Bring Back, Bring Back, Oh Bring Back My Gold Bond To Me
"The mountains went into labor and gave birth — to a mouse! This ancient quotation could be cited to characterize the publication of the long-awaited Financial Crisis Inquiry Report on Thursday, January 27, commissioned by an earlier Congress. Another characterization is the title of an article in The New York Times from Frank Partnoy, professor of law, San Diego University: "Washington's financial disaster"on Jan. 29.
The trouble with the Report is that it misdiagnoses the problem and comes nowhere near to offering a remedy. The root cause of the Great Financial Crisis is not deregulation, excess pay and poor risk management, not even collateralized debt obligations or government's subsidizing mortgages. The root cause reaches back to August 15, 1971, when the Nixon-Friedman conspiracy knocked out the corner-stone of the edifice of the nation's and the world's financial system, the gold bond. (Before 1971 the debt of the U.S. held by foreign governments and central banks were gold-bonded.) The remedy is: refinance debt in terms of gold bonds.
Before going any further I would like to establish my credentials. In 1983 Congressman William E. Dannemeyer of California recruited me and in January, 1984, I started working in his Washington, D.C. office on the problem of monetary and fiscal reform in the United States. Dannemeyer was a man of great vision. He saw that the road the nation was forced to take after the default of the U.S. on its international gold obligations, instigated by the Nixon-Friedman conspiracy, was to lead into financial catastrophe. In his office we hammered out a proposal that would be "presentable". It was clear to us that a proposal recommending an outright return to the gold standard would have been a non-starter. Our approach was through the back door: fiscal reform now, monetary reform later.
The world was more than ready to embrace gold bonds after the 1971 experiment, upsetting the interest-rate structure, commodity markets, and currency relations. The price of crude oil went from $2 a barrel to $42, interest rates from 4% to 16%. The Mexican peso and the Soviet ruble were wiped out.
Gold bonds had had a proven track record. They had financed the construction of transcontinental railways and transoceanic shipping, as well as the metamorphosis of the U.S. from a poor agricultural country to become the world's greatest industrial power during the last quarter of the 19th century. Gold was a great financial resource that could have financed a comparable metamorphosis for the rest of the world during the last quarter of the 20th century. It was not to be. Instead, gold was forcibly removed from the international monetary system and condemned to idleness. The world started its slow descent to hell.
Dannemeyer foresaw the tsunami of red ink that was to inundate the U.S. when it turned from the world's greatest creditor to become its greatest debtor nation. The twin deficits: the budget and the trade deficit were to sap the country's vitality and to lead to the dismantling of its once legendary great industries.
Our blueprint to refinance the debt of the U.S. in terms of long term gold bonds was ready as the Reagan administration drew to a close and the Bush administration took over. Dannemeyer led a delegation of ten Republican congressmen to the Oval Office to present the plan to George Bush, Sr., in October, 1989. The event was reported on the front page of The New York Times accompanied by a photo. Dana Rohrabacher, California Congressman (who presently serves his 12th term in Congress) was a member of the delegation and he can confirm the accuracy of this recollection. The only point on the agenda of the historic meeting was the gold bond refinancing of the U.S. debt. President Bush listened attentively to the presentation of Mr. Dannemeyer. Afterwards he turned to his Treasury Secretary who was also present, suggesting that his staff and the staff of Mr. Dannemeyer ought to get together and iron out the wrinkles of the plan and come back with a joint
Things were looking up. A meeting with the Treasury staff was scheduled. But just before it was to take place there was a call from the Treasury that the meeting had to be rescheduled because of important other business. There was a similar call just before the rescheduled meeting and the episode was repeated again. It was clear that the Treasury staff was sabotaging the wishes of President Bush.
I have done what I could: I have presided over the hatching of a plan to put the country and the world back to monetary and fiscal rectitude. The plan studied and approved by ten Republican Congressmen and was presented in the Oval Office of the president. There was nothing more for me to do. I resigned and left Washington in May, 1989. I have great admiration for Mr. Dannemeyer and he respects me. We knew the issue would be forced by history in the fullness of times.
