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The Gold Standard Revisited

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July 24, 2011 – Comments (5) | RELATED TICKERS: GLD , AUY , SLW

I found this article in the Investopedia website.  The author does a good job summarizing the timeline on the gold standard.  But he seems to make a mighty leap to his conclusion.  Let me know if you agree.

 

"We have gold because we cannot trust governments." President Herbert Hoover's statement in 1933 to Franklin D. Roosevelt foresaw one of the most draconian events in U.S. financial history: the Emergency Banking Act occurred that same year, forcing all Americans to convert their gold coins, bullion and certificates into U.S. dollars. While the Act successfully stopped the outflow of gold during the Great Depression, it did not change the conviction of gold bugs, those who are forever confident in gold's stability as a source of wealth.

 For 5,000 years, gold's combination of luster, malleability, density and scarcity has captivated humankind like no other metal. According to Peter Bernstein's book "The Power of Gold: The History of Obsession", gold is so dense that one ton of it can be packed into a cubic foot.

 With the Great War, political alliances changed, international indebtedness increased and government finances deteriorated. While the gold standard was not suspended, it was in limbo during the war, demonstrating its inability to hold through both good and bad times. This created a lack of confidence in the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the world needed something more flexible on which to base its global economy.

Read more: http://www.investopedia.com/articles/05/030705.asp#ixzz1T4I78jZj
 

5 Comments – Post Your Own

#1) On July 24, 2011 at 8:00 PM, johnhenr (68.68) wrote:

Read the article. The guy gives a good history of gold, but his conclusion is nonsense.  When a paper currency is not backed by gold, a government can print money willy nilly so that inflation runs rampant and the currency is worthless because it it backed by thin air.  Anybody who remembers post WWI Germany knows that their currency was wothless and it took a wheelbarrow full of money to buy a loaf of bread.

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#2) On July 24, 2011 at 8:08 PM, whereaminow (< 20) wrote:

With the Great War, political alliances changed, international indebtedness increased and government finances deteriorated. While the gold standard was not suspended, it was in limbo during the war, demonstrating its inability to hold through both good and bad times. This created a lack of confidence in the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the world needed something more flexible on which to base its global economy.

That's all you need to read.  It's code for "governments wanted to wage a world war of massive destruction but couldn't afford it".

So yes, governments lost faith in gold, but people did not.  Then, England's folly of the Genoa conference in 1922 setting up the gold exchange standard to pyramid notes on top of sterling, followed by their incredibly stupid decision to repeg at $4.86 (Chuchill's dumb decision, as usual) and then the Fed inflating to save England's behind which caused the stock bubble... and the rest is history.

David in Qatar

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#3) On July 25, 2011 at 9:08 AM, Jbay76 (< 20) wrote:

+1 for D in Q!

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#4) On July 25, 2011 at 4:14 PM, FreeMarkets (40.86) wrote:

+ 1 for David!  Nice to see you post, even if just a comment.

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#5) On July 25, 2011 at 6:05 PM, rfaramir (28.66) wrote:

A lot of questionable assertions in this piece, so the final junk conclusion is only a surprise to those he has strung along.

"gold bugs, those who are forever confident in gold's stability as a source of wealth."

It is a *store* of wealth, not a source. Productivity is the source of wealth; wealth has to be produced. E.g., owning a dividend-paying stock will add to your wealth over time, so it may be seen (in a shallow sense) as a source of wealth, but more accurately, the stock's capacity to produce wealth for you comes from the company's productivity at serving the needs of its customers. Gold is an efficient way to *store* your wealth. Cows, land, and other forms of tangible wealth are good for many things, but not so good at being conveniently tradable, divisible, durable, portable, etc.

"At the start of this obsession, gold was used solely for worship."

Ignorant, unsupported assertion.

"Since it could not always rely on additional supplies from the earth, the supply of gold expanded only through deflation, trade, pillage or debasement."

What??? None of these actions or events expands the supply of gold! Deflation is a *reduction* in the supply of money. (If he means the resultant generally lowered prices, that does increase your purchasing power, but that's not the same thing as an increase in the supply of gold.) Trade just moves gold around in a voluntary fashion. Pillage moves it around in a devastatingly forceful fashion. Debasement thins it out, but definitely does NOT increase the supply. (It increases the supply of coined units, but each has less gold, by definition.)

"Also, constant supply imbalances between gold and silver created tremendous stress to England's economy."

He's referring to bimetallism. This is merely the logical result of fixing the ratio of the price of gold and silver (or any two commodities). When the natural (free market) rate differs by a sufficiently large percent (as small as 16:1 vs 15.5:1), arbitrage will make the artificially overvalued commodity disappear en masse. Just don't do this! Gold can be money, silver can be money, but there's nothing requiring them to have any particular ratio to each other, and trying to force prices always fails.

"While the gold standard was not suspended, it was in limbo during the war"

Idiot. Limbo means suspended.

"demonstrating its inability to hold through both good and bad times"

Meaning people broke their written promises. The standard did not fail to hold, people failed to hold to the standard. People in government, specifically.

"This created a lack of confidence in the gold standard"

Meaning the people lying got away with it. The population lost confidence in the standard instead of in the people breaking it.

"It became increasingly apparent that the world needed something more flexible on which to base its global economy."

When you've been bamboozled, you come up with a crock like this. "Flexibility" in your promises is called "Lying" and is not a good basis of an economy. The free market requires that people live up to their contracts.

"The pound and the French franc were horribly misaligned with other currencies"

Meaning they had lied more than other governments. Their currencies (paper promises to redeem gold) had been over-printed. This is fraud.

"war debts and repatriations were still stifling Germany"

Meaning their war debts were denominated in gold, so the German government could only lie to their own people (users of their currency), not to the whole world. A limited ability to lie is "stifling" to governments.

"and banks were overextended"

Banks lied too, not just the governments. See fractional reserve banking.

"finally, in 1931, the gold standard in England was suspended"

Insted of lying a little, they broke every promise they had ever printed (to redeem notes in gold).

"the Emergency Banking Act occurred [In 1933], forcing all Americans to convert their gold coins, bullion and certificates into U.S. dollars.... Then in 1934, the U.S. government revalued gold from $20.67/oz to $35.00/oz, raising the amount of paper money it took to buy one ounce"

The most blatant fraud in history could only occur after forcing everyone to trade their gold to the US for 'dollars' (which at that moment were each worth 1/20.67th ounce of gold). Then change the terms of the contract so each was only worth 1/35th oz of gold. It wouldn't have worked if the people had the gold and government had the receipts.

"to help improve its economy"

A lie to justify the fraud.

"The high inflationary environment of the late 1960s sucked out the last bit of air from the gold standard."

No, increasing the supply (definition of inflation) of dollars, which are promises to deliver gold (to non-Americans at this time), results naturally in conversion of these promises while they are still good, because the last ones holding the promises when the gold runs out are left with nothing.

"Finally, in 1971, even this bit of gold convertibility died. Gold was free at last. There was no further reason for central banks to hold it."

Yet they continue to do so. Why? Ben says, "Tradition?" He won't admit the real reason. $1600/oz gold indicts his caretaking of the supply of our money.

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