Gold Standard = Fiat in Disguise

January 19, 2002

In his occasional paper THE RETURN TO GOLD 1925, Cambridge University scholar, Donald E. Moggridge, tells us that it was Sir Isaac Newton, who, back in 1717, set the price of gold at 77 shillings 10 and 1/2 pence per standard ounce (22-carat, .9167 fine), a price that endured for two hundred years.

In reality, Sir Isaac, serving as Master of the Mint, recommended that the gold coin of the realm (Guinea) be valued at 20 shillings 8 pence (which corresponded with 76 shillings 7.6 pence per 22-carat ounce), but Parliament rejected his odd number and set the guinea at 21 shillings even ( This of course compelled Sir Isaac to increase his mint price of gold by 1 shilling 2.9 pence in order to make 89 guinea coins out of two troy pounds of 22-carat gold at Parliament's price. Thus it was Parliament, not Sir Isaac, who set the price of gold at 77s 10.5d, which was destined to preside over the rise and fall of an aberrant monetary system known as gold standard.

Pound Sterling, England's monetary unit, containing 20 shillings, with 12 pennies (pence) to each shilling, was obviously a misnomer. It has been over seven hundred years since the last time 240 pennies were made out of each troy pound of sterling silver (37/40 or .925 fine). From the times of Edward I on, English kings had been making more and more pennies out of the same troy pound of sterling silver. In times of Elizabeth I, one troy pound of sterling silver was already yielding 744 pennies, or 62 shillings. The silver content of one penny became so small, that the smallest coin made out of sterling silver was Threepence (1/4 shilling), whose weight was a bit short of the weight of the original silver penny Alfred the Great inherited from Charlemagne (slightly less than 2/3 of US silver dime). "One-Third Pound Sterling" would thus be more appropriate name for "Pound Sterling".

In times of Charles II, 89 gold "Pound Sterling" coins, then called "Guineas" because gold was coming primarily from the Guinea coast of Africa, were made out of two troy pounds of 22-carat gold (.9167 fine). After the roller coaster rides during Louis XIV wars in Europe, gold/silver ratio settled at 1/15, and that was the reason why Sir Isaac recommended to Parliament that the value of Guinea coin be set 8 pence above 20 shillings.

When Parliament set the value of a guinea coin 4 pence above this equilibrium price, it was not an act of simple rounding to the nearer full shilling. It was an act of deliberate policy that started a chain of events which ultimately led to replacing the eternal silver-and-gold standard with gold standard, and then to reducing gold standard to the fiat money regime.

By setting gold/silver value ratio at about 1/15.2, instead of 1/15 suggested by Sir Isaac, Parliament initiated a long time policy of drawing gold to England at the expense of silver. Because gold was thereby set to buy more silver in England than it did in continental Europe, "Gresham Law" would compel speculators to buy gold on the continent, sell it in England, and take their proceeds in silver back to the continent for the next round of gold purchasing. (Gresham Law is rendered in quotation marks, because it was already proposed by the famous astronomer of Renaissance era, Copernicus, and because merchants of the world have been using it for millennia without waiting for anyone's explanation.)

After two generations of this surreptitious enrichment procedure, in which each side thought it was taking advantage of the other, enough gold was accumulated in England to make possible the first overt move toward replacement of the ancient bimetallic silver-and-gold standard with monometallic gold standard. But when the first law to that effect - "providing that silver coin should not be legal tender for more than 25 pounds in one payment except for its bullion value" - was formally enacted in 1774, "its significance was not fully understood at the time." (Encyclopedia of Banking and Finance, 466)

This long term policy of drawing gold to England was challenged by Napoleonic France, where gold/silver ratio was set still higher at 1/15.5, but after Waterloo, with England free of immense financial burden of supporting enemies of France, gold standard (which could better be described as a war against silver) was openly adopted in England by way of a monetary reform, whose significance was not fully understood again.

The weight of silver coins was reduced in 1816 by 2/31 or 6.45% (now Master of the Mint would make 66 shillings instead of 62 out of a troy pound of sterling silver), and the weight of a new "Sovereign" gold coin, first issued in 1817, was reduced against that of a "Guinea" coin by 1/21 or 4.76%, in order to make it worth One "Pound Sterling" even. The reduction of the weight of a gold coin of the realm did not change the "Newton price" of gold bullion because the value of a Sovereign was only 20 shillings, instead of 21 shillings for a Guinea, but the face value of the new shillings was now higher than their silver content, meaning, the status of sterling shillings was now formally reduced to that of token coins, i.e., silver was effectively demonetized.

