold prices soar over the past 12 months, with spot gold topping $US1000/oz last year and consistently trading at a historical high in Australian dollar terms.

Gold’s bumper performance has boosted the value of the RBA’s remaining 80 tonnes of gold from about $2 billion in June 2007 to around $3.3 billion.

According to World Gold Council figures, RBA vaults held 79.8 tonnes of gold as of December, making up about 6.3 per cent of its total reserve, compared to an international average of 10.2 per cent.

In the European Union most governments hold more than 50 per cent of their reserves in gold, while in the US it was as high as 76 per cent in 2008.

"O Gold! I still prefer thee unto paper, which makes bank credit like a bark of vapor." Lord Byron

"There is never enough gold to redeem all the currency in circulation."John B. Robinson

"Whoever has the gold makes all the rules." Source Unknown

"Why then, is gold the unmentionable, four letter word of economics? ... The answer is threefold: A misunderstanding of the role of money; a misreading of history; and finally, visceral revulsion to the notion that a metal can do a better job of guiding monetary policy than a gaggle of finance ministers, central bankers and well-degreed economists." Malcom Forbes

"Indeed, there can be no other criterion, no other standard than gold. Yes, gold, which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence." Charles de Gaulle

"By common consent of the nations, gold and silver are the only true measure of value. They are the necessary regulators of trade." Hugh McCulloch

"Gold has worked down from Alexander's time... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory." Bernard M. Baruch

"Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them." David Ricardo

"Civilized countries generally adopt gold or silver or both as money." Alfred Marshall

"Hunger for gold is made greater as more gold is acquired." Aurelius Clemens Prudentius

Human Freedom Rests on Gold Redeemable Money

by Hon. Howard Buffett U.S. Congressman from Nebraska and father of Warren Buffet.

Reprinted from The Commercial and Financial Chronicle 5/6/1948

"Congressman Buffett stresses relation between money and freedom and contends without a redeemable currency, individual's freedom to sustain himself or move his property is dependent on goodwill of politicians. Says paper money systems generally collapse and result in economic chaos. Points out gold standard would restrict government spending and give people greater power over public purse. Holds present is propitious time to restore gold standard.""Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere."But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty. You see, gold is mobility, gold is a passport to move across borders."Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom."In that case then certainly you and I as Americans should know the connection. We must find it even if money is a difficult and tricky subject. I suppose that if most people were asked for their views on money the almost universal answer would be that they didn't have enough of it."In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option and choice of the holder of paper money."

Most of you know my bullish bias on silver. I have written numerous articles outlining this incredibly misunderstood, unloved and undervalued investment opportunity.

http://www.bullionmark.com/2008/11/amazing-silver.html
http://www.bullionmark.com/2008/10/silver-to-gold-ratio.html
http://www.bullionmark.com/2008/09/important-considerations-for-silver.html
http://www.bullionmark.com/2008/09/myths-in-silver-market.html

Much of my research is based on gold and silver comparisons throughout history. I want to make it very clear that I am also bullish on gold but relatively speaking the silver story and data is compelling.

My latest research involved looking at the amount of ounces in existence (all the metal ever mined plus recycle minus consumption) back to 1900 and developing a series of metrics based on price and population.

The first chart shows that 1 billion ounces of gold existed in 1900 versus 5 billion ounces today in 2008. This makes sense. Gold is valuable, therefore hoarded and its industrial uses are largely reclaimed through recycling. Roughly new mine supply adds to the ounces in existence.
However 12 billion ounces of silver existed in 1900 but only 1 billion remain in 2008. Yes thats right less than 1 billion ounces and there is 5 times more gold available than silver! Why is this so? Well silver has far more industrial uses than gold. It is critical to electronics, whitegoods, medical technology, solar technology, industrial equipment, water purification, photography, nano technology, military weapons etc etc. Silver is critical in our daily lives. However the low price of silver makes recycling uneconomic, so silver used is silver consumed and lost forever. Secondly, silver is mined as a bi product of other metals such as zinc, lead, copper and gold. Silver is scarce in the earth and very expensive to mine. World silver mine supply could decline substantially in the next 2 years as economic conditions worsen around the globe. Silver mines themselves are going bust (ie Macmin silver in Australia) but also the base metal miners who mine some silver as a bi product have now become uneconomic and closing at an accelerated pace. Peak silver is with us!


Overlaying the population of 1.6 billion we see the world per capita gold at 0.6 ounces in 1900. In 2008 this has increased slightly to 0.7 ounces despite the population increasing to from 6.75 billion. So gold has been added to world supply slightly faster than population growth. Silver on the other hand has declined from 7.5 ounces per capita in 1900 to just over 0.1 ounces per person on the planet. See chart below.




If we then bring price into the mix the story becomes even more compelling. If we take the 1900 gold price of $20 and silver price of $0.65 and multiply by the ounces at the same period we get a value or market cap for gold and silver. By dividing silver into gold we can see relative market caps in a ratio. In 1900 this ratio was 2.6. for every dollar of silver in the world there was $2.6 dollars of gold. Astoundingly in 2008 there is $400 in gold in the world for ever dollar of silver. Silver is scarce and dramatically under valued versus gold.



The final chart highlights the much publicised gold to silver ratio. Simply the price of silver divided into the price of gold. Given the 700 year average is 15 the currently level of 80 appears extreme.



I wish to stress that I am very bullish on gold. I expect to see gold prices of between $3000 - $6500 in the next 5 - 10 years. However I am ultra bullish on silver. If the history, data, fundamentals, technicals, pricing and even market structure can overwhelm the political forces holding silver down, prices could reach unimaginable levels almost overnight.

by Ludwig von Mises

Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called "sound money."

The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments.

The gold standard did not fail. Governments deliberately sabotaged it, and still go on sabotaging it. But no government is powerful enough to destroy the gold standard so long as the market economy is not entirely suppressed by the establishment of socialism in every part of the world.

Governments believe that it is the gold standard's fault alone that their inflationary schemes not only fail to produce the expected benefits, but unavoidably bring about conditions that (also in the eyes of the rulers themselves and most of the people) are considered as much worse than the alleged or real evils they were designed to eliminate. Except for the gold standard, governments are told by pseudo-economists that they could make everybody perfectly prosperous. Let us test the three doctrines advanced for the support of this fable of government omnipotence.

1. The Fiction of Government Omnipotence

"The state is God," said Ferdinand Lassalle, the founder of the German socialist movement. As such, the state has the power to "create" unlimited quantities of money and thus to make everybody happy. Intrepid and clear-headed people branded such a policy of "creating" money as inflation. The official terminology calls it nowadays "deficit spending."

But whatever the name used in dealing with this phenomenon may be, its meaning is obvious. The government increases the quantity of money in circulation. Then a greater quantity of money "chases" (as a rather silly but popular way of talking about these problems says) a quantity of goods and services that has not been increased. The government's action did not add anything to the available amount of useful things and services. It merely made the prices paid for them soar.

If the government wishes to raise the income of some people, for example, government employees, it has to confiscate by taxation a part of some other people's incomes, and then distribute the amount collected to its employees or favored groups. Then the taxpayers are forced to restrict their spending, while the recipients of the higher salaries or benefits are increasing their spending to the same amount. There does not result a conspicuous change in the purchasing power of the monetary unit.

But if the government provides the money it wants for the payment of higher salaries by printing it or the granting of additional credits, the new money in the hands of these beneficiaries constitutes on the market an additional demand for the not-increased quantity of goods and services offered for sale. The unavoidable result is a general tendency of prices to rise.

Any attempts the governments and their propaganda offices make to conceal this concatenation of events are in vain. Deficit spending means increasing the quantity of money in circulation. That the official terminology avoids calling it inflation is of no avail whatever.

The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend except by taking out of the pockets of some people for the benefit of others.

2. The "Cheap-Money" Fallacy

Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods. Interest cannot be "abolished" as long as people prefer an apple available today to an apple available only in a year, in ten years, or in a hundred years.

The height of the originary rate of interest,[1] which is the main component of the market rate of interest as determined on the loan market, reflects the difference in the people's valuation of present and future satisfaction of needs. The disappearance of interest, that is, an interest rate of zero, would mean that people do not care a whit about satisfying any of their present wants and are exclusively intent upon satisfying their future wants, their wants of the later years, decades, and centuries to come. People would only save and invest and would not be consuming.

On the other hand, if people were to stop saving, that is, making any provision for the future, be it even the future of the tomorrow, and would not save at all and consume all capital goods accumulated by previous generations, the rate of interest would rise beyond any limits.

It is thus obvious that the height of the market rate of interest ultimately does not depend on the whims, fancies, and the pecuniary interests of the personnel operating the government apparatus of coercion and compulsion, the much-referred-to "public sector" of the economy. But the government has the power to push the Federal Reserve System, and the banks subject to it, into a policy of cheap money. Then the banks are expanding credit. Underbidding the rate of interest as established on the not-manipulated loan market, they offer additional credit created out of nothing. "The gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments."

