Some Thoughts on the "War on Gold"

November 20, 1997

Back in 1966 when he was still a member of his mentor's (Ayn Rand's) Court, Greenspan penned an essay entitled, "Gold and Economic Freedom," which explained the staying power of gold.

 

"An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions," the essay began. "They seem to sense-- perhaps more clearly and subtly than many consistent defenders of laissez-faire--that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other."

Gold-backing of finance is anathema to banking cartels and socialist politicians. Cartel bankers want a government sanctioned and protected exclusive right to charge interest on fiat money that they loan to governments and commercial borrowers. Socialist politicians want essentially an unlimited spigot for government spending for they accrue and retain political power through controlling and channeling government largess spending. Bankers make money via the interest they charge on credit they extend to borrowers. If the credit they make available cost them nothing then they have gained an immense advantage for insuring profit to themselves while minimizing risk and capital requirements. They can use the proceeds of the fiat money they earn in interest to go and purchase tangible assets of real wealth. Indeed, a study of the wealth controlled by the Federal Reserve System cartel of banks shows this is exactly what they have done since the Fed came into existence in 1913.

The two parties melded together are a match made in hell for theirs is a powerful formula indeed for centralizing and accumulating power and wealth under their dominion all to the detriment of others (i.e., you as a citizen are not only enslaved to your private debt obligations but also the immense and ever growing public national debt). This pervasive and inescapable bondage to banker cartel debt obligations is nothing less than a prescription for a modern feudalism.

Gold-back money is an enemy to this formula, however, hence why these two parties have conspired together through the better part of this century to banish any and all forms of gold-backed money. First to go was use by private citizens and later as for trade between nations. Today the war on gold by the central bankers is still underway as European central banks have shed reserves driving down prices of gold in terms of their fiat currencies. Gold is made to artificially look like a loosing proposition all the while their fiat currencies are bolstered by comparison. Even an announcement by Switzerland bankers to consider reducing their reserves has worked this effect on the market, scaring existing gold holders to dump their claims and get out of gold and thereby driving prices down.

One has to admit it is an impressive war they are waging. The mere notion that a monetary unit that is a representation of outstanding past debt (such as the federal reserve note or any other central bank note) is in the ascendancy as a preferred store of value relative to a real tangible precious commodity is simply astounding. Even more so when one considers that the actual world wide supply of recovered gold certainly isn't increasing very rapidly at all yet the continual monetization of debt which expands the money supply of the fiat currencies continues at a rapid pace. You think that perhaps this is not so because the United States annual deficit has come way down? Well, back in 1980 at the onset of the waves of foreign debt crisis, Congress gave the Federal Reserve System the expanded privilege to monetize practically anybody's debt -- especially that of foreign governments.

This expanded privilege well served all the IMF sponsored bailout packages of third world debt refinancing, as in large part these bailouts consisted of monetized refinancing loans -- fully backed and guaranteed by the US taxpayer. The game continues to this day as a $23 billion bailout package to keep Indonesia from defaulting occurred a couple of weeks past. The next target for one of these rescues will likely be South Korea. The Clinton administration is denying that it will have to come down to this. But we well know by now that when the Clinton administration denies something will be necessary, then that means it is sure to happen. Then we have the old stalwart of Hong Kong that recently suffered a $200 million in US run on deposits of a bank there.

With the staggering woes that have beset the Asian tiger as of late we may well need to expect a whole series of bailouts for the Pacific economies akin to the 1980s bailout wave. And the Fed sits poised to monetize new loans as needed. So there is an endless stream of new debt that the Fed will be monetizing into the foreseeable future on a grand scale.

As the years have rolled by we have witnessed ever so often a new twist in the fiat money game designed to keep the game afloat for a little while longer. In 1980 the Fed got a pliable Congress to change the laws so that the Fed could monetize foreign debt. This kept the debtor nations from going into default and triggering a banking crisis. The game is kept going.

Ronald Reagan wanted unlimited funds to wage his war on the Evil Empire, but got elected to cut taxes, and yet his Congress refused to reduce the welfare state to pay for any of it -- indeed they saw to it that the welfare state grew more than ever before. No problem. The now wealthy Japanese (and others such as the petro dollars) had plenty of US fiat dollars due to their invasion of our auto and electronics markets. They were an eager sell of US bonds during the 80s as they looked for a secure place to park their wealth to where it wouldn't suffer erosion from inflation. The foreign purchasing of our bonds kept significant inflation at bay as the existing money supply of fiat dollars were recycled into new rounds of debt. With a thus contrived low inflation environment, the game is kept going.

Then with the advent of the 90s, the foreign money began to tire of their eagerness for government bonds. Thus a psychological orchestration began so as to herd money into the stock market. The momentum for this kept building and an unprecedented amount of money moved from conservative bonds into risky stocks. The surge of money chasing a limited supply of stocks drove prices up at an incredible rate resulting in a tremendous price inflation of stocks. What was once a market below 2000 now hovers a little below 8000. The asset inflation of the stock market has acted as yet another sink for the money supply. So remarkably the seemingly magic feat of keeping the inflation genie at bay has again been achieved. The game is kept going.

