Guest Post: The Unadulterated Gold Standard Part 2

Tyler Durden's picture

Authored by Keith Weiner; originally posted at The Daily Capitalist,

In Part I, we looked at the period prior to and during the time of what we now call the Classical Gold Standard.  It should be underscored that it worked pretty darned well.  Under this standard, the United States produced more wealth at a faster pace than any other country before, or since.  There were problems; such as laws to fix prices, and regulations to force banks to buy government bonds, but they were not an essential property of the gold standard.

The essential was that people had a right to own and trade gold coins.  They had the right to deposit them in a bank, if the bank offered attractive terms (especially the payment of interest).  Banks had a right to take deposits, to buy assets, and to pay interest.  Banks had a right to issue paper notes that were claims against gold.  Banks had a right to lend their deposits (fractional reserves).

Despite some government interference, the Classical Gold Standard enabled a Golden Age of prosperity and full employment that is totally out of reach today (not to be confused with the rapid development of technology).  This is not to say there were not business failures, bank failures and panics – what were later called depressions and now recessions.  A free market does not attempt to guarantee that no one can ever lose money.  It is merely an environment in which no one is forced to subsidize someone else’s risks or losses.

Unfortunately, by the early 20th Century, the tide had shifted.  Europe was inexorably moving towards war.  The US was abandoning the principles on which it had been founded, and exploring a different kind of government: an unlimited government that could centrally plan and manage the economy and the lives of the people.

In 1913, the US government created the Federal Reserve.  Much has been written about this now-hated organization.  At the time, the Fed was supposed to be the re-discounter of Real Bills.  Real Bills arose spontaneously in the market centuries before banks or central banks.  They are credit used for clearing.  When a wholesaler delivers goods to a retailer, the retailer accepts the goods and signs the bill.  Commercial terms were commonly Net 90.  It turned out that in the free market, these bills would circulate as a form of currency, with a value that was based on the discount rate and the time until maturity.  Real Bills were the highest quality earning asset, and the highest quality asset except only gold itself.

For many reasons, politicians felt that a quasi-government agency could make better credit decisions than the market.  To “discount” a Real Bill was to pay gold and take the Bill into one’s portfolio.  The Fed, as re-discounter, would offer the banks unlimited liquidity in exchange for their bills.  Almost immediately, the Fed also began to buy US government bonds.  What better way to expand credit than to push down the rate of interest?  The Fed could use much more leverage than if they were restricted to buying bills (which would all mature into gold in 90 days or less!)  This time, they thought, there was no limit to how far down they could push interest, nor for how long.

The Fed almost certainly enabled the government to borrow at lower rates than would otherwise have prevailed, but even so the rate of interest rose during World War I.  This is because the government was borrowing unprecedented amounts of money.  The interest rate peaked in 1919.  Then it began to fall, not bottoming until after World War II.

The net effect of the Fed was to totally destabilize the rate of interest.  In looking at this graph of the 10-year US Treasury bond from 1790 to 2009, one thing is obvious.  There were spikes due to wars and other threats to the stability of the government.  But for long periods of time, the rate of interest moved in a narrow range.  For example, from 1879 until 1913 (i.e. the period of the Classical Gold Standard), the rate of interest was bound to a range of 3% to 3.5%.  During World War I, the rate spiked up to 5.5% and then began to fall to well under 2% after World War II.  Then the rate began its ascent to over 17% in 1981.  After 1981, the rate has been falling and is currently under 1.7%.  It will continue to fall, but that is a discussion for another paper.

The US, unlike Europe, did not suspend redeemability of the currency into gold coin.  In Europe, the toll of the war in terms of money, property, and of course lives, was much higher.  The governments felt it necessary to force their citizens to deal in paper money only.  After the war, they had problems returning to gold.  For example, Germany was prohibited from freely trading with anyone.  One consequence of this was that the Real Bills market never reemerged.

In 1925, Britain initiated a short-lived experiment: the Gold Bullion Standard.  The idea was that paper money would be backed by gold, but the gold would be kept in the banking system in the form of 400-ounce bars.  Technically, the paper was redeemable, but the bars were so large that, for all practical purposes, the money may as well have been irredeemable to ordinary people.  Britain abandoned this regime in 1931, in part due to gold flows to the US.

