Money is a great metaphor.
When it’s free and easy, so is the society that handles it.
When it’s hard to come by and retains its value, money is trusted and respected. As a result, at a social level there is greater trust and respect.
If you think back to the time of the classical gold standard, society was very conservative. That was when gold was money in the hands of the people.
But the First World War changed that. It required huge monetary inflation to carry out. Inflation steals purchasing power from the people. Gold is the messenger of this theft. It tells the tale in its price.
The main global power at the time, Britain, effectively ended the classical gold standard with the outbreak of war. Gold sovereigns and other specie coins no longer circulated. They were replaced by paper money.
Long after the war ended, Britain tried to return to some sort of gold standard. You could buy gold, but only in 400 ounce bars. Clearly, this was designed to keep gold out of the hands of the people.
In trying to return to the discipline of gold, the Brits priced it incorrectly. The gold/pound exchange rate didn’t recognise the huge war-time inflation. It was never going to last.
During this time, the US, the rising global power, continued to allow gold coins to circulate. But with the onset of the Depression, these coins didn’t circulate. People were hoarding instead.
In the prior years, the banks created way too much credit. This was the Roaring Twenties. The people instinctively knew it. When it all went pear shaped, they wanted their money.
Gold was money back then. Gold was the reserve base that the banks created mountains of paper money on. So when the people wanted their money (gold) back the vaults emptied. This in turn meant banks had to sell assets to ensure their leverage didn’t explode.
Hence the deflation of the 1930s. Hundreds of bank runs meant gold drained out of the banking system.
That’s why Roosevelt made it illegal to own gold. Soon after becoming president, he issued an executive order forbidding payment of gold by banks. This made things worse. Citizens withdrew cash to buy gold on the international market.
Roosevelt then ordered all citizens to hand in their gold at the official price of US$20.67 per ounce. The nationalisation of the gold market was completed in January 1934 with Executive Order 6102. It required the banks to turn their gold over to the US Treasury. It also gave the president authority to devalue the dollar by 40%.
Just nine months after confiscating gold from its citizens in exchange for fiat currency, the government devalued that currency by 40%. It was the largest theft in history. Moreover, it was a major blow for the trust and respect that had previously existed between government and its people.
Now here we are, 85 years later. The greenback has lost an additional 98% of its value in relation to gold.
What do you think that has done to the level of trust and respect that exists in society?
It’s why we have vast government programs. It’s why we have deteriorating standards of education. It’s why we have thousands of unelected bureaucrats in thousands of government funded organisations trying to tell us what to do.
It’s why we have increasingly destabilising booms and busts and sky-high house prices. Cheap and easy money screws the wage earner and rewards the leveraged speculator.
Moreover, it rewards big business and big government. Which is why the path to low/zero/negative interest rates will not change.
Central bankers around the world should know that gold held the financial system together with a tough sort of discipline during the ‘golden age’ of the classical gold standard. It returned for a short time following the Second World War. That was the Bretton Woods System, which lasted from 1945–1971.
But gold and big government do not mix well together. They are mutually exclusive. Which is why central bankers just shrug their shoulders and cut rates again. They hope, but don’t expect it to really help.
The real solution to our current woes though is pretty simple: Make gold a reserve asset in the global banking system and revalue it. This would reliquefy the global financial system. It would reduce the real burden of debt.
More importantly, giving gold an official role again would bring discipline back into the system. Money wouldn’t be so easy come, easy go. Trust and respect would creep back into society.
Of course, that’s not going to happen. We will only return to gold following a complete monetary breakdown.
But you can do the next best thing. Buy gold!
Or, if you’re willing to take on more risk, buy gold stocks.
Editor, The Rum Rebellion
PS: I recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.