What even the authors of Encyclopedia of Banking and Finance do not seem to fully understand is that demonetization of silver alone was enough to put the British Empire on the road toward the fiat money regime. With gold Sovereigns in circulation, and with Pound Sterling Bills freely redeemable in gold Sovereigns, no one ever realized that gold standard, without silver, could not assure integrity of the money supply as effectively as silver-and-gold standard could, that gold standard was in reality a clever, covert form of the fiat money regime.

The fact that England had a gold Sovereign that was worth one Pound Sterling was immaterial. What really mattered was that one Pound Sterling was no longer defined as twenty sterling silver shillings, but as twenty token shillings. What it meant was that for monetary purposes gold was no longer priced in silver (an independent unit of account) but in a fiat unit of account (a token coin or a paper Pound Sterling). Gold must be priced in something other than gold, otherwise every sale of gold would have to end up as exchange of equal amounts of gold, and that "something other than gold" must have full intrinsic value of its own if the honest money regime is to be maintained.

It was demonetization of silver that introduced a fiat unit of account. But because it was done through the kitchen door, so to speak, by way of pricing gold in terms of gold rather than in terms of silver, no one had any reason to question this tautology as long as the gold definition of the fiat unit of account was maintained, i.e., as long as Sterling Bills were being redeemed in gold Sovereigns.

We can have honest money regime when gold is priced in silver and silver is priced in gold; physical silver and physical gold. But once gold is priced in printed pieces of paper instead of pieces of silver, the honest money regime is gone, even though the formerly silver and now fiat units of account are defined in weight of gold, because there is no natural limit on the overall amount of printed pieces of paper as there was on overall amount of pieces of silver.

Sovereign coin, consisting of 7.98805 grams of 22-carat gold, was worth 20 shilling coins, whose value was now defined as 1/20th of a gold sovereign because the silver content of one shilling was reduced below a shilling worth of silver. Under gold standard, the value of gold sovereign was therefore "twenty 1/20th parts of a gold sovereign", i.e. 399.4 milligrams of 22-carat gold.

Years ago, I saw a Hollywood comedy in which one brother becomes suspicious that the other is secretly bringing his secretary to their home because she happened to know that the bathroom was upstairs. So he confronts her:

"How do you know that the bathroom is upstairs?"
"Because... the kitchen is downstairs."
"And how do you know that the kitchen is downstairs?"
"Because... when the bathroom is upstairs..."

Finances of the British Empire rested on little more than that. How do you know Sterling Bill is worth gold Sovereign? Because gold Sovereign is worth Sterling Bill. And so, integrity of the Sterling Bill's reserve currency status was never questioned as long as the Sterling Bills were being redeemed in gold Sovereigns on demand.

A fiat unit of account, whether evidenced with a printed piece of paper or a token coin (containing less than an equivalent worth of precious metal), is a fiat unit of account, even if its tautological definition in weight of gold is maintained for one hundred years; it is not a unit of account that has intrinsic value of its own, other than gold.

When silver-and-gold standard is replaced with gold standard, it is false to represent the new system as still honest money regime. Despite all the appearances to the contrary, gold standard is already a fiat money regime. The populist representatives of American farmers grasped this truth all too well over a century ago, when they insisted on restoration of silver as money alongside gold after provisions for free minting of silver dollars were omitted from Specie Resumption Act of 1873. They did not wait for anyone to explain it to them; they knew the fraud when they saw one.

England replaced silver-and-gold standard with gold standard, to be able to confer upon her Sterling Bill a world reserve currency status on par with gold itself. Upon that Sterling Bill the whole imperial power rested.

Once the gold standard was in place, the monetary base of the British Empire could be supplemented with paper gold, thus making real gold available for massive predatory interventions on other markets, in the form of periodic infusions and withdrawals of gold, which was the real reason for periodic booms and busts all over the world. So called "business cycles" under gold standard were wrongfully attributed to capitalism as such; they were only the results of financial bubbles hatched and milked by the bankers of London. And when those bankers would occasionally loose control over their machinations, and their shirts in the process, Old Lady from Threadneedle Street, as Bank of England came to be known, always stood ready to bail them out. They were ripping-off other nations without incurring military expenses; they were providing England with the fruits of war without war.

(E.g., Barring Brothers were ruined already in 1890, when the Argentinian bubble they engineered blew up on them. But because Bank of England could then print the world's reserve currency, as the Fed, and now ECB, can in our days, Barring Brothers were kept in business for another century.)

Before the gold standard era, trade moniker for "payment in cash" was "gold or silver"; during gold standard era, it became "gold or pound sterling". And along with this change came the persistent propaganda that "gold standard was accepted by all civilized nations". In reality, all civilized nations adhered to silver-and-gold standard, and it was England alone who was pushing gold standard upon the world.

