Gold and Economic Freedom: Did Greenspan Know What He Was Doing?

Gordon_Gekko's picture

via Gordon Gekko's Blog

With Gold reaching new heights in dollar terms, I think this is an appropriate time to post an article on the subject circa 1967 by none other than the famed former Chairman of the Federal Reserve Alan Greenspan. In this article Greenspan, a former Goldbug, waxes eloquent on the role of Gold in our society, although it is debatable whether he can be classified as a "former" Goldbug. I, for one, think he's still a Goldbug. This is what he said in a recent speech at an investment conference in New York -

"What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment".


Rising prices of precious metals and other commodities are "an indication of a very early stage of an endeavor to move away from paper currencies".

Questions have been raised by some commenters on ZH recently whether Greenspan did what he did on purpose. Reading the article below and considering the fact that he is a devotee of Ayn Rand (who by the way was at his side when he was sworn in as chairman of the Council of Economic Advisers in 1974), it's pretty hard to argue that Greenspan did not know what he was doing. Of course, some might say what a horrible way to bring about change but the fact remains that Greenspan did not do anything that would not have happened otherwise - he just accelerated the process by giving the corrupt bankers (who control everything, including the Fed) enough rope to hang themselves. Also, in my humble opinion, human beings do not change until pushed to desperation. The beauty of this is that the people are not only becoming more aware about our financial system and heretofore obscure subjects such as monetary policy but are themselves demanding change - things like abolition of the fed, return to sound money, etc. Do you think any of this would have happened if everyone was fat and happy using the corrupt Fed-controlled fiat money system? I think not. This is a more sustainable way of changing things - i.e. from the grassroots level - as opposed to somebody at the top dictating what needs to be done, which almost always ends in failure. Indeed, the best protection against criminal organizations such as the Federal Reserve taking over our society is vigilant and informed citizens. Read this and figure out for yourselves whether this is someone who hates Gold or does not understand it. Greenspan might indeed be John Galt - the man who stopped the motor of the world.




An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire -- 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.


In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.


Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.


The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.


What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.


In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.


Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.


A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.


When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.


When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one -- so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.


But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists -- why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely -- it was claimed -- there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.


When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.


The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form -- from a growing number of welfare-state advocates -- was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.


Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.


In the absence of the 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 declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth 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.


--Alan Greenspan




Update: It just came to my mind that Greenspan joined the famed John Paulson's hedge fund in the January of this year and admittedly - "they're the only hedge fund he will advise on the direction of the economy". Soon after, John Paulson and Co. made a significant bet on Gold to the tune of $1.3 billion (and even more thereafter, including owning over 8% of the entire GLD ETF). Coincidence? I think not! Greenspan knows the games Central Banks, especially the Fed, have played all these years with Gold since going off the Gold standard and I think he has a pretty good idea where the price of Gold going. In any case, I would definitely wanna be long something John Paulson is!

Brothers in Arms!




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Anonymous's picture

You may want to check out Bix Weir Road to Roota essays on 24h gold or his website. He comes to the conclusion that Greenspan sees himself as John Galt and has purposely given the bankers the rope.

Kreditanstalt's picture

"If men had no means to store value, i.e. to save, neither long-range planning nor exchange would be possible."


That is SO true - TODAY! 

MsCreant's picture

I am not accusing anyone of anything, I fear this post will be heard that way. This is an honest question. Why do I see posters referencing the ethnicity of some folks in the financial world. I saw posted an article stating 48% of billionaires are Jews, for instance. Why should this fact be something I take into consideration in my thinking about what is happening? How does that help me in thinking things through?

I know this question looks like a landmine, but it is not meant to be.

Thanks for your answers, in advance.

Cheeky Bastard's picture

Why do I see posters referencing the ethnicity of some folks in the financial world


Because they are morons


I saw posted an article stating 48% of billionaires are Jews, for instance. Why should this fact be something I take into consideration in my thinking about what is happening?

