Bernanke's Great Lie: The Gold Standard and the Great Depression

(See Part I, The 'Great Slump' of 2008.)

The purpose of the following is to argue that the "gold standard," as understood by most of the public, did not cause or worsen the Great Depression as current Fed Chairman Ben Bernanke has based many of his papers, speeches, and, to a large extent, his entire career on. In our contemporary times, I do believe this blame must be firmly rejected and monetary policy should, at the very least, be debated in a national forum. Indeed many other economists, such as the Friedman family, Anna Schwartz, Alan Greenspan, and Jeffrey "Shock Doctor" Sachs, have all propagated this lie.

My premise is simple. I charge that these renowned Keynesian and Friedmanite-Monetarist-Chicago-Shock-School economists have consistently used the term "gold standard" to mislead their audiences and readers. For the sake of brevity, I will focus on Mr. Bernanke as he is the current standard-bearer of the Fed's fiat monetary system. Frequently, these economists do concede there are differences, but instead of clarifying they muddy the waters. For instance, in his 1990 NBER paper Bernanke frequently refers to an "interwar gold standard" and in his 2002 salute to Milton Friedman he acknowledged that "the gold standard was not adhered to uniformly as the Depression proceeded."

While there may be a paper from the Austrian School of economics that firmly rebukes the claim in my direct fashion, based on the mislabeling of the term, I have not come across it (yet). However, both Murray Rothbard and Walter Block have understood this truth as well, and dropped the clues.

Furthermore, there should be very little surprise that the statist forces have used this trick. Yesterday's communist "nationalization" is today's "conservatorship." "Hoarders" are really savers. "Insurgents" are really guerrilla fighters; only a minority are "terrorists" as our political leaders consistently tell us. An unbiased observer would call a "war" whether on terror, poverty, drugs, WWII, etc. - as state-sanctioned murder, destruction, and theft of property. Even the political terms "liberal" and "conservative" are terms meant to confuse and divide, as I discovered in one of my first articles "An Hypocrisy of Terms: Liberal and Conservative".

Without more ado, let's dive into "gold standard" terminology, although if you do not understand the differences between commodity, receipt, fractional, and fiat money to please read this first "The Money Matrix - What is Honest Money? (PART 4/15)".

• The pure 100% reserve gold and silver standard is commodity money issued in the form of hard gold and silver coins, or receipt (whether paper or electronic) money issued in lieu of metal held in a money warehouse. The amount of coinage in circulation plus the receipt money always equals the total mass of metal in the monetary system. Rothbard refers to this as a "parallel standard," but be careful to not confuse this with bimetallism.(1) I have found that this is what people commonly mistake as the "gold standard." I will refer to the above as the Austrian standard for simplicity.(2)

• The "international" or "classical" gold standard is actually a form of fractional money. In simple terms, one can redeem paper or electronic currency for a fixed amount of gold coinage; America was officially under this standard from the Gold Standard Act of 1900 (3) until FDR outlawed and confiscated the gold of the people in 1933. The critical concept to understand here is that the monetary supply can be inflated or pyramided upon the total base amount of metal, which of course is conveniently possessed by the government. So, under the "classical" gold standard, if everyone decided to exchange their paper receipts at the same time, the country would be bankrupted; not enough gold would exist for everyone to redeem their receipts. When the United States executed the Gold Standard Act of 1900, the first step was for the government to procure a massive reserve amount of gold, so that everyone can be fooled or lulled into thinking that their gold can always be redeemed in full.(4)

• The "gold bullion" standard is one of the systems Bernanke lumps together as the "interwar gold standard." Under this monetary system, gold coins are never minted. Redemption in gold is only permitted in the case of large international transactions; the country's populace is prohibited from ever possessing the actual money [Rothbard, America's Great Depression, p(190-1/409)]. The country can proceed to inflate for as long as it can fool the populace that the disparity between gold and its banknotes is acceptable. In many ways, America existed under this unstable yoke from the FDR Gold Theft of 1933 until the Nixon closure of the international gold window in 1971.(5) The American citizenry was not permitted to own gold coins and bars until 1975.

• Under a "gold exchange" standard a country keeps no physical gold that can be redeemed. For reserves, only other "hard" receipt money from another nation that could ultimately be redeemed in gold is kept. The prime example of this is many European countries adopting the US dollar immediately following WWI. Again, the country can proceed to inflate for as long as it can fool the populace that the disparity between the pegged "hard" currency and its banknotes is acceptable.

• A fiat monetary system consists of money that is declared "legal tender" by a government with no commodity backing. Fiat is Latin for "so be it" meaning money ordered into existence by a sovereign power. As Rothbard notes, if one examines both the "gold exchange" standard and the "gold bullion" standard closely, both are de facto fiat currencies as the people are in effect banned from possessing the backing commodity, gold.

Now what really happened in the early twentieth century? This must be understood before we examine Bernanke's interpretation. Up until 1914, America and most European nations were on the "classical" gold standard. China operated on a "classical" silver standard. Then America brought the central bank known as the Fed into existence in 1914 via the Federal Reserve Act of 1913. Next, to finance WWI, France, Holland, Germany, Britain, Belgium, and Italy broke off of the "classical" gold standard and issued paper money to finance their military spending deficits. Indeed, the four year long war would have only lasted months if the countries had remained on the gold standard, or had their paper debt been refused by countries like America [Lips, 2001]!

Amidst the ruined fields and cities, the inequities of Versailles led to Germany's infamous Weimar hyperinflation of 1923, which was only one of many national currencies ravaged by hyperinflation. Germany, Russia, Poland, Austria, and other countries suffered greatly due to the lack of sound money; Weimar was ended by the introduction of the Rentenmark, which was tied to gold [Evans, 2003]. However, on the side of the WWI victors (Britain, France, and Italy) was America with its gigantic hoard of gold. American Fed chairman Benjamin Strong massively inflated the dollar to prop up the Bank of England's "gold bullion" standard, with no benefit to the American people whatsoever.

This Great Inflation took place between 1921-1929 and the American monetary supply was inflated by 62%, or 7.7% annualized, as can be seen in the below table. As the table shows, this gushing spigot of credit was abruptly slammed shut by the Fed at the end of 1928, and directly preceded the stock market's infamous crash of 1929, as well as collapses in farm prices and commerce. In 1930, massive job losses gave way to many economists' soothsayer prophesies of the future, including Lord Keynes' "The Great Slump of 1930." [Note that several intervals in the table are just 6 months. Rothbard, America's Great Depression, p128-209/409.]

In 1931 all hell finally broke loose. A cast starring JP Morgan, the Rothschilds, the Bank of England, the BIS, and the Federal Reserve Bank of New York attempted to avert the collapse of Kredit-Anstalt, Austria's mega-bank. The attempt failed when France called in its loans issued to Germany and Austria, which had formed a customs and trade union on March 21. The effects of the trade collapse in Europe quickly crossed the Atlantic, and the Fed and many American banks had bought up German debt, which had plummeted in value. Germany and Austria fought like wolves to cling to their "gold exchange" standard.

The final descent came on September 21 when the Bank of England abruptly left its "gold bullion" standard and depreciated madly, causing massive losses to French banks. Markets hemorrhaged and froze up, and bank runs and panics took place everywhere. [Rothbard, Depression, p295-322/409.]