Thus they are inescapably falsifying the businessmen's estimation of market conditions. Although the supply of capital goods (that can only be increased by additional saving) remained unchanged, the illusion of a richer supply of capital is conjured up. Business is induced to embark upon projects which a sober calculation, not misled by the cheap-money ventures, would have disclosed as mal-investments (over-investment in capital). The additional quantities of credit inundating the market make prices and wages soar. An artificial boom, a boom built entirely upon the illusions of ample and easy money, develops. But such a boom cannot last. Sooner or later it must become clear that, under the illusions created by the credit expansion, business has embarked upon projects for the execution of which the real savings are not rich enough. When this mal-investment becomes visible, the boom collapses.


The depression that follows is the process of liquidating the errors committed in the excesses of the artificial boom; it is the return to calm reasoning and a reasonable conduct of affairs within the limits of the available supply of capital goods. It is a painful process, but it is a process of restoration of business health.

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world. The economically backward nations would not have to complain about the insufficiency of their capital equipment. All they would have to do for the improvement of their conditions would be to expand money and credit more and more. No "foreign aid" schemes would have emerged. But in granting foreign aid to the backward nations, the American government implicitly acknowledges that credit expansion is no real substitute for genuine capital accumulation through saving.

3. The Failure of Minimum Wage Legislation and of Union Coercion

The height of wage rates is determined by the consumers' appraisal of the value the worker's labor adds to the value of the article available for sale. As the immense majority of the consumers are themselves earners of wages and salaries, this means that the determination of the compensation for work and services rendered is made by the same kind of people who are receiving these wages and salaries. The fat earnings of the movie star and the boxing champion are provided by the welders, street sweepers, and charwomen who attend the performances and matches.

An entrepreneur who would try to pay a hired man less than the amount this man's work adds to the value of the product would be priced out of the labor market by the competition of other entrepreneurs eager to earn money. On the other hand, no entrepreneur can pay more to his helpers than the amount the consumers are prepared to refund to him in buying the product. If he were to pay higher wages, he would suffer losses and would be ejected from the ranks of the businessmen.

Governments decreeing minimum wage laws above the level of the market rates restrict the number of hands that can find jobs. Such governments are producing unemployment of a part of the labor force. The same is true for what is euphemistically called "collective bargaining."

The only difference between the two methods concerns the apparatus enforcing the minimum wage. The government enforces its orders in resorting to policemen and prison guards. The unions "picket." They and their members and officials have acquired the power and the right to commit wrongs to person and property, to deprive individuals of the means of earning a livelihood, and to commit many other acts which no one can do with impunity.[2] Nobody is today in a position to disobey an order issued by a union. To the employers no other choice is left than either to surrender to the dictates of the unions or to go out of business.

But governments and unions are impotent against economic law. Violence can prevent the employers from hiring help at potential market rates, but it cannot force them to employ all those who are anxious to get jobs. The result of the governments' and the unions' meddling with the height of wage rates cannot be anything else than an incessant increase in the number of unemployed.

"The result of the governments' and the unions' meddling with the height of wage rates cannot be anything else than an incessant increase in the number of unemployed."

It is precisely to prevent this outcome that the government-manipulated banking systems of all Western nations are resorting to inflation. Increasing the quantity of money in circulation and thereby lowering the purchasing power of the monetary unit, they are cutting down the oversized payrolls to a height consonant with the state of the market. This is today called Keynesian full-employment policy. It is in fact a method to perpetuate by continued inflation the futile attempts of governments and labor unions to meddle with the conditions of the labor market. As soon as the progress of inflation has adjusted wage rates so far as to avoid a spread of unemployment, government and unions resume with renewed zeal their ventures to raise wage rates above the level at which every job-seeker can find a job.

The experience of this age of the New Deal, the Fair Deal, the New Frontier, and the Great Society confirms the fundamental thesis of the true British lovers of political liberty in the nineteenth century, namely, that there is but one means to improve the material conditions of all of the wage earners, viz., to increase the per-head quota of real capital invested. This result can only be brought about by additional saving and capital accumulation, never by government decrees, labor-union violence and intimidation, and inflation. The foes of the gold standard are wrong also in this regard.

4. The Inescapable Consequence, namely, the United States Government Gold Holdings Will Shrink

In many parts of the earth an increasing number of people realize that the United States and most of the other nations are firmly committed to a policy of progressing inflation. They have learned enough from the experience of the recent decades to conclude that on account of these inflationary policies an ounce of gold will one day become more expensive in terms both of the currency of the United States and of their own country. They are alarmed and would like to avoid being victimized by this outcome.

Americans were once forbidden to own gold coins and gold ingots (from 1933 to 1976). Their attempts to protect their financial assets consisted in the methods that the Germans in the most spectacular inflation that history knows called "Flucht in die Sachwerte" (flight into real values). They are investing in common stocks and real estate, and prefer to have debts payable in legal tender money rather than holding claims payable in it.

Even in the countries in which people are free to buy gold there are not yet (1965) conspicuous purchases of gold on the part of financially potent individuals and institutions. Up to the moment at which French agencies began to buy gold, the buyers of gold were mostly people with modest incomes anxious to keep a few gold coins as a reserve for rainy days. It was the purchases via the London gold market on the part of such people that reduced the gold holdings of the United States.

There is only one method available to prevent a further reduction of the American gold reserve, namely, radical abandonment of deficit spending as well as of any kind of "easy-money" policy.

A speech given by Ferdinand Lips
at the University of St. Gallen on 24 June 2004 as part of
the International Finance & Security lecture series


I would like to thank the organizers, Mr. Graf and Mr. Brunner, for inviting me here today. It says a lot that you have chosen such a contentious topic as gold. That shows courage. Indeed, until recently it was almost taboo to mention the word gold. Anyone who did so risked being labeled eccentric. But you were quite right in choosing this topic. You will soon see the extent to which gold has played a central and positive role in human history since the dawn of civilization.

I will provide evidence that without a gold-backed currency we are destined to face crises and military conflicts throughout the world. The best proof of this is provided by the events of the 20th century and the dawning 21st century.

I will also prove, or at least assert, that without a new gold standard the world will descend into a new dark age. I don’t know what the significance is, but the calendar of the ancient Mayan civilization ends in the year 2012. In my estimation, the current financial system, or non-system as I call it, will no longer exist by that time. As you know, it is based on deception and a mammoth debt burden that can barely be serviced anymore. In all likelihood, this mountain of debt will overwhelm the world someday.

I also want to give you hope, however, by describing to you how once upon a time there were better financial systems than the one we have today. My speech is also an appeal to you. I appeal to you young people to think of gold as money. Engage in monetary archeology. Try to devote some thought to the gold standard. It is up to you to save the world. No one will do it for you.

My speech will last 45 minutes. Afterwards, you will have to opportunity to ask questions. For those of you who would like to buy my latest book Die Gold-Verschwörung1) (Gold Wars), I will be happy to write a personal inscription.

Introduction:
today’s situation stems from abandonment of the gold standard
All of the bad things happening in the world today can be traced back to two specific events. They have given rise to the most troubling issues of the 20th century and now of the 21st century, including political dilemmas, wars, monetary crises, economic emergencies, widespread poverty, racism, the Holocaust, mass migration and terrorism. All of these things are overwhelmingly attributable to these two developments.

The first event is the abandonment of the gold standard at the beginning of World War One in 1914, and the second event is the establishment of the Federal Reserve System in the USA in 1913. World history demonstrates that there is a close relationship between monetary systems and war and peace.

And economic history shows that financial markets only function smoothly under a gold standard.

It is also evident that there is a close relationship between monetary systems and ethics and morality.

Unfortunately, it is not widely known that the 19th century was a period of prosperity and economic growth without inflation.

It seems like a fairytale when we discover that in those days the world’s major currencies remained stable over a long period. The French franc, for example, remained solid for 100 years. It was the age of the gold standard.

The lifespan of currencies
French franc 1814 – ... years
Dutch guilder 1816 – 1914 98 years
Pound sterling 1821 – 1914 93 years
Swiss franc 1850 – 1936 86 years
Belgian franc 1832 – 1914 82 years
Swedish krona 1873 – 1931 58 years
German mark 1875 – 1914 39 years
Italian lira 1883 – 1914 31 years

(Source: Pick’s Currency Yearbook 1977 – 1979)

How the gold standard worked
The basic rule of the gold standard was a fixed price for gold, i.e. each currency was convertible into gold at a specified rate. The currencies were backed by gold and redeemable in gold on demand. A nation’s monetary reserves consisted of only gold. On an international level, importing and exporting gold was unrestricted. All balance of payments deficits were settled in gold. (Balance of payments: the sum of all transactions between the domestic economy and the rest of the world.) Gold thus had a disciplining influence on a national economy.

