Global Financial Crisis for Dummies: Why the Abandonment of the Gold Standard is Responsible for the World's Sovereign Debt Crises

smartknowledgeu's picture

The below article is an extremely well written, thoughtful and lucid article written by Hugo Salinas Price, a Mexican businessman that has argued for the necessity of Mexico to return silver to a monetary status as well as returning to the use of a gold standard. I am submitting this important piece for those that have been re-educated at the world's top economic schools and consequently disseminate thoughtless propaganda regarding the reasons for massive unemployment worldwide and today's global sovereign debt crises. I am also posting this article for the unthinkers out there that fulfill the role of the "loyal dutiful wife" (this applies to both men and women out there) and always believe only what they are instructed to believe by bankers and governments. I consider the below a MUST READ for anyone that wishes to avoid wealth destruction within the next five years as the fiat currency game of musical chairs will undoubtedly result in the world's citizens left as the odd man out, standing without a chair, when the music ends.


The Gold Standard: Generator and Protector of Jobs, by Hugo Salinas Price

 

The abandonment of the gold standard in 1971 is closely tied
to the massive unemployment the industrialized world has suffered in recent
years; Mexico, even with a lower level of industrialization than the developed
countries, has also lost jobs due to the closing of industries; in recent
years, the creation of new jobs in productive activities has been anemic at
best.

The world’s financial press, in which leading economists and
analysts publish their work, never examines the relationship between the abandonment
of the gold standard and unemployment, de-industrialization, and the huge
chronic export deficits of the Western world powers. Might it be due to
ignorance? We are reluctant to think so, given that the articles appearing in
the world’s leading financial publications are written by quite intelligent
analysts. Rather, in our opinion, it is an act of self-censorship to avoid
incurring the displeasure of the important financial and geopolitical interests
that are behind the financial press.

In this article we discuss the relationship between loss of
the gold standard and the present financial chaos, which is accompanied by
severe “structural imbalances” between the historically dominant industrial
powers and their new rivals in Asia.

 

World trade before 1971

 

From the end of World War II through the 1960s, all
well-governed nations in the world sought to maintain a constant balance
between their exports and imports. They all wanted to maintain a situation
where they exported more than they imported, so that they could accumulate
growing Treasury reserves of gold, or in its defect dollars, which, under the
terms of the United States (US) promise in the Bretton Woods Agreements of
1944, could be redeemed by any Central Bank that requested gold in exchange for
its dollars.

To be precise, we cannot fail to mention one exception. The
exception to the rule was none other than the US. All well-governed countries
sought to export more than they imported, except the US.

The US was not overly concerned with maintaining a balance
between exports and imports, because – according to Bretton Woods – the US
could pay its export deficits by the simple expedient of sending more dollars
to pay its creditors. As the sole source of dollars, the US had a clear
advantage over the rest of the world; they could pay their debts in
(redeemable) dollars that they themselves printed.

Economists of the day warned of the danger of this practice,
which resulted in a constant loss of American gold. From over 20,000 tons at
the end of World War II, US gold reserves dropped year by year as certain
countries, notably France, insisted on redeeming their dollars for gold at a
rate of 35 dollars per ounce of gold. France incurred intense displeasure in
Washington and New York due to its demands for gold in exchange for dollars;
some analysts attribute the unrest in France in the spring of 1968 to covert
operations by the US intelligence services, in a show of America’s disapproval
of the behavior of France, led at the time by General Charles de Gaulle.

The US did nothing to slow the loss of gold. In the early
months of 1971, Henry Hazlitt, a solid classical economist, predicted that the
dollar would have to be devalued; he said it would be necessary to increase the
number of dollars that would be needed to obtain an ounce of gold from the
United States Treasury. Only months after his warning, the dam burst, and in
August 1971 the US was forced to devalue its currency, because the amount of
gold in its reserves had fallen to a dangerous level. (Today, many doubt that
the US has the 8,000 tons of gold it claims to have in its vaults at Fort Knox
and the US Military Academy at West Point, N.Y.)

What Henry Hazlitt never imagined was that instead of
devaluing the currency – the recommendation of Paul Samuelson, Nobel Prize
Winner in Economics, published the week before August 15, 1971 – President
Nixon took the advice of Milton Friedman and declared that from that time
forward the US would no longer redeem dollars held by the world’s central banks
at any price. The US unilaterally violated the terms of Bretton Woods. In
effect, it was actually financial bankruptcy.

Since then, all world trade – or most of it, as the euro,
the pound sterling, and to a lesser extent the yen all compete with the dollar
– is conducted using dollars that are nothing more than fiat money, fake money.
Because all the world’s other currencies were bound to gold through the dollar,
the immediate consequence was that simultaneously they also became fiat money,
fake money with no backing.

 

Consequences of abandoning the gold standard

 

The consequences of that fateful day have overthrown all
order and harmony in economic relations among the nations of the world, while
facilitating and expediting the global expansion of credit because part of the
dollars exported by the US ended up in the reserves of Central Banks around the
world.

Countries began to accumulate dollars as the expansion of
credit in the US advanced inexorably, now free of the restraint formerly
imposed by Bretton Woods. The rest of the world was forced to accumulate
dollars in reserves, because having insufficient dollar reserves, or having
reserves that did not grow, or worse, having falling reserves, was a clear sign
for monetary speculators to attack a country’s currency and destroy it with
devaluation.