To make a long story fairly brief, President Hoover began the ill-fated government-assisted economy called the 'New Deal,' which FDR fanatically continued. FDR ended the "classical" gold standard with his theft by force of America's remaining coin bullion. On March 5, 1933, he cajoled the American public to return its gold coinage to the banks. On April 5, 1933, he made the private ownership of gold illegal and demanded that all remaining gold be surrendered to the government.

The next step was obvious, as Milton Friedman and Anna Schwartz wrote in A Monetary History of the United States, 1867-1960, FDR devalued the dollar from $20.67 to $35.00 per troy ounce of gold to PARTIALLY account for all of the inflation that had occurred since 1914. Those who were forced into giving their gold to the banks in March and April now realized a whopping 70% loss of their purchasing power, which had been stolen by the Fed. Those who retained their gold were now conveniently branded outlaws, and unable to legally use their gold as currency. [Note: After the FDR confiscation order was passed, only ~20% of the outstanding gold coinage was returned, the rest disappeared.] The statists' rule by decree, or fiat rule, began to fully consolidate its grip upon the world.

America's poor and middle class would languish in the throes of this 'New Stupidity' until WWII. A few Misesian boom-bust cycles later bring us to the present-day, as President Obama readies his 'New Stupidity Again' stimulus plan. As the Great Depression was to a large extent exemplified by high involuntary unemployment, one has only to look at the below chart to realize that FDR and Hoover were economic failures. Only until the war boom of 1942 would unemployment drop to pre-Depression levels. [Of course, this "boom" assisted America, but destroyed much more of the industrialized world. I've found that Henry Hazlitt explains the fallacies of the New Deal best in his Economics in One Lesson, chapters 4 and 8.]

Now at long last we can refocus on Bernanke's lies. In fact, he is fully cognizant of the Fed's role in causing the Great Depression. On November 8, 2002, he stated:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

However, in the same speech, a cascade of lies flows:

The next episode studied by Friedman and Schwartz, another tightening, occurred in September 1931, following the sterling crisis. In that month, a wave of speculative attacks on the pound forced Great Britain to leave the gold standard.

As previously claimed, Great Britain had never returned to the "classical" gold standard, and instead had been propped up by the FED! The "speculative attacks" were not speculative at all; they were committed by those who recognized that this Madoff-Ponzi scheme had failed!

[In the 1920's] countries that adhered to the international gold standard were essentially required to maintain a fixed exchange rate with other gold-standard countries. Moreover, because the United States was the dominant economy on the gold standard during this period (with some competition from France), countries adhering to the gold standard were forced to match the contractionary monetary policies and price deflation being experienced in the United States.

Again, a blatant misuse of "gold standard"! The countries Bernanke is referring to were on the "gold bullion" or "gold exchange" standards, which are de facto FIAT!

Friedman and Schwartz's insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.

Friedman and Schwartz had no "insight" here! In fact they were blinded! Countries on the "gold exchange" standard were constantly devaluing their currencies by repegging to the dollar or the British pound, although they were correct in that Fed dollar inflation secretly contributed to further debasement.

Bernanke in his 2004 speech "Money, Gold, and the Great Depression":

After 1918, when the war ended, nations around the world made extensive efforts to reconstitute the gold standard, believing that it would be a key element in the return to normal functioning of the international economic system. Great Britain was among the first of the major countries to return to the gold standard, in 1925, and by 1929 the great majority of the world's nations had done so. Unlike the gold standard before World War I, however, the gold standard as reconstituted in the 1920s proved to be both unstable and destabilizing.

He's lying through his teeth! Great Britain never returned to the "classical" gold standard after 1914! In 1929, NONE of the countries that had left the "classical" gold standard returned to it! NONE ever would! Sure, he admits that the post-WWI "gold standard" did not work well, but he does not state the true reason why! The British pound, the German mark, the Italian lira, et cetera were all just fiat in disguise!

Here's classic Bernanke:

The existence of the gold standard helps to explain why the world economic decline was both deep and broadly international.

Hogwash! First, WWI would have been greatly shortened and the economic decline would never have occurred if the world had not left the "classical" gold standard. Second, we have already seen how the FED, Hoover, FDR, and especially the British lack of fiscal discipline widened the depth and breadth of the Depression, not the "gold standard"!

If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold. As Friedman and Schwartz noted in their book, countries such as China - which used a silver standard rather than a gold standard - avoided the Depression almost entirely. The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries.

Sorry for sounding like a broken record, but let's continue. First, all the countries Bernanke mentions were not on the "classical" gold standard, just a weak fiat facade. For one of his key supporting pieces of evidence, Bernanke fails to complete a thorough eco-political study of China, including the theft of the populace's silver by their government, and the MINOR detail that China was under massive upheaval and wracked by civil war in the mid-1920s, so they just MIGHT have been fudging some of their economic numbers. Comparing the Chinese economy with the likes of Britain and France in 1925 is as silly as comparing the Somalian economy with Japan's in 2008.

In his 1990 NBER paper "The Gold Standard, Deflation, and Financial Crisis in the Great Depression," Bernanke does reveal he is aware of the Genoa Conference of 1922 that promoted the "gold exchange standard." It is also interesting that in 1990 Bernanke fairly consistently uses the term "interwar gold standard," while in his recent speeches and writings he just uses "gold standard." At no point does he clearly define the "interwar gold standard." In fact, he even lists the League of Nations claim that by 1925, 28 of 48 major currencies were once again "pegged to gold."

Maybe when this depression finally ends in the hyperinflationary death of a bunch more fiat currencies, I will write a paper to correct all the Keynesian and Friedmanite gaffes Bernanke and others continue to make. Hopefully, I can call it "How the Austrian Standard Cured Inflation and Stopped the Financial Crisis of the Greater Depression." I will be sure to correctly define the Austrian Standard first.

(1) Bimetallism refers to a policy when countries fix a ratio of silver to gold, say equating 16 grams of silver to the same purchasing power as 1 gram of gold. America used this type of monetary system during much of its early history. The key problem with bimetallism is that differing international fixed ratios or even large supply-side changes will result in large outflows of metal, or attempted arbitrage, to make profits based on the ratio difference. Roughly speaking, a kind of modern fiat equivalent would be the yen carry trade, which is based on foreign exchange rates and interest rate differences.

(2) The Austrian School of economics follow the Misesian regression theorem, which succinctly states that for anything to become money, it must first have intrinsic value of its own and have been chosen by the free market to serve as money. When this occurs, the gold or silver typically gains a monetary premium over other commodities [Block, 1999]. From a sound money purist's point of view, the most obvious example of this is the monetary premium that the petrodollar receives as the world's reserve currency. Gold and silver have unparalleled records as successful money across most of continents, culture, and time. One has only to research the Alexander's Greeks, the Mayans, medieval Europe, imperial China, the Egyptians, British Empire, the Romans, and ancient Mesopotamia.

(3) The Gold Standard Act of 1900 equated $1 USD ≈ 0.048 troy ounce gold. At today's price of ~$850 per ounce, the dollar in December 2008 is worth a scant 2.4% of its' 1900 value.

(4) The pro-FED forces were actually anxious to pass this law; it was a key step towards the Federal Reserve Act of 1913. By making gold the sole metal backing the currency, the pesky, harder-to-control threat of silver was formally vanquished [Rothbard, The Case Against the Fed].