It limited public spending. It provided citizens a currency that maintained its value and was internationally recognized. In such a system, if a balance of payments deficit develops because domestic prices go up, gold automatically flows out of the country. This leaves less gold available for internal money circulation, and prices will thus come under control or decline. Exports become competitive again, and the balance of payments reverses. If, on the other hand, a country has a balance of payments surplus, gold will flow in and allow the economy to expand. Upward revaluations or devaluations were unthinkable. The system maintained it stability automatically. This is one reason why politicians do not like gold. Gold forces them to balance their budget.

Stable currencies through the ages
History offers many examples of monarchs and kings who exercised great discipline in creating money. Ancient Greece, where the first gold coins were minted, provides one such example. Due to its gold content, the drachma in effect became the global currency of the civilized world at the time. During this period, the Greek cities thrived. And economic trade flourished.
The most impressive example of a nation with healthy money was Byzantium. In keeping with the ancient tradition of stable money in Greece, Emperor Constantine decreed the creation of a new coin named the solidus. For over 800 years, the solidus served as a global currency, circulating from China to the British Isles and from the Baltic Sea to Ethiopia.

Byzantine laws regarding monetary matters were very strict. Before someone was accepted into the bankers’ guild, the candidate needed sponsors. These people had to provide a character reference. The authorities wanted to be certain that the candidate would never counterfeit money. Anyone who violated these rules had their hand cut off.
It is an amazing historical fact that the Byzantine Empire flourished as the center of global trade for 800 years. During this period, there was not a single devaluation or any amassing of debts. Neither in antiquity nor in modern times has anyone else set such an example. Through its money, Byzantium controlled both the civilized and uncivilized world at the time. This outstanding phenomenon came to an end when Emperor Alexius Comnenus, who had high gambling debts, was forced to devalue. The Turks marched in 200 years later, and the splendor was over.

Another outstanding example of the success of standardized gold coins was the gold dinar of the Arabian Empire. At its peak, this empire extended from Bagdad to Barcelona.
The rise of the Italian city-states like Florence, Siena, Venice and Genoa was only made possible thanks to a new gold currency, the Florentine fiorino d’oro.
A stable, reliable gold currency spurred an upswing in trade and promoted prosperity in the Italian city-states and broad areas of Western Europe.
Gold as money formed the economic basis of the Renaissance. Cultures thrive only when prosperity prevails, not when people are poverty stricken. The power and the natural reliability of gold, in turn, brought mankind to a higher level of civilization.

In their great wisdom, the founding fathers of the USA stated in the American constitution that only gold and silver should be considered legal tender. The concept of paper money and a central bank were a horror for them. Today, all of this is ignored and viewed as anachronistic.

The 19th century gold standard, the highest monetary achievement of the civilized world
The gold standard was neither conceived at a monetary conference nor the brainchild of some genius. It was the result of centuries of experience. Great Britain was the architect. At the height of the gold standard at the beginning of the 20th century, there were about 50 countries, all of them leading industrialized nations, which participated in the gold standard. It was one big clearance community, and it worked.

In his book Währungen am Scheideweg(3) (Managed Money at the Crossroads – The European Experience), Professor Melchior Palyi wrote in 1960:
“For the first time since Rome’s prime did the civilized world succeed in creating a monetary unit. The commercial and financial integration of the world was achieved without the help of a military empire or a dreamy utopia. In theory and in reality, this monetary unit was accepted and recognized as the only rational currency system. Due to the automatic mechanism and the discipline to which the monetary institutions were tied, fluctuations in the exchange rates were very limited if not altogether impossible. This was the incalculable advantage of a gold currency.

Capital could be used for short-term as well as long-term transactions. Trade and industry were able to plan ahead. Especially the automatic mechanism and the rules of decent behavior in monetary affairs observed at the time liberated the value of money from the impact of governments’ whims. They substantially stabilized it on a worldwide basis. Despite all assurances by the monetary reformers, no reasonably equivalent replacement has been found in the meantime.”

Economist Ludwig von Mises wrote in his book Human Action4):

“The gold standard was the world standard of the age of capitalism, increasing welfare, liberty and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface… and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another...

The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard.”

Before Alan Greenspan5) 6) sold his soul, he described the gold standard as promoting prosperity and freedom.

According to him at the time, only this monetary system could prevent the chronic deficit spending of the welfare state and the recurrent speculative excesses of the financial world that result in depressions. He believed that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other. A true division of labor economy cannot exist without gold.

The era of the gold standard during the 19th century was the golden age of the white man, as well as Japan. During this period, after Napoleon, there were only seven wars of any consequence.

Post-Napoleonic wars in the 19th century
1855 Crimean War
1861-65 American Civil War
1866 Austro-Prussian War, North German Confederation
1870-71 Franco-German War
1877-78 Russian-Turkish War, Congress of Berlin
1894-95 Sino-Japanese War
1900 Anglo-Boer War in South Africa
And furthermore: There was no terrorism of the scope we know today.

Assertion
I assert that if the gold standard had been maintained and if the warring nations had kept on observing the rules of the gold standard, World War One would not have lasted very long at all. Because of the automated mechanism and the prevailing rules of decent behavior at the time, financing the war on credit in a Keynesian fashion would not have been possible. (Parenthetically, Swiss historian Jacob Burckhardt describes Keynes as one of the great destructive forces in world history, along with Karl Marx.) Soon after the onset of World War One, the moment came when the world turned to monetary fraud. Political pressure to finance the war by issuing bonds made it impossible to pursue a sane monetary policy and drove the currencies to ruin. Without deficit financing, the war would have lasted for 6 months at the most. But without the discipline of a gold-backed currency, it went on for 4 1/2 years. The world lay in ruins, and millions of young people, indeed an entire generation, were lost on the battlefields.

The demise of the gold standard topples the old world order
The catastrophe of World War One also signified the passing of the old world order. Stefan Zweig’s book Die Welt von Gestern7) (The World of Yesterday) describes how comfortable the world was before the war. Financing the war had a particularly ruinous effect on Germany, the country with the most robust and thriving economy at the time. The Reichsbank financed a large part of the war expenditures on a short-term basis, i.e. not with long-term War Loans like the British. This fact, in addition to the Treaty of Versailles and unreasonable reparation payments, led to hyperinflation, to the destruction of the middle class and, finally, to Hitler. It thus set the stage for World War Two. Look at what the shortsighted socialists have made out of the economic miracle with their welfare state: a lamentable Germany.

The monetary tragedy of the 20th century
The return to the gold standard after World War One was a fait accompli. But it lacked wisdom and conviction on the part of those in charge. At the Conference of Genova in 1922, the gold exchange standard was introduced.

Please note that it was not the gold standard that was reestablished, but rather the watered-down gold exchange standard that was launched. This meant that, apart from gold, the central banks could also dollars and pounds (i.e. the currencies of the triumphant nations) as reserves. Suddenly, dollars and pounds were equivalent to gold. That was inflationary because dollars and pounds were now accounted for twice: first in the country where they were issued, and second in the country that held them in reserve.

Furthermore, it should have been obvious that these paper currencies were in no way immune to losses in purchasing power. Therefore, they could not be lasting and generally valid yardsticks. Gold always retains its value – paper currencies do not. One of the most catastrophic decisions in monetary history also occurred when despite the emergence of inflation in the meantime, Winston Churchill, as Britain’s Chancellor of the Exchequer, chose to maintain the gold parity at the same level as it had been in 1914 instead of devaluing the pound. The Fed, facing a mild economic downturn in the USA in 1927, began providing large amounts of liquidity to the banking system. Moreover, it wanted to help out the Bank of England, which was losing a lot of money at the time because fixed income investments in the USA were more attractive. In order to lower the interest rate level, the Fed thus pumped even further liquidity into the system. This money eventually made its way to the equity markets, and the situation got out of hand in 1929. When the authorities decided it was time to stop the boom, it was already too late. The USA’s economy collapsed and dragged the world into the Great Depression of the 1930s. To this very day, the proponents of planned economies blame the gold standard for this debacle. But there was no gold standard anymore. If there had been, it would have worked at the time.

Central banks, banks and wars
When the gold standard was abandoned, central banks were the last barrier to rampant money creation, as long as they were able to maintain their independence. In the meantime, however, we have learned from bitter experience just how ineffective these so-called keepers of stability have been. Central bank independence did not turn out how it was intended to be. Central banks became compliant pawns of the governments. Indeed, it is precisely the central banks and the banking system that, through their creation of credit, have made deficit spending and war expenditures possible, and even promoted them in many instances. In his book Debt and Delusion8), British economist Peter Warburton places most of the blame for the deterioration of economic and financial policy since the early 1980s on the central banks. There are no golden brakes anymore.