The moment of truth came twenty years later, in 2008. The problem is the same; only the financial condition of the United States is that much worse. The remedy is also the same: the United States can save its monetary leadership in the world if it bites the bullet and makes its debt gold-bonded. This should be followed by opening the U.S. Mint to the free and unlimited coinage of the standard silver dollar and the Gold Eagle as mandated by the Constitution. There is no need to fix the exchange rate between gold, silver and paper currencies. The only thing that needs to be done is to declare the legal tender protection of irredeemable dollar unconstitutional. Let the people choose freely which kind of money they wish to use and want to be paid for their labor. Let Ben Bernanke compete with his Federal Reserve notes against Gold Eagle coinage and the standard silver dollar.
In 1989 Mr. Dannemeyer wrote a pamphlet entitled Gold Bonds for Peace and Prosperity. It should be republished and publicly debated. The bad-mouthing of gold has gone on far too long. It is high time to have a real debate on real issues.
It is insane to quarantine gold, the only real solution to the debt problem. Without re-introducing gold as the ultimate extinguisher of debt, the Debt Tower will continue its explosive growth. When it topples, it will bury the world economy under the debris.
New Austrian School of Economics
Course Two at the Martineum Academy in Szombathely, Hungary, from March 5 through 13, 2011. Title of the course:
ADAM SMITH'S REAL BILLS DOCTRINE AND SOCIAL CIRCULATING CAPITAL
What makes this course especially topical today is the fact that more and more hints are being dropped about the possible rehabilitation and restoration of the gold standard — following the ignominious collapse of the irredeemable dollar. However, a gold standard without its clearing house, the bill market, is not viable and itself is liable to collapse in short order — as it did in the early 1930's. The level of public ignorance about the necessity of a clearing house is appalling. It is made that much worse by a tottering banking system. We have an urgent message: only gold standard cum real bills can restore prosperity to the world, in view of the fact that we have to write off the world's banking system as a total loss.
This is the second in a four-course series on Austrian Economics, a branch of economic science based on the work of Carl Menger (1840-1921). It is meant for those, including beginners, who are interested in the theory of money, credit, and banking, with special emphasis on the current financial and economic crisis. The complete program consists of four courses (10 days, 20 lectures each). Completion of each course will earn one credit. Participants who have accumulated four credits get a diploma signed by Professor Fekete. Course One that was given in 2010 is not a prerequisite. It is available on DVD for purchase.
NEW: There will be an add-onoptional one-day seminar on the gold and silver basis and the threat of a permanent backwardation of the monetary metals on March 14. Stay tuned for further details. NOTE: All scholarships have now been awarded.
Posted by David Robertson on 02/03/11 04:28 AM
"I for one am not very optomitic about finding huge hoards of gold in Fort Knox."
You may well be right. An interesting article at Professor Fekete's web site indicated that 50% of all the gold ever produced had disappeared into private hoards. the link is here:
Click to view link
From this I concluded that the global power elite, who have always been gold bugs, were saving for a rainy day. I thought they may well use this gold to underpin their new global monetary system. The putative gold in Fort Knox was probably sold off in the years 1949 – 1971. Of course this is mere speculation but it seems to me that their gold would be safer stored outside the United States, Switzerland perhaps?
Posted by Old Geezer on 02/02/11 08:56 PM
I have only one point in the gold back currency arguement. Since there has been no audit of Fort Knox in the past 50 years does anyone think that we have enough gold to institute a gold backed currency system without revaluing gold to several thousand dollars per ounce. I for one am not very optomitic about finding huge hoards of gold in Fort Knox. It would be a good idea, one that will probably fail, for an audit of Fort Knox to see just how much gold in there. That should be an eyeopener. It might also bring the discussion to a close....as there might not be enough to buy a Starbuck's double latte with skim milk. Case closed.
Posted by Bionic Mosquito on 02/02/11 07:46 PM
"Re: Gresham's Law with regard to converting to a gold system, this whole discussion is a red herring."
You could have said something sooner. If had I been aware of this I would have saved myself from the trouble of a nice conversation with Mr. Robertson.
"Read my post citing Griffin's method. There will be no bad money driving out good money; only good money driving out FRNs!"
Yes, I think Ben Bernanke is reading Griffin's book as we speak.
