X.
Congress “Mut zur Ethik” (Courage to Take a Moral Stance)
Humanitarianism
at the Crossroads
Congress
in Feldkirch (Austria), August 30 – September 1, 2002
Why Gold-Backed Currencies Help Prevent Wars
Lecture
by Ferdinand Lips, Zürich
(translated
from German)
The context
I will start my talk with an allegation. You
have gathered here for a specific reason. You have come because the gold
standard was given up in 1914 at the beginning of World War I.
Looking at the
program, I see that all of the topics with which we are going to deal are in
some way related to that event. World history proves that there is a close
relationship between monetary systems and war and peace. It is also evident
that there is a close relationship between monetary systems and ethics and
morals.
Unfortunately,
it is not widely known that the 19th century was a period of
prosperity and economic growth without inflation. It strikes us like a
fairytale when we discover that in those days the most important currencies
were stable over a long period. The French franc, for example, remained solid
for one hundred years. It was the era of the gold standard.
The Life Span
of Currencies
French Franc 1814 –
1914 100 years
Dutch Guilder
1816 – 1914 98 years
Pound Sterling 1821 – 1914 93
years
Swiss Franc 1850 – 1936 86
years
Belgian Franc 1832 – 1914 82
years
Swedish Krona 1873 – 1931 58
years
German Mark 1875 – 1914 39
years
Italian Lira 1883 – 1914 31
years
(Source: Pick’s Currency Yearbook 1977 – 1979)
How the gold
standard worked
The basic rule
of the gold standard was a fixed amount of gold for each money, i.e., each
money was defined as a specific weight of gold. Paper currencies were
redeemable into gold at any time. A nation’s monetary reserves consisted of
only gold. On an international level, importing and exporting gold was
unrestricted. All balance of payments deficits were settled in gold. (Balance
of payments: the sum of all transactions between the homeland and other
countries.)
In this way,
gold had a disciplining influence on a national economy. It limited public
spending. It provided citizens with money that maintained, and even slightly
increased, its purchasing power over time and was internationally recognized.
If a balance of payments deficit developed, gold automatically transferred out
of the country. As a consequence, prices began to decrease. Exports became
competitive again and the balance of payments reversed. If a country had a
balance of payments surplus, then gold entered the country and the economy was
able to expand. Upward revaluations or devaluations were unthinkable. The
system maintained its stability automatically. This is one reason why
politicians do not like gold. Gold forces them to balance their budget.
The 19th century gold standard,
the highest monetary achievement of the civilized world
The gold
standard was neither conceived at a monetary conference, nor was it the
brainchild of some genius. It was the result of centuries of experience. Great
Britain was the architect. At the height of the gold standard at the beginning
of the 20th century there were about fifty nations, all of them
leading industrial nations, which participated in the gold standard. It was
one big clearance community, and it worked.
In his book Währungen am
Scheideweg (Managed Money at the Crossroads – The European
Experience), Prof. Dr. M. Palyi wrote in 1960:
“For the first time since
Rome’s prime did the civilized world succeed in creating a monetary unit. The
commercial and financial integration of the world was achieved without the help
of a military empire or a dreamy utopia. In theory and in reality, this
monetary unit was accepted and recognized as the only rational currency system.
Due to the automatic mechanism and the discipline to which the monetary
institutions were tied, fluctuations in the exchange rates were very limited if
not altogether impossible. This was the incalculable advantage of a gold
currency. Trade and industry were able to plan ahead. Especially the automatic
mechanism and the ‘rules of decent behavior’ in monetary affairs observed at
the time, liberated the value of money from the impact of the governments’
whims. They substantially stabilized it on a worldwide basis. Despite all
assurances by the monetary reformers, no reasonably equivalent replacement has
been found in the meantime.”
Economist
Ludwig von Mises wrote in his book Human Action:
“The gold standard was the
world standard of the age of capitalism, increasing welfare, liberty, and
democracy […]. In the eyes of the free traders its main eminence was precisely
the fact that it was an international standard as required by international
trade and the transactions of the international money and capital market. It
was the medium of exchange by means of which Western industrialism and Western
capital had borne Western civilization into the remotest parts of the earth’s
surface […] and creating riches unheard of before. It accompanied the triumphal
unprecedented progress of Western liberalism ready to unite all nations into a
community of free nations peacefully cooperating with one another. […] The gold
standard is certainly not a perfect or ideal standard. There is no such thing
as perfection in human things. But nobody is in a position to tell us how
something more satisfactory could be put in place of the gold standard.”