(5) Federal outlays to pay for President Lyndon B. Johnson's "Great Society" and the Vietnam War caused a massive debasement (or inflation) of the dollar, which resulted in other nations, most famously France, to redeem their dollar reserves for gold.

Comments

[socrateazz:]

Very interesting. Some of that info was new to me. Other parts were from a view I had not concidered.. Let me add all goods have values. Are they really correct monetarily? If not, then the average value should tend toward the correct value. And excess will eventually cause a value to decrease. A shortage will cause a value to increase. Any prices will depend upon a supply of the product and a demand for it! Gold is just a means of valuing goods. Money has replaced that means of valuation. Blaming exchange problems on gold is as rediculous as thinking gold will solve monetary problems. I say the problems we see today and the 1930's are the result of and effort to overcontrol values of goods by manipulating what is. holding prices above or below actual value will cause and extreme opposite valuation. Expect a lot of volitillity in goods during the next few years. Those who produce those goods will then expect more return for risking price fluctuations. And many companies that have survived quite well when things were more stable may not exist in the furture. sorry got off the real subject.

2008 Dec 26 06:37 AM

[NOWHEREMAN:]

Socrateazz: you have earned your moniker.

The Dust Bowl phenomenon was another major contributor to the Great Depression which receives no notice but created havoc across the country and prolonged the Depression. A comparable event is missing from the current scenario, and its absence will mitigate our current dillema as well.

IMO

2008 Dec 26 10:02 AM

[kotika98:]

dude, when you say "I will write a paper" you make it sound like you are a professional economist - but you are not. Seems like you havent read Friedman's paper explaining that gold standard in the form you are promoting is simply not possible.

You are onto something here, though. Your paranoid rants are probably caused by realization that the government ultimately decides how much your savings will be worth, and you dont like it. Neither do i, but getting onto gold standard would not change that.

Finally, Bernanke etal like fiat monetary system for precisely the same reason you dont like it - that they can control the money supply.

2008 Dec 26 10:07 AM

[Prudent Man...:]

When the government guarantees losers and taxes and over regulates winners what is the incentive to produce.

This whole gold/fed/theories/etc. are malarkey. You either produce and that production is monetized or you don't. If people spend more than they produce as does the government you have a credit bubble. And bubbles always burst or deflate. This one has taken thirty years to do so and all the Administration, Administration-Elect and Congress propose are polices to exacerbate the problem as FDR.

We encourage consumerism and credit while penalizing productivity. Never worked and never will work whatever any self-anointed theorists claims. This fact not theory.

The "Baby Boomers" have squandered the legacy of the "Greatest Generation" and they have neither the will, talent or fortitude to restore it for at least another generation or two.

2008 Dec 26 10:33 AM

[User 30121:]

Jake: Thank you so much for this article! It needs to be absorbed! Some will, some won't. Those that don't are doomed to make the same mistakes, and as investors, are simply doomed!

I couldn't help thinking about the "20-20 test". You know, the one where in 1900 one could take a 20 dollar bill and purchased a fine suit and, with a 20 dollar gold piece, do likewise. Fast forward to today. Take a 20 dollar bill and see if you can find a decent pair of socks for the price, whereas a 20 dollar gold piece STILL buys you a fine suit!

Now, where should one put their money? In PHYSICAL Gold and silver, period!

2008 Dec 26 11:25 AM

[User 30121:]

I agree with your comments to a point about the Dust Bowl, et al. However, to suggest that that makes things different this time, without identiying the fact that the EGB's (elitist greedy bastards) have already decimated the economy to a degree unimaginable in relationship to negatives of the past is just plain short sighted IMO.

2008 Dec 26 11:31 AM

[flow5:]

A metallic standard is an impossibility. There is no such thing as "free trade".

2008 Dec 26 12:36 PM

[GMiki1:]

We ARE having weather phenomena that are extreme and have great economic impacts--was Katrina not a major, major event with heavy costs. I have heard expressed the idea that we may have another Dust Bowl coming as well. Certainly we have exacerbating occurrences such as peak oil and possible food shortages.

As for the economic sources of the Great Depression, I always heard in school that buying on margin was a cause of the stock market collapse. Leverage, in fact, underlies our current problems as well as an unbelievable mountain of debt against a miniscule savings rate. At the time of the Great Depression, we were a creditor, not a debtor nation.

2008 Dec 26 12:42 PM

[NOWHEREMAN:]

Hasn't stopped us from printing money has it?

2008 Dec 26 01:02 PM

[Greg Pinelli:]

I don't know that we needed 50,000 words to tell us paper money/credit is too easily manipulated and that gold and silver provide what amounts to an independent arbiter....It's interesting that a poster thinks the gold standard is "malarkey" yet rants that money is manipulated and bubbles created precisely so consumerism can run rampant.
and also kotika....dude..Milton Friedman originally was both an Objectivist and Austrian disciple who thought the gold standard was just dandy. There's NO reason it couldn't work..except that people in power are scared to death of it...and people who fancy themselves investors like where there ammunition comes from.

2008 Dec 26 01:06 PM

[Periphanto:]

Much of this is simply covered in the Money Masters Video available on Google Video to view. I have also purchased a copy as it is information that may some day have its rights in question. For about 3 or 4 years I have seen the outcome of economic events. Even 911 is tied to economic direction/control. European Bankers are in possesion of the World. They will stop at nothing for this prize. If you think that anyone is a good guy it is my opinion that you are wrong. This is all Thrid Chakra Existing. Capitalism is born from the third Chakra. It can only ever exist in the Third Chakra. It will take Centuries for Man to move from this need, which creates most if not all War on the Planet. I have no solution or suggestion. It is simply how man is. There will always be someone on top and in control. question is how accessible is wealth to most? I am just waiting to see what the Money Masters next move is... Globalism? I think so... Just with Globalism in place and Absolute Global Control, what will the motivation or philosophy be that the populus must live be??? I wonder if Capitalism will survive. One thing is certain. America as great as she was will take several blows. Historical evidence of such is cited when our currency was inflated to prop up England's Central Bank. European Bankers again in control over the United States. I wonder if LAND itself will be confiscated??? It would not surprise me at all not when man lives in his Gut, the third Chakra.

2008 Dec 26 01:16 PM

[jimmy46:]

It would be nice if all countries went on an honest gold standard similar to before WW1,

BUT

That's not likely, and I'm not sure it would do any good for the US to go it alone.
Also, there isn't enough gold in the world for today's needs.

The gold standard worked at the end of the 19th century because so much new gold was found in CA in 1849, Australia, & the Yukon.

Gold would probably have to be priced at $5,000 / ounce to balance gold supply with the size of the economy.

2008 Dec 26 01:29 PM

[NOWHEREMAN:]

User 3: hell no! I just made that comment to elicit a response from the Author, since he was making comparative statements.

As far as I'm concerned, buy gold and hold it. Don't use it as a trading vehicle.

You pay insurance for all sorts of things and are grateful that you don't have to use it. Nothing happens, it expires and you have to pay some more.

Gold does not expire.

My only beef with gold bugs is that they are trying to Time gold moves. You do not "time" the purchase of Insurance.

Buy It now changes to Buy it later, at the drop of a Pin.

You make a bunch of money in an ETF? this is paper not gold. Sell it, buy a coin or ingot. It will go up as much as that ETF and you won't be playing with pieces of paper.

So when someone says "this Will happen by XYZ", as a reason to buy gold, I question the reasoning behind market timing call. You either believe in it or you don't.