But the silver-and-gold standard that lasted millennia would not lie down and die just because the English declared it not civilized. Silver had to be killed.

In an essay of January 4, 2001, A TALE OF WINE AND WATER, I presented the view that British government's inaction and acquiescence in Bismarck's unification of Germany was an error to which Disraeli belatedly awoke once Bismarck destroyed the Second Empire in France along with the balance of power in Europe. Having reconsidered this matter, I am now of the opinion that British cabinets and shadow cabinets of 1860s were not outwitted by Bismarck. They only wanted to convey such impression to the world. In reality, they deliberately cultivated Bismarck and actually lead him down the garden path until he knocked down the French Empire for them.

What did the British have against Napoleon III?

They had nothing against him. Their sole quarrel was with his Latin Monetary Union.

France was the powerhouse of silver-and-gold system. The gold/silver ratio of 1:15.5 was maintained because France always stood ready to exchange gold into silver and silver into gold at that ratio.

In 1861, as the Civil War in America began to exercise upward pressure on the price of silver, French government came up with broad initiative to create monetary union in Europe based on standardized silver coinage. Eventually, the union came into being in 1865 between France, Italy, Belgium and Switzerland. To conform to union standard, the alloy/silver content in French Francs was increased from 1/10 to 1/6. Thereafter silver and later gold coins of member countries were accepted as legal tender in the whole union (token coins were legal only in countries of origin). Greece joined the Latin Union in 1868, and Scandinavian countries aborted their entry in 1870 as a result of Franco-Prussian War. Other countries conformed their coinage to the standards of the Latin Union without formal entry.

Because the silver-and-gold standard promoted by the Latin Union was upholding classic capitalism based on small government, balanced budget and fiscal responsibility - the values later identified with Austrian school of economics - the ruling elite of England, already poised for financing the expansion of the British Empire by way of inflating money supply, saw little choice but to destroy silver as money worldwide.

With this thought in mind, it is easy to see the English handiwork both in Franco-Prussian War in Europe and in the Civil War in America. One day, it may even be possible to establish that meteoric rise of Republican Party in America was financed with British money, and that US Supreme Court was manipulated from England. But for our purposes here it will suffice to state that Franco-Prussian War led to demonetization of silver in Europe, and the Civil War led to demonetization of silver in America.

The ability to sway US Supreme Court toward pro-slavery ruling in Dred Scott case, appears in retrospect to be of so fundamental importance that it is hard to imagine the imperial heads in London would overlook it.

If the Supreme Court of the United States would have temerity to say in Dred Scott ruling - NO ONE MAY HAVE A RIGHT TO DO WHAT IS WRONG - the history of these United States would have been completely different than it was, because the Civil War would have never taken place. And if the Austrian pre-eminence in German Reich would remain in place, the European Union would become reality already in the 19th century, with silver currency in place of Euro. Gehenna of two World Wars, Communism and Fascism would simply never happen.

Is there a proof positive, a smoking gun evidence, which would establish British instigation and engineering of Civil War in America and Austro-Prussian War and Franco-Prussian War in Europe?

Not yet. But there is a proof positive, that British imperial government deliberately destroyed the largest ancient nation of the world essentially to the same ends.

England was loosing silver to one-sided trade with China. China was on silver standard. And ever since the people of England acquired a taste for tea, silk and porcelain, England's silver was flowing to China, because traders of China were buying little in exchange. If the Western barbarians liked Chinese tea or silk, they could buy it for silver, but the traders of China felt they had everything worth having, and saw little need to buy the barbarian wares.

This hemorrhage of silver to China was acute enough to threaten construction of the gold standard house of cards. One-way loss of silver to China would raise its price in England which would lead to de facto remonetization of silver. To keep their gold standard game going, the English gentlemen resorted to pushing opium upon the people of China. Here was one product the Chinese did not have, and once they tried it they would ask for more. "By 1830 the opium trade at Canton was said to be the most valuable trade in any single commodity anywhere on earth." Twice within one generation, in 1840 and 1858, British Navy intervened to force the Emperor of China to open borders for "free trade". Those interventions are well known in history as Opium Wars. What is not taught in history classes is that opium was smuggled to China also on Yankee clippers.

The very best Mayflower names of New England are on the long list of Yankee opium traders in China. Opium money was behind many Yankee fortunes of the XIX century. "Russell & Company was the biggest US dealer in opium, and the third largest firm in the Indian opium trade, British or American." Colonial India was the source, and China was the market. Unlike their British counterparts, Yankee clippers also used Turkish opium.