Posted by David Robertson on 02/02/11 05:18 PM
The discussion re. Gresham's Law was with regard to the proposal in the article above by Professor Fekete to introduce gold and silver as competing currencies with FRNs. What you suggest, or should I say what Ed Griffin suggests, is a horse of an entirely different colour, i.e an entirely new monetary system. This would only be possible if those who propose such a system have the power to implement it.
Just as I do not believe the bill proposed by Ron Paul will succeed I do not believe any new monetary system proposed by anyone other than the global power elites has any chance of succeeding. The global power elites are presently collapsing the US dollar and will introduce their new monetary system in due course.
This may sound defeatist but I would suggest it is simply recognising reality. There are some genuine efforts to change the way we are governed but they are years away from achieving anything. For those who are looking to be involved in meaningful change they are the best I have seen to date. Ed Griffin's Freedom Force International is a case in point. Another is the Republic for the united States of America and last The Second Republic Project from the Argentinian journalist Adrian Salbuchi. All of these are very promising enterprises but they are still in their infancy.
My own hope lies elsewhere and is more solidly based. As both Ed Griffin and Adrian Salbuchi have recognised, the missing ingredient in all the efforts to date to change the way we are governed is POWER. The global power elites have spent centuries building their global power network and global institutions. They have hundreds of thousands, indeed millions, working for them whether knowingly or not. This is an entrenched power base that cannot be easily overthrown. The ONLY power in the universe able to do it is God. That is where my hope lies and it is a sure and certain hope based on an oath and a promise from the Creator and Redeemer God Himself.
Posted by Catevala on 02/02/11 12:18 PM
Re: Gresham's Law with regard to converting to a gold system, this whole discussion is a red herring. Read my post citing Griffin's method. There will be no bad money driving out good money; only good money driving out FRNs!
Posted by David Robertson on 02/02/11 05:31 AM
I have discovered another web site that has an even more detailed analysis of Gresham's Law. One of the quotes there is relevant to our debate:
"Several propositions that imply or are the companions of Gresham's Law were widely known and used correctly by economists long before the law acquired its name. One of those propositions relates to the relation between paper money or credit and the precious metals. David Hume, writing in 1752, went to great pains to demonstrate that the existence of paper credit would mean a correspondingly lower quantity of gold, and that an increase in paper credit would drive out an equal quantity of gold."
The full explanation of this proposition can be found here:
Click to view link~ram15/grash.html
Posted by David Robertson on 02/02/11 04:24 AM
There is no correct way to interpret Gresham's Law. It isn't holy writ. That is one of the reason's I posted the link that you believe supports your position. It describes different scenarios in which it might be applied. Actually I support your position since i believe it is a valid way to interpret Gresham's Law. I do not believe it is the only way. I happen to believe it will also apply in the situation we are imagining would exist if gold and silver money were to be introduced to compete with debt note paper money.
In the situation you describe of a wheat supplier demanding gold for his wheat and refusing to accept paper, assuming that this would be legal if paper is legal tender, which is unlikely in our current economy, I would say that it would depend upon market power. Generally I believe that the power is in the hands of the consumer not the producer but that this would be reversed in the case of a monopoly.
A more likely situation would be that the suppliers of goods and services would bid for the gold by reducing gold prices and increasing paper prices.
As I noted in one of my posts one of the consequences of introducing gold and silver as legal tender would probably be increasing paper prices and decreasing gold prices. This is simply the corollary of a rising gold price.
The same holds true of workers demanding gold in payment for their labour. They could only enforce their demand a) if it were legal and b) if they had the market power to do so. These are not givens.
It would be an interesting experiment and I for one would like to see it happen but given what we know about the actual world we live in I believe it will remain what you call a "thought experiment".
Posted by Catevala on 02/01/11 10:13 PM
Posted by Jim Roache on 2/1/2011 1:13:06 PM
'There is not enough bullion for gold and silver coinage is there? Or is the intention to use paper or some other worthless article as hand to hand currency? A gold standard " absolutely " but not pegged. Gold must find its own price'.