I started buying gold and silver in various forms back in 1974 when I married my current and only wife. I still have every coin, chain, ring etc. It can all be melted down if need be. I remember when you bought a gold chain by the gram. I was in Europe in June. They were using the same method for both Gold and Silver.

I am a Gold Investor not a Gold Bug.

2008 Dec 26 01:31 PM

[silverwood:]

If we are ever to go back to a gold/silver standard of some type, then what I deem as a problem with our original system was defining a unit of metal as a dollar, or peso or frank, etc. This new system should mint coins that only state the amount of metal it contains. Then let the market decide how much of that metal is needed to purchase a particlar goods or service. Paper money could continue to circulate along side the metal and it too would be valued by the market accordingly in relation to metal. Get government out of the money issuing business. Private business could freely mint the coins and government's sole function would be to monitor it and keep the coin's stated content accurate.

2008 Dec 26 01:48 PM

[User 30121:]

aitavaras:

Hear, hear! Your point is well taken!

My retort (language) was too pointed..and my fault!

I, too am into physical gold (and silver) BIG TIME as I have commented many times here. I classify myself as a gold "survivor" since without my decision to become an accumulator after losing "everything" in 2000-1, I would have been homeless..or worse. Now, I am just waiting for the other (government) shoe to drop which will make me whole financially, after the market debacle took it all from me as stated above.

2008 Dec 26 02:01 PM

[NOWHEREMAN:]

Its just that there are so many of these Articles all saying about the same thing.

About the only thing different is the Name of the Author and many times the same Author writes about the same thing multiple times. This was Pinelli's 3rd article in the past 10 months. They all say the same thing but the common stocks he recommended in previous installments have all been reamed.

The first included his favorite Silver Company, CDE. He pushed it in his Article and in his comments to queries to the Article. Recently I mentioned it as being a great long term Silver Investment. In his Geo Persona, he berated me for even considering a penny stock which CDE had turned into since it was the Greatest Silver play ever in early March. What changed? He was pushing a new favorite, SLW. SLW isn't even mentioned in the current Article.

Other Authors do the same thing. Buy this or buy that for a multitude of reasons and if they go down, they have a multitude of new "Buy Nows before its too late" all for essentially the same reasons with nary a mention for the other recommendations.

That's really why I grind them through my particular Mill. I do not like "Poseurs".

I have asked Mr. Pinelli if he truly has a Bachelor of Arts in Experimental Psychology repeatedly. He has not replied. I now know the true nature of the person. IMO

2008 Dec 26 06:23 PM

[tdillian:]

very interesting article.. learned things I did not know before. thanks

2008 Dec 26 06:31 PM

[fran:]

the truth lies somewhere between today's degrading value fiat currency and the first barter system used eons in the past. i have not the time to settle on what's best. i believe in two things--

gold offers a "store" of value

recent Richard Russel article[DOW THEORY PUBS], reproduced recently 321gold.com
makes sense[gold, wealth mobility, liberty--ref W. Buffet's father, cong rep nebraska].

all the remaining is "TALK ONLY". expect little change in any near timeframe.

2008 Dec 26 06:37 PM

[BlackyBlack:]

I think I get what you're saying, but you didn't actually say it - the conclusion I draw from your article is that Bernanke is wrong (or was lying) and that the Fed can't avert debt deflation and a depression through inflation. Bernanke has said that the Fed can avert debt deflation by inflating the money supply or "credibly threatening to do so" - because in a fiat regime the power to inflate the money supply is theoretically unlmited. Bernanke has said that under a fiat regime such as we have now we should not have the same problems with debt deflation because those problems were largely a product of us being on the gold standard. But you're saying it's not that simple.

I think you have a very good point. You should write that paper now.

2008 Dec 26 07:10 PM

[Jake Towne:]

Dear kotika98 -

I am not a professional economist. Perhaps I should add a yet at the end there.

Most of the naysayers of the gold standard simply claim that the worlds supply of gold is "not enough". This is a complete fallacy. Gold makes good money since it is scarce in the economic sense, but is actually fairly plentiful. You don't get it. In the Austrian Standard described above, the items you would purchase would be priced in goldgrams or silvergrams, not paper petrodollars!! Plus in todays electronic age it could be store in (well-)audited money warehouses/vaults along with silver.

I have read Friedman and Schwartz - most of it anyways, its a damn long book - and they raised a lot of good points. However, I could have rewritten this article from their "lies" instead of using Bernanke's; I figured he's more renown right now, plus he's a super-easy target.

If I may be allowed a barb in reply; as far as my writing being "paranoid", you and your central banker buddies have sure done a great job over the last decade, haven't you? :) No, the Austrian Standard I described above would really be the "people's money" not that of governments. Why should the peoples of this earth cede their right to honest money to the government? Go ahead, tell me why. And then demonstrate what a great job they have done since 1914. I would be interested if you could do this; it would repudiate the solution to the current crisis, Austrian economics.

Also, if you have not already, I suggest you read Rothbard's "What Has the Gov't Done With our Money?" The link is in the original article here, where just like a "professional economist" I listed my sources. :)

Thank you for commenting!
Jake

www.nolanchart.com/art...



On Dec 26 10:07 AM kotika98 wrote:

> dude, when you say "I will write a paper" you make it sound like
> you are a professional economist - but you are not. Seems like you
> havent read Friedman's paper explaining that gold standard in the
> form you are promoting is simply not possible.
>
> You are onto something here, though. Your paranoid rants are probably
> caused by realization that the government ultimately decides how
> much your savings will be worth, and you dont like it. Neither do
> i, but getting onto gold standard would not change that.
>
> Finally, Bernanke etal like fiat monetary system for precisely the
> same reason you dont like it - that they can control the money supply.

2008 Dec 26 07:44 PM

[SeekingTruth:]

An exemplary treatise on this subject, and I tried to learn as much as possible. Thank you for your strong efforts.
I think there are problems whatever sytem is chosen, but I also believe that our money should be backed by something other than "the full faith and credit of the US Government." Whether it's paper money , or "Cabbage Patch Dolls" anything that can be mass produced at will can't have much of a future based on it's own intrinsic value.
As each new administration becomes potentially more dictatorial, as we have just witnessed, the probability that any system chosen, albeit superior to others , can be messed with upon a change in power, tends to makes the whole exercise virtually academic or moot, as your history lesson reveals. This is most disconcerting, but I don't see a workable solution in the face of this.
It looks like every man for himself if we dare be realistic. So buy the gold, the silver, the Swiss Francs, the farm land, a mule and a plow , the solar power system or whatever it takes to try to get a good nights sleep is the only practical way to deal with all this, at least as I see it right now. Perhaps I will learn more and change my mind.
Best Wishes to All in the New Year..

2008 Dec 26 08:01 PM

[mattwm:]

Very interesting article.. But I can't help noticing how much you sound like a 9/11 conspiracy theorist. Why is Ben Bernanke a liar? Are you suggesting that he knows better but is trying to cause the American economy to collapse? Please give some reasons based on some manner of evidence. Even anecdotal conspiratorial reasons would be better than simply claiming he's a liar; at least that would make you either right or delusional.
I must admit that I did not know FDR confiscated privately owned gold. I verified this with further research. I found this extremely alarming.
Thanks for the thought provoking article!