But stock markets can crash due to irrational overreaction to crisis. The game could be brought to an unpleasant halt if a bear market were to return. Inflation could return with a vengeance. So the Fed in the 90s puts in place a "plunge protection team". Now the Fed can turn on its monetization money tree to put a bottom back under plunging stock markets -- as was done on the Tuesday morning after our last Monday crash in October. The game, once again, is kept going.

So through one gimmick after another the monetary scientist of the central banks have devised stop gaps to keep their game afloat. On the one hand we might be tempted to applaud them for their ingenuity. Yet on the other hand, their fixes tend to be of limited durability over time. How much longer will the plunge protection team be able to work its medicine before its existence becomes common knowledge? Right now on the Internet it is common knowledge amongst the "little people" [1]. That means the big money guys have known or surmised it for quite some time. Eventually all investing behavior will come to take for granted the existence of the Fed plunge protection team. Investors will come to believe that they can play in the market with impunity because the Fed will be there to rescue the market for them. We've already seen what the realization of a federal guarantee can due to a financial market -- simply look at the Savings & Loan industry of the '80s and its manic spree of speculative investment (where all their risk was ultimately insured by the federal taxpayer). Make no mistake about it. The plunge protection team is not a panacea that will forever guarantee a rising stock market. Eventually gyrations of these mini-crashes could get so out of hand that it will over tax the limits of the plunge protection team's interventions. The complacency of the investors that is being built into the market by the presence of the plunge protection team will guarantee it.

All the while the central banks are shedding large portions of gold reserves in their on-going war on gold they are simultaneously weakening their own positions in terms of fungible, highly liquid assets. If they, as financial institutions, or the national economies that they oversee, encounter a major financial crisis situation, then they will be in a far weaker position to defend against such adversity. If all they hold are paper assets of debt obligations and their own fiat money, then a crisis which devalues these holdings severely will leave them without a fallback defensive measure -- i.e., their gold reserves. A collapse in the stock markets and a run on bank deposits due to a global financial crisis could deal them a severe blow. Normally they would hold their gold reserves to sell and defend their position in times of adversity. Yet for months they have been selling gold reserves in the midst of the good times -- all for the sake of warring on gold to bolster the stature of their fiat currencies by comparison to it. Thus the current war on gold smacks of being yet another one of their gimmicks of limited durability. Their reserves, though large, are finite. And quite possibly there is a limit to which even these anti-gold ideologues will go in reducing their position in it. Ultimately there is a human cynicism present in everybody such that even this crowd will desire to retain a gold hedge due to their mistrust of other central banks, national economies, and just general uncertainties.

Finally, the bag of tricks to keep the game afloat may be about run dry. One additional gimmick of the banksters that comes to mind is that they would no doubt like to eliminate physical cash as legal tender -- just as they eliminated the requirement of having to lend tangible wealth when extending credit. This would give the game yet an additional crutch for if there is no physical cash then people couldn't make runs on banks demanding withdrawals of their deposits. Money would only exist as checkbook money. Currently over 95% of central bank fiat money exist as checkbook money. Yet because cash is still permissible as a "legal tender", a potential threat for a run on bank deposits exist. Outlaw cash and the threat of a run becomes pretty much vanquished. We should look for this ploy in the months/years ahead. However, it is likely that this measure will be enacted in the midst of a great financial panic -- not prior to one.

A 1933-style bank holiday would likely be declared where people are given a grace period to surrender their cash and have it credited as checkbook money into a bank account. It is likely paper check writing will be done away with as well at the same time and only smart-card-based transactions, electronic transfers, and direct deposits permitted afterwards. Remember, the 1917 Trading With the Enemy Act was amended in 1933 such that any arbitrary provision can now be leveled against you the citizen and full arbitrary regulation of banking was established on a federal level. So the rules can be construed anyway the partnership of the monetary scientist and political scientist see fit. There is no respecting here of constitutionally recognized unalienable rights. The 1933 Trading With the Enemy Act amendments make all US citizens essentially the "enemy" of the Federal Reserve/federal government partnership to be regulated as they see fit. In 1933 that meant outlawing of your right to own gold bullion. Even today you cannot buy and sell gold bullion with privacy. The IRS insist on tracking such transactions. Think of it as a form of gun registration. If it ever comes time to outlaw gold bullion possession again, they'll know where to come looking for it.

Well, there you have the courtesy of a different perspective than what you would get from your newspapers and TV financial shows. Maybe you don't accept the analysis that has been presented here. That's perfectly fine. Really, my only goal in writing and presenting these pieces on money and central banking is to stimulate people into thought about money. Even if you do not accept or else disagree with this presented perspective it would still be worth your while to ask yourself the question of WHAT IS THE TRUE NATURE OF THE MONEY THAT OUR CIVILIZATION USES? Is it important to attempt to understand it in the event it has any significant concrete impact on your personal life beyond the obvious? If I can stimulate someone to go out and research this for themselves then I consider I have been more successful than if I had merely converted someone to agree with my own perspective and understanding of money. A truly thinking, engaged, and fact finding mind is what is needed more of -- not a lazy ideological robot. In a way, my motivation is perhaps selfish. If many other individuals can be provoked into researching and thinking about this subject with soberness and intent fervor, then the knowledge and insights gained by others may well come back to amplify and further enlighten my own.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."