In 1933, the President Roosevelt told American citizens that they must turn in their gold for approximately $20 per ounce.  Once the government got all the gold they could, Roosevelt revalued gold at $35 per ounce.  The dollar was never again to be redeemable to Americans.

After World War II, Europe was physically and financially devastated.  European gold had largely moved to the US either because of the coming war, or to pay for munitions.  The Allied powers knew by 1944 that they would be victorious, and so met at Bretton Woods to agree on the next monetary system.  They agreed to what could be called the Gold Exchange Standard.

In this new standard, the US dollar would be the reserve asset of the central banks and commercial banks of the world.  They would end up with dollars on both sides of their balance sheets, and pyramid credit in their local currencies on top of this reserve.  The dollar would continue to be redeemable to foreign central banks (but not to US citizens).

This regime was unstable, as economists such as Jacques Rueff and Robert Triffin realized.  Triffin proposed that there is a dilemma for the world and the US.  As the world demanded more money, this meant that the US had to run a trade deficit to provide the currency.  But a chronic trade deficit would cause the value of the dollar to fall, with wealth being transferred from foreign creditors to domestic (US) consumers.

Throughout the 1960’s, European central banks, and most visibly France, redeemed dollars.  By 1971, the gold was flowing out of the US at a rate of over 100 tons per day.  President Nixon had to do something.  What he did was end the Gold Exchange Standard and plunge us into the worldwide regime of irredeemable paper money.

Since then, it has become obvious that without the anchor of gold, the monetary system is un-tethered, unbounded, and unhinged.  Capital is being destroyed at an exponentially accelerating rate, and this can be seen by exponentially rising debt that can never be repaid, a falling interest rate, and numerous other phenomena.

In Part III, we will look at the key characteristics of the Unadulterated Gold Standard.

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falak pema's picture

you forget bancor in this instead of $-gold exchange. Bancor and gold...

I think I need to buy a gun's picture

i'm soooooo sick of this shit get it going and lets all move on,,,,,

vast-dom's picture

OT: as has been pointed out by yours truly on Wednesday, and now hitting MSM:


"Mike Rogers and other lawmakers suggest Barack Obama may have known about former general's affair before election day"

Miligate heating up....not only did Obama know about this affair well before election, but Obama leveraged said affair to CANCEL troops en route to secure embassy on intel that a hit was going down. Why? To not risk his campaign, knowing full well that he had the general by his balls. When the "investigation" was leaked by "other party" Obama's leverage vaporized. And why you may ask did this get out precisely after election? After our prez watched live video feed of his our most patriotic ambassador's murder?

Give the sociopaths enough rope...

Like I've been saying, this is going to blow up. I am surprised, based on my sources, that the shit didn't go up in flames on Friday. But be patient, because Petraeus has secured top DC lawyer today....



Michaelwiseguy's picture

I don't know why Fox News has their panties in a bunch over semantics. What is their obsession with calling the militia violence on the US Embassy in Benghazi Terrorism? Terrorism is a tactic and you can't win a war against a tactic. 


The Quickest Way EVER Through A Security Checkpoint 
markmotive's picture

Simple answer to a convoluted question: YOU NEED TO BE YOUR OWN CENTRAL BANK

Store some of your personal wealth in the form of gold and silver.

How much?

GetZeeGold's picture



Barbaric ZHers......clinging to their vodka, bullets, and gold.


MedTechEntrepreneur's picture

I hope you're right but the MSM doesnt seem all that interested. Bob Woodward on FNS said it was no Watergate. Share more please.

caustixoid's picture

vast-dom, if you're going OT why hijack an existing thread?  You're right about sociopaths but good luck thinking "this is going to blow up.".  Broadwell is an ex-major in military intelligence -- this tells you all you need to know, which is that you'll never know.  Whatever shit went down I guarantee it's not going to bring down TOTUS or turn into a major scandal.  The Chimp's neo-con criminal crew survived much worse -- Abramovich, political prosecutions, no-bid contracts, reconstruction billions "lost", let alone WMD lies -- how'd that end? Tenet got a medal, Lord Vader got some 20 y.o.'s heart in his chest and the Chimp makes $100k per speech.  Obama's retirement will be at least as sweet.