2008 Dec 26 09:20 PM

[Allah:]

That's a dumb argument - a long term investment in the dollar would be buying treasury bills not holding a 20 dollar bill. Investing $20 in t bills for 108 years would yield enough to buy a suit as well. The gold piece might buy a suit now but that's only because gold is in one of its infrequent price spikes, wait a few years for gold to revert to it's regression line and you'll have shop in Walmart to buy anything with the gold piece.

> I couldn't help thinking about the "20-20 test". You know, the one
> where in 1900 one could take a 20 dollar bill and purchased a fine
> suit and, with a 20 dollar gold piece, do likewise. Fast forward
> to today. Take a 20 dollar bill and see if you can find a decent
> pair of socks for the price, whereas a 20 dollar gold piece STILL
> buys you a fine suit!
>
> Now, where should one put their money? In PHYSICAL Gold and silver,
> period!

2008 Dec 26 09:26 PM

[Tony Petroski:]

I enjoyed this article. Can I change the subject slightly? Keynesianism always made sense to me in theoretical terms: Save during flush times and go into debt during harsh times. But Keynesianism never works in practice because politicians always have the pedal to the metal all the time. Therefore we get booms and busts that are worse than if we had no political interventions. On the money side, a gold standard works in theory for a stable country operating a common-sense economy, but in reality, politicians realize that they have to inflate their way out of the hole, hence, goodbye gold standard.

2008 Dec 26 09:59 PM

[raising4dau...:]

Good catch on the fallacy of the 20-20 test. $20 invested in dollars since 1900 would be worth a whole lot more than $20. At 4% compounded annually, the $20 doubles 6 times to $1,280 which buys a darn nice suit today. Even with taxes, it's still worth an ounce of gold today.

On Dec 26 09:26 PM Allah wrote:

> That's a dumb argument - a long term investment in the dollar would
> be buying treasury bills not holding a 20 dollar bill. Investing
> $20 in t bills for 108 years would yield enough to buy a suit as
> well. The gold piece might buy a suit now but that's only because
> gold is in one of its infrequent price spikes, wait a few years for
> gold to revert to it's regression line and you'll have shop in Walmart
> to buy anything with the gold piece.

2008 Dec 26 10:58 PM

[Gedankonomist:]

Better paranoid than stupid.

On Dec 26 10:07 AM kotika98 wrote:


> You are onto something here, though. Your paranoid rants are probably
> caused by realization that the government ultimately decides how
> much your savings will be worth, and you dont like it. Neither do
> i, but getting onto gold standard would not change that.
>

2008 Dec 27 12:48 AM

[Gedankonomist:]

The FED is in essence a counterfeiting operation. Would you expect the head of a counterfeiting operation to tell the truth?


On Dec 26 09:20 PM mattwm wrote:

> Very interesting article.. But I can't help noticing how much you
> sound like a 9/11 conspiracy theorist. Why is Ben Bernanke a liar?

2008 Dec 27 12:50 AM

[John Lounsbury:]

I read this article late, so I got to read an entire comment stream. The comments really shorten what I need to say. The author, whom I have not read before, covers a lot of interesting history, presents conflicting opinions from others, the great and not so great, and adds his own opinions.

Specific comments I identify with came from socrateazz, aitvaras, PrudentMan and SeekingTruth. (Sorry if I missed citing others, its a long comment stream.)

The one thing I want to add is something I felt was lurking in the thoughts behind some of the comments but was not clearly said. The value of money is only based on what it can buy that has utility. Money is only a means of exchange, much more efficient than bartering. If the supply of anything that is accepted as a medium of exchange exceeds the growth in items of utility, the value of a unit of the medium will decrease. By supply of the medium, I mean the product of the quantity times the velocity. That, and only that, defines inflation.

Thus, gold is no different than printed currency, except that its production requires much more effort (expense) than running a printing press. The value of gold as a means of exchange for things of utility is less subject to inflation than fiat currency because, unless all fiat currencies lose great value in a short time, the production level is limited, by the great effort and expense required, to grow at only a few percent per year. So if we had only gold as a medium of exchange, and the demand for things of utility grew faster than the supply of gold, then the perceived value of gold would go up and those who had the things of utility, but not enough gold to buy other things of utility, would barter what they had for what they needed. It is only a short step from there to using I.O.U.s pending deliveries. It is only a short step from there for the I.O.U.s to extend in duration and then we have another fiat currency. The result of this would be the diminished perception of the value of gold because it would not be the only means of exchange. The only reason that gold has its high perceived value today is the fear that the I.O.U.s may not be honored.

Of course, if there is no increase in demand for things of utility, then the perceived value of gold will not change, unless there is a decrease in demand, in which case the perceived value will fall.

Economic value lies only in things of utility. Currency has no utility; it produces nothing to satisfy a human need or want. Gold has mostly marginal utility; it satisfies only a human vanity for self-decoration. I said mostly marginal because it does have a little bit of industrial use, for example, in electronics.

When a society values anything based on perception rather than utility, it loses efficiency and will decline.

If anyone gets all the way down here to read this, I'll be surprised. Anyway, that will give me more time to polish up these thoughts before I share them more widely. After all, I wrote this after I should have gone to bed.

Good night.

2008 Dec 27 01:35 AM

[Dave Wrixon:]

What I have learnt is that the current scenario is bullish for Gold.

Just kidding. I cannot see a stop and rewind situation here. But what it does show, is that even if the Gold Bugs are right, there is not really much upside in holding gold. Although, a return to the Gold Standard and even a big boom in the Gold Price are unlikely, the pay back it would seem would be Federal confiscation.

I think I will continue to give the yellow metal a wide birth. The basic problem with Gold is that it is simply not an investment. If money is defined by gold, then the value of your holding in 1000 years will be just what it is now, so many ounces of gold.

Real investments derive real returns through economic activity. Profit is the reward for risk and hard work. Gold just sits there looking pretty. It really has no more place in the Modern Financial Era than the original Chinese seashell money.

2008 Dec 27 03:41 AM

[Dave Wrixon:]

This is a highly simplistic argument. You are ignoring the income that cash could have generated over that period. Yes, we all know the value of cash drops over-time. Indeed within sensible limits, that is a useful mechanism for punishing capital that is not usefully deployed. However, most investors require a real return after inflation, which generally speaking would have yielded hundreds if not thousands of suits over that period, especially if you had picked winners like Buffet, Apple or even Microsoft.

Moreover, your measure is also somewhat flawed. Due to mass production techniques the man hours involved in producing a suit from the cotton field to cash register, and even the energy input have been greatly reduced. The value that is being delivered in todays terms is not comparable with the value being delivered in 1914. Just consider the number of suits in circulation and the flaw in your argument becomes obvious.


On Dec 26 11:25 AM User 30121 wrote:

> Jake: Thank you so much for this article! It needs to be absorbed!
> Some will, some won't. Those that don't are doomed to make the same
> mistakes, and as investors, are simply doomed!
>
> I couldn't help thinking about the "20-20 test". You know, the one
> where in 1900 one could take a 20 dollar bill and purchased a fine
> suit and, with a 20 dollar gold piece, do likewise. Fast forward
> to today. Take a 20 dollar bill and see if you can find a decent
> pair of socks for the price, whereas a 20 dollar gold piece STILL
> buys you a fine suit!
>
> Now, where should one put their money? In PHYSICAL Gold and silver,
> period!