Consider this as a form of positive discrimination as a form of reparation for past misdeeds, plus the historical structure and rules within the structure of Jewish community.

MsCreant's picture

Cheeky, I dig you as a poster. What you are doing, sweetheart, is shutting conversation down rather than opening it up. I appreciate your heart, your strength, and your intolerance of injustice. But sometimes, I have learned, if you let people share the logics of how they organize their worlds, you will learn some things that are helpful for understanding where they are coming from. They may not be "morons."

I am a bit of a hot head myself.

Thanks for your answer.

spanish inquisition's picture

There is a saying "He who owns the gold makes the rules". It has been religiously adhered to for thousands of years by certain peoples. Isn't it funny that gold becomes a nuisance once you are a Fed chairman and giving advice to the goyim about their money.

Anonymous's picture

What happened on the 18th of March 2009?

This question is especially directed toward Gordon Gekko and ghostfacedinvestah

Anonymous's picture

Sorry guys but what happened on March 18th 2009?

This is especially directed toward Gordon Gekko and ghostfacedinvestah?

Gordon_Gekko's picture

Fed announced monetization of US Govt. debt and MBS's. Direct monetization of government debt is usually the endgame for a fiat currency regime.

Anonymous's picture

Greenspan: "It's like that movie Office Space. The idea was good but, as we found out later, the computer programmer was working in a little shop in a little town in India, and driving lorries at night to feed his kids, and apparently, the program just got a few zeroes wrong. Well, maybe more than a few."

Anonymous's picture


I am no expert, but I have some common sense. I don't think that anything you say here will convince the paper people that gold is the ultimate value.

You are absolutely right though; what they aren't getting is that not only is it scarce and hard to produce in every way, but it is durable (they're still digging gold coins up thousands of years later) and we all still need a medium of exchange.

Paper, really nothing else, can withstand the ravages of time, gov'ts, fires and floods, etc, etc.

And I don't think they get that Greenspan may have sought to bring the current banking system down by acting the way he did, a la D'anconia et al.

Anonymous's picture

often the value of costume (fiat) jewelry is its appearance to be gold. gold is an excellent electrical conductor, commonly used to plate hi-tech electrical connectors. it is impervious to corrosion, it provides a concentrated form of wealth storage, and it looks pretty cool. although I prefer silver. Many times in history survival hinged on the posession of a piece of gold jewelry to be traded.

Anonymous's picture

The devious plan of the last 30 yrs was ol' Easy Al livin the good life as the grand vizor of the great millennial party. A-shmoosin, a-partyin, and grand vizorin in front of congress in a language that drove Barney Frank to chew up his favorite pair of pink undies in utter frustration. Al had-has it made. What else can you say.

Jay's picture

Ron Paul devotes a chapter in his new book, End the Fed, to Alan Greenspan and speaks directly to Gordon Gekko's contention:

Many libetarians had actually advanced the theory that Greenspan was still a true believer and would advance the cause of sound money and freedom when apprpriate. I never thought that a possibility, and as time moved on, I became more firmly convinced that pragmatism, a philsophic position Ayn Rand hated, drove Greenspan. He visited the House Committee on Oversight and Reform on October 24, 2008, and was welcomed as a "distinguished" former Federal Reserve Board chairman.


This was the final word on Greenspan.


Most of his testimony was designed as an attempt to protect his reputation and to explain away his shortcomings as Federal Reserve Board chairman. His testimony was pathetic. He made the point that the computer programs that they were using to anticipate these problems were not well designed. The only reason there was an expansion of debt is there was an excessive demand for our debt; it was not a consequence of Federal Reserve Board policy. And to climax his arguments, he said that he did make a mistake, that indeed we did not have enough regulations on the market. In other words, create the conditions for malinvestment and compensate for them by having more government regulations. As the hearings were coming to a close, I could only conclude: Greenspan is not John Galt.