ISEEIT's picture

Wasn't 'capitalism' destroyed when 'money' became a 'funny joke' that government could just shit like yesterdays dinner?

I thought 'capital' was in reality (WTF ever happened to that?) a line in the sand. If you wanted to play the game, you would voluntarily accept the exchange value of some genuine article?

If I give you fucking dollar bills that I simply create out of desperation because my version of the game fails to work as I had hoped, then who in the hell is really going to want them?

Counterparties :)

Rehypothecation :)

Fractional reserve system :)

Oh Dear....

A system built on trust.

Prepare accordingly.

bank guy in Brussels's picture

Antal Fekete, the mathematician who has become a leading figure in gold circles, has argued that the gold standard really did end in 1914, tho not because of the Federal Reserve -

Fekete says that what went wrong when the gold standard was theoretically 'restored' after World War I, was that they did not re-affirm the international 'Real Bills' policy that was described by Adam Smith, as mentioned above.

'Real Bills', as noted above, is the form of self-extinguishing credit backed by real gold that will be paid at the end of a short fixed term ... which Fekete says was optimally about 90 days.

You get a contract 'good as gold' for payment in gold in 90 days ... because this is 'good as gold' anyone can trade this for a small discount, to get short term cash to pay employees, materials suppliers, shippers etc. ...

Fekete describes how before 1914 this was centred in London, and 'Real Bills' were accepted from all over the world, and contracts in the Far East were written with 'payment in gold in London in 90 days'. In London, the 'good as gold' paper traded in the short term, with real gold at the end for anyone who wanted it ...

Without 'Real Bills' discounted for near-term payment in gold, Fekete says the whole world started choking for lack of short-term credit ... Germany was ravaged in particular, leading to the Weimar hyper-inflation ... in America they had a 'roaring 20s' boom on 'crazy credit' instead of the 'Real Bills' gold-backed credit that extinguishes itself in a few months ... That is Fekete's position on what happened

And in fact, it was not until the 1980s that global trade finally rose back to the levels it held in 1913 ...

Don't know what I think of Fekete's complex material but, like the freegold stuff, it is fascinating if a bit hard to follow

Marco's picture

How would real bills have helped Germany pay it's reperations?

Urban Redneck's picture

Germany's reparations were due in Gold, why didn't leave much for the domestic economy.

AUD's picture

Hence the 90 day bill, still one of the benchmark 'money market' securities to this day. Not that it is redeemable in gold.

vast-dom's picture

honesty on average is the inverse function of indefinite unbacked credit. rehypothecated credit exponentially increases said inverse function. ergo, gold is simply too honest for today's over-leveraged ponzi planet. there must be a crash that resets markets because that is the only way to true liberty (for the debt-slaves).


all of the above is essentially Milton Friedman redux rehashed.

cranky-old-geezer's picture



In this new standard, the US dollar would be the reserve asset of the central banks and commercial banks of the world.  They would end up with dollars on both sides of their balance sheets, and pyramid credit in their local currencies on top of this reserve.  The dollar would continue to be redeemable to foreign central banks (but not to US citizens).

Moving away from gold & silver as "money" was unconstitutional.  

Refusing to redeem gold & silver certificates was illegal.

Turning "money" authority over to a private central bank was unconstitutional.

So how did they get away with it?

Simple, federal government bankrupted circa 1930 and was taken over by the Fed (under international law).  Constitution was null and void from then on, tossed out, ignored. 

Next step: cancel gold & silver redeemability.  

Next step: confiscate all the gold from the people.  Or try to.

Next step: take US govt currency out of circulation, put FRNs in circulation.

Brenton Woods was possible only because the federal govt had bankrupted ...quietly, hardly anyone knew outside of congress.

AUD's picture

You also left the most important line unemphasised ZH, so I'll do it for you,

Real Bills were the highest quality earning asset, and the highest quality asset except only gold itself.


Seasmoke's picture

In God We Trust, but the Trust is gone ............