2008 Dec 27 04:02 AM

[norom:]

During the gold standard, it was illegal to posses gold unless you were a dentist or it was jewelry, and then it could only be a reasonable amount for individual use. You could NOT redeem your reserve notes for gold. The United states used the gold standard up into the 1970's. The fiat system was adopted because of a desire for each dollar to represent the CPI, allowing more productive nations to have more purchasing power than lesser nations.

Gold is intrinsically useless. Arguments to the contrary are equally useless.

2008 Dec 27 05:41 AM

[silverwood:]

After reading through all the comments which all have a good point or two, I would like to add this. Gold is more than a medium of exchange. Gold is synonymous with with freedom and liberty. That's what the Founding Fathers were aiming for when they wrote the Constitution. They knew what paper money's real costs were. They wanted to prevent the control of the many by just a few. So maybe a gold/silver standard isn't perfect but it will be better than the slavery the fiat money masters are striving for.

2008 Dec 27 08:55 AM

[silverwood:]

norom, if you were to hold your name up to a mirror, it would describe you perfectly.


On Dec 27 05:41 AM norom wrote:

> During the gold standard, it was illegal to posses gold unless you
> were a dentist or it was jewelry, and then it could only be a reasonable
> amount for individual use. You could NOT redeem your reserve notes
> for gold. The United states used the gold standard up into the 1970's.
> The fiat system was adopted because of a desire for each dollar to
> represent the CPI, allowing more productive nations to have more
> purchasing power than lesser nations.
>
> Gold is intrinsically useless. Arguments to the contrary are equally
> useless.

2008 Dec 27 09:09 AM

[ronslim:]

It seems to me that legal tender is in fact the main issue. If allowed to use grams of silver,gold, or whatever as money in contracts etc. the fiat currencies would either be restrained (unlikely) or rapidly and correctly valued. The peoples money would be the vehicle of choice for savings if not for buying groceries.

2008 Dec 27 11:55 AM

[huh!:]

The last 30 mins of above mentioned movie (masters of money) explaines it all. This movie was made in '96 long before 9/11 and all this mortgage crisis. And the guy concludes with "seeing" a new crysis looming over all of the world, and hopes we would fix the things before it happens. Because if the crysis comes and we let "them" fix it, we will become slavery and every power will be centralized in hands of few.

I know it sounds crazy, but I watched movie last night (for the first time), and it just makes sense. Beside that, it is so well documented and fact supported, and it doesnt let you have any doubts.

2008 Dec 27 03:18 PM

[Mark McHugh:]

I have concerns that we may see something along the equivalent of the dust bowl. We put too much faith in genetically engineered seed, and there is this weird business about the bees disappearing (see colony collapse disorder). I don't know what this all means, but I certainly get the feeling that a massive crop failure is within the realm of possibility.


On Dec 26 10:02 AM aitvaras wrote:

> Socrateazz: you have earned your moniker.
>
> The Dust Bowl phenomenon was another major contributor to the Great
> Depression which receives no notice but created havoc across the
> country and prolonged the Depression. A comparable event is missing
> from the current scenario, and its absence will mitigate our current
> dillema as well.
>
> IMO

2008 Dec 27 04:24 PM

[otbricki:]

I think that it is a mistake to focus to much on just the Great Depression. One also needs to consider economic cycles prior - the Long Depression and so on.

Conventional thinking is that these cycles were also triggered by deflations and money supply shortages.

I am also leery of the idea of any arbitrary physical object, be it paper or material as a store of wealth. True wealth comes from the utilitarian value of the things that you own.

So aitvaras, you say you are a gold investor. But then you advise to buy gold and not trade it. How do you reconcile these statements? At least superficially they appear to be mutually exclusive.

2008 Dec 27 06:56 PM

[hillbillywilly:]

the last time i responded someone resonded i was intellectually challeged. I repeat produce and buy. I have been mining gold for over40 years (producing) never sold one ounce. I'm laughing all the way, my eight years of college served me well. I repeat save all you can and don't "play" the markets , buy gold and silver and sit back and let the feds make you wealthy they have never produced and you that do prodouce are way ahead of those "intellecual' failures.


On Dec 27 04:24 PM mark mchugh wrote:

> I have concerns that we may see something along the equivalent of
> the dust bowl. We put too much faith in genetically engineered seed,
> and there is this weird business about the bees disappearing (see
> colony collapse disorder). I don't know what this all means, but
> I certainly get the feeling that a massive crop failure is within
> the realm of possibility.

2008 Dec 27 06:57 PM

[norom:]

I wrote it that way for you gold-bug.

Gold is a speculative bubble just as sure as housing was. The only difference is that there is no underlying asset to protect. Gold has no utility.

Gold bugs and Ron Paul supporters seem to work under the notion that if you buy gold it will eventually become the reserve currency of the world again. It will not. And if it did, it would not make anyone who invested in gold rich. It would make you poor as it is confiscated by world governments. As it WAS at the turn of LAST CENTURY!


On Dec 27 09:09 AM silverwood wrote:

> norom, if you were to hold your name up to a mirror, it would describe
> you perfectly.
>
>
> On Dec 27 05:41 AM norom wrote:

2008 Dec 27 09:47 PM

[docklc:]

More than most others, John Lounsbury got it right, even tired and ready for bed. He also knows how to spell, which is a big plus in itself. Gold, silver and other monetary media, including seashells and beads, are only worth what the larger society says they are worth during a specific period of time.

Time moves on, monetary values inflate or deflate as supply, demand and velocity dictate--largely based on the psychology of the times and the desire for the goods and services then. Only a few things are really necessary for life--food, water, air and shelter among them. Beyond the basics, it is desire that drives the bargain with whatever may be higher on the desire scale at that time. The relative scarcity and attractiveness of an item seems to heighten our desire for it: hence, gold, platinum and silver and good artworks--all with great longevity and beauty tend to appreciate. But, to use any as an anchor of monetary value has the same problem as any anchor. It tends to get stuck.


On Dec 27 01:35 AM John Lounsbury wrote:

> I read this article late, so I got to read an entire comment stream.
> The comments really shorten what I need to say. The author, whom
> I have not read before, covers a lot of interesting history, presents
> conflicting opinions from others, the great and not so great, and
> adds his own opinions.
>
> Specific comments I identify with came from socrateazz, aitvaras,
> PrudentMan and SeekingTruth. (Sorry if I missed citing others, its
> a long comment stream.)
>
> The one thing I want to add is something I felt was lurking in the
> thoughts behind some of the comments but was not clearly said. The
> value of money is only based on what it can buy that has utility.
> Money is only a means of exchange, much more efficient than bartering.
> If the supply of anything that is accepted as a medium of exchange
> exceeds the growth in items of utility, the value of a unit of the
> medium will decrease. By supply of the medium, I mean the product
> of the quantity times the velocity. That, and only that, defines
> inflation.
>
> Thus, gold is no different than printed currency, except that its
> production requires much more effort (expense) than running a printing
> press. The value of gold as a means of exchange for things of utility
> is less subject to inflation than fiat currency because, unless all
> fiat currencies lose great value in a short time, the production
> level is limited, by the great effort and expense required, to grow
> at only a few percent per year. So if we had only gold as a medium
> of exchange, and the demand for things of utility grew faster than
> the supply of gold, then the perceived value of gold would go up
> and those who had the things of utility, but not enough gold to buy
> other things of utility, would barter what they had for what they
> needed. It is only a short step from there to using I.O.U.s pending
> deliveries. It is only a short step from there for the I.O.U.s to
> extend in duration and then we have another fiat currency. The result
> of this would be the diminished perception of the value of gold because
> it would not be the only means of exchange. The only reason that
> gold has its high perceived value today is the fear that the I.O.U.s
> may not be honored.
>
> Of course, if there is no increase in demand for things of utility,
> then the perceived value of gold will not change, unless there is
> a decrease in demand, in which case the perceived value will fall.