The era of the
gold standard during the 19th century was the golden age of the
white man. During this period, after Napoleon, there were only seven wars of
any importance.
Post-Napoleonic
Wars During the 19th Century
1855 Crimean War
1861 – 1865 American
Civil War, abolition of slavery, Abraham Lincoln
1866 Prussian-Austrian
War, Königsgrätz, North-German Union
1870 – 1871
German-French War
1877 – 1878
Russian-Turkish War, Congress of Berlin
1894 – 1895 War
between Japan and China
1895 – 1898
Spanish-American War
1900 2nd Anglo-Boer War in South Africa
And
furthermore: There was no terrorism of the scope we know today.
Contention
My claim is
that, had the gold standard been maintained, the warring nations would have had
to observe the rules of the gold standard, and, therefore, World War I would
have been over in a few months. Because of the automated mechanism and the
prevalent “rules of decent behavior,” financing the war on credit in a Keynesian
style would not have been possible. Parenthetically, except for Karl Marx,
Swiss historian Jacob Burckhardt describes Keynes as one of the great
destructive forces in world history.
Soon after the
onset of World War I, the moment came when the world turned to monetary fraud.
Political pressure to finance the war with money created out of nothing made a
sane monetary structure futile and led to the ruin of currencies – and a war
lasting four years. The world lay in ruins and a young, hopeful generation was
lost somewhere on the battlefields.
The
collapse of the international monetary system provokes the demise of the old
world order
The result of
World War I signified the fall of the Old World. Reading Stefan Zweig’s book Die Welt von
Gestern (The World of Yesterday), you will be able
to see what the world looked like then, and how cruel it is today. As we are in
Austria today, we should remember what the Austro-Hungarian Empire represented
and denoted how orderly the situation in Western, Central and Eastern Europe
was in those days. One of the most senseless things to happen in world history
was the breakup of the Austro-Hungarian Empire and everything that was
connected to it.
Of course,
there is no such thing as a perfect world, but cross the Hungarian border from
the Burgenland and enter the next bigger city, Körmend, and then you will know
what I am talking about. A few years of communist rule has laid the land in
ruins. Financing the war is what mainly ruined Germany, then the most thriving
country. The Reichsbank financed a large part of its war effort on a
short-term basis, i.e., not with long-term War Loans like the British. This
fact, in addition to the Versailles Treaty and unreasonable reparation
payments, led to hyperinflation, destruction of the middle class and, finally,
Hitler. It set the stage for World War II.
The monetary tragedy of the 20th
century
The return to
the gold standard after World War I was a fait
accompli. But it lacked wisdom and power on the part of those in
charge. In 1922, at the Conference of Genoa, the gold exchange standard was
introduced. Please note that it was not the gold standard that was
reestablished, it was the gold exchange standard that was launched. This meant
that, apart from gold, national banks could also use dollars and pounds, i.e.,
the currencies of the triumphant nations, as reserves. Suddenly, dollars and
pounds were equivalent to gold. That was inflationary, because dollars and
pounds were now accounted for twice: first, in the country where they were
issued; and, second, in the country that held them in reserve.
Furthermore,
it should have been known that paper-ticket currencies were in no way immune to
loss of purchasing power. Therefore, they could not be permanent and generally
valid yardsticks. Gold always keeps its value—paper currencies do not. Today,
it is generally accepted that increased credit formation was the reason for the
uncontrolled speculation in the real estate and stock markets during the 1920s.
Their collapse paved the way for the crisis of the 1930s. The same thing can be
said for the present stock market crisis. It is also due to immense credit
formation over the past twenty years and lack of monetary discipline provided
by the gold standard.
Central banks,
banks and the war
When the gold standard was abandoned, central
banks were the last barrier to rampant money creation as long as they were able
to maintain their independence. However, in the meantime we have learned from
bitter experience just how ineffective these so-called keepers of stability
were. An excellent example for this is the U.S. Federal Reserve in 1913. This
fateful institution was founded even before the war. Since, the dollar has
plummeted to about five percent of its former value. Central bank independence
was not what it was cut out to be. Central banks became compliant pawns of
governments and their constituent banks. In today’s non-system, it is precisely
central banks that, in conjunction with banks, make financing of wars of adventure
possible by means of unlimited credit formation. There are no brakes anymore.