Bansters-in-my- feces's picture

"The Bernanke Standard" Bitchhez...!

delacroix's picture

in 1913 the U.S. government created the federal reserve ? wtf is this douchebag smoking? at least he doesn't copyright his revisionist history/ fiction pieces anymore.

AUD's picture

The US government did create the Federal Reserve. All central banks operate under government charter.

delacroix's picture

yes, the politicians always pass their most important legislation, on christmas eve, when most of their members are at home. I can just picture diligent government employees up till all hours of the night, penning the federal reserve act. NOT

Absalon's picture

Not actually clear what the author means by the period of the classical gold standard.  Growth in the period 1875 to 1914 was primarily the result of the Bessemer and open hearth processes and then electrification.

Quarky Gluon's picture

Under a gold standard the money supply will be controlled by those who own and control most of the gold supply -- the plutocrats.  A fiat currency issued in a controlled manner by the treasury, on the other hand, can grow the money supply organically along with a growing economy.  A gold standard, however, would do just the opposite and artificially restrict growth in the the economy due to both necessary and artificial limits on the supply of gold.  The very problem with a gold standard is that it is tethered, bound and hinged and thus tethers, binds and hinges an economy that wants to freely grow.  

Mr. Magniloquent's picture

Yes, the wealthy always have the most wealth. This is known by definition. Your comments insinuate that plutocrats are benevolent through fiat currency. When in history provides license to hold such a view? Gold standards are justly that, standards. This does not mean that other forms of money are mutually excluded. Take silver for example.

You are a prisoner to the convention that governments existed before money or currency, and that the later is dependant on the former to function. The only people in history whom have ever felt that spontaneous money were inadequate have been those whom seek to control and acquire something for nothing. Beware these people, for they are either foolish or evil, wittingly or otherwise.

Pareto's picture

Bullshit.  There is plenty of gold to establish a gold standard while supporting a productive and stable economy.  The argument that there is not enough physical gold to support a gold standard only tells me that the arguer does not understand money and prices.  Consider simple fiat.  Given a certain stock of money, preferences, and production, an array of prices is revealed through demonstrated preferences.  Now consider a reduction in the stock of money, holding everything else equal.  Prices fall.  The point is, there is no optimal measure of gold for a gold standard.  Prices will simply adjust taking the available (committed) stock of gold in exchange into account.  It is ludicrous to argue that gold itself would hamper production, and innovation in an economy.  It would infact instill greater certainty for intermporal considerations, cap ex, and so on.  Besides, isn't "A fiat currency issued in a controlled manner by the treasury, on the other hand, can grow the money along with a growing economy" that command and control price fixing of interests rates is what got us into this shitstorm to begin with?  Why would anybody argue for the very thing (Bullshit omniscient dickheads) that is wiping out your savings, and your wealth? RP 2016  Peace.

Variance Doc's picture

Spot on.

It never ceases to amaze me how stupid and lazy people really are.  They just parrot shit without actually thinking about what they are saying, like QG above.



cranky-old-geezer's picture



The very problem with a gold standard is that it is tethered, bound and hinged and thus tethers, binds and hinges an economy that wants to freely grow.

Nope, the problem with a gold standard is paper currency.

Constitution says nothing about paper currency backed by gold held by the government.  It says gold & sliver are money, not paper currency backed by gold.  Founders didn't want paper currency at all.

Paper currency issued by the government just isn't in the constitution. Backed or unbacked doesn't matter, the paper currency itself is unconstitutional.

Founders didn't want the government in charge of money beyond setting the gold-silver ratio.  They didn't want the government building up a stockpile of gold and issuing currency against it.

Why?  Because they knew it would be manipulated.  They knew the government would lie about how much gold they have.  They knew the government would print more currency than they have gold for.

Gold backing is fraudulent.  It makes currency a derivative where its value is determined by something else that cannot be verified.  It requires trusting what the government says when you shouldn't.

Gold redeemable is the only thing that's half way honest.  It doesn't prevent the government from printing more currency than they have gold for, but it makes it risky.

The only truly safe money has its value in the money itself.  Intrinsic value.  Not relying on what someone says it's worth ...especially the government.