As the loss of gold ceased to be a limiting factor, the last
restrictions on the expansion of credit were stripped away. A heavy flow of
dollars to all parts of the world spurred the expansion of global credit, which
did not stop until 2007. The international banking elite always strive to
obtain greater profits and to that end always seek to expand credit. Starting
in 1971, freed of the restraint of being required to pay international accounts
in gold, or with dollars redeemable for gold, the constant unfettered creation
of credit and still more credit ensued. It was boom time in the US.

The US, which paid the rest of the world with its own
irredeemable dollars of no intrinsic value, lauded the adoption of “free trade”
and “globalization”. The US could buy whatever it wanted, anywhere in the
world, in any quantity, and at any price. Starting in the 1990s, its export
deficits became alarming, but nothing was done to reduce them; on the contrary,
they grew year by year.

Mexico, following the US example, joined NAFTA – the North
American Free Trade Association. Down with import tariffs! Free trade with the
world! The new vision offered the enthralling, seductive picture of a
globalized world without borders, where everyone could buy and sell where they
liked, with no limits. The 90’s were years of unbridled optimism for
globalization!

Free Trade is unquestionably beneficial for humanity at
large. It is good to be able to buy goods where they are cheapest; some countries
enjoy conditions that favor them in production of certain things; each country
should produce those things in which it has an advantage over other countries.
Thus, the whole world can benefit from the good things each country has to
offer. It is an appealing and sound doctrine, but… there is a crucial catch:
the doctrine of Free Trade was conceived for a world where the sole means of
payment was gold. When the doctrines of “Free Trade” and the “Comparative
Advantages of Nations” were developed, the economists of the day could not
imagine a world that did not use gold, but instead relied on a fiat money that
could be created at will by a single country.

The “globalization” of the 1980s and 1990s and to date is
based on the ideas of “Free Trade”. HOWEVER, IN THE ABSENCE OF THE GOLD STANDARD THAT EXISTED WHEN THE DOCTRINE WAS CONCEIVED, "GLOBALIZATION" HAD COMPLETELY DESTRUCTIVE RESULTS, which have caused the de-industrialization of
the West and the rise to power of Asia. [JS Kim's Editorial Note: Again, though Western bankers are responsible for the downfall of economies in Europe and the US, they cleverly foster antagonism against China and its "strong yuan" policy as the reason for the downfall of Western economies though Western bankers are entirely to blame. This again is an example of the clever game of blaming foreigners that they use to distract people's attention away from the true culprits of today's crisis to tie up and waste people's energies against the false enemy of immigrants and foreigners. The Banksters' goal is to keep people's energies focused on the symptoms and to heap blame on undeserving parties to prevent people from understanding the cause of the symptoms.]

In the decades prior to 2007 a massive fleet of cargo ships
was created, which sailed for the US and Europe – the West in general, Mexico
included – bearing all kinds of inexpensive, quality products made  in
Asia. The flood was so great that local factories in the Western World were forced
to move to Asia, to employ cheaper labor and continue to sell their products in
the West.

My readers will know how many industries, large and small,
have ceased to exist in the US and the West in general, because Chinese
competition killed them. They will know as well how hard it is to find a
product that can be produced at a profit in the developed countries. It is very
difficult to find a niche for any product to be manufactured locally. The
flight of factories to Asia to take advantage of lower wages caused
unemployment where local factories were closed. For the same reason job
creation is slow or non-existent.

A taxi driver in Barcelona told us: “Spain is a service
economy. Industry is no longer our foundation. If tourists stop coming, we’ll
die.” By the same token, it has been said of Greece: “It produces olive oil and
tourism, and nothing more.” The US, industrial colossus of the post-war world,
has been de-industrialized. Now, what are developed countries to do to create
jobs? [JS Kim's Editorial Note: Again, the unemployment issue is another example of how politicians and bankers once again distract the people from their culpability in this matter by  blaming the loss of jobs on immigrants when it is the BANKERS and their implementation of unsound money that has created the problem of massive unemployment around the world today. Kick all the immigrants out of all Western countries and all Western countries' job situations may improve temporarily, but the unemployment problem will rear its ugly head not long after, as long as we accept fiat currencies as the means of purchasing goods and services.]

 

Diagnosis of the evils of de-industrialization and
unemployment


These evils appeared because gold was eliminated as a) a
constraint on the expansion of credit and the creation of money, and b) the
only form of payment of international debt.

Under the gold standard all players in international trade
knew that it was only possible to sell to a country that sold something else in
turn. It was not possible to buy from a country that did not buy in turn. Trade
was naturally balanced by this restriction. The “structural imbalances” so
commonplace today were unheard of.

For example, in 1900, Mexico could export coffee to Germany
because Germany, in turn, exported machinery to Mexico. Germany could buy
coffee from Mexico because Mexico, in turn, bought machinery from Germany. Each
transaction was denominated in gold, and as a result there was a balance based
on an economic reality. Because there was balance in world commercial
relationships, a relatively small amount of gold sufficed to adjust the
international balance. The world financial center which acted as a “Global
Clearing House” was London. A few hundred tons of gold were sufficient to meet
the needs of that Clearing House. For further reading on the function of London
as a clearing centre for world commerce, see “Real Bills” and associated
articles by Antal E. Fekete at www.professorfekete.com

Another example: In 1930, the US could sell very little to
China, because the Chinese were poor and lacked purchasing power. Because the
US sold very little to China, at the same time it could buy very little from
China. Although prices of Chinese products were very low, the US could not buy
much from China, because China did not buy from the US – China was poor and
could not afford American products. Thus, trade between China and the US was
balanced by the need to pay the balance of their transactions in gold. Balance
was imperative. There was no chance of “structural imbalance”.