Gordon_Gekko's picture

Think about it - what else would he - could he - tell them? Could he come out and say that the Fed needs to be dismantled, that it should be replaced by sound money, that his decisions such as an extremely loose monetary policy were wrong and were in fact designed to kill the very fiat money system that he was incharge of? The banksters would not have spared him if they realized that they've been had by none other than someone who they considered a loyal ally, if not an outright slave. Do you remember what happened to Andrew Jackson? Greenspan just gave those idiot politicians what they wanted to hear - a bullshit answer.

MsCreant's picture

Been reading a little more Greenspanage.

Tin Hats on please.

What if the richdude mission, handed off to Greenspan, was to destroy the fed, so that they could consolidate a global central bank? Milk America for everything you can on the way to Armageddon, get everyone pissed at the Fed, get the public primed to dismantle it themselves and agree to the one world thing via Special Drawing Rights, etc.

Tin Hat off.

Whew!  What happened to me?

Gordon_Gekko's picture

Don't worry about tin-hats. I quote Aristotle again:

"It is the mark of an educated mind to be able to entertain a thought without accepting it."

Anonymous's picture

Prechter has theorized that if the world is truly entering a Grand Supercycle wave IV, by its end we may witness the creation of a "global super-Fed" as the engine of credit to feed the final Grand Supercycle Wave V mania. But we're talking 200-300 years before that mania would reach its zenith.

Anonymous's picture

I applaud you for making this point. Having been an Ayn Rand devotee since I was a teenager, and knowing of Greenspans relationthip to her and his support of her philosophy, I wondered early on, 2002-2003, if he wasn't crashing the system on purpose.

What better way to crash a corrupt system than to take control of it and guide it over the cliff yourself?

It just is beyond my ability to comprehend that a man of such strong principles would do a 180 and stand in support of a system that is completely contrary to his world view.

Back when I started asking if he might be gaming the system I was laughed at by virtually everyone. It's nice to see that I am not the only one who thinks this now.

I also had a theory at the time that the banksters, through their ridiculously lax lending standards, were purposely ruining the credit records of millions of Americans by loaning money they knew would never be repaid so they could charge much higher rates in the future. I wonder if that theory will ever grow legs.

Great work!

Anonymous's picture

Rand ... teenager ... yeah, everyone goes through that phase of development. but some eventually grow out of it when they see thru the BS teeny "philosophy"

Anonymous's picture

Road to Roota II – Maestro Greenspan’s Mangum Opus!

Bix Weir discusses the plan by Alan Greenspan and friends to destroy the entire monetary system in a one time Creative Destruction Event. Read this article to understand what that means. If you open your eyes long enough to see past the monetary smoke and mirrors these days you can tell it is happening as we speak. We are down to the end days for the fiat monetary system with the implosion being dragged on since September of 2008 and very soon to come to a climax.

Ned Zeppelin's picture

As a thought experiment, substitute "widgets" for every mention of gold and you'll soon see that gold is not the problem, or the cure - our problems stem from the failure to confine borrowing and lending within certain parameters through intelligent (and strictly enforced) regulation.  And by widgets I mean any asset having a useful value.  Gold may be a strong candidate for the position, but is is far from the only one. And the right widget is the product of circumstance - there is no innate, immutable law that says gold is "it."

I hereby declare myself not to be a gold bug. I think this is what Karl Denniger is saying too, if I understand him. I think it is a worthy argument to have.  BTW, gold bugs are not crazy either, as I see the logic of running the math matrix, and concluding that, under most circumstances, right now, gold is "it" in terms of being a universal asset that can store value, etc. I get that.  But gold is not the only pre-condition to a properly functioning monetary system, it is a useful solution to the problem of how do you impose restraints on the ability to print money.

Gold has no value if it cannot be eaten, used for ammo, or run an internal combustion engine.  Those are assets of a more enduring nature, but don't work quite so well as a form of "money."