That means true money is a commodity of some sort.  Gold and silver  are the most practical commodities to make into money, but other commodities could be used also, copper and platinum for example.

But commodity money is more difficult to use in a banking system.  It has to be physically moved around.  And it can't be manipulated by the government. 

Of course no government wants that.  No government wants honest money, because they can't manipulate it.

Constitution doesn't give government control over money.  It merely says what will be money in America, gold and silver.  It naturally follows that copper, platinum, and other metals could be used also.

And it can be anyone's gold, silver, copper, platinum coins, not just those minted by our government.  Italian, Russian, German, French, anyone else's coins are just fine according to the constitution.

Commodity money doesn't prevent fractional reserve banking.  It just makes it risky.  If a bank makes loans that don't get paid back, they risk a run on the bank.  So reserve ratios must be very high, in the 80% - 90% range, and loan losses must be recognized immediately, not swept under the rug hoping to be saved by a government bailout, which would never happen.

Commodity money helps prevent manipulation and fraud.  That's it, bottom line.

Paper currency allows all sorts of manipulaton and fraud.  That's why governments love it.

SAT 800's picture

The founding fathers had the example of France very much in mind; it had blown up a paper money scheme early in the 18th. century; and just after the American Revolution, (which we won because of substantial state-of-the-art military assistance from France), The United States came into existence in 1781 during the signing of a peace treaty in Paris between England and France; without our military ally, France; no United States. Period. Then the French had their own revolution; power to the people, etc. and started printing paper money to finance the government; this exploded to worthlessness in a few years. So, during the writing of the Consitution and the Consitutional Congress this was very much on their minds. A close study of the actual history of Frances financial systems during the 1700's is very educational; the second time around, after the revolution; they said, well, we're all grown up now, and we know better; we won't print too much. You have a choice; trust politicians not to print too much, or trust the limited quantity of gold. The founding fathers wanted not to trust themselves; their descendants, or any central bankers, either, for that matter. but the Greed Freaks managed to un-do all their careful work.

SAT 800's picture

Quarky Gluon; this is the usual ignorance on this subject. Like most highly technical historical subjects it requires years of study of the actual events and  processes that occured in order to have any insight into the question. Your concept that a limited amount of gold limits industrial expansion is the standard statement of the lazy and ignorant person who has never made any attempt to educate himself. You just proved beyond a reasonable doubt, that you never even attended economic Kindergarden.  Henry Ford, Thomas Edison, Geo. Westinghouse, and various railroad holding company owners were able to finance their industrial expansion without any problem from a limited amount of gold; (much more limited than it is today); these enterprises involved paying livng wages to millions of people and building enormous workshops and factories. they were not inter-net startups. All this was done with true Gold financing.

A Nanny Moose's picture

he who has the most gold, makes the rules.

ummm...we have exactly this now, without a gold standard.

awakening's picture

No we don't, otherwise other people would be able to compete with Bernanke's printing press.

OneTinSoldier66's picture

There is competition for Bernanke's printing press, he has to compete with Gold, barter, the underground market, etc. Over time there will be less state issued paper money zombies walking around, replaced with more liberty minded people that repudiate the thought of being a slave to national debt.

awakening's picture

Gold and other hard assets are a good hedge against the $ printing; the problem with that (and barter, the underground market, etc.) is when you use a means of trade with such assets (or within those systems, underground is not an accidental name) that goes against other laws (taxation) that are then enforced by those whom (allegedly) uphold the law. With such a system in place it is rather simplistic to consider that competition (my idea of competition is much fairer) in comparison.

'Over time there will be less state issued paper money zombies walking around, replaced with more liberty minded people that repudiate the thought of being a slave to national debt.'

I got no argument against that; my only question here is what's taken them so long?

OneTinSoldier66's picture

Good post, excellent question.

SAT 800's picture

very "modern" comment; cute, ignorant, useless.

JustObserving's picture

Talking about crooked politicians confiscating your gold at $20 an ounce, here is more political chicanery:

The hacker network Anonymous claimed in a press release that Republican activist and Fox News anchor, Karl Rove tried to steal votes electronically. According to the group, Rove laid tunnels through voter tracking software intended to switch votes in three states from Obama to Romney during a server crash, essentially stealing the election.