Under Free Trade with the gold standard, the great majority
of transactions did not require movement of gold to complete the exchange. The
goods exchanged paid for each other. Only small remainders had to be paid in
gold. Consequently, international trade was limited by the volume of mutual
purchases between parties; for example, Chinese silk paid for imports of
American machinery, and vice-versa.

The gold standard imposed order and harmony. If President
Nixon had not “closed the gold window” in 1971, the world would be radically
different today. China would have taken a century or more to reach its present
level. China could not buy much from the US, because it was poor;
therefore, China could not sell much to the US.

 

All this changed radically with the abolition of the gold
standard.


Everything changed because the United States, having removed
gold from the world monetary system, could “pay” everything in dollars, and
without the gold standard as a limiting institution, it could print dollars ad
libitum - without limit. Thus, in the 1970s the United States started to buy
huge amounts of high quality products from Japan, while the Japanese boasted:
“Japan sells; Japan does not buy.” A SITUATION THAT WAS IMPOSSIBLE UNDER THE GOLD STANDARD BECOME PERFECTLY POSSIBLE UNDER THE FIAT DOLLAR STANDARD. The
Japanese became gigantic producers, their country an island transformed into a
factory. Japan accumulated vast reserves of dollars sent from the US in
exchange for Japanese products. This in turn triggered the de-industrialization
of the US.

Take for example the US manufacturers of T.V. Some of the
famous US factories that built TV receivers by the millions were “Philco”,
“Admiral”, “Zenith”, and “Motorola”. The Japanese had better and cheaper
products, and since the abandonment of the gold standard allowed Japan to sell
without buying in turn, and allowed the US to buy without selling in turn, the
result was that all the huge factories producing these TV’s in the US were
closed down. That’s how “going off gold” closed down US industry.

Unlimited purchases from Japan flowed to the US and
the world, because they were paid in dollars, which could be created in
unlimited quantities. The balance the gold standard had imposed disappeared and
imbalance took its place.

After 1971, the US embarked on a protracted, large-scale
expansion of credit. As the nation was de-industrialized and high-paying jobs
in industry disappeared, a lack of disposable income for the population was
replaced with easy and cheap credit, to conceal the stagnation in per capita
income. Consumer credit drove imports from Asia and furthered de-industrialization
even more. The great expansion of American credit was made possible because the
gold standard, which restrained the expansion of credit by the banking system,
had been abandoned. It is no coincidence that some analysts have observed that
in real terms, American workers have had no real increase in their income since
1970.

All mainstream economists consider the elimination of the
gold standard perfectly acceptable. They still do not see, or do not want to
see, that the “Law of Unforeseen Consequences” is at work: the enormous
advantage the US gained by being able to pay unlimited amounts in irredeemable
dollars has become the fatal cause of the industrial destruction of the US –
and of the West in general. A Mexican saying applies: en el pecado llevas la penitencia
– “sin brings with it its own punishment”.

 

The current malaise: financial crisis, industrial crisis,
crisis of unemployment


Today the situation is far worse. China, with a population
of 1.3 billion, has become a formidable power. No one can compete with China in
price. China sells vast quantities of goods to the rest of the world, without
the rest of the world having any chance of selling similar quantities to China,
and China can do so, because today trade deficits are “paid” not in gold, but in
dollars or euros or pounds sterling or yen, which will never be scarce: they
are created at will by the USA, the European Central Bank, the Bank of England,
or the Bank of Japan.

A fearful monster has been created as a consequence of the
elimination of the gold standard, which imposed a limit: “You can only sell to
those who sell to you; you can only buy from those who buy from you.” This
limit no longer applies; everything is disarray, inequality, imbalance;
“structural imbalance” prevails because we no longer have the gold standard.

The credit expansion boom has ended, and in its place we
have a global financial crisis.  Today the problem of “structural
imbalance” and the de-industrialization and unemployment it has produced in
formerly industrialized countries acquires greater relevance with every passing
day. What is to be done with the masses of jobless men and women? No one knows
the answer, because the answer is not acceptable to the thinkers of today: the
correction of “structural imbalances” and re-industrialization, in other words
the creation of new jobs, lies in restoring the gold standard worldwide.

The “globalization” so highly praised by the financial press
in recent years, has become the worst imaginable nightmare. [JS Kim's editorial note: Again, this is another instance in which bankers used one of their tools in their toolkit, the paid-off mass media, to disseminate their lies that globalization was good for all citizens of the world, when in reality, globalization as the bankers implemented it, harmed nearly everyone and benefited only them.] It is no longer
possible to support the unemployed with government handouts. The Sovereign
State is close to bankruptcy. Thus, nature takes its revenge on those who dared
violate its laws by seeking to impose false money on the world.

Richard Nixon’s elimination of the gold standard has proven
to be the US’s best possible strategic gift to China and the rest of Asia.
Today, China has a colossal industrial base that might have taken centuries to
build, while the US is to a great extent devoid of factories and incapable of
reclaiming its former glory. How tragic a fate for the US!