Warren Delano II of Fairhaven, Massachusetts, was one of the consecutive heads of Russell & Company in Canton. In a letter home, he described his endeavor as follows:

"I do not pretend to justify the prosecution of the opium trade in a moral and philanthropic point of view, but as a merchant I insist that it has been a fair, honorable and legitimate trade; and to say the worst of it, liable to no further or weightier objections than is the importation of wines, Brandies & spirits into the U. States, England, &c."

Having made his fortune in China, Warren Delano settled in Newburgh, New York. One of his nine children, Sara Delano, married a widowed neighbor, James Roosevelt. Their only son was Franklin Delano Roosevelt of New Hyde Park, New York.

"When the columnist Westbrook Pegler accused the President of living off the fortune left by 'an old buccaneer' who had wrested it from 'a slave traffic as horrible and degrading as prostitution', the White House maintained a discreet silence.

"But Eleanor Roosevelt had been stung by Pegler's charge, and when she visited Hong Kong in 1953, she made a point of asking a veteran British merchant about the opium era. After talking with him, she reluctantly concluded, 'I suppose it is true that the Delanos and the Forbeses, like everybody else, had to include a limited amount of opium in their cargoes to do any trading at all'."

What gives this story even more poignant dimension is the fact that the fortune FDR was living off was the second fortune of Warren Delano. A millionaire at the age of 48, Warren Delano was ruined by the Panic of 1857. In 1860, just after the second Opium War, he went back to China, "to Hong Kong this time, where he spent five more years recouping his losses in the two trades that had initially made him so rich so rapidly - tea and opium."

(Quoted from "A FAIR, HONORABLE, AND LEGITIMATE TRADE" by Geoffrey C. Ward with Frederic Delano Grant, Jr., American Heritage, a Malcolm S. Forbes' magazine of August/September 1986, p.49. See )

The reason we are recalling the opium story here, and are focusing it on Warren Delano, is not to "tarnish" FDR's memory, but to make a point that descendants and heirs of the opium trade protagonists happened to be the principal English agents who saddled America with Federal Reserve System and with Quisling governmental elite, which has been keeping itself busy dismantling our Constitutional order down to its empty shell now remaining.

Descendants and heirs of Mayflower luminaries, who were taught by English gentlemen that the road to a great family fortune and a country squire life style led through destruction of other people's lives - by the turn of the centuries China had thirty million opium addicts - could not possibly have any qualms about betraying heritage of American Revolution in exchange for proconsular vestments of the English imperial government of the world. The opium skeleton in many a Mayflower family closet explains why was it so easy to recruit America's "best and brightest" into the service of a foreign elite.

Because bimetallic money was not only a part of the American constitutional system, but a necessary part, effective restoration of this system must include return to bimetallic money. This was the reason why THE ALTERNATIVE FUTURE, A Call For Overnight Revolution, proposes gram of silver and gram of gold as parallel monetary units.

In response to that proposal, a good argument was raised at Forum by its silver advocate G-khan that silver is now primarily an industrial metal that is being used up and thus irretrievably lost on massive scale, and for this reason it may already be too scarce to serve as daily money. This argument may be entirely correct. Still, I think the ultimate determination should be made by the free market, as there are variables that may change the whole equation considerably, such as increased production, dishoarding silver flatware, alternate technologies in photography, etc, etc. Even the market tested unavailability of silver should not serve as an argument that gold standard is good enough. Gold alone can never be good enough. If not gold and silver, than gold and platinum, or gold and silver and platinum.

In theory, modern technologies already allow the real time settlement of all daily banking transactions, which makes airtight control over money creation practical without gold and silver. In practice, it all boils down to integrity of the system's operators. In my judgment, system's operators should never be exposed to a moral hazard of any kind. Their computer clicks should always refer to the real gold, real silver, real platinum, real anything of limited supply and general acceptance. The fiat units of account should be purged from economic universe once for all.

For as long as you price your gold in fiat dollars and not in silver, or you price your silver in fiat dollars and not in gold, you are a part of the problem.

The only way to restore the honest money is to elect the honest-money President and honest-money Congress. Everything else is "vanity and vexation of spirit". To elect honest-money President and honest-money Congress is your birthright. The alternative of not doing it is to become a servant of the people who are buying America from under your feet using US Treasury bills, notes and bonds as untraceable currency. Anything that turns the spotlight away from the imperative to elect the honest-money President and honest-money Congress perpetuates your enslavement, no matter how "honest", how "true", how "impressive", and how patronizing any such distraction may appear to be. The price of self delusion is higher than you think.

For Post Scriptum, please accept this XVIII century little tale in loose rendition of yours truly:

"This incense is for me, rat was telling his sisters,
Sitting on the altar during evening vespers.
But when he was distracted by too much of that
Cat jumped upon him and strangled him dead."

The purity of gold is measured in carat weight.