According to the story, Anonymous discovered Rove’s plan months in advance and began coding firewalls to block “kingmakers” from changing votes on Election Day. Networkers working for Rove tested the hack in the days leading up to November 6, while firewalls were disabled. On Election Day (at least by Anonymous’ account) Rove’s “worker bees” made 105 attempts to cross through firewalls, but the hacker network successfully kept them out. They offered specific (albeit coded) details regarding Rove’s attempt, and hinted that more details may appear on Wiki Leaks in the future.


Supernova Born's picture

Gold standard: industrialists that produce something rule
Fiat system: financiers that produce nothing rule

tony bonn's picture

bravo keith and the gold standard institute

XenoFrog's picture

It should be a Gold/Silver standard. A 100% Gold standard has and did fuck over the little guy.

funthea's picture

I completely agree.

An exerp from something I wrote to FOFOA:

Gold was held and controlled by the CB. With silver in the way, they could not control the monetary system to the extent they needed to. They needed to limit the competition. This was good for the bankers but bad for the people at large.

Imagine this: if the only cars available were Chevy's, and they were put to market. The price discovery that would be found would be regarding those who wished to have a car and those who did not. Price discovery was not found necessarily for a Chevy, but rather for a car in general. If GM limited production for various reasons, be it legitimate or otherwise,a new price discovery would be found. They could manipulate the supply at will, thus causing new price discoveries. However, if we introduce competition of Ford, suddenly we find true price discovery, of not only cars in general, but also for the individual auto maker, one over the other. Even if one wishes to manipulate the supply, true price discovery is maintained.


kralizec's picture

And like in the days of old, precious metals can be debased, just like currency is now...some things, like fraud, will never end, no matter the standard...

SAT 800's picture

The problem you refer to is the centralized power of a Central Bank; this has nothing to do with a gold standard; which does not require a central bank to function.

SAT 800's picture

A common mis-understanding. you refer to the past as tho you knew what happened in it. Study history carefully and extensively; it will take years; eventually you actually will know what happened.

Skin666's picture

"Despite some government interference, the Classical Gold Standard enabled a Golden Age of prosperity and full employment that is totally out of reach today (not to be confused with the rapid development of technology). This is not to say there were not business failures, bank failures and panics – what were later called depressions and now recessions. A free market does not attempt to guarantee that no one can ever lose money. It is merely an environment in which no one is forced to subsidize someone else’s risks or losses."

The various panics and depressions of the 19th and early 20th century were mostly due to the fractional reserve banking system. These were also I believe largely intiated by the big banks themselves, so they could buy up bankrupt assets at a fraction of the pre panic price.

This is never admitted by the likes of Paul Krugman, when slagging off the idea of going back to a Gold Standard.

Not that we need a Gold Standard anyway. Gold and silver money is all we need, along with electronic currencies like Bitcoin, that will make the big banks and government redundant.

LongSilverJohn's picture

The old monetary standard that used gold and real bills (short term receivables to secure short term loans) had a close link between production, trade and final payment, keeping things on a short leash for the benefit of creditors and commercial borrowers.

The system was self adjusting, as noted above, though improvements in productivity put downward pressure on prices making it hard to service long term debts.

So what about a system that used an algorithm to extract a nominal clearance fee on payments going through the banking system with proceeds used in the FX market to keep a currency pegged to gold or some other external standard?

The relationships would be defined and formalized into the system, making it flexible, able to accommodate positive economic contributions (productivity) and yet predictable. Thoughts?

SAT 800's picture

The downward pressure on prices, and the actual falling prices, during the late 1800's, for instance; were not a problem. So, you have invented a complicated bureacracy very liable to fraud and distortion to solve a problem that doesn;t exist. This universal falsity that resides in everyones mind, that a gold standard somehow limits growth and productivity improvements is really remarkable. Propaganda really does work. Study of real history works also; I reccomend it to you.

GMadScientist's picture

Knobs are great, it's the assholes turning them that leave a lot to be desired.

Why not just peg the SDR to gold and move to "one reserve currency to rule them all"?