International and National Commerce


The word “commerce” is defined in the Concise Oxford English
Dictionary as “Exchange of merchandise or services, esp. on a large scale [
French or from Latin COM(mercium from merx mercis merchandise)]

Note that the “exchange of merchandise or services” cannot
include as a complement to that exchange a fictitious payment with fiat money,
which is neither merchandise nor a service, but rather a paper note or digital
entry denoting a debt payable in nothing. In the case of the dollar, the debt
is a debt of the Federal Reserve and registered accordingly on its balance
sheet. A debt cannot be settled by tendering a debt instrument (which is
payable in nothing in any case) and in effect, Balance of Payments debts have
not, by any means, been settled in international commerce since 1971.

The non-settlement of international balance of payments
debts has produced the accumulation of huge fictitious dollar reserves on the
part of exporting countries, since 1971. The same holds for fictitious payments
of export deficit debts with euros, pounds, yen or any other present-day
currency. See the following graph:

Gold, up until the Bretton Woods Agreements of 1944, figured
as the complement to the international exchange of merchandise or services and
did settle outstanding balance of payments deficits, because it was a
merchandise or commodity used as money.

According to the Bretton Woods Agreements, the fiduciary
dollar was accepted as being as good as gold, with trust on the part of Central
Banks upon the ability to redeem the dollar into gold. From 1944 up until 1971
then, these fiduciary dollars were held in Central Bank reserves as a credit
call upon US gold; the final payment had not been effected and was delayed as a
credit granted to the US until the dollars held in reserves were to be cashed
in for gold at some future date.

As it turned out, the “fiducia” or “trust” was misplaced,
for in 1971 the US reneged on the Bretton Woods Agreements of 1944, “closed the
gold window” and stiffed the creditor countries. No final settlement of
international commerce debts took place in 1971, nor has any taken place since then;
the truth of this statement is obscured by the mistaken idea that tendering a
fiat currency in payment of an international debt constitutes settlement of
that debt.

Once that false idea – that fiat money can settle a debt -
is accepted as valid, then the problem of the enormous “imbalances” in world
trade becomes an insoluble enigma. The best and brightest of today’s accredited
economists attempt in vain to find a solution to a problem that cannot be
solved except by the renewed use of gold as the international medium of
commerce.

Regarding national commerce, the same reasoning applies. In
reality, no one engaging in commerce in any country in the world today is
actually paying for purchases, that is to say, there is no any actual
settlement of any debt. All individuals, corporations and government entities
are merely shuffling debts (payable in nothing) between themselves, in the form
of either paper bills or digital banking money, whether in dollars or any other
currency in the world.

For internal national commerce the smaller value of the
silver coin was convenient for day-to-day transactions at the popular level and
did constitute settlement of debt when tendered in payment, for silver is a
merchandise or commodity which, like gold, can participate in commercial
exchange.

Today, China and the other great Asian exporters have
belatedly realized that the dollars they received as “payment” for their mass
exports are nothing more than digits in American computers. If the Chinese do
not cooperate, the bankers in New York can erase those digits in half an hour,
and leave China with no reserves. For this reason, the Chinese and Asians in
general are buying gold, and will continue to buy it indefinitely: computers
cannot erase gold reserves.

The awful truth about China is that the Chinese acquired
their formidable industrial power in the short span of thirty years at a
tremendous cost: for thirty years they worked for nothing. China has $2.5
Trillion of reserves; China does not have any use for these reserves, they have
no intrinsic value and China does not know how to get rid of them in exchange
for something tangible of value; these reserves are nothing more than digits in
computers in the Western world. Net, net, net: China worked for thirty years to
provide the world with a vast quantity of merchandise, in return for: nothing! Thirty
years of slavery, to build an industrial empire!

 

Mexico: forced to use the protectionist “Band-Aid”


Mexico has its oil, perhaps more than we are told. Let’s
hope so! Our economy is less complex, less sophisticated, than the US’s.
According to a Mexican Treasury study carried out in 2007, 85% of Mexicans have
no bank accounts – a good sign that they can get by on paper money and are not
getting into trouble with credit card debt. The Mexican economy, as we see it,
is like a broad, low pyramid. It is more stable than the American “skyscraper”
economy, a highly complex economy. Mexico is better equipped to survive the
present crisis than the USA.

In today’s great world financial crisis of false money, we
are likely to see countries around the world resort to protectionism: the
leaders will be the same countries that so recently sang the praises of
“globalization”. [JS Kim's Editorial Note: Is this not great irony?] In this probable case, Mexico will have to do the same. It is
a far from ideal scenario, but it is imperative for lack of the gold standard.
Protectionism limits productive efficiency in any country because it limits the
market for its protected products to its own national market. A limited
market hampers efficiency. The supply of goods available to the population
will be more limited and probably of lower quality at higher prices.
(Protectionism will have similar effects in the US.)

Mexico will have to restrict imports in the near future.
Otherwise, we will suffer serial currency devaluations. Protectionism is not
the best policy, but Mexico will probably be forced to resort to it, for lack
of the gold standard, which would be the best means of creating jobs in the US,
in the rest of the “developed” world and here.


The effective cure


If Mexico aspires to anything more, we shall have to wait
for the restoration of the gold standard worldwide. In the meantime, neither
demagogy nor Socialism will solve our problems. Only the gold standard can do
that.