I have dealt with this question previously here on the Bell, following the proposal of Edward Griffin, under the comments below the article "Peter Schiff on Why the American Economy is Broken" (January 9th). At that time it was Timothy who asked the same question:
"But there is absolutely no way gold and/or silver will work as the 'vehicle' in the 21st Century. There isn't enough of it on the planet to sufficiently 'lubricate' the system and it's use, like 'bartering' is entirely cumbersome. By some accounts, silver is more rare than gold, and if so, it is even less available for use as a currency".
It is truly amazing how persistent this notion is. But it is not true. G. Edward Griffin in his magnum opus book The Creature from Jekyll Island explains how to do it (there are several steps but I am just going to give the salient ones).
Pledge the government's hoard of gold and silver to be used as backing for all the Federal Reserve Notes (FRNs) in circulation. The denationalization of thse asssets is long overdue. Determine the weight of all the gold and silver owned by the U.S. gov't. and then calculate the total value of that supply in terms of real silver dollars.
Determine the number of all FRNs in circulation and then calculate the real-dollar value of each one by dividing the value of the precious metals by the number of Notes. Retire all of the FRNs from circulation by offering to exchange them for dollars at the calculated ratio. There will be enough gold and silver to redeem every FRN in circulation.
Posted by Wayne on 02/01/11 09:51 PM
The question is not good money vs bad money, but rather where does one acquire and hold something that will have value in a world with no property rights.
Real estate belongs to the government, and most businesses can be shut and or looted instantly should the powers that be desire to do so.
Your bank account and brokerage house balances are completely under the control of the US government, and, as in the case of your safety deposit boxes in the 1930's, will be looted at the convenience of the government.
History always repeats!
Posted by Bionic Mosquito on 02/01/11 05:59 PM
I will add: good money may not fully drive out bad money.
Imagine 100% gold backed money, 100% silver backed money, 20% gold backed money, and money backed by the full faith and credit of a taxing authority. Each will find its level as derived by the market, and would always regularly adjust to each other as market participants dictate.
Each type of "money" will find a relative value to each other. The market will determine the worth of each "money" in the market, and each "money" will find a value to settle where it will function for trade.
Every commodity and currency market is a good example of this today. Even the market in gold demonstrates that there are those willing to sell gold at a given price in FRNs. Else, how could you buy gold for FRNs?
That you demonstrate a preference has nothing to do with the correct interpretation of Gresham's law.
Posted by Bionic Mosquito on 02/01/11 05:39 PM
"We simply disagree on the results of the application and that is good."
No, we disagree on the definition and interpretation of Gresham's law.
"You and the Daily Bell staff may use your gold and silver coins and keep your FRNs and I will use my FRNs and keep my gold and silver coins."
This comment further demonstrates that you do not understand Gresham's law, or my point.
"We both agree I assume that we view FRNs as inferior. This is the bad money that Gresham avers would drive out the good (gold and silver)."
Try a thought experiment. Pretend you are the seller of goods and not the buyer (yes, it takes two to make a trade). Why would you, the seller of wheat or steel, accept FRNs or other "paper" in exchange for good assets? A market is not just whatever the buyer dictates. The seller must also agree.
Now, in small steps, let's move ahead. Back to you being a buyer. Go find a seller of wheat who will trade it for paper, when there is a market trading wheat for gold. What if there isn't such a seller? You may "want" to pay with paper, but no seller of wheat is willing to accept it. Good money thus drives out bad.
Posted by David Robertson on 02/01/11 05:00 PM
The link I put into my last post but one addressed to you contains this sentence: "Properly understood, Gresham's Law refers to an unintended consequence of legislation the intention of which is to force people to treat a money they view as inferior as if it were not so. " This is a good definition I think.
We both agree I assume that we view FRNs as inferior. This is the bad money that Gresham avers would drive out the good (gold and silver). I happen to believe that this will hold even if the price of the PMs is allowed to float against FRNs.
You and the DB staff appear to believe that in that case people will use gold and silver coins (or even digital gold and silver) to buy and sell. I find this impossible to believe but as I said in my last post that is what the markets are for.
Posted by David Robertson on 02/01/11 04:31 PM
We are not dealing with coins of the same face value but different metal content. We are comparing how consumers will view two currencies, one visibly appreciating in value and the other depreciating. How would you personally deal with that situation?