Gordon_Gekko's picture

"And the right widget is the product of circumstance - there is no innate, immutable law that says gold is "it.""

You are right, but it is what it is and until such time as a better medium replaces it, that's what we have. It could have been platinum or something else but through whatever quirk of fate that's what humanity chose. I am aligning myself with the facts as they are rather than the other way round, in order to best survive. Karl Denninger actually thinks the fiat money system to be better than Gold, and that is where he is wrong, and history has PROVEN him to be wrong (of course, with the corrupt educational system we have in America, we wouldn't know anything about history now, would we?). Gold's uniquenes arises out of the fact that people have collectively chosen it as money over other things throughout history. You don't need to have an "innate, immutable law" of any sort but just look at the fact as they are and the FACT is Gold's enormous stocks to flow ratio, which no other commodity has. This gives us confidence that Gold is hoarded and will continue to be used as money.

AR's picture

GG /  You stated:  "...human beings do not change until pushed to desperation..."  That, my friend, is absolutely correct.  One cannot pay for debt, with debt, then pay for that debt, by issuing more debt.  Amercians, and many others around the world, have yet to experience real "desperation."  You're direct and blunt -- we appreciate that quality. Good report.

Green Sharts's picture

Yeah, Greenspan wasn't an incompetent for the last 40 years, he was actually implementing a devious plan to wreck the world economy so the gold standard would be brought back.

Thanks for the laugh.

Gordon_Gekko's picture

It isn't as conspiratorial as you think it is. He gave the bankers what they wanted - as has been the custom throughout Fed's history - only too much of it! I am not saying that is precisely what happened, but it definitely is an interesting way to look at things - a thought experiment, if you will. BTW, reading the essay, do you see any shred of incompetence?

RockyRacoon's picture

Gordon, why can't we just agree that he lost his bearings in the halls of power?  As Greenspan said in his testimony before the House Committee on Oversight and Government Reform:  “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”  Why should we not take him at his doddering word?

Gordon_Gekko's picture

Of course that might very well be - we are just speculating here. To quote Aristotle:

"It is the mark of an educated mind to be able to entertain a thought without accepting it."

Anonymous's picture

If enough people believe that gold it more valuable then fiat, then so it will be.

No different than all the other unshakeable beliefs in other global myths, like transubstantiation, resurrection, virgin births, angels and demons, ghosts, Nobel peace prizes for new POTUSES that wage war, breast implants, nips and tucks, combovers, rugs, lap dancers that love you, CDOs, MBSs, ARMs, zirp, CARS, Lord Blankfein's humanity,ad nauseum.

Deniability and Belief, for most, are Supermen to fact, reality and unmitigated demonstrated disasters.

e.g. they're rebuilding N'Orleans, Californicans still build on Earthquake faults, and people keep incumbents in office.


Anonymous's picture

Without reading more than the grabber at the top, the answer is decidedly, NO.

Miles Kendig's picture

I cannot but think that in a world dominated by those that believe that only way to reflate the ponzi is a race to the fx bottom while attempting to manipulate value stores to correspond in order to maintain a world of relativism and rough equivalence forgot that as that process develops more and more folks will look to maintaining some sense of absolute value in that world.  Creating a feedback loop.

I am sure Greenspan understands this quite well.  After all, any economic system in sum total of debt and assets cannot exceed the sum total of the creation & carrying capacity of those encompassed by that system.  A simple fact the greatest carry trade of all time, the monetization and encumbrance of nearly all future economic activity in a so called perpetual 2% inflationary environment fails to appreciate.  A simple bit of structural engineering that the current crop of central bankers and most politicians are attempting to circumvent.