For our industrial capacity to gain access to international
markets – and for Mexicans to gain access to products from international
markets – it will be necessary to restore the gold standard. Bilateral trade
agreements are not optimum. The optimum is to have the world as a market, where
payment for exports is balanced by imports and residual balances are paid in
gold. Payment in gold of export deficits and collection in gold of export
surpluses is sine qua non. Under the gold standard, Mexico would achieve
sustainable prosperity and full employment for our admirable workforce.

Products from China and Asia in general, which today
undermine our industrial capacity and create unemployment because we cannot
compete with the extremely low wages of the Asian countries, would cease to be
a problem under the gold standard; if the Asian countries, which today invade
our markets, do not buy similar quantities of Mexican products – which today
they do not – they would not be able to export their products to Mexico. The
gold standard would fairly balance exports with imports; it would prevent the
strategic destruction of our industry and protect us naturally, without the
need for protectionist barriers.

The same therapy Mexico needs – the restoration of the gold
standard – is what the world requires to regain economic health and sustainable
prosperity.

Under a restored gold standard, Americans will not be able
to purchase goods from China, unless China purchases American goods with a
similar value. If the Chinese find nothing of value to purchase in the US, then
Americans will be unable to purchase Chinese goods. It’s as simple as that! To
continue selling to the West, China will have to open wide its doors to
imports!

If Americans find they simply cannot purchase Chinese goods,
Americans will manufacture those goods themselves. Industries and new jobs will
spring up like mushrooms immediately, to satisfy American demand. International
balance will be restored, unemployment will disappear.

Protectionism is not a cure, it is a Band-Aid. Mexico will
not achieve the prosperity of which it is capable through protectionism nor by
resorting to Socialist measures that crush the creative spirit of the
individual. Nor can we succumb to renouncing our nationality and accepting
absorption by the US, imitating all the (very costly) measures the current US
administration imposes on its citizens. The ideal combination for Mexico
includes a moderate dose of nationalism, a government that does not incur
deficits, the institution of a monetized one-ounce silver coin, the “Libertad”,
to stimulate and protect savings, and eventual participation in a new global
gold standard, in which our nation can find the opportunity to fulfill its
destiny.

“The gold standard is the generator and protector of jobs.”

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FEDstidius's picture

Hello,

Could someone please explain the following paragraph:

"Countries began to accumulate dollars as the expansion of credit in the US advanced inexorably, now free of the restraint formerly imposed by Bretton Woods. The rest of the world was forced to accumulate dollars in reserves, because having insufficient dollar reserves, or having reserves that did not grow, or worse, having falling reserves, was a clear sign for monetary speculators to attack a country’s currency and destroy it with devaluation. "

I'm not particularly clear on why that is true or what underlying functions require this to exist.

I would also like to know if anyone has a clear response to the argument that fiat was used as a means of keeping pace with global growth. Specifically that there were not enough dollars to meet the demand for every transaction and that fiat would be used as a means to fill that demand.

I understand conceptually the function of the gold standard as it relates to inflaction and trade imbalances and I sully support the author on his conclusions. I am wondering though, with dollars being finite in repspect to thier gold backing, if, through intranational growth, inflation was always going to happen.

Thanks,

Still relatively new at some of these concepts.

sgt_doom's picture

I believe that paragraph indicates that because the USD (American dollar) is the reserve currency and used to repay sovereign debts, not to have enough in reserve would make said country vulnerable to currency arbitrage.

As for the second question:

http://en.wikipedia.org/wiki/Triffin_dilemma

I personally don't believe in a return to the gold standard -- what Keynes proposed at the original Bretton Woods (and most of his proposals there weren't adopted) was to used a basket of natural resources as the world currency, thus the resource share of each country establishes a base degree of wealth.

I suspect energy is the only true basis for a currency, though.

FEDstidius's picture

Thank you. That makes sense concerning the the USD as reserve currency for other nations. What I am still lost on is the argument that we need fiat to meet the needs of increased transaction demands. Money should not only store wealth but also be a medium for exchange.

Any imput would be appreciated. Thank you.

anarchitect's picture

Fiat isn't needed to meet increased transaction demands. Gold can be subdivided as necessary. For example, GoldMoney uses gg (gold grams), and even smaller amounts could be invented for accounting purposes. Of course, all the bits in the computers have to be backed by real bullion.

"Money should not only store wealth but also be a medium for exchange."

This is a big topic that I won't even try to address.  Instead, I will defer to FoFoA's blog (http://fofoa.blogspot.com/), where a recent post, Equilibrium, discusses this.  It's a long read, and your statement isn't addressed until near the end.  I still don't know what to make of his arguments--a rarity for me!--but they are very thought-provoking.

Postal's picture

Wow. About as scary as some of Cheeky's missives. *shudders* Time for more beans and rice, and gold and silver.

Max Hunter's picture

Great read.. Very understandable.

There can be no doubt that trade imbalances are the root of our demise. I have never seen gold as the solution to this in the same light described here. I certainly do now.

You will get resistance to this idea.. People want something for nothing and as long as our politicians and elite can capitalize on this "defect" you will have people violently oppose the idea.

One of my favorite quotes:

"Three things cannot long be hidden; the sun, the moon, and the truth" Buddha

mdwagner's picture

This article could be summarized in one or two sentences.