The Federal Reserve System
The most ominous and threatening event in central bank history was the establishment of the Federal Reserve System in the USA in 1913. The Bank of England and Germany’s Reichsbank served as a model. If you do not appreciate at the moment why I view the foundation of the Fed as ominous, I advise you to read the book The Creature from Jekyll Island – A Second Look at the Federal Reserve System by G. Edward Griffin9). Under the pretext of protecting the public against bank crashes and maintaining a stable value of money, the US Fed (which is not federal at all, but rather very private) is a cartel that is designed to protect its members against unwelcome competition and, in the event of losses, to pass these on to taxpayers. Its foundation flies in the face of the American Constitution envisioned by the founding fathers. Presidents like Thomas Jefferson and Andrew Jackson were always against the establishment of a central bank. It came into being in a very devious manner, as the Federal Reserve Act was pushed through Congress just prior to Christmas of 1913, when most delegates were already at home with their families. Its foundation violates the American Constitution, which states that only gold and silver should be considered legal tender.

Mr. Griffin recommends abolishing the Federal Reserve System for the following reasons:

The Fed is incapable of achieving the goals it has set for itself, namely maintaining a stable value of money. Since its foundation, the value of the dollar has fallen by more than 95%.
It is a cartel that violates the public interest.
It is an outstanding instrument for promoting exorbitant pricing by the banking system.
It creates highly unfair taxation.
It encourages and abets wars.
It destabilizes the economy.
It is an instrument of Totalitarianism.

The state, or more precisely, the welfare state
Economist Wilhelm Röpke, one of the men behind Germany's economic miracle10), once said: “One can venture the claim that governments very rarely had complete control over their currency without abusing it. In today’s age of the welfare state, the probability of such abuse is greater than ever before.”

Today the gold standard is needed more than ever, for we all know from bitter experience that politicians cannot be trusted. The current political establishment will therefore stubbornly resist any attempt to introduce a gold-backed currency because such a currency would make it impossible to maintain today’s welfare state. The welfare state’s existence is predicated on government deceit of the citizens since it bears the most responsibility for the eroding value of money.

The unfortunate decisions made at Bretton Woods in 1944
The world had not learned anything at all. At the end of World War Two, it was decided to introduce the gold-dollar standard. The USA was thus granted the appalling monopoly to settle its debts with paper money it printed itself, which Charles de Gaulle referred to as the exorbitant privilege. Nobody could have resisted such temptation. A direct result of this was the inflation of the 1970s.

I ask you to consider the fine points: After World War One, we went from the gold standard to the gold exchange standard with dollars and pounds. Then after World War Two, we then proceeded to the gold-dollar standard. The pound had lost its previous stature in the interim and was no longer suitable as a reserve currency. As a sign of the USA’s growing economic power, apart from gold the dollar remained the world’s only valid reserve currency.

When President Nixon unilaterally abandoned this arrangement on 15 August 1971, it was tantamount to the bankruptcy of the USA. The era of floating exchange rates began in 1973. That fully opened the floodgates for money creation, credit expansion, deficit spending and speculation. As far as the ominous foundings of the IMF and the World Bank are concerned, we don’t have time to discuss them in depth today. Suffice it to say that there is no doubt that both institutions encouraged and supported Socialism around the world.

Today’s international order as a consequence
In a speech on 7 August 2002, President George W. Bush said the following: “There is no telling how many wars it will take to secure freedom in the homeland.” With this comment, Mr. Bush announced that there might not only be a war against Iraq, but many wars around the globe. He did not define when a war would be considered won or lost. This means these wars may continue indefinitely. Once again, they will be financed by deficit spending and through the banking system. This would not be possible under a gold standard.

I will now take a closer look at how the USA will be able to pay for these wars. In principle, the USA is bankrupt. The trade balance deficit is approaching 600 billion dollars, the budget deficit exceeds 500 billion dollars, and its foreign debt is enormous.

The USA has indeed already been bankrupt since 15 August 1971. That was the day America escalated its war on gold. Not unlike a banana republic, the USA defaulted on its obligation to redeem dollars for gold. If you are bankrupt, you theoretically should not be able to wage any wars. Under the discipline of the gold standard, it certainly would not be possible. Despite this, however, the USA can wage war and simply pay for it with its unbacked paper money, with fake money so to speak.

Who, then, actually pays for these wars? The answer is simple: We all do! It was the same in the case of Kennedy’s and Johnson’s Vietnam War. The world helps to finance the deficits, and the Americans wage the wars. That is ultimately the disgraceful result of abandoning the gold standard. But nobody notices, or is willing to admit it. That’s how it is: We are all partly to blame.

The 20th century and the onset of the 21st century
Contrary to the 19th century – with its solid and inflation-free growth, notable currency stability and relatively small number of wars – the 20th century was marked by inflation, hyperinflation, currency and trade wars, waves of speculation and military conflicts. The 20th century also brought two world wars, hundreds if not thousands of local wars, hundreds of millions of casualties, wholesale genocide, mass migration, worldwide monetary erosion, economic ruin, gigantic slums, the Aids epidemic and, ultimately, the decline of civilization.

Why are there wars?
Among the various motivations for international disputes that have ultimately led to war, economic reasons have undoubtedly been the most significant – from the primeval struggles for hunting territories, pastures, salt mines and fertile valleys, to the predatory attacks and conquests of the seafaring and trading nations, all the way to modern battles for living space, sales territories and, the most important motivation of all, access to natural resources. However, domestic political problems have also played a large role. Wars have frequently been started to divert attention from problems on the home front.
In the Middle East, both aspects have been important to the Americans, namely:

Control over the oil resources of the Middle East

Distraction from the disastrous condition of the US financial system

Saddam Hussein was only a pretext. Let’s not forget that the USA had previously built him up and supported him as a buffer against Iran.

There is one more reason, however, and that is the unbelievable arrogance of the US government. But now the arrogant leaders in the USA are feeling the backlash. First this is a war that can’t be won, and second it is doing even more damage to the dollar. Wars have always undermined the purchasing power of currencies. Whereas a gold coin from the time of Alexander the Great still shines as it did then, paper currencies are destined to revert eventually to their intrinsic value, and that is nil.

The Germans know a thing or two about that. They suffered a total loss after World War One, another total loss after World War Two, and were ultimately admitted to the European Monetary Union, thus accepting the euro as their currency. And this all happened in less than a century.

Gold is freedom
Not only is there a correlation between gold-backed currencies and war, but also between gold-backed currencies and freedom. In a famous essay entitled Gold and Economic Freedom5) that current US Fed Chairman Alan Greenspan wrote in 1966, he said the gold standard promotes prosperity and freedom. When we recall that one of the first official acts of Lenin, Mussolini and Hitler (and, by the way, Franklin D. Roosevelt) was to forbid the private ownership of gold, this relationship becomes clear. Even now, the price of gold is still manipulated each day and kept artificially low. Those in power want to maintain the fictitious status of the dollar, at least for as long as possible. In my book Gold Wars11), I described this manipulation.

Why is gold being manipulated?
Gold is indeed being manipulated each day by a clique of reckless financial wrongdoers. The following chart shows the gold price movements and manipulation over a one-day period. You can clearly see what is happening here.

Normally, the price of gold rises in Europe, but as soon as the COMEX opens in New York it is driven downward – more on some days, less on others. And this takes place without regard to the harm, and by that I mean the economic damage, that it causes throughout the world.

Why are these financial wrongdoers interested in manipulating gold?
In each and every discussion about the future of gold and its price, one thing needs to be clearly understood:

GOLD IS A POLITICAL METAL.
And this is so for the simple reason that given its historical role as money, gold just isn’t compatible with the modern financial system. Up to 15 August 1971, there was never a period in history during which no currency was linked to gold.

The world’s history of currencies is full of examples of devaluations, coin clipping and bankruptcies. Yet it was always possible to switch to other currencies that were backed by gold. But if you disregard the Swiss franc, this has no longer been possible since 1971.

All of the economic, monetary and financial catastrophes of the past 30 years can be traced back to this event.

Today’s system of unbacked paper money is still very young. It relies solely on faith – faith that the debts upon which it is based will be repaid someday.

A single, one-off event that could shake this faith, and thus the foundation of the financial system, is a robust upsurge in the dollar price of gold.

That is the entire reason why gold is manipulated each day.

But we know from the history of the Gold Pool in the 1960s that gold cannot be manipulated endlessly. At the time, the central banks tried to fix the price of gold at 35 dollars an ounce. The Gold Pool fell apart on 17 March 1968, and the entire pitiful experiment became the object of ridicule.

Gold is very cheap today because the governments of the world tamper with its price on a daily basis.

Where do we stand today? In a world at war and in crisis!
We are in the midst of a global currency and devaluation war.
The world’s reserve currency, the dollar, is weak because of the USA’s alarming financial situation – more than 34 trillion dollars of debt, 200 trillion dollars of derivatives and some 10 trillion dollars of obligations outside of the official government accounting. (And just think, in 1997 there were fears that the global financial structure would collapse due to a single hedge fund, Long Term Capital Management, with total assets of 3 billion dollars.)
The money supply is increasing dramatically in the USA and worldwide.
The stock markets currently resemble casinos; they are overvalued and dangerous. The Dow Jones Index is manipulated each day by the Working Group on Financial Markets (established in 1987 by President Ronald Reagan). There are no free markets anymore.