Regardless, the current structure requires the trust & confidence of nearly all for it to work.  However, the mere existence of the ever growing feedback loop that can no longer be discounted or ignored demonstrates that it is the central banker group that is losing the t/c high ground in the quest for stability of their exponential growth curve in their dream of creating and enhancing a relative world of rough equivalence.


ventcap's picture

Older forms of money versus gold:

Pecuniary - cows - were used to transfer money by droving them  to a distant market and selling them.

Salary - salt - as paid to roman legions and used for food preservation - more valuable than gold at certain periods of history.

Gold was not chosen as money. It evolved into its ultimate role by virtue of all its superior properties.

A cow dies, gold doesnt.

Salt disolves in water, gold doesnt.

Copper transforms into malachite under exposure to air (water and carbon dioxide)

Gold  has an SG of 19, (silver 12).  Gold could be transported with 19 times less volume than transporting water.

But in addition to all those properties and others, the relative scarcity and time and effort to find and mine Au and Ag established their relative values to other commodities.

Summary : Gold (and silver) evolved to their monetary roles because of their properties; they were not chosen or prescribed by law. Paper fiat as legal tender flies in the face of 6000 years of monetary evolution and has almost always been fraudulenty manipulated by its issuers.

Anonymous's picture

For anyone who cares: the old lady on whom I used to practice my Polish, a survivor of WWII and a Nazi camp, commented that in times of war and currency collapse, gold or silver were the best currency, because metals are sold strictly by weight.

X grams of 18K gold got you Y kilos of potatoes or whatever. According to Pani Herta, dollars, pounds or whatever had much more limited purchasing power in that time and place.

Anonymous's picture

I think Paulson's fund is pretty much his own funds too. I enjoyed reading about his protege Paulo Pellegrini.

Your definitely right on 'FAT' ignorance. The Madoffs only come out of the woodwork when Joe Public takes a hit. Nobody even checks the books when the markets get lazy.

Hopefully the term 'Masters of the universe' will be consigned to a rotten period of lies and fakes.

arnoldsimage's picture

. . . so stated the Jewish banker, Paul Warburg: "We will have a world government whether you like it or not. The only question is whether that government will be achieved by conquest or consent" (February 17, 1950, as he testified before the US Senate).

Hephasteus's picture

I guess every central banker must come face to face with the absolute truth before they know exactly how to distort it. Gold DOES NOT AND WILL NOT marry to fractional reserve banking. It creates the paradoxes way way too fast. Which is why it evolved the way it did. To purely fiat with very hidden and abstracted ties to gold. It will TRY to evolve futher into the super obfuscated derivitaves swap crap the central banks are shoving onto society. Take that baby and strangle it to death before it grows up.

Anonymous's picture

yeah, Arnold's just jealous, wishes he was a member of the club

Anonymous's picture

funny that your link contained a google ad for 'bloomberg for mayor'.

JR's picture

You are right, Gordon Gekko, a good starting point for a realistic plan for survival is the awakening of America.  A superb analysis.

As for Alan Greenspan, G. Edward Griffin put it well: “Unfortunately, when Greenspan was appointed as Chairman of the Federal Reserve System, he became silent on the issue of gold.  Once he was seated at the control panel which holds the levers of power, he served the statists well as they continued to confiscate the people’s wealth through the hidden tax of inflation.  Even the wisest of men can be corrupted by power and wealth.”

Two of the many results of the Greenspan/Bernanke years are reflected on yesterday’s front business page of the SF Chronicle, one regarding unemployment, “White-collar workers hit hard,” and the other on reverse mortgages (“Study finds abuses in marketing”) that are eating up all the equity in homes of the elderly.

Regarding unemployment, the Chronicle says that "a new analysis shows that nearly half of the 5.4 million Americans who have been out of work longer than six months held white-collar or professional jobs," making up 46 percent of the long-term jobless compared with 30 percent at the point of peak job loss after the 2001 recession.

Says the article, "These are people with college degrees who have done everything right. It’s like no-fault unemployment.”

Your Fed at work…

Gordon_Gekko's picture

This is what "misallocation of resources" means in real terms.

