Gold is the ultimate anti-paper money.
That’s because owning it represents a vote of no confidence in modern paper currencies—called fiat money. The latter are backed by nothing but the promises of governments not to debase money.
Gold is an effective way of hedging against the periodic disasters that have occurred in American economic history as a result of the often destructive, misguided actions of the Federal Reserve and other parts of the government. Governments have used their monopoly over paper money to fund expansions of programs or to pay for wars instead of directly asking people to vote for higher taxes. But the strategies of central bankers and presidents have often blown up.
For instance, Alan Greenspan, in an overlooked part of his memoirs (“The Age of Turbulence,” p233), concedes that the Fed’s loosening of criteria for subprime loans helped cause the crash of 2008. However, he still believes in the policy! It’s important to remember that before the deluge, most of the mainstream media whopped it up for Greenspan with ridiculous books such as “Maestro” by Bob Woodward, who had no grounding in economic history, and “American Abundance” by Lawrence Kudlow, who should have known better.
The Fed also caused and exacerbated the Great Depression of 1929 as demonstrated by numerous economic historians from Milton Friedman to Murray Rothbard. Easy money helped fund wars or big social welfare spending. This resulted in a weakening of the currency, which now has an “official” debt of some $21 trillion and rising (Why the quote marks? Remember these are the government’s numbers, which is a little like keeping your own score in bowling, then telling everyone you bowled a 220 even though you had no marks). The promise of the Fed in 1913 was that it would avoid the disasters of the business cycle.
Central Banking Mischiefs
Yet governments using money mischief have happened many times in our history. The over issuance of the Continental during the American Revolution was a disastrous chapter. Another was the cheap money policies of the Fed in the early 1970s. Its inflationary policies created a Potemkin Village effect just in time for the 1972 election. The economy looked great for a short period. Then, after President Nixon was re-elected, it led to a decade or so of stagflation. It hurt millions of people, but not for those who distrusted the fiat money system.
After Nixon renounced gold and as inflation ate up the economy, the stock market tanked, with a close to 50 percent loss over an 18-month period in1973-74. Gold, throughout centuries of economic history, has been a protection against the damage caused by central bank mischiefs.
Those Who Didn’t Believe
“Gold moved from $35 an ounce in August 1971 to $800 per ounce in January 1980. That’s a 2,200 percent in less than nine years,” according to “The New Case for Gold” by James Rickards. “Through ancient and modern history it was the unique properties of the gold monetary standard which made it universally acceptable to trading peoples in the market,” write Lewis Lehrman in “The True Gold Standard.”
Here are some of the ways that people over centuries have protected themselves from the monetary and fiscal frauds of governments. In the early days of the republic, when limited government was the goal of many of the founders, it was different.
“Paper money and (legal) tender laws,” wrote one of the participants in “The Debate on the Constitution,” are “wisely guarded against in the proposed constitution,” according to “The Letters from the Federal Farmer to the Republican.” The original constitution contained no mention of paper money. Many of the founders were embittered by the Continental episode and were hard money men.
Big Government’s Monetary Logic
Yet it is logical that the unlimited governments of modern times have railed against gold. They contend that those who held it were “speculators” or “hoarders.” They have tried to circumvent the benefits of gold. These included gold as a recognized store of value, a standard that people can use almost anywhere on the planet, a kind of money designed to weather the worst of economic storms caused by the skullduggeries of pols or the long wars of giant welfare/warfare states.
For instance, take the stagflation disasters of the 1970s. They were caused in part by repeated government overspending on the Great Society and the War in Vietnam—a more superfluous war America never fought (O.K., the Spanish-American War was also insane). The Vietnam War was fought against a former de facto U.S. ally, Ho Chi Minh, who was a Communist who hated the Chinese and whose scions today, although still Communist, want to ally with the United States.
These wars and welfare programs were enabled by cheap money policies; scandalously low interest rates provided by the Fed and the Nixon administration. The latter took the country off the last links to gold in 1971 while the president installed Arthur Burns as head of the Fed. Nixon had refused to re-appoint the previous Fed chief, William McChesney Martin, because he wouldn’t bend to the president’s demands for cheap money. Burns, one of the worst Fed chairman in interest, kept interest rates artificially low as demanded by Nixon.
Eventually the nation suffered with double digit inflation and prime interest rates that peaked at 21.5 percent. This was so bad that many interest sensitive industries—such as cars and real estate, industries whose health depended on borrowed money—virtually stopped. An enormous amount of damage was done.
Burns, by the end of the 1970s, gave a speech entitled “The Anguish of Central Banking.” Nixon’s economics—which included wage and price controls a stab at an incomes policy—hurt the country for years.
Nixon, at the beginning of the 1970s, turned King Canute. He thought he could stop the vote of no confidence in the American dollar by taking the nation off the last link to the gold standard. He didn’t want Americans to cash out of dollars and buy gold any more than he wanted skyrocketing oil prices from angry Arab investors overseas who were holding billions of petrodollars. Those holding petrodollars were angry that their dollars were no longer as good as gold and that their dollars had been devalued. This showed how Nixon’s fiat money polices, along with other presidents over the past century, failed.
Some presidents have tried to break people of hedging against hard times by making the possession of gold illegal (Under FDR). They have used central banks to try to devalue gold. Governments have passed legal tender laws to force people to take cheap money called greenbacks during the American Civil War.
That’s when many people preferred specie, gold or gold coins that have a real value. The easy money policies of the Civil War failed for the same reason easy money failed before and after—-many people, even though without any knowledge of economic history, understood a basic fact: Gold has had a universal value throughout history. “People freely accepted gold,” Lehrman wrote, “from generation to generation, in exchange for other goods because gold money could be held as a store of stable future purchasing power.”
Ultimately, gold makes sense because governments are the cause of inflation, which is a devaluing of the currency. And it is difficult to know when the next money mischief episode happens, but we know it will sometime since a central bank is an inherently dangerous institution.
That’s because no central bank is held to a commodity standard—money backed up by gold or silver—and therefore is under no limitation as to how much paper currency can be issued even if it risks bankrupting a society or causing another decade of stagflation.
The Special Place of the Central Bank
The central bank has always had a uniquely privileged place.
“The central bank, which cannot meet its obligations, is allowed to suspend payment and to go off the gold standard,” wrote Vera Smith in “The Rationale of Central Banking.” Smith argues the history of central banks contains many instances of “legalized bankruptcies.”
It is a sobering thought. It is as though the central bank stands the idea of the Rechsstaat on its head. This legal concept, the creation of moral and legal philosophers such as Kant and Rudolph von Gneist, calls for governments to subject to the same laws as any citizen, a concept so often violated by modern welfare/warfare states.
Yet anyone who values a free society must accept the idea that governments must be limited; that centralized legal monopolies are a bad thing. “The first lesson of liberty,” warned Lord Acton, “is that liberty depends on the limitation of power.”
But what limits the Fed?
How can we insure that it doesn’t turn the dollar into a junk currency a la Arthur Burns/Richard Nixon? Must we trust the same institution that gave us the subprime crisis, the crash of 1929 and the succeeding Great Depression and the crooked, political motivated, easy money policies of the early 1970s that generated a brutal period of stagflation?
Don’t trust in the Fed or any political party. Backed into a corner by a long war or the unexpected high price of keeping political promises, trust in something else.
Trust in hard assets that are universally recognized. One such asset is gold.