The insiders are getting out.
We face negative interest rates (i.e. inflation exceeds interest income), which are bad for investment and the economy.
There is a deficit between gold production and demand – central banks have loaned out 1/3 to 1/2 of their gold. The gold is gone. Panic could ensue if people realize that gold is the only safeguard of monetary value and that a large portion of the central banks’ gold has been sold.
The mountainous debt has reached historically high levels worldwide. This will place an onerous interest burden on the young generation and may be impossible to finance. It could result in panic or might be dealt with through inflation.
The current erosion of money is catastrophic for wage earners and retirees. The Middle Class is being squeezed. A billion people around the world live in poverty stricken areas. Soon, one out of every three city dwellers will live in slums. Such conditions will promote the spread of radicalism. Hate is growing.
The global economy will be in a Kondratieff winter over the next 10 years. Humanity has managed to overcome every crisis up to now, but given the current means of monetary degradation, it will not get through this crisis without serious consequences.

Political confusion is on the rise.
The geopolitical situation has never been so bad. A coup in the Kingdom of Saudi Arabia could, by itself, have a disastrous impact on the flow of oil and the global economy.
At this point, allow me to provide a quote from a speech given in Washington D.C. in 1948 by Congressman Howard Buffett, father of the most successful investor of all times, Warren Buffett:

“Because of our economic strength, the paper money disease here may take many years to run its course. But we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife. That was the way out for the paper-money economy of Hitler and others... For if human liberty is to survive in America, we must win the battle to restore honest money. There is no more important challenge facing us than this issue – the restoration of your freedom to secure gold in exchange for the fruits of your labors.”

Ladies and Gentlemen, these are the subtle relationships between freedom, money, intellect, war, peace and gold.

Ladies and Gentlemen, I believe I have now provided sufficient reasons for the necessity of a healthy, stable currency based on gold. It is the only solution! We must go back to honest money, back to the gold standard.

Or as Otto von Habsburg once said: “Ethics and morality are still the safest approach to take in all fields

In conclusion, I will therefore allow two other gentlemen with a renowned grasp of world affairs to speak out on the topic of a gold-backed currency. The internationally recognized investment consultant Harry Schultz has given us one of the best definitions of the gold standard: Standards: (gold and other)

I have written several times in the last 36 years and I want to restate this principle with force: I am pro-gold regardless of the price! I don’t fight for gold in order to make a profit on gold shares, bars or coins! Gold is important for far more important reasons and I would be embarrassed to promote gold only for monetary gain. Gold is the essential linchpin for our individual (not group or nation) freedom. Gold belongs to the monetary system as a governing factor. We belong back on the gold standard. I used to compromise and say a quasi-gold standard will probably do, a modified Bretton Woods version. And that may be what will evolve, but in my view we should fight for a pure gold standard, the old-fashioned form, because it worked! And not just for fiscal reasons! It forced nations to limit their debt, spending and socialist schemes, which meant sound behavioral habits were formed around those limitations, and those habits rubbed off on everyone. People were more honest, moral, decent, kind, because the system was honest and moral. Cause and effect. Today we have cause and effect of the opposite standard: no limits on what governments can do, control, dictate; no limit on government debt, welfare or socialist schemes. There is no governor on the government.

This habit rubbed off on the public, causing them to go into debt, lose respect for the system and morality. The effect brings us more divorce, fraud, crime, illegitimate births, broken homes. When the money of any country loses its base/backing there is no standard for any behavior. Money sets a standard that spreads into every area of human activity. No paper money backing, no morality. That is why gold coin money worked so well and why the US moved into paper money very slowly, carefully, keeping the paper dollars backed 100% by gold. But slowly, like slicing a sausage, that backing was removed in stages, ‘til now there is none. The effect of this cause is all around us. Violent films reflect violent society reflect no respect throughout society. Layer by layer, we are corrupted when money loses certainty. Today’s stock market bubble is part of the scene as will be tomorrow’s mega-crash and mega-recession. Big Brother was made possible through the absence of automatic controls and loss of individual freedom via non-convertible currency. So, pass the word. Fight for gold. Not for profits, though they are helpful and help us fight for individual freedom, but for a future that returns to sanity in various standards. If we have a gold standard we get a golden human standard! The two are intertwined. They are the ultimate cause and effect. Gold blesses.”

Charles de Gaulle, President of France, gave his country the greatest gift he could offer: He restored France’s confidence.

On 4 February 1965, he said::

“The time has come to establish the international monetary system on an unquestionable basis that does not bear the stamp of any country in particular. On what basis? Truly, it is hard to imagine that it could be any other standard than gold. Yes, gold whose nature does not alter, which may be formed equally into lingots, bars or coins; which has no nationality and which has, eternally and universally, been regarded as the unalterable currency par excellence.”

I thank you!

Ferdinand Lips

Speech given by Ferdinand Lips
at the University of St. Gallen on 24 June 2004 as part of
the International Finance & Security lecture series

Gold. People either love it or hate it. There aren't many who feel ambivalent toward it. Unfortunately, gold is deeply misunderstood by investors, and that misunderstanding is hurting their portfolio returns. Many in the investment community trot out the old myths about gold: that it is a bad investment; that it is very risky; that it is not a good inflation hedge. But is there anything behind these assertions? If investors take the time to examine the facts, these commonly held beliefs simply do not stand up to scrutiny. It is precisely because these myths have become so prevalent that gold is still undervalued. Once the general public realizes these beliefs are not valid, the price of gold will be much higher.

MYTH 1:
GOLD IS A BAD INVESTMENT
A frequently cited argument is that since it peaked at $850 per ounce (all amounts in U.S. dollars unless otherwise noted) in 1980, gold's return has been poor compared to the major stock indices. However, that peak price was a short-lived, single-day aberration. Investors who avoided the mania phase and purchased gold one year earlier in 1979 at its average price of $306 per ounce also avoided any significant losses during the subsequent bear market. The performance of different asset classes varies from cycle to cycle. The previous cycle from 1968 to 1980 saw the Dow Jones Industrial Average remain flat with significant volatility, while gold increased by 2,300 percent. In the current cycle, which began in 2002, gold has posted a compounded return of 14 percent, while 15 of the 30 Dow components are negative.

Many studies compare gold to equities over peri-ods as far back as the 1700s. But these studies ignore the fact that gold's price was fixed until 1971. Prior to that time, gold was money and not an investment. Interestingly, virtually none of the stocks listed in the 1700s still exist today. Instead, the returns of major indices such as the Dow are boosted by the removal of bankrupt companies and poor performers, which are replaced by high performers. Three of the 30 companies that made up the Dow in 2000 have since been replaced.

From a strategic portfolio allocation viewpoint it is easy to see why Ibbotson Associates, one of the world's most highly regarded asset allocation specialists, determined that holding between 7.1 percent and 15.7 percent in precious metals bullion reduces portfolio volatility and improves returns.

MYTH 2:
GOLD IS NOT A GOOD INFLATION HEDGE
The arguments against gold as an inflation hedge are usually based on calculations arising from the intra-day price spike in 1980. While gold did not keep up to inflation using daily prices from 1980 to 2002, the annual average gold price has kept up extremely well since 1971, when the price was no longer fixed, Figure 1. During the same timeframe, the U.S. dollar lost about 80 percent of its purchasing power. In fact, all the world's major currencies have depreciated by significant amounts due to continuous excessive increases in the money supply. The impact of this devaluation on real returns is significant.

Conversely, gold has not only maintained its purchasing power but increased it against all major currencies. It will continue to do so as long as the world's central banks keep increasing the money supply by a greater percentage than their country's GDP growth.



More importantly, gold maintains its purchasing power not only during inflationary periods, but also during deflationary periods. An extensive study, published by Roy Jastram, analyzed the purchasing power of gold in England and the U.S. from 1560 to 1976. Jastram concluded that gold held its value remarkably well over time. The purchasing power of gold and precious metals actually increases during deflationary periods because other assets decline in price by a much greater amount than precious metals do.

As central banks continue to accelerate the pace at which money is printed, inflation will increase, and the purchasing power of paper currencies will decline. This will result in more and more astute investors fleeing to the safety of gold. As a con-sequence, gold's price should rise far in excess of the Consumer Price Index and the true inflation rate. In order to protect portfolios from rising inflation, Wainwright Economics concluded that an all-bond portfolio would need an 18 percent allocation to gold, silver and platinum, while an all-equity portfolio would need 40 percent just to stay ahead of inflation.

MYTH 3:
GOLD IS A RISKY INVESTMENT
Risk means different things to different investors. A pension fund may perceive risk as a failure to meet its liabilities, whereas an asset manager may view risk as a failure to meet its benchmark. Most investors, however, associate risk with a loss of their capital or underperformance of their invest-ments in comparison to their expectations. "Risk comes from not knowing what you are doing," according to Warren Buffett.