>
>
> Economic value lies only in things of utility. Currency has no utility;
> it produces nothing to satisfy a human need or want. Gold has mostly
> marginal utility; it satisfies only a human vanity for self-decoration.
> I said mostly marginal because it does have a little bit of industrial
> use, for example, in electronics.
>
> When a society values anything based on perception rather than utility,
> it loses efficiency and will decline.
>
> If anyone gets all the way down here to read this, I'll be surprised.
> Anyway, that will give me more time to polish up these thoughts before
> I share them more widely. After all, I wrote this after I should
> have gone to bed.
>
> Good night.

2008 Dec 28 01:45 AM

[johnthegeni...:]

It has been said before, but let me repeat: The mindless declarations of the gold-bugs notwithstanding, gold is itself a form of fiat money as it has no inherent value.

Any arguments which ignore this are worthless. Period.

2008 Dec 28 02:42 AM

[ArtfulDodger:]

Perhaps I need to read this one again.

Lots of information blasted at the reader.

I hate to criticize authors, but what the hell is the point? Is there anything new is this other than a little history here and there?

The great thing about reading Forbes Mag is that Steve Forbes makes his writers come to a conclusion and a point!

I don't see it in this article. Sorry.

2008 Dec 28 08:28 AM

[HAMLET:]

Mr. Bernanke is not a liar. He merits respect.

2008 Dec 28 11:36 AM

[Allah:]

Those of you thinking 'this time it's different' with gold prices, just remember that they said the same of internet stocks, real estate and oil. Gold must return to it's historical price trend line.

2008 Dec 28 03:13 PM

[JohnL:]

I think many of the comments reflect a basic confusion about the differences between saving, speculating and investing. Savers are trying to avoid risk while speculators and investors consciously do so. Over thousands of years, gold has normally been superior for saving. It is only a good speculation when it's exchange value gets really low. It has never been an investment except for jewelers and others who use it in their products. To compare gold with shares of Microsoft stock is unfair to gold. To compare gold with fiat dollars printed in alarming quantities by our government is unfair to the hapless dollar. :-)

Gold's utility as money has always been attacked by the Bernanke's of the world - bankers and politicians. The author provides some nice clarifications of our monetary history to challenge their attacks.

2008 Dec 28 07:25 PM

[Texian:]

This is addressed to you commentators who say gold has no important utility. Yes, it cannot be eaten, made into durable, practical cloth; fashioned into strong, usable tools; and so on. But consider its two most important utilities: (1) store of value and (2) medium of exchange. Gold and silver have been the preferred store of value and media of exchange for millennia. Gold is mentioned within the Bible account of God's creation of the universe (Genesis 2:11). Gold and silver were among Abram's assets (Genesis 13:2). Gold and silver have been the media of exchange of nomadic clans (Gen 24:35) and big civilizations (Genesis 44:8 speaks of gold and silver in Pharoah's household). Further, the precious metals belong to God (Haggai 2:8), though he made them for our use.

Something else: Why has Fort Knox for generations stored gold? Why not paper?

Also, consider that governments can debase gold and silver coins by adding base metals to them, as I have witnessed during my lifetime. But debased coins are visible to the public and somewhat embarrassing to those in power. The stealthy approaches are for government and its accomplice, the central bank, to print and use all the paper currency it desires or to use a keyboard to create electronic money. But all that new money bids up prices, just as a plentitude of money in pockets at an auction bids up prices.

Do you want higher prices, social unrest, a fatter and bigger government, a ruined economy with only haves and have nots, and dictatorship? If so, keep ignoring the Constitution's mandate that Congress (Article 1, section 8) shall create and use only gold and silver coins (Article 1, section 10) as federal money. (The state governments had their own monies, and the Constitution does not grant the federal government the right to prohibit this but only mandates that federal money shall be gold and silver coins.)

A final tidbit: A new nation has formed within U.S. borders. It uses only gold and silver coins. In late November, the Free and Independent People of Lakota (an Indian tribe in N.D.) announced formation of the Free Lakota Bank. Lakota declared its national independence on Dec. 17, 2007.

According to its website, press.freelakotabank.c..., the bank is the world's only non-reserve, non-fractional bank that issues, accepts for deposit, and circulates REAL money; i.e., silver and gold.

The Free Lakota Bank is associated with the American Open Currency Standard (opencurrency.com), which facilitates circulation of alternate coinage (seven at the moment), and provides a list of participating merchants (nearly 12,000) who accept the coins. This description of the Free Lakota Bank does not constitute an endorsement of same.

2008 Dec 28 07:35 PM

[nova:]

" When a society values anything based on perception rather than utility, it loses efficiency and will decline."

Just recently, I visited a museum old American mid 19th century settlement in Massachusetts. It cost me $60 for three tickets, and I wad disappointed for a long drive and "nothing new" to see.

But, at the settlement square, I got inside a bank-museum. I learned that at that time people used almost exclusively coin money. At that time, banks just started to introduce "paper money". Under a glass I found a history of paper-money introduction. It was based up on a very simple principle: Creation of these paper-obligations was based on people TRUST in banks issuing these paper-obligations to convert these IOU in "real" money.

For the long years, America was an industrial superpower. The world was looking forward to buy American products and services, and US$ was supported by the US government to tax its people and businesses. Well, now it is a history. Now, US government is only capable of printing fiat-US$.

The 20th century has been full of lies:
* Socialists-Bolsheviks came to power in Russia promising to liberate worker and peasants from capitalistic oppression. Instead worker and peasants in Russia got slavery and concentration-extermin... camps well before NAZI Germany did the same on more "civilized" scale.

* Then, there was a big lie about the WWII: bad Germans and Japanese and good Soviet Communists, Americans and British. Germans indeed killed many people in gas-chambers but Americans were planning to gas the entire Japan (only nukes dropped over Japan made it unnecessary)

* Then we had lies about Vietnam, Iraq, etc., etc.,

* Now, we got a big lie of how America got into the present economic & financial crisis. It was just greedy real-estate agents and mortgage companies together with few misguided Wall-Street bankers. The lie goes on telling us that by printing more fiat-money all American & world problems will be solved. If only FDA has printed more fiat-money, there would not be any Great Depression. How convenient!!!!

2008 Dec 28 08:02 PM

[Scalpulator:]

Wow and all that 30s era gold confiscation without the propaganda machine called CNBC! Without a nation glued to the TV??!!

BTW: is it just me or are there some curiously short and ill thought out responses bashing gold and defending heli-ben? Is the noise-machine perhaps lurking in here?

2008 Dec 28 10:42 PM

[smiley1:]

Thanks much for your hard work, Jake. Common sense tells me that once you open the Pandora's Box of fractional / fiat money systems it's just a matter of time until incompetence, greed and corruption take their toll...welcome to our world!

