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[goldsmith]

GOLD IS A POLITICAL METAL

When I imply that there is a war against gold,
gold bugs with silver hair nod in agreement.
When I say that the government is opposed to
the public’s using gold coins in exchange,
gold bugs understand exactly.
They see that the war on gold is a war of
government officials against private owners
of gold.

When I say that gold is a political metal, I mean
more than the obvious fact that gold has political
ramifications.
I mean something more significant.
I mean that gold has always been intertwined with
politics, that gold, alone among metals until the
success of the Manhattan Project added uranium to
the list, has been the uniquely political metal.

In some societies, we can speak of "the silver wars."
China used a silver standard for generations.
The same was true in the colonial United States.
"Pieces of eight" were Spanish silver coins that
served as America’s primary currency until the
mid-nineteenth century.
(The most detailed and accurate Constitutional
history of American money is Pieces of Eight,
by Edwin Viera.
The older, shorter edition is more suitable for
normal people.
The two-volume edition is not aimed at normal
people;
it’s aimed at legal historians.)

After the end of the Napoleonic wars in 1815,
Western European governments moved to the gold
standard for international commerce.
This made the gold standard the domestic monetary
standard, too.
But because governments adopted fixed prices
between gold and silver – price controls –
their laws would drive one or the other metallic
coinage out of circulation.
The legally overvalued money metal coins
stayed in circulation.
The legally undervalued money metal coins went
into hoards, the black market, or were exported.
This, of course, is the inevitable consequence of
price controls:
shortages of the item whose legal price is below
the market price.
Gresham’s law – bad money drives out good money –
is merely an application of the law of price
controls.

WHY POLITICAL?

Political rulers throughout recorded history
have asserted a monopoly over money.
They have argued that the State possesses
legitimate authority over the creation and
distribution of money.
Because gold and silver have been widely
used as money metals, the State has asserted
control over the monetary uses of these
two metals.

This is the origin of the war against gold.
Gold is widely recognized and desired as an
investment.
It is a highly marketable commodity.
This was far more true in 1913 than it is today.
Prior to the de-monetization of gold, which
began in 1914, a person could take a gold coin
anywhere where international trade was common
and buy just about anything.
It did not matter which ruler’s image was on
the coin.
The coin was valuable because of its gold content.
The image may have helped to convey information
about the coin –
so much gold of a certain fineness –
but the face on the coin had merely a brand-name
recognition effect.
The British gold sovereign was so widely
recognized that James Bond carried sovereigns as
late as the mid-1960’s.
In "From Russia With Love," the coins were
in the booby-trapped briefcase.
The ruler’s image verified the quantity of gold
in the coin.
It did not add value except as a kind of Good
Statekeeping Seal of Approval.

Gold’s value is not independent of governments.
This is because governments buy and sell gold.
This activity affects its price.
Gold’s value is also affected by laws against
the circulation of gold coins.
The Soviet Union had such laws.
So did the United States, 1933–1974.
But gold’s value as a money metal can exist
independently of a government’s actions to
subsidize or stigmatize gold’s use as money.
Gold circulates as money precisely because it
has a value independent of government policies.
Or it did.
It no longer does.
Gold has been de-monetized by governments and
their acolytes, the economists.

As with any scarce resource, gold moves to those
holders who bid highest.
The more widespread gold’s use as money becomes,
the more likely that trade will accompany gold.
Gold reduces risk by reducing the likelihood of
default or fraud on the part of the State or its
licensed agents, fractional reserve banks.
A government can go bankrupt, but its gold
coins will still circulate at gold’s market
value.
The same is true of any coin-issuing agency.
The gold may be marginally more or less valuable
in a particular form because of the degree of
recognition of the producer, but a government that
accurately certifies its gold coins will find that
its coins circulate at full value even if the
government itself faces bankruptcy or extinction.

Gold’s independence from the fate of governments
points to a political truth that governments
despise:
governments are not the source of the value of
gold.
To the extent that gold is money, gold testifies
against the sovereignty of the State in the realm
of money.
It testifies to the sovereignty of consumers in a
free market.
The free market, not the State, is the primary
source of gold’s exchange value.

This means that consumers can escape from the
State’s anti-consumer policies.
They can buy gold.
This provides them with international money,
black market money, and
"hoard it and spend it later" money.
It provides one group of citizens with the personal
escape hatch from the effects of government
power-seeking.
Which group?
olitical skeptics who do not trust the government’s
money.