There are many kinds of risk: currency risk, default risk, market risk, inflation risk, systemic risk, political risk, interest rate risk and liquidity risk. While all of these apply to financial assets, many do not apply to gold bullion. Physical bullion is not subject to default risk, liquidity risk, political risk, inflation risk or interest rate risk. In the rare circumstance of strong currencies, gold may be subject to short-term currency risk and, at times, to market risk. Unlike financial assets, however, gold bullion cannot decline to zero. Gold is the only asset that can protect wealth from non-diversifiable systemic risk.

Volatility or standard deviation are often used as measures of risk, and gold is considered to be quite volatile. However, when annual compounded returns are plotted against standard deviation, the individual Dow stocks are all more volatile than gold, and all but two of the Dow stocks had poorer performance than gold, silver, and platinum over the past eight years. Figure 2.



Returns are important, but even more important is to compare risk-adjusted returns. Clearly, an investment that has higher volatility may still be attractive if the returns are appropriately higher. Nobel prize-winning economist William Sharpe devised the most commonly used measure of risk-adjusted performance: the Sharpe Ratio. This ratio measures the amount of excess return per unit of volatility. The interpretation of the Sharpe Ratio is straightforward: the higher the ratio the better.

Bullion is unlikely to suffer underperformance risk in the near future. Demand for gold, silver and platinum is increasing for both commodity and monetary attributes, while annual mine production is declining. As the price of oil continues to rise due to production declines and increased demand, inflation will accelerate. As central banks increase money supply at accelerating rates, the purchasing power of currencies will continue to decline. As these two major trends interact with each other, the price of gold will continue to rise.

MYTH 4:
GOLD DOES NOT PAY DIVIDENDS OR INTEREST
The Bank of England used this argument to justify selling half the country's gold holdings at the bottom of the market in 1998. It wanted a "safe" investment, one that would generate interest, and it chose U.S. treasury bills. The gold was sold for under $300 per ounce. In the months following that sale, the price of gold tripled, and the value of the U.S. dollar lost 30 percent against the British pound. The currency exchange losses plus the opportunity cost resulted in billions of pounds in losses, significantly offsetting any interest income the Bank might have received.

The same is true for bond investors. In an infla-tionary environment, the "real" or inflation-ad-justed interest rate they receive is often negative. Gold, like any other asset that sits in a vault, will not earn interest or dividends, but neither is it at risk. No asset class generates income unless you give up possession and take the risk of not getting it back. However, gold's capital appreciation is many times greater than the prevailing interest yields, while not being subject to any of the risks that interest-bearing investments are subject to.

MYTH 5:
GOLD IS AN ARCHAIC RELIC
Gold is often referred to as an archaic relic with no monetary role in today's modern digital society. Several facts contradict this view. The world's central banks still hold 29,000 tonnes of gold in their reserves. Gold, silver and platinum trade on the currency desks - not the commodity desks - of the banks and brokerage houses. The turnover rate of physical gold bullion, between the nine members of the London Bullion Marketing Association, currently averages $24 billion per day. Trading volume is estimated at seven to ten times that amount. Clearly, gold is still trading in its traditional role as an alternative currency.

MYTH 6:
MINING STOCKS ARE BETTER INVESTMENTS THAN BULLION
While mining stocks can generate impressive returns during an uptrend in precious metals prices, they do not always outperform bullion. It is unfair to compare junior mining companies to bullion because of the huge disparity in risk. While successful junior miners can generate impressive returns, over 90 percent of precious metals discoveries never become productive mines. A better comparison would be the larger producers. While mining stocks have outperformed bullion during the early stages of this bull market, gold bullion has outperformed the major mining indexes since March 2007. Figure 3.

Mining stocks tend to be significantly more volatile and risky than bullion, and during sharp market declines they tend to follow the broad equity markets downwards -even if the price of the metal is rising. During the late stages of the bull market of the 1970's, mining stocks underperformed bullion. In order to adequately compensate investors for the higher risk, mining stocks would have to outperform bullion.



CONCLUSION
Investors who take the time to carefully evaluate the benefits of bullion will realize that these com-monly held myths do not hold up to scrutiny. Those investors stand to reap significant rewards. Investors who believe these myths are missing out on the opportunity to add an asset class that diversifies portfolios, protects against inflation, and may provide better returns than traditional assets, such as stocks and bonds.

Under a worst-case scenario of systemic risk, bullion may be the only asset that holds its value. As these myths are dispelled and the price of bullion rises, as many mainstream analysts predict, informed investors will benefit from purchasing bullion at today's undervalued prices.

When the public at large becomes fully educated with respect to precious metals, it will bid up the price. Considering that global financial assets are estimated at over $180 trillion, while total global above-ground gold is only $4 trillion (and above-ground bullion is less than $1.5 trillion), a massive wealth transfer event is likely to occur. It is inter-esting to note that even a 10 percent switch from financial assets to gold would result in a 450 percent to 1,200 percent increase in the gold price.

From Le Metropole Cafe


For several years now I have believed that the U.S. Dollar would fail and be replaced with a "new system". I went out to supper last night and asked for the bill, the waiter went to get it and I burst out laughing. For some reason I began thinking about how stupid it is to have a system where someone gives you a product or service and you give them a piece of paper. The local currency as are all paper currencies, is not backed by anything. Yes the government has a couple $ Billion held as currency reserves but of course financially the US is "the worst in show" and Dollar reserves should now be thought of as an anvil around ones neck.

The links posted above displays further posturing for the change coming to our financial system. Mr. Putin and other global leaders have come to the same conclusions, ie. why do they send goods to the US or other nations and accept "pieces of paper" in the form of Dollar credits? This reformation of Bretton Woods will also encompass the ideology of the Basel II agreement. In other words the world is going to demand more clarity of balance sheets, more banking reserves [which means less leverage], and in general a return to a more conservative financial stance similar to days past.

Recently we have been hearing of ".899" Gold turning up all over the world. Believe it or not, Gold has its own fingerprint or "DNA" so to speak. The speculation is that this .899 Gold is actually metal received from the confiscation back in 1933. Back then the government made it illegal to hold Gold personally, recalled Gold coins and melted them into bars that were stored in West Point, N.Y.. If it turns out that this .899 Gold is in fact from West Point there will be hell to pay. Already on a global basis, Gold is becoming scarce and difficult to obtain physically. If the world perceives that coin melt Gold is being dishoarded we could witness a global panic into the metal. For over 60 years the US has been thought of as having the largest Gold holdings on the planet, can you imagine the ramifications if the world began to believe that we were selling Gold from the bottom of the barrel?

The real dilemma this is. The Dollar system has broken down and the world must move, but how? Foreigners have three choices, they can do nothing and watch the Dollar [and their own currencies] hyperinflate while trying to prevent credits, assets and markets from imploding. They can try to make a "currency basket" to replace the Dollar [which equates to a bunch of cripples leaning on a bunch of cripples]. Or they can figure out how big and how deep the "Dollar holes" are in their balance sheets and then they would compare the size of the holes to the amount of Gold they hold and simply mark the price up to to replace or fill the smoking Dollar holes.

I believe this third option is what will eventually happen. I think that global bankers will try to estimate how many Dollars have infested their systems, these will be more or less marked down and/or off. The Gold audits will begin and once they figure out at what level Gold must rise to offset these evaporated Dollar assets, credits and debts then.....walla! a new Gold price! We have fought against western efforts to suppress Gold and Silver for over 10 years now, I think it ironic that it will be governments that must remark their bullion to morph into the new financial system. This will not be a wind at our backs, it will be a category 5 hurricane that will effect a markup almost overnight.

Bullionmark's comment:

These comments are spot on. Interestingly back in 1990 or '91 about 1 month before the Soviet Union fell, gold with the Czar's stamp started turning up worldwide. The Soviets were dumping "unpure" Gold similar to the coin melt for use as hard currency. The same thing is now happening with the coin melt bars. The US is down to the bottom of the barrel! I expect a dramatic upward revaluation of gold and silver sooner rather than later. Could the G20 meeting on November 15th be the catalyst? Makes sense for an incoming President to get this big problem on the table before his inauguration on January 21st.

This article was first published in May of 1973 by the Foundation For Economic Education. It is as pertinent in today's world as it was then.

In 1944, as the world was recovering from the effects of World War II, the heads of state from over 100 countries met in Bretton Woods to create an international monetary system that would unite the western world, insure monetary stability, and facilitate international trade. Over the years since then the system has been plagued by dollar shortages and dollar "gluts"; chronic deficits and chronic surpluses; perpetual parity disequilibria, "hot money" capital flows, and currency depreciation. By 1968, a "two-tier" gold market was established in the midst of a gold crisis which, by 1971, culminated in the suspension of dollar convertibility together with a dollar devaluation against multilateral revaluations of most other major foreign currencies.

Bretton Woods is dead and an autopsy is called for to determine the cause of death. If meaningful international monetary reform is to follow, it is necessary to know what went wrong.

Fixed exchange rates, flexible rules.... Under the rules established by the Bretton Woods agreement, the gold values of a member nation's currency could be altered "as conditions warranted." This distinguishing feature of the Bretton Woods system exposed a drastic ideological departure from the gold standard.