2008 Dec 28 11:00 PM

[zanardm:]

Gold standard vs confidence in Fed. The currency notes we have in our pocket states at the top: Federal Reserve Note. So our money is based on our confidence in the Federal Reserve, and hence with it's closely associated treasuries market. Is the Federal Reserve being managed like other district reserve banks? Is there transparency and accountability? Are there banking controls? Or is everyone there on there own? How much does an economist know or care about bank managing? Do we need a conservative banker and team at the Federal Reserve? We re-did the 1930 economic experiment, but this time with the Fed faucet (money) turned on full blast, with no effect. It's time for a real change of direction and leadership at the Fed. Just say NO to more debt windows. It's the DEBT, stupid! p.s. now days, probably all economist are innovative and aggressive. It's time for a bit of reality - called a banker.

2008 Dec 29 12:20 AM

[Moon Kil Woong:]

It seems like people love delving into the dustbin of the past. On a more current note Bernake's actions today seem more cogent. For example, why pay people interest to deposit money at the fed if you are trying to stop deflation? Why is holding money hoards in reserves to cover backstops on liabilities bad by banks and people because it causes deflation but it's ok for the Fed to do it (which it is)?

I agree with the author. Bernake's economic grounds are that of a charlatan, saying one thing, doing another, and lying about the facts he knows to be the truth. He says in a deflationary period all you have to do is dump money on everyone but in fact he is not doing so. In fact, he is putting on the breaks which he himself said the Fed would not do during another bout of deflation.

Does his actions strike you funny? He contradicts everything he ascribes to. So I assume he ascribes to nothing. If he said gold was worthless I'd be digging for it in my backyard! His deflationary actions are encouraging hoarding. A zero interest policy always encourages this action. Hoarding dollars, hoarding gold, or hoarding food. All of it is no good for economic stability.

2008 Dec 29 02:52 AM

[bosun.j:]

Seemingly, the Banksters and their hucksters don't like physical gold because they can't make interest or commission from it.

Hey, I could be wrong.

Nah!

2008 Dec 29 07:38 AM

[Smarty_Pants:]

"Good catch on the fallacy of the 20-20 test. $20 invested in dollars since 1900 would be worth a whole lot more than $20. At 4% compounded annually, the $20 doubles 6 times to $1,280 which buys a darn nice suit today. Even with taxes, it's still worth an ounce of gold today." - raising4daughters

The 'catch' itself includes a fallacy. It presumes that a dollar can earn interest and a lump of gold cannot. This is not the case. Pre-FDR lending contracts commonly required repayment of loans in gold as a contractual matter. There was even a Supreme Court case after FDR banned gold which broke the gold payment clauses in pre-existing contracts and allowed payment in paper legal tender instead.

294 U.S. 240 supreme.justia.com/us/...

If that $20 ounce of gold were loaned out and repaid in gold (as was done under the gold standard) all those years your purchasing power would vastly exceed the purchasing power of the cumulative interest on $20 of legal tender paper.

Looking at it from another point of view, saying that $20 paper fiat requires interest to outvalue an inert lump of metal sort of admits that the paper fiat doesn't hold value as well as the lump of metal over time.

2008 Dec 29 11:07 AM

[Robert Sare...:]

Nice article. It should get wider circulation. I was against "floating" the
currency. It has worked out, like the "standard of living index" but it
was controversial at the time. We would be better off with metal backed
money. That might not be fair to other countries but we would be
better off due to the price of oil and so on. All this business was
theoretical in the seventies. What made us do it? Maybe the grist
of another article. Thanks for your trouble.

Best Wishes,
Bob

2008 Dec 29 06:14 PM

[Suave:]

What is money? If a group of people went on a three hour cruise and were ship wrecked on a small island, they would immediately go into basic survival mode. Shelter and food would be their number one priorties. Soon though, they would discover that some were better fisherman, while others were good working with wood and bamboo. Thus, bartering would begin. For example: A day's supply of fish for a carved bowl or utensil. Once their rescue became less likely, other forms of "necessities" would be introduced. The women could weave straw mats, mend clothing with crude bone needles, as well as prepare delicious meals once they discovered all of the bountiful native herbs. The men would specialize too. Some would be very good furniture makers, others would hunt with the weapons they made. Bartering becomes more difficult now. A monetary system is introduced. What this "money" is and where it comes from is really not important; just as long as everyone agrees what "money" is. This is where the Bible's view that "the love of money is the root of all evil" becomes a fact. Greed is human nature afyer the fall of man.

Without the Federal Reserve, there is a very good chance we would be speaking German. When the country is at war, you must win at any cost; then worry how you are going to pay for it. Without an endless supply of money, this is impossible. In hindsight though of course, the World Wars introduced a debt that was so massive, the only way to stop deflation was with inflation. Printing more of the useless paper; triggering the endless cycle we now enjoy.

The problem is not the Reserve in concept. The problem is the abuse of the Reserve. Since the U.S. works on a fractional banking system, a bank only needs 10% in its own vault, to borrow 10 times that amount from the Treasury. Even this is fine as long as a) it is kept in check, and b) note every depositor wants his money at the same time.

When the housing boom was beginning, and every bank in the country was lending to anybody and everybody; this should have shot up red flags all over the Federal Reserve to investigate just what was going on. Every time a loan is made, 90% of that loan is new money being placed in circulation (since the banker can borrow $90,000 from the Treasury if he has $10,000 in his vault).

Instead, the Reserve not only allowed the Treasury to print more money, they also lowered interest rates to encourage even more loans.

This might sound like the Federal Reserve must be abolished. On the contrary, the Reserve is needed in time of war. It's the abuse of the Reserve that creates this endless rollercoaster. A new form of checks and balances must be introduced.

Jan 01 08:45 PM

[Cicero:]

Artful, the "conclusion" and "point" is that the Federal Reserve, in collusion with Congress, is manipulating the supply of our money and credit. The Fed is independent, and refuses to actually answer the questions Congress does ask them. Congress can and must abolish the Federal Reserve. Listen and watch Stahl and Bartiromo, the CBS and CNBC female reporters, giggle and fawn over the proudly grinning Greenspan as he explains how he avoided the questions of Congress. On CBS’s 60 Minutes, Stahl explains how Greenspan uses “indecipherable Delphic dialogue” and laughs admiringly as he reminisces fondly of his obfuscation skills, explaining that he would use some form of “syntax destruction” to not answer questions – listen carefully to her tone of voice as she repeats the phrase in the background, as if she is on the inside of the “joke” that the Federal Reserve is playing on us. At the end of the short clip watch the dreamy look on her face as she puffs up Greenspan’s already over-inflated ego, describing his words as “impenetrably profound” and noting that he worked to polish his cryptic responses so that, often two newspapers would print contrasting headlines about what he said, he almost pulls a muscle patting himself on his self-satisfied back:: www.youtube.com/watch?...

Greenspan detailing his obfuscation on CNBC (4:50) is here: www.youtube.com/watch?...

Greenspan admits that the Federal Reserve answers to NOBODY 7:40 into this interview: www.youtube.com/watch?...

Jan 02 12:43 PM

[Jake Towne:]

Dear Cicero -
Thanks for those links

Jan 07 07:05 AM

[tyrone ferrara:]

In the end of times, dealers made rich from gold, silver, etc. shall stand afar off for fear, weeping and wailing, for such great riches shall lose all its value in one hour (Revelation 18:11-17).

Mar 24 01:42 AM