I believe this is a valid application of the so called Gresham's Law viewed as a simple principle, bad money drives out good. At the time the law was first enunciated money was mostly precious metal coinage. I believe the principle is still applicable when we use irredeemable debt paper and gold or silver.
We simply disagree on the results of the application and that is good, That is what makes markets work. You and the Daily Bell staff may use your gold and silver coins and keep your FRNs and I will use my FRNs and keep my gold and silver coins.
Posted by David Robertson on 02/01/11 04:15 PM
To answer your implied question I was not envisaging any particular price for gold. I did indicate that I believed the price would rise considerably.
The case you propose is very possible and the merits of each transaction would have to be considered independently. It is impossible to lay down a rule. As I said the inclination would be to hold on to the appreciating currency and dispose of the depreciating one. Nevertheless the demand for gold and silver by suppliers in exchange for their goods or services might rise to the point where one would be willing to do business.
Another consideration would relate to credit. Since most purchases are made on credit would you be more willing to incur debt in FRNs or in gold or silver. My guess is that you would use FRN credits since the value would be depreciating. In gold or silver the value of the repayment would be greater assuming as we do that the price would rise.
You raise another valid point that also occurred to me and that is that giving legal tender status to gold and silver would in all likelihood lead to rapid inflation in FRNs. Given these likely outcomes what is the probability of the introduction of gold and silver as currency? Much as I would like to see such an event I do believe it to be very unattractive to the ruling elites and therefore extremely unlikely.
Posted by Sovereignjim on 02/01/11 04:01 PM
@DB Please, please, please use "fraud free market" in place of "free market"
Posted by Myron Martin on 02/01/11 03:30 PM
The repeal of legal tender laws is a logical first step, but a return to a gold and silver standard of some sort may have to be done in stages so as not to distort the economy even further. I am sure behind the scenes the elites are already working on some sort of plan that will relieve public anger while they retain control and continue to skim the cream from world production and trade.
Posted by Rrust on 02/01/11 03:25 PM
@ David Robertson
I base this on the simple observation that one would be foolish to sell an appreciating asset (gold or silver) and keep a depreciating asset.
I think I understand what you are saying, but perhaps you are *locked* into thinking in terms of current *paper* prices for gold and silver. The *real* values may well be rather different.
Would you be *foolish* to trade one of your gold eagles for $4000 (frns) or $5000 (frns) worth of goods?
Posted by Bionic Mosquito on 02/01/11 02:18 PM
It is impossible to read the article you cite and not come to the conclusion I point out in my first post. I do not understand how you are interpreting it.
Selgin is quite clear: where legal tender does not force a preference of one coin over the other, good coins are preferred. Where legal tender requires fixed exchange rates or other favored treatment, the bad coin wins. You have offered evidence to further demonstrate my point. I thank you.
I will suggest in a fully free market, both good and bad coins could circulate, each at a value the market deems appropriate. There will always be a market clearing price for every freely traded asset.
Your "simple observation" is not applicable in this world of legal tender laws. Selgin's paper fully supports the proper interpretation of Gresham's law, as I stated above.
Reply from The Daily Bell
Posted by David Robertson on 02/01/11 01:59 PM
Having read another analysis of Gresham's Law that says in the beginning "The proposition known as "Gresham's Law" is often stated baldly as "bad money drives good money out of circulation" I must say that I stand by my conclusion. This particular analysis is at this link:
Click to view link
As you yourself have said it is unlikely that legal tender status of the present irredeemable FRN will be revoked even though Ron Paul is proposing just such action. In that case even if the exchange rate is not set and gold and silver are permitted to float against the irredeemable FRN it is my opinion that the FRN will be used and that the gold and silver will be hoarded. I base this on the simple observation that one would be foolish to sell an appreciating asset (gold or silver) and keep a depreciating asset.
Posted by Jim Roache on 02/01/11 01:13 PM
There is not enough bullion for gold and silver coinage is there? Or is the intention to use paper or some other worthless article as hand to hand currency? A gold standard " absolutely " but not pegged. Gold must find its own price.
Reply from The Daily Bell
Yes, let the market decide.