Under the gold standard, no natural conditions would ever warrant a change in the gold value of a nation's currency. Under a pure gold standard, all the money in circulation would be either gold or claims to gold. Any paper money would be fully convertible into gold. There would be no difference between claims to gold and gold itself, since, if claims to gold circulated as money, the gold could not.

However, there are government-made conditions that could warrant a reduction in the gold value of a nation's currency. If governments have the power to artificially increase the claims to gold (e.g., dollars), they have the power to depreciate the value of the national monetary unit.

Bretton Woods was established with the intention of aiding governments in exercising their powers of inflationary finance. Government leaders knew that the gold standard prevented them from fully pursuing domestic goals that depended on deficit spending and prolonged, artificially induced "booms." They detested the gold standard for its fixed rules which brought adverse economic repercussions whenever they refused to adhere to them, and they detested flexible exchange rates that exposed the government's policy of currency depreciation.

The political temptations of artificially increasing the money supply in order to "stimulate the economy" prevailed against the gold standard and brought the beginning of a "new era": fixed exchange rates with flexible rules, the exact opposite of the gold standard.

No longer would politicians adhere to the discipline of the gold standard. No longer would they have to restrict their deficits or domestic money supplies. Government leaders would make their own rules and fix the nominal value of money by decree. And if "conditions warranted" a reduction in the nominal value of a nation's money, it was agreed that a nation could devalue up to 10 per cent after the formality of obtaining other nations' permission. This was called the "adjustable peg" system.

The great ideological distinction between the gold standard and the Bretton Woods system, then, is that the Bretton Woods system was ostensibly intended to stabilize exchange rates, but at the same time it anticipated that governments would not defend the value of their currencies. Worse, Bretton Woods institutionalized a method which allowed and condoned future currency depreciation.

Export or devalue: institutionalizing the devaluation bias....

Historically (and the Bretton Woods era was no exception) nations have seen fit to pursue a basically mercantilistic trade policy, i.e., a policy which maintains various regulations intended to produce more exports than imports.

The mercantilistic case is not a realistic one. For example, it would be impossible to develop a logical case advocating that all individuals should sell products and services at the same time. Obviously, some individuals must be consumers if there is to be a market for sellers.

There is no difference when it comes to nations trading in a world market. This is simply to say that not all nations can run trade surpluses at the same time.

An equally difficult case would be to try to convince some individuals that most of the money they receive from the sale of goods and services should be saved rather than spent on the consumption of goods. Yet this is the intent underlying all government policies that aim at increasing exports (sales) and restricting imports (consumption).

There is no logical reason why individuals should not be allowed to reduce their cash balances by buying goods from other nations if they believe it is to their benefit; that is what their cash balances are for. To penalize men or discourage them from importing by imposing licensing restrictions, capital controls, tariffs, or "import surcharges," only serves to limit the variety of their economic choices. This in turn only serves to reduce their standard of living. A nation's drive for export surpluses, together with its "protectionist" policies of restricting imports, leads to an increase in the domestic money supply. This influx of money, together with the money that governments feel they must artificially create in order to "stimulate the economy," leads to higher domestic wages and prices as more money chases fewer goods. These higher wages and prices create an illusion of prosperity, which explains the popularity of mercantilist-inflationist policies.

But higher domestic wages and prices lead to a dwindling trade surplus as a nation's goods become less competitive in world markets, and a dwindling trade surplus, unless corrected, eventually deteriorates into a trade deficit. This is the dilemma facing all governments that pursue the contradictory and self-defeating policies of mercantilism and inflationary finance.

Under a gold standard there is only one way to resolve this dilemma: stop artificially creating money, stop preventing money from leaving the country. The result would be a normal, self-correcting deflation — i.e., a contraction of the domestic money supply — which would lead to a fall in domestic prices and to equilibrium in that nation's balance of trade position.

But because governments hold an unwarranted fear of lower prices and favor higher prices that give the illusion of prosperity, the framers of Bretton Woods adopted a mechanism that would allow governments to inflate their currencies yet escape the process of a normal self-correcting deflation. By devaluing their currencies, governments could continue to inflate their domestic wages and prices while making their exports less expensive to the world.

The device of devaluation was established to allow nations to regain their competitive edge once their surplus deteriorated into deficit. Devaluation immediately lowers the price of a nation's exports, and in this way nations can more actively strive for export surpluses. Thus the framers of Bretton Woods found a way in which nations could continue both their drive for export surpluses and their domestic policies of inflation.

A nation would simply export its goods until its domestic inflation reduced or eliminated its trade surplus, then devalue. In this way the Bretton Woods system established an implicit code of conduct: export or devalue. It institutionalized a devaluation bias within the new international monetary system, which led to serious imbalances, ultimately resulting in hundreds of devaluations during the Bretton Woods era.

"Hot Money Blues."...

Because devaluations are completely arbitrary (at best mere guesswork), new problems arose in place of old ones. The problems centered around the pre-devaluation exchange rate: nations were committed to supporting the rate even when it was unrealistic.

Bright investors soon began to realize when a particular currency was overvalued and to shift their money from the weak currency to stronger ones. This caused further pressure on exchange rates and resulted in speculation — i.e., selling short on X currency, buying gold, or buying long on Y currency. Governments intervened in foreign exchange markets in order to preserve their unrealistic exchange rates, by accumulating massive amounts of unwanted weak currencies. But this could not continue for long.

Finally, when a government was forced to devalue, the action had repercussions on other currencies (particularly if a major currency were involved): it brought all other weak currencies under suspicion. This resulted in further devaluations as investors transferred their money into only the strongest currencies in anticipation of competitive devaluations and major currency realignments. This was called "hot money" and was attributed to speculators — not to currency-depreciating policies of governments.

Finally, under the Bretton Woods agreement, national currencies were not allowed to "float" and seek their own levels. The new "par value" of a currency was arbitrarily set by the IMF — and these were consistently either too high or too low. Like all forms of government price-fixing, the fixed exchange rate system was in perpetual disintegration. This resulted in further "hot money" flurries, further realignments of currencies, and an inherently unstable exchange rate system — the exact opposite of the goal intended by the framers of monetary reform at Bretton Woods.

The role of the dollar under Bretton Woods....

The role of the dollar under the Bretton Woods system was vastly different from that of other currencies. Because of the

United States' economic strength and Europe's economic weakness after World War II, the dollar was used by other governments as a reserve for their currencies. This meant the dollar was pegged to gold and supposedly committed to stability and convertibility. Thus the dollar was supposed to be "as good as gold," and therefore to be treated as a reserve asset just like gold.

There are several implications tied to the concept of a paper reserve currency. (1) Gold, the main reserve asset, was considered too limited in quantity to restore world liquidity or to provide sufficient wealth for rebuilding war-torn nations. (2) While gold could not be increased, a paper asset (U.S. dollars) could — consequently the reserves of the western world could be expanded. (3) Inflation could be implemented in a "more equitable" manner by an ever-increasing paper reserve. (4) A paper reserve currency "should not be devalued" yet it should be increased "as needed" to meet demand. This last blatant contradiction was the major factor in the disintegration of the IMF in later years.

Limited gold — unlimited dollars: a formula for disaster....

Since gold was limited, the vast majority of the assets on which foreign currencies were based to finance Europe's recovery was not gold but U.S. dollars — the second primary reserve asset. The demand for dollars came in two forms: (1) demand for foreign exchange to be used for importing goods, and (2) demand for reserve liquidity and replenishment.

The U.S. satisfied the demand for foreign exchange by inflating its currency and extending loans and gifts to Europe. These gifts and loans were used almost entirely to import goods from the U.S. Therefore, many of these dollars returned to the U.S. However, the demand for reserve liquidity and replenishment was met by continuing U.S. deficits that led to European "stockpiling" of dollars in the form of interest-bearing notes and demand deposit accounts. Demand for dollars between 1950 and 1957 continued and an excess of dollars began to build up in foreign central banks.

After 1957, and to this day, the foreign banks have been obliged to continue to take in dollars that were neither intended for imports nor needed for liquidity. This era has become known as the era of the dollar "glut."

Confidence versus liquidity — a two-tier tale....

During the 1960's the progressive supply and accumulation of dollars mounted and world central bankers found themselves confronted with a government-made monetary dilemma: the more dollar reserves they acquired, the more likely was the chance that their dollar surplus would depreciate in value. To state the problem another way, the more liquidity central bankers enjoyed, the less confidence they had in their most liquid asset — the dollar.

Gresham's Law prevailed and in 1968 central bankers and private speculators began to convert their dollars into gold. A gold crisis developed: the U.S. could not hope to convert the amount of dollars outstanding against its gold stock. A "two tier" gold market was set up to avert a dollar devaluation and the break-up of the International Monetary Fund (IMF), i.e., one free market for speculators and industrial users who would buy gold at the free market price, and an official market where governments would transact dealings at the pegged price of $35 per ounce. Finally in 1971, in a wave of "hot money" speculation, the U.S. was forced to devalue the dollar against gold and to suspend its convertibility.