In olden days, this escape hatch was an insult
to a king, whose face was on the coins that he
was debasing by adding metal of lower value.
The king wanted to increase his spending, but
there was tax resistance.
So, he would call in the old coins, melt them,
add cheap metal, and try to spend them into
circulation at the old rate for coins with
higher gold content.
The plan never worked.
The new coins would always fall in value.

This enraged the government.
It made theft through deception less effective.
The citizens who spotted the fraud early would
buy gold by exchanging the debased new coins
for old gold coins, leaving the less perceptive,
more trusting citizens holding depreciated
new coins.
Private citizens did what the king was trying
to do, and this invasion of the king’s asserted
prerogative to steal enraged kings
for centuries.

Today, there are no kings, other than "King"
Farouk’s famous kings of clubs, diamonds, hearts,
and spades.
But politicians still play the old games, and play
it much better.
They want the monopoly of theft that comes from
passing the new, counterfeit money to the suckers
(citizens) at yesterday’s lower prices.
So, when a few of the recipients of the new, phony
bills and credit money start unloading them to buy
gold, the politicians take action.
They do not want to share the benefits of being able
to buy at yesterday’s prices with today’s more
plentiful money.

When gold’s price rises steadily when there seems
to be no war imminent or other international disaster,
people start looking for a reason.
The main reason is that the government is inflating.
If gold’s price is rising in one currency but not
others, this is additional evidence of policies
of monetary inflation.

The government wants people to believe in
"something for nothing."
It wants people to believe that digital money
creates wealth.
But if one group seeks to gain a disproportionate
share of wealth by exchanging fiat money for gold,
only to see gold’s price rise, the politicians
try to stop this.
They cry out against "speculators" who are "acting
against the public interest" by "profiting at the
expense of widows and orphans."
This is a more acceptable way of saying:
"These private amateurs are invading our turf in
the ever-profitable business of looting widows and
orphans."

A rising price of gold is like a trip-wire alarm
that announces:
"The politicians are at it again.
Bolt down the furniture."
It is a signal, published in the newspapers, that
there is something untrustworthy about the central
bank’s monetary policies.
It alerts entrepreneurs to start buying goods before
prices rise further.
So, prices rise even faster.
This makes it even more expensive to buy votes
with fiat money.
The new money buys fewer of the goodies that
politicians hand out to buy votes.

The skeptics who say

"the government should never be trusted"

get rid of the new money and buy at yesterday’s
prices.

The trusting souls who say,
"The government is our friend"
hang onto the money, only to see it fall in value.
The skeptics win;
the State-trusting citizens lose.

This is an affront to the politicians.

It raises the cost of trust.

Economic law then takes over:

"At a higher cost, less will be supplied."

More citizens begin to distrust the government.

The politicians deeply resent this aspect of gold,
for the same reason that a burglar resents the
widespread installation of burglar alarms.

THE CAMPAIGN AGAINST GOLD

The State has adopted several strategies in
undermining the use of gold as coinage.

Here are a few of the more common strategies.

Issue paper IOU’s for gold, called gold certificates.

Issue more of these certificates than there is gold
to redeem all of them on demand on the same day.
"Suckers!"

Allow commercial banks to do the same thing.
"Suckers!"

Create a central bank that stands ready to issue
gold to bail out any bank that experiences a
gold run.

Allow commercial banks to suspend redemption of
gold during a national emergency.
"Suckers!"

Allow the central bank to confiscate the gold
of the now-protected commercial banks.
"Suckers!"

Make the ownership of gold illegal for citizens.

Create a gold-exchange system internationally in
which foreign central banks buy interest-bearing
bonds from one or two countries that back their
currencies in gold:

IOU’s for central bankers.

Create a central bank for central banks that will
lend gold during a national bank run.

Call it something other than a bank, such as
the International Monetary Fund.

Suspend gold payments to foreign central banks
when too many of them catch on that there are
more IOU’s out there than gold to redeem them.
"Suckers!"

Persuade all of the other central banks to store
their gold in the senior branch of a central bank
whose nation used to redeem gold on demand by
foreign governments, but which defaulted
decades ago.
"Suckers!"

If the price of gold rises, calling attention
to the monetary fraud of legalized counterfeiting,
sell some of this gold to the grandchildren
of those trusting citizens from whom you
stole the gold.

But call the sales something else, such as
gold leasing.

Don’t reveal a reduction in the official reserves
of gold.