 

Without the gold standard, the only thing that keeps a fiat currency worth anything is the restraint of politicians/central banks.  And we know that in the end, there is no restraint.

anarchitect's picture

True, but what's far more interesting is his discussion about the implications of a gold standard on trade. The US has been running large trade deficits for a long time. Under a gold standard this can't last very long because gold has to keep leaving to pay for the excess imports. But with the USD being the world's reserve currency, trade deficits can continue indefinitely, because all that flows out of the US is paper. The only thing that will stop this is if the rest of the world decides they no longer want to be duped. And if they decide to redeem their paper by buying US assets en masse, watch out. The USD will undoubtedly be worth less at that point, but it would nonetheless drive US inflation to the moon.

steve from virginia's picture

The below article is an extremely well written, thoughtful and lucid article.


The same therapy Mexico needs – the restoration of the gold standard – is what the world requires to regain economic health and sustainable prosperity.


What total, useless, garbage! What the world requires is the four Saudi Arabias needed to push oil prices to $20 a barrel. (Temporarily, until these too ... are pumped dry.)

Mexico's so- called 'prosperity' to date has been the flow of crude from its Cantarell oil field. This field is now in steep terminal decline. Within the next two years Mexico will become a net- importer of crude oil. How does Mr So- and So presume to pay for these oil imports (so that 'ordinary' Mexicans can drive in circles?)

Gold?

Would you trade YOUR gold for a tank of gas? So you can drive to the store and buy (with gold) some beer?

The second prop of the Mexican economy is its narcotics exports to the US and Europe. Why doesn't Mexico adopt the cocaine standard? It certainly is 'sustainable'. Mexico can lead the way by creating the world's first organized crime- based economy.

As for deficits and 'austerity' - the new 'it gurl' at the club: how about ante- ing up with some energy conservation?

Our economic woes are the result of excessive energy consumption with no return. The high real price of crude - the input cost relative to production output - is stranding the production infrastructure. It costs more to produce than the return from the production. The deficits are the (ongoing) borrowing to 'tide production over' until this 'temporary state of affairs' is resolved.

Not in your lifetime, not in the lifetimes of your great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great-great- great- great- ...

 

... grandchildren.

 

All squandered for some temporary 'kicks' and people wonder that the bill is coming due. The deficits will in time take care of themselves. The operative word is 'repudiation'.

Gold will not save you.

Trifecta Man's picture

"Would you trade YOUR gold for a tank of gas?"

No.  Maybe a silver coin or two.

Chicken Little's picture

Yep, gas can still be bought for 25c per gallon as long as you use a pre-1964 quarter.  The silver content is $3.36 in today's FRN's.

MarketTruth's picture

"It took 169 long years and seven major wars -- from 1776 to 1945 -- to rack up a cumulative deficit that matches the gaping budget hole of just 28 short days in February 2010." -- Marty Weiss

-----------------------

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

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

The above was said by Alan Greenspan, 'Gold and Economic Freedom' in 1966.

mchandler@ameritech.net's picture

Species - The British had just such a scheme to expedite international shipping when communications were no faster than ships and settlements were cumbersome.

Species8472's picture

What's to stop the exporter from lending its accumulated gold to the importer, agian and again?

ToddGak's picture

It seems like you wouldn't want to lend gold...the assumption being that if a country has to borrow gold, they are not creditworthy in the first place...i.e. why would a country need to borrow gold unless they were not exporting anything themselves, and if they are not exporting anything, how would they ever be able to pay back the gold plus interest?  Remember you can't create gold out of thin air the way you can create fiat money out of thin air -- you would actually have to produce something of value to "earn" the gold to pay back your gold creditor.

Trifecta Man's picture

Would you believe a political promise to always return it?

Privatus's picture

On one hand, the situation seems hopeless, what with the fed having us by the balls and all. On the other, the global fiat Ponzi seems to be collapsing nicely into a noumenal puddle of scum all by itself. Godspeed.

Dan Duncan's picture

Consider Kundera's "The Unbearable Lightness of Being" as a metaphor.

The gold standard is like "The Eternal Return".  It a “heaviness” on our lives and on the decisions we make (it gives them weight, to borrow from Nietzsche’s metaphor), a heaviness that Nietzsche thought could be either a tremendous burden or great benefit depending on one’s perspective.

The German expression Einmal ist keinmal encapsulates “lightness” so: “what happens but once, might as well not have happened at all.

Since money is created each time the government deficit spends or buys an asset from the private sector, money is created on the fly. No need to use that which was already created, when we can just create some more. So the government just goes about its business spewing money.

Thus, a dollar created today is a dime tomorrow. Dollars are fleeting and Modern Money has no weight and no bearings.

Nevertheless, despite its fiat underpinnings, money is subject to the laws of nature…and that which is easily created and ultimately fleeting is always rendered insignificant.

The use of such insignificance as a store of value will become unbearable.

As a result, our government is deluded into thinking that decisions do not really matter. These decisions (Wars, unrealistic entitlements, etc., etc) are rendered light, because they do not cause personal suffering (just print more!). Yet, simultaneously, the insignificance of decisions ultimately is doomed to cause us great suffering and this is perceived as the Unbearable Lightness of Being…and Modern Money. This insignificance is existentially unbearable when it is considered that people want their labor, assets and savings to have credible sense of meaning.

Imposing a standard on our money is a burden and a heavy one at that. But at least the the heaviness is bearable.