Gold's limitations: a blessing in disguise....

The demise of Bretton Woods can be traced directly to an excessive supply of dollars. The anti-gold principles of inflationary finance practiced diligently under the Bretton Woods era, turned into a give-and-take fiasco: the U.S. became a faucet of wealth, supplying dollars on request to every corner of the world, while over a hundred countries drained the U.S. in the name of world liquidity and "reparations."

The result was a flood of dollars that swept over the world producing world inflation, numerous recessions, hundreds of currency realignments, disruptive trade, a gold crisis, and the final international monetary crisis that has left the world precariously groping for stop-gap measures to resume monetary and trade transactions.

Clearly the Bretton Woods vision of a stable and ever-expanding reserve currency was doomed from the onset. Had the governments limited their reserves to gold, the kind of monetary and credit expansion under Bretton Woods — and all of its disastrous consequences — could never have occurred. Gold places objective limits on monetary and credit expansion, and this in itself was enough for the framers of Bretton Woods to condemn it.

It is no accident that the kinds of limitations gold imposes on the extension of money, credit, and reserves is just what the world is crying for today in light of the "dollar glut." As a reserve currency, the dollar was supposed to be as good as gold. But monetary authorities never stopped to ask "what makes gold so good?" The answer is that gold is limited — the very point for which it was condemned.

The refusal of government leaders to adhere to the rules of the gold standard and their desire to create a monetary system based on their own arbitrary rules of whim and decree, failed as it has always failed. Once again, history has proved that a mixture of government whim with the laws of economics is not a prescription to cure world problems: it has always been and will always be a formula for world chaos.

U.S. balance of payments problems....

U.S. balance of payments deficits began in the early 1950's and have not ceased to this day. The cause of these incessant deficits can be traced to monetary and trade decisions made at the inception of Bretton Woods and reinforced throughout its existence.

The first straw....

When it was decided that the U.S. was to act as world banker and benefactor to those countries in need of help after World War II, it is doubtful that anyone really believed the U.S. would profit as world banker. On the contrary, the consensus was that war-torn nations needed more money than they could afford to pay back. It was argued that the

U.S. could afford to (and therefore should) extend foreign aid (gifts), loans at below market rates of interest (gifts), and military protection (gifts), to those countries in need.

What must be remembered is the precedent for this decision: the U.S. was committed to protect and finance the western world by virtue of its great strength and an ever-expanding stream of dollars.

It was assumed that this money would return to the U.S. via import demand, and in fact, during the years 1946 to 1949 most of it did, resulting in fantastic U.S. surpluses.

On selling one's cake and wanting it too....

But during the years 1950 to 1957, a turn of events took place. Europe by design curtailed its already abundant imports and concentrated on replenishing its national reserves. With conscious intent, the U.S. continued to supply the world with dollars through deliberate balance of payments deficits to accommodate Europe's demand for reserve replenishment. The refusal of the foreign governments to allow their citizens to use their constantly rising dollar surpluses for U.S. goods (by imposing trade restrictions) led to the dollar glut of the 1960's.

The blame for the chronic surpluses of foreign governments and chronic deficits of the U.S. must be shared. While the U.S. can be blamed for financial irresponsibility, the surplus countries must be blamed for economic irresponsibility. The U.S. could have stopped its deficits, but surplus-ridden countries could have stopped penalizing their citizens and discouraging them from importing. Instead, they decided to increase dollar reserves (dollars that for the most part were given or loaned to them) and to either exchange them for gold or hold them in the form of interest-bearing notes and accounts.

By accumulating excessive amounts of dollars that they refused to use, surplus countries helped foster U.S. deficits: some nations' chronic surpluses must mean that other nations are running deficits. The irony of the decision to run an intentional chronic surplus is that the purpose of selling goods is to gain satisfaction as an eventual consumer. The drive for both surplus reserves and surplus exports, and the refusal to consume goods with the money received, implies that a nation expects to sell a good and somehow derive satisfaction from it after it's gone.

The illusion of the last straw....

The increasing demand for dollars led the U.S. government and the Federal Reserve System to increase the amount of dollars and thus to depreciate the purchasing power of the dollar. As confidence disappeared in the dollar's ability to continue its role as a reserve currency, "hot money" flurries soon appeared. Thus, by the late 60's and early 70's, an enormous amount of dollars accumulated against a dwindling supply of U.S. gold. This caused both "runs" on the U.S. gold stock and "flights" from the dollar into stronger or undervalued currencies.

This speculative capital outflow caused the U.S. balance of payments deficit to increase in a pyramiding fashion. Finally, the conspicuously low amount of U.S. gold reserves, the disparity between currencies and interest rates, and a dwindling U.S. trade surplus, aroused a well-founded suspicion that the dollar might be devalued — and that other, stronger currencies might appreciate in value.

This justifiable suspicion then caused even greater U.S. capital outflows which led to even greater U.S. deficits. This was the "straw that broke the camel's back." But it was the haystack of straws before it, beginning with the first straw — i.e., the first U.S. inflation-financed gift abroad — that inexorably led to the progression of U.S. balance of payments deficits, international monetary chaos, and the disintegration of the Bretton Woods system.

The high price of gifts....

When the U.S. embarked on a policy of inflation-financed world loans and gifts, it surrendered all hopes of attaining a balance of payments equilibrium for itself or for the world. Between the years 1946 and 1969, the U.S. as world banker extended some $83 billion in grants and loans. Since 1958 some $95 billion has left the country. Most of these dollars were non-market transactions motivated by political and military considerations.

While many economists believe it is necessary for the U.S. to run trade surpluses to correct its balance of payments deficits, to expect normal exports to rise to the level of these abnormal capital outflows only makes sense if one stands on one's head — it is not a logical position to take.

These grants should never have been given to foreign nations. It was an economically unsound move and the grants were extended at the expense of the American taxpayers. Further, any additional loans and gifts made by the U.S. to satisfy nations who demand "free" military protection, such as Europe and Japan have been demanding for years, or "reparations" such as those now being demanded by North and South Vietnam, will only lead to further capital outflows... and this at a time when the world is plagued by depreciating dollar reserves and continuing U.S. deficits — the very cause of the international monetary crises which led to the demise of Bretton Woods.

Those who argue that the U.S. balance of payments deficits were caused by insufficient trade surpluses blind themselves to the fact that the U.S. has been running continuous trade surpluses for almost a century. They refuse to place the blame for U.S. balance of payments deficits where it belongs: on the U.S. government's inflationary policies of give-away finance.

On domestic dreams and international nightmares....

The notion that governments can divorce domestic inflation from international economics is fallacious. There is no domestic-international dichotomy in economic theory. There is a causal relationship between all economic activity, thus there can be no international immunity from unsound domestic policies and no domestic immunity from unsound international policies.

To the degree that nations practice sound domestic economic and monetary policies, the result will be stable economic progress in both the domestic and international economies. To the degree that domestic policies are unsound, distortions will occur that will be destabilizing and inhibit economic progress both domestically and internationally — the results being counter-productive in both areas. Bretton Woods was set up to accommodate various nations' domestic dreams. The dreams of post-war prosperity were financed by inflationary schemes that were incompatible with any sound international monetary standard. The Bretton Woods agreement established the contradictory system of fixed exchange rates with a built-in devaluation mechanism, in order to avert the monetary repercussions of not adhering to the exchange rates they fixed. The framers of Bretton Woods knew that governments had no intention of preserving the value of their currencies, that, in fact, they planned to deficit spend and inflate in order to pay for their domestic economic programs.

No international monetary system — not the gold standard nor any form of standard less fiat system, nor any combination thereof — can insure stability given unsound domestic policies. The fundamental economic issue today is not the kind of international monetary system that will replace the Bretton Woods system, but whether the domestic policies of the nations involved will permit any international monetary system to last. The pre-condition of any lasting monetary system is that it has integrity.

A monetary system that has integrity means a monetary system that is protected from government-created inflation, i.e., arbitrary and artificial increases in the supply of money and credit.

It is a moral indictment against today's political leaders and the public at large that the chances for a monetary system that has integrity are almost non-existent. For before a nation can have a monetary system of integrity, it must end all policies of inflationary finance. And this means that all those dreams a nation cannot afford must end.

The public has bought the politician's claim that they can get something for nothing; that all a government need do is print up money to pay for programs that satisfy national dreams. But there is no such thing as a free lunch — someone must inevitably pay the price of that lunch.

And so it is with domestic dreams.

The price for indulging in domestic dreams through government "something for nothing" programs is domestic inflation and international monetary crises with all their tragic and disruptive consequences.

If domestic dreams of nations today are pursued by resorting to the insidious schemes of inflationary finance, they will inevitably become the international nightmares of tomorrow.

This was the lesson learned from the Bretton Woods system. May it rest in peace!