Allow central banks make a substitution:

written promises to pay gold, issued by private
organizations called bullion banks, instead of
actual gold.

Wait for the price of gold to rise, thereby
bankrupting the bullion banks,
which will not be able to repay.

These are all corporations, and so enjoy limited
liability benefits.

No one goes to jail.

In this final scenario, who wins?

All those people who bought gold while the
gold-leasing operations lowered the market
price of gold.

Today, the central banks’ gold is steadily
being repatriated to private owners.

The central banks are subsidizing the future net
worth of gold buyers.

When there is finally no more gold to lease,
or when central bankers at long last figure out
that IOU’s issued by recently bankrupted gold
bullion banks are not really what
central bankers need to establish public
confidence in their forecasting abilities,
the price of gold will skyrocket.

At that point, the public will decide it’s time
to buy – at high and rising prices.

Those who have already bought will then look
at the rest of the population, which failed
to buy while the buying was good, and very
quietly, in private circles, issue their
unofficial assessment:
"Suckers!"

THE SHORT RUN

Politicians are guided by the short run.

Central bankers take a longer view than politicians,
but ultimately, they are the handmaidens –
if that’s the correct metaphor –
of the politicians.

They do what they are told during a
political crisis.

Politicians care nothing about gold
today.

This is something new.

This was not true in 1971 or 1931.

The economists care just as little.

What gets politicians’ attention is the
interest rate.

The same is true of investors.

So, the central bankers can play games with gold,
lending it at 0.3% per year, as if this were
a wise move.

Of course, this arrangement is a whale of a deal
for bullion banks, which borrow low, sell the gold,
and lend high.

But what about the day of reckoning?

What about when gold starts up, and bullion banks
cannot afford to buy it back and pay off
the central banks in the commodity borrowed?

Central bankers don’t care.

They think that gold will never again be a factor
in the monetary affairs of mankind.

When they think "never," they mean in their
lifetimes.

They may be right.

But the lifetime of one generation is short compared
to the affairs of mankind.

Events will speed up and opinions will change fast
when the public at last figures out that they have
once again been the victims of the government’s
experts.

They will see the price of gold rise.

They will once again pay attention to the price
of gold.

This will focus attention on monetary policies.

This will put central bankers in the place they
hate to be: the spotlight.

But, in the meantime, central bankers can create
short-term losses for the long-term winners.

They can sell (lease) more gold and turn gold price
increases into spikes.

They can scare off most gold investors for a long time:
skeptics who don’t have deep pockets.

They can restrict the speculative gains and
increase the set-backs by dumping gold.

They will do this.

Count on it.

Central bankers do not want to let the public know
that "the public’s gold"
(ha, ha) is gone,
that it has been sold to jewelry wearers
and industrial manufacturers.

The game must go on, but a rising price of gold
reveals the corruption and deception of the
players who make the rules.

What is happening, unseen, is that what was
the public’s gold in 1913 is being sold back
to them.

The whole idea of "the public’s gold" was a
sham from day one, a way to get the suckers
to turn over their gold for IOU’s issued by
commercial banks or governments.

Deposit by deposit, the public’s gold was
turned over to professional liars and
counterfeiters:

fractional reserve bankers and politicians.

When the gold was confiscated by central bankers
in 1914 and 1933, in the name of
"the public good,"
the public ceased to own any gold.

The entire notion of
"the public’s gold"
that is held in trust by the government and
the central bank is the very reverse of the
actual situation.

The public’s gold ceased to be the public’s
gold when it became "the public’s gold."

CONCLUSION

The common man will lose.

He always loses when fraud is legalized
by the government.

The common man wins only when markets are free,
contracts are enforced, and fraud is prosecuted.

None of this applies to the gold market
because the State asserts a higher law
than the law of contracts:

the law of State sovereignty over money.

What, then, of the not-so-common man?

If he distrusts the promises of the politicians,
then he will take advantage of the fraud
of gold leasing.

He will buy the leased gold, which becomes his,
leaving the bullion bankers to worry about
repayment.

In the era of the international gold standard,
the public trustingly handed over their gold
coins to scam artists in three-piece suits
who issued IOU’s and then defaulted on the
contracts, with the government’s approval.

Today, the spiritual heirs of the scam artists
are selling back the confiscated gold
to the biological heirs of those long-dead
trusting souls.

You and I can buy gold today at lease-subsidized
prices in exchange for fiat money.

I say, "This is an opportunity not to be missed."

October 27, 2003
By: Gary North, Mises on Money

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[B]