ToddGak's picture

That is a really interesting perspective, thanks for that.  With that metaphor it's easy to see how we can go infinitely into debt and it doesn't seem to matter to anyone...just keep piling trillions upon trillions and the government keeps spending more and more...

mchandler@ameritech.net's picture

Economic collapse happens with gold money too. Fiat currency lets them over extend debt and carry the foolishness to a more extreme end and a more spectacular failure, but really it is simple human greed and dishonesty that creates unstability. When a nation has gold the rulers can still decide to tax their subjects until the economy can not sustain them. It can shave the coins or add base metal until it is worthless. Blowing the treasury on wars is a favorite. If you win it's rarely at a profit and if you loss it's devastating. Spain is an example - with the wealth of the new world they should have had a world empire of 10,000 years.

I've seen the ads on TV and in the newspaper trying to suck every last gram of gold out of our population. I'm starting to wonder how much longer I should wait to take my wife's jewelry out and bury it deeply. It seems like soon they will stop asking to buy it and just come take it again.

Grand Supercycle's picture

 

EURO buying support i've mentioned over the past few weeks has resulted in a bullish basing pattern on the daily chart. The important weekly chart remains bearish though.

http://stockmarket618.wordpress.com/about

akak's picture

Grand SuperSpammer, would you kindly fuck off?

jdrose1985's picture

How about you two get a room and if you have some spare time after you've finished each other maybe you can lay in bed discussing ways to monopolize these boards so only things you desire to see are posted.

Some of us appreciate those who take time to put what they're seeing up to be seen by others instead of reducing this place to the likes of yahoo boards. Of course this post by me is equally as wasteful as no doubt both of you will never return to this article in your incessant drive to jump to every newest article to spew whatever vitriole you can conjure in your needy way of being seen and heard.

I'm just sayin

 

akak's picture

Your rage is completely misplaced.

Grand SuperSpammer does absolutely nothing but gratuitously spam every single thread here on ZeroHedge with links to his/her site, with never a pertinent or relevant comment on the subject under discussion.  While the information contained on their site may be of value, this is utterly the WRONG way to go about presenting and introducing it.  Or would it be appropriate for me to start advertising my business on this site, unsolicited, as well?

Really, your vitriol against me, as opposed to the spammer here, is comical.

AnAnonymous's picture

I wonder how articles like that can still maintain credibility for their writer.

So much inconsistent data.

Anyone has the amount of gold  owned by France before and after the reported time?

US down from 20,000 to 8,000, France up to ? from ?

Everyone tried to export more than it imported? How could this work? Shouldnt trade a zero sum game? 

Bilateral exchange only? What prevents a country from buying from China without selling to them?

Outsourcing of jobs: jobs were outsourced for several factors.

One being that the general  environment of certain countries no longer supports certain activities. Just like in the US, at a national scale, you dont produce cars on Park avenue, on a world scale, you should not produce cars in countries which have Park avenue standing. This factor of outsourcing is the result of how the US society is organized and how the model spreads all around the world. Nothing to do with currency of any type. Just with modification of the general environment.

Another being that outsourcing polluting jobs outsourced the pollution. Pollution was a big issue in the 1950s,1960s. Just read the press. In  a "better them than me" type of solution, it was deemed better to export jobs and the pollution going with it. It worked as the US solved part of its pollution problems. One side effect was also to allow easy finger  pointing at countries harbouring the new jobs (mainly China) as they are now the ones suffering from the jobs pollution. China has a high level of pollution, it is an evidence they dont care about the environment. That is not because the US shipped jobs away in order to evacuate pollution. No, no, it has nothing to do with that. Cheap shot, easy smear game. 

 

On globalization: globalization has been one ongoing process for five hundred years now. The US, Mexico are a result of globalization.

What is happening now is the end of the globalization process. That is a different type of animal.

Forsaking the gold standard was a consequence of oil being a limited resource. Up to the 1960s, oil was touted and treated as an everlasting resource, reinforced by a yearly high rate of oil fiedl discovery. In the 1960s, the rate plummetted. It was no longer possible to treat oil as an everlasting resource.

It was the start signal for the rush to determine who was to guzzle the most of a finite resource. To help to achieve a good position, debt is an unmatched tool.

tony bonn's picture

you can never publish too many articles like this....i have given up on the fucktards who deny the moneyness of gold and its role in protecting freedom - which is why we have NONE left.

gold is in permanent and severe backwardation....it spells death to economic activity...

Ruth's picture

Wow, too sensible, thank you smartknowledgeu for bringing Hugo Salinas Price to ZH!

blindman's picture
http://maxkeiser.com/ Guest Post: The Real Problem June 20th, 2010 by Damon Vrabel
Respond

All the market/finance news since 2008 isn’t just random criminal acts.  It’s not just scandal.  It’s not just greedy narcissists on Wall Street.  Those are all symptoms of the larger problem–that nations are caught in a monetary machine designed to takeover everything over the course of several decades.

The forces inside the machine precisely replicate the vortex forces inside a hurricane.  As long as hurricanes are over warm water, their internal pressure lowers and they grow from Cat 1 to Cat 3 to Cat 5 storms as they suck in the outer bands of the territory over which they lord.  This is precisely what JPM Chase, Goldman, and the rest of the Fed cartel have done in the territory over which they lord.  It grew from a Cat 1 to a Cat 5 over several decades.

But now the Cat 5 can’t grow anymore…there’s nothing left to suck from the outer bands, i.e. the population isn’t borrowing more and can’t afford increasing interest payments.  The storm is hitting cold water.  It’s going to DEFLATE massively.  This is why we’re seeing all the scandals and corruption coming out…the bankers in the upper storm near the eye are scrambling to suck the last bit of value before the game’s over.

So the key is to stay focused on the storm and fix the macro problem, rather than wasting emotional energy on the individual scandals.  Here’s part 1 of a 3-part series discussing how to do it:

Steroid's picture

It's time to discover Professor Fekete at ZH, too!

Fabio's picture

Agreed!

Good start:

WHAT YOU ALWAYS WANTED TO KNOW ABOUT GOLD

http://www.gold-eagle.com/gold_digest_08/fekete060710.html

akak's picture

Hugo Salinas Price is a beacon of monetary sanity in a world gone insane.  If only Mexico had a hundred more economists like him --- and the USA even ten.

DoChenRollingBearing's picture

Well, OK, I need more time to re-read and digest Salina Price's piece.  He is VERY respected in the gold & silver community.

The only comment that I can offer now is that gold standard (and silver standard) currencies have always failed as well.  Due to wars, overspending, decrees, etc.

.govs through history have demonstrated their irresponsability when it comes to spending...

dumpster's picture

DO CHIN

 

THEY FAILED because they did not honor the standard,,

the standard was scrapped to go to war, to over spend ..

If they honor the standard the gold silver backed currencies would not fail.

it is a failure of the greed and political aspirations of bankers and business .

serpentine lol

Anton LaVey's picture

Actually, a gold-backed currency CAN fail. I can think of at least two ways right now, one of them being detailed in the above article:

  1. Through currency debasement: shaving just a tiny little bit of Gold and Silver off your coinage.This is what happened to Rome.
  2. Through currency "exhaustion": if your currency is backed by Gold, and your country produces less and less exports, the countries that export products for sale in your country will end up demanding Gold in return for their products. This is pretty much what happened to the USA when General de Gaulle demanded (and obtained) Gold from the USA in the early 60s. The next thing you know, the Gold window was closed pretty freaking fast by Tricky Dick. Surprise!

In other words, having a currency backed by Gold is only a way for a Government to stabilize the amount of money in circulation in the economy. While this is a very desirable goal, it is not the be-all and end-all solution to monetary policy. Governments hell-bent on imperial conquest and domination tend to throw out all monetary prudence - to paraphrase you, they stop "honoring the [gold] standard".

If there is any teaching at all to be obtained from history, it is this: that ALL government will, at point or another, during the course of history, abandon the Gold standard or actually use debasement to "loosen the strings of the purse", so to speak.

Make of that what you will.

sgt_doom's picture

Excellent comments.  The only accurate basis for any value-traded instrument has been, and will always be, energy.

A Nanny Moose's picture

I think we spend too much time blaming inanimate objects for our own shortcomings. Did the currency fail, or did humans cheat because conditions allowed it? I would posit that currency did not fail, but that Humans cheated because the system setup allowed it.

We cannot look at the failures in a vacuum. We must examine those failures withing the context of the system in which money is operating. Case in point, legal tender laws, and fixed standards such as bimetalism. Monopoly is not natural, and prices fluctuate. Most of these failures stem from our inability to treat currency as just another good traded on the marketplace.

Money did it's job. It stored wealth, and demanded that we put forth or best effort in trade.

To paraphrase Hazlitt...The best money is one that leave the least power in the hands of governments.

Trifecta Man's picture

And that's why I call the substitution of fiat currency for gold-backed money, and cheap base metals for silver money, the BIGGEST SCAM EVER, and it was perpetrated by the US government, in defiance of the US Constitution.

Nels's picture

Debasing the currency is not adhering to the gold standard, so it wasn't the standard that failed, but the failure to stick to the standard.

And buying more than you can afford is not a problem of the gold standard, but a personal or government stupidity.  What the gold standard does is enforce the penalty for stupidity early, before you've bankrupted the globe.

hbjork1's picture

It has been 65+ years since I started a coin collection in in 1944. As a young person I had to be content with collecting silver based coins but was interested in the "precious metal" currency arguments through the decades. Having observed the events in policy relating to the value of the dollar For the record I believe with the author is very much on target. The only difference of opinion is that the 1971 events were really a capitulation rather that the start of the problem. I felt that the problem started in the early 60's as the period WWII "war effect" was ending. Until that period, the US had the only intact, modern robust industrial capacity in the world. But Japan and Europe were beginning to self supply and compete in world markets. Gold (real money) reserves had been acquired during and for a time after the war. And silver had been relatively cheap due to domestic supply so coinage was 90% proof. There was some expectation in the press of a recession. But the decision was made during the Kennedy administration to remove silver as a basis from the coinage and “Payable to The Bearer on Demand” from the $1 Federal Reserve Note. Since that time, we have had “fiat” currency. So I also agree with Nels. “Debasing the currency is not adhering to the gold standard, so it wasn't the standard that failed, but the failure to stick to the standard.”

Kreditanstalt's picture

One of my favourite writers...explains things clearly and well.  That graph of paper currency reserves is frightening: THAT is a bubble!

anarchitect's picture

One of my favourites as well, and a first-class act. He's trying to get Mexico to reintroduce a silver coin. To prevent it from being hoarded, its legal tender value would be quoted on a regular basis and would rise with the price of silver. However, its value would never be allowed to fall.

He's a great example of a billionaire working for something that would truly benefit working class Mexicans, far more so than Buffett and Gates with their idiotic support for progressive causes.