A controversial article looking at former U.S. Fed Chairman Alan Greenspan’s role in the easy money systems which have pervaded the U.S. and the world economies – and his recent disavowals of these systems in retrospect. While the article is primarily directly relevant to the U.S. economy, it has parallels within any nation which has implemented similar monetary easing. The views expressed are those of the author and not necessarily those of the owner of this website.
By Stefan Gleason*
Under certain circumstances, seemingly decent human beings are capable of horrific things.
So it is with Former Federal Reserve Chairman Alan Greenspan, who parlayed his sound money bona fides into the top post at America’s private banking cartel and current issuer of our un-backed currency. In betrayal of his own stated free-market principles, Greenspan spent his tenure at the Fed pumping up financial markets with easy money and enabling runaway government spending commitments.
Today, however, the “maestro” of central banking is playing a very different tune. He’s warning against an inevitable crisis resulting from the very policies he helped implement.
Perhaps it’s a late-life crisis of conscience. Perhaps he feels guilty. Perhaps at age 90, he just feels free to speak his mind in a way that most current and former Fed officials don’t. In any event, Alan Greenspan is very concerned about the legacy he will leave and now seems genuinely worried about the country’s financial future.
Greenspan: “We Are in the Very Early Days of a Crisis Which Has Got a Way to Go”
Following the Brexit shock and the market volatility that followed in its aftermath, Greenspan scolded British officials for the “mistake” of allowing the vote to leave the European Union to take place. He predicted more dominos would fall. In an interview with Bloomberg last week he said, “We are in very early days of a crisis which has got a way to go.”
It’s not surprising to hear Greenspan echo other pro-globalist voices in bemoaning the potential disintegration of the European Union. Central bankers, commercial bankers, governments, and international corporations all have vested interests in pushing for what they call “integration.”
Outgoing United Kingdom Independence Party (UKIP) leader Nigel Farage declared the successful Brexit referendum “a victory for ordinary people” against “multinationals,” “big merchant banks,” and “big politics.”
The success of Brexit, which defied the predictions of pollsters, may bode well for Donald Trump. His unconventional campaign for the presidency hits on similar anti-globalist, anti-establishment themes.
Meanwhile in Congress, renegade Republican Rep. Thomas Massie is pushing what he calls an “Amexit” from the United Nations. Massie’s American Sovereignty Restoration Act (HR 1205) would allow the U.S. to leave the United Nations and cease sending $8 billion per year in “contributions” to the world body.
Anti-establishment politics irks elites in central banking and elsewhere who institutionally prefer the status quo. But what really worries former Fed chair Alan Greenspan isn’t the upcoming election or any bill in Congress. It’s the $19+ trillion national debt and the trillions more in future spending commitments that are already baked into the cake.
Greenspan: Entitlements Time Bomb “Is What the Election Should Be All About”
The problem, as Greenspan sees it, is the structure of Social Security, Medicare, and other “mandatory” spending programs. Through them, ever growing numbers of people “are entitled to certain expenditures out of the budget without any reference to how it’s going to be funded. Where the productivity levels are now, we are lucky to get something even close to two percent annual growth rate. That annual growth rate of two percent is not adequate to finance the existing needs.”
Greenspan’s prognosis: “I don’t know how it’s going to resolve, but there’s going to be a crisis.”
His pessimism stems from the political reality that elected representatives lack the will to address entitlement spending. “Republicans don’t want to touch it. Democrats don’t want to touch it. They don’t even want to talk about it. This is what the election should be all about in the United States. You will never hear one word from either side,” Greenspan told Bloomberg.
He is right, of course. Even self-described “conservative” Republicans who tout smaller government in principle don’t actually vote for it in practice. Mathematically, they can’t.
Once you rule out cuts in military and entitlement spending, as most Republicans do, what’s left on the table to cut is small potatoes. Going after waste, fraud, and abuse isn’t going to stop the bleeding of red ink as millions of Baby Boomers withdraw from the workforce and expect to collect trillions in unfunded benefits that have been promised to them.
The good news (if you’re a politician) is that under our monetary system you don’t ever have to cut. You don’t have to ensure that your promises of future benefits can be met with revenues. You can be as fiscally irresponsible as the Federal Reserve’s willingness to expand the currency supply permits you to be. The Fed stands ready to buy up government bonds in unlimited quantities, making a sovereign default practically impossible and enabling the government to borrow at artificially low interest rates.
The government debt bubble is a product of the fiat monetary system. Under a gold standard, Congress would be limited by what it could actually extract from the people in taxes.
Here’s what one of the world’s most famous economists said recently about gold: “If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard.”
The self-described “gold bug” economist quoted above is none other than Alan Greenspan!
Yes, the longest-serving chairman of the world’s most powerful fiat money establishment.
The same Alan Greenspan who helped both Republican and Democrat administrations drive up the national debt from $2.4 trillion to $8.5 trillion in the years 1987-2006.
The same Alan Greenspan whose implicit open-ended backing of U.S. debt markets helped Congress grow unfunded liabilities by untold trillions more than is even reported in official debt figures.
The same Alan Greenspan who engaged in shocking interventions and currency devaluations, starting with bailing out Long Term Capital Management in 1998 and followed by a blowing up of the tech bubble, and, after its crash, the housing bubble.
Why Did Greenspan Commit His Horrific Monetary “Crimes”?
At last, Greenspan sees the light. Perhaps in private he always did. Before he helmed the Fed, he was known as a free-market advocate who associated with novelist-philosopher Ayn Rand and strongly favored a gold standard. But unlike a Randian hero, Greenspan compromised his principles in his pursuit of power, fame, and social status.
Taken to its extreme, the phenomenon of Greenspan’s tenure was akin to the “banality of evil,” a concept that came into prominence following Hannah Arendt’s book about the Nazi trials. Arendt’s thesis, as described by author Edward Herman, was that people who carry out unspeakable crimes aren’t necessarily crazy fanatics, but rather “ordinary individuals who simply accept the premises of their state and participate in any ongoing enterprise with the energy of good bureaucrats.”
Why did Greenspan play a key role in undermining sound fiscal policies and sound money while he was at the height of his power and influence at the Fed? Why did he do so much to fuel asset bubbles and reckless debt spending? Only Alan Greenspan himself knows for sure, but we’re the ones paying the price.
*Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, TheStreet.com, Seeking Alpha, Detroit News, Washington Times, and National Review.
As we move through 2016, the Horsemen of the geopolitical, economic