Anonymous's picture

Just an observation, as a complete amateur and non-finance professional.

Is there a possibility of gold EVER returning to pre-fiat levels of valuation ($35/oz)? If so, does that mean that gold is an inverse short? (Unlimited upside, but limited downside)

If there was a way for gold to return to $35, what would it look like? (massive removal of liquidity, unpopularity, etc...)

If that is the case, then isn't gold a proxy not for panic, but for global leverage? When leverage is increasing, gold falls (typically) and when leverage falls, gold rises?

Please provide some educational feedback, as I am really trying to understand this better.

Gordon_Gekko's picture

Is there a possibility of gold EVER returning to pre-fiat levels of valuation ($35/oz)?

That would involve destroying A LOT of dollars that have already been created - not possible IMHO. The oligarchs would get their heads lopped off.

If so, does that mean that gold is an inverse short? (Unlimited upside, but limited downside)

Actually, you should have said "if not so", but I think you get it. That's EXACTLY right. Gold will never Go back below $850 (or even $1000, if you ask me) now. This is one of the quirks of the fiat money system we have right now and intelligent individuals a la John Paulson will profit handsomely from it.

If that is the case, then isn't gold a proxy not for panic, but for global leverage? When leverage is increasing, gold falls (typically) and when leverage falls, gold rises?

Perhaps I am wrong but I don't think leverage has anything to with it. Falling confidence in fiat money is the primary reason for a rising Gold price. Additionally, the reason Gold dropped almost 50% in price from it's 1980 high and stayed there for two decades is that massive paper Gold supplies (via the Gold futures market) were dumped on the market by the Central Banks (including other shenanigans such as miners "hedging" etc, Gold "leasing" via bullion banks etc). So the futures market has primarily been operating as a fractional reserve system for Gold where many more futures contracts are in existence than Gold available for delivery. If tomorrow delivery was demanded on all the futures contacts, the futures market would basically implode. The price of Gold was/is deliberately controlled by the CB's in order to restore faith in the fiat money system - the source of their power. It serves to hide the massive inflation of paper money that they have engaged in - sort of like shooting the messenger. The low price of Gold for the past few decades has been an illusion and a fantastic chance to get it at firesale prices.

AN0NYM0US's picture

Paulson + Greenspan

the most obvious opportunities are often in plain sight - great article GG

Anonymous's picture

gold has value because people collectively agree that it has value. so you are putting your faith into the assumption that this agreement will continue.

Gordon_Gekko's picture

This is the mistake a lot of people including TumblingDice are making. Nobody is forced to agree that Gold has value. We all KNOW for a FACT that Gold has value because - and you don't seem to be aware of this - it takes a significant amount of human effort to mine it, refine it, etc., unlike paper money which can effectively be created at no cost. I'm not putting my "faith" into any "assumption". I know - for a fact - that Gold has value because no human being can conjure unlimited quantities of it out of thin air. Of course, if there were a technology developed tomorrow to create unlimited amounts of Gold at ZERO cost to the producer, Gold would lose all it's value - but I think it highly unlikely.

PS: Of course, money is all about division of labor and living in a society so therefore I pay attention to what other people have thought of as money over the years (and still do) which is why I go with Gold. If you plan on living all your life alone without ever using any goods/services created by any other human then I admit Gold is useless to you.

aldousd's picture

While I don't think you're actually advocating the labor theory of value, it appears as though you are.  A quick way to make the distinction: Pearls aren't valuable because men dive for them, they dive for them because they are perceived to be valuable by other men.  Gold isn't valuable because man expends effort digging it up, but they expend effort digging it up because they see it's utility in the market as a medium of exchange.  The reason they use gold instead of something else is purely historical context.  There may have been physical attributes of gold, along with it's relative scarcity, that historically made it acceptable as a store of value, but the reason behind its original selection and pervasion is now moot.