In his book Jenseits
von
Angebot
und
Nachfrage
(The
Social Crisis of Our Time) economist Wilhelm Röpke said: “One can
venture the claim that governments very rarely had complete control over their
currency without abusing it.” In today’s age of the welfare state, the
probability of such an abuse is greater than ever before.
The tragic
decisions of Bretton Woods in 1944
The world had
not learned anything at all. At the close of World War II, it was decided to
introduce the gold/dollar standard. A direct result was inflation in the 1970s.
Again, notice the subtlety. After World War I, we went from the gold standard
to the gold exchange standard with dollars and pounds. After World War II, we
proceeded to the gold/dollar standard. The pound had lost its previous stature
in the interim, and, next to gold, the dollar remained the only valid reserve
currency and, then, only because the dollar was convertible by foreign central
banks into gold on demand. It was a sign of the increasing economic power of
the U.S.
The structure
created in Bretton Woods gave Americans the appalling monopoly to settle their
debt with paper-ticket-token money they had printed. Nobody could have resisted
such temptation. When this structure collapsed on August 15, 1971, we moved to
a system of floating exchange rates. That fully opened the floodgates for
creation of money, credit, deficit spending and speculation.
Today’s
international order is a consequence
In a speech on
August 7, 2002, President George W. Bush said the following: “There is no
telling how many wars it will take to secure freedom in the homeland.” With
this comment Mr. Bush announced that there might not only be a war against
Iraq, but many wars around the globe. He did not define when a war would be
considered won or lost. This means that these wars may continue indefinitely.
The consequences of these wars are very clear. Trade and investment activities
will suffer great damage in such an environment of insecurity.
I will now
take a closer look at the question of how the U.S. will be able to pay for
these wars. In principle, the U.S. is bankrupt. It has been like that since
August 15, 1971. That was the day America escalated its war against gold. Not
unlike a banana republic, the U.S. defaulted on its sovereign obligation to
redeem dollars for gold as agreed upon in the Bretton Woods system.
Theoretically, the U.S. cannot be warring at all, i.e., under the strict
discipline of the gold standard it would not be possible.
Because of the
nation’s deficit, there would not be any money left to spend on an unproductive
and destructive war. The U.S.’s foreign debt is enormous. Until the early
1980s, the U.S. was a creditor nation. Now it is a debtor nation, including a
catastrophic balance of trade, which is running up an annual deficit of $450
billion. And still the U.S. is conducting wars, which it is paying for with
paper-ticket-token money, which basically is the equivalent of counterfeit.
The Americans are creating this funny money themselves – and everybody has
accepted it since 1971. Ever since then, and for the first time in history, the
world has been living on a system of irredeemable paper-ticket-token money. So
we may note that if the world were on a gold standard, the U.S. could not be
conducting any wars. Why? Because then they would have to pay for them in gold.
Gold, therefore, acts as a braking mechanism. Putting on the brakes has a
disciplining effect.
Who, then,
actually pays for these wars? The answer is simple. We all do, out of our
savings and our promises of future payment, e.g., our pensions! It was no
different for Kennedy’s and Johnson’s Vietnam War. We were all footing the bill
by eventual world inflation leading to rapid devaluation of our currencies.
The 20th century
Contrary to
the 19th century, the 20th century was a century of
inflation, hyperinflation, trade and currency wars, waves of speculation,
military conflicts, two world wars, hundreds if not thousands of local wars,
hundreds of millions dead, annihilation of entire nations, mass migrations,
economic ruin, and, finally, the decline of civilization.
Why are there
wars? Without a doubt, economic reasons weigh in as the most ponderous in any
string of motivations for international conflict that ultimately lead to war.
They range from primeval struggles for hunting territories, pastures, salt
mines and fertile valleys, to predatory attacks and conquests of the seafaring
and trading nations, all the way to modern battles for living space, sales
territories and, the most important motivation of all, access to natural
resources. Internal political problems also play a major part. Often wars are
started to divert attention from problems on the home front. In the Middle
East, both aspects are involved: the control over oil resources and the
distraction from the disastrous condition of the U.S. financial system. Saddam
Hussein is only a pretext.
These wars
continue to contribute to the destruction of currencies’ purchasing power.
While a gold coin from the times of Alexander the Great or Julius Caesar still
shines as it did then, it is the fate of the purchasing power of
paper-ticket-token currencies to revert to their cost of production, and that
is nil. The Germans can tell the U.S. a thing or two about that. A total loss
after World War I, another total loss after World War II, and finally admission
to the European currency system, the Euro. All that happened within less than
one hundred years.
Gold-as-money
is a precondition for freedom
Not only is
there a correlation between gold currencies and war, but also between gold
currencies and freedom. U.S. Federal Reserve Board of Governors Chairman Alan
Greenspan wrote a well-known essay “Gold
and Economic Freedom” in 1966 attesting to this. He recently confirmed
that he believes this essay is applicable today.
Once we
remember that one of the first official acts transacted by Lenin, Mussolini and
Hitler (and, by the way, also by Franklin D. Roosevelt) was to forbid possession
of gold, we recognize the context. Even today the price of gold is manipulated
and kept artificially low. Wall Street bankers and their helpers have been at
it for quite some time. In the U.S. a lawsuit was filed. I cannot say more
about this at the moment, but it should serve as an impulse to reflect on the
present situation. These manipulations are described in my recently published
book
The Gold Wars: The Battle Against Sound
Money As Seen From A Swiss Perspective.
All we have
today is paper-ticket-token money. It is equivalent to counterfeit money. It
does not offer a citizen any security. He cannot save enough money. If he does
save, most of it is lost. The situation is worst for recipients of wages and
pensioners. In the end he is forced into the arms of the (welfare) government,
and he effectively loses his freedom. Politicians will mostly resist the
reinstallation of gold-as-money. Röpke was right when he wrote in his book Internationale
Ordnung - heute (International Order and Economic Integration):
“Depoliticizing money was never as vital as in the era of modern democracy.”
Conclusion
Today, when
“Humanity is at a Crossroad,” as the topic of the conference characterizes the
worldwide political situation, we want to address academic faculties. We want
to know what they can contribute to finding a way out of this and to prevent an
unimaginable escalation of suffering. As a banker, I implore you to put the
gold standard back on the agenda. The people understand it intuitively. The
gold standard would be my guild’s aid to bridle the power frenzy of the
mighty.
Paper-ticket-token
or funny money is like a drug addiction. It takes more and more of the drug to
satisfy the addiction. Collapse is the final result. There is no indication
today that this experiment with the equivalent of counterfeit money will end
any better than earlier, similar experiments. Due to the U.S.’s economic power,
paper-ticket-token money has already lasted longer than one might expect. Allow
me to conclude with a quotation from a speech given in Washington D.C. in 1948
by Congressman Howard Buffett from Nebraska, father of the most successful
investor of all times, Warren Buffett. The address was entitled “Human Freedom Rests on Gold Redeemable Money”:
“Our finances will never be
brought into order until Congress is compelled to do so. Making our money
redeemable in gold will create this compulsion. […] The paper money disease has
been a pleasant habit thus far and will not be dropped voluntarily any more
than a dope user will without a struggle give up narcotics. But in each case
the end of the road is not a desirable prospect.[…] I can find no evidence to
support a hope that our fiat paper money venture will fare better ultimately
than such experiments in other lands. Because of our economic strength the
paper money disease here may take many years to run its course. […] But we can
be approaching the critical stage. When that day arrives our political leaders
will probably find that foreign war and ruthless regimentation is the cunning
alternative to domestic strive. That was the way out for the paper-money
economy of Hitler and others. […] I warn you that politicians of both parties
will oppose the restoration of gold. […] Also those elements here and abroad
who are getting rich from the continued American inflation will oppose a return
to sound money. […] But, unless you are willing to surrender your children and
your country to galloping inflation, war and slavery, then this cause demands
your support. For if human liberty is to survive in America, we must win the
battle to restore honest money. […] There is no more important challenge facing
U.S. than this issue – the restoration of your freedom to secure gold in
exchange for the fruits of your labors.”
Ladies and
Gentlemen, these are the subtle relationships between freedom, money,
intellect, war, peace and gold. Thank you very much.
Ferdinand Lips
is the author of The Gold Wars: The Battle
Against Sound Money As Seen From A Swiss Perspective.
Contact Information
Larry Parks, Executive Director
FAME,501(c)(3)
Box 625,
FDR Station,
New York, NY 10150-0625
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Phone:212-818-1206
Fax: 212-818-1197
Lparks@FAME.ORG
www.fame.org
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