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

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.”

Comments

[sgt_doom]

"..far more so than Buffett and Gates with their idiotic support for progressive causes."

Oh, give it a rest already with this canned propaganda.

Since when did supporting wars in Africa for coltan (Gates) and the privatization of all public education (Gates) and mindless support for credit derivatives (Buffett) qualify as "progressive causes"?

(And I'm not even mentioning all the support of Gates and company for foreign scab workers -- all those endless worker visa programs -- and the offshoring of as many jobs as possible.)

Unless what passes for your head is permanently affixed up your butt.

[anarchitect]

Buffett yapping about higher taxes on the "wealthy", which is anyone with the gall to get ahead a bit, and both of them yapping about giving it all away. Sure, they're undoubtedly two-faced, but it's their progressive claptrap that's in the foreground.

"Foreign scab workers"? At least I have a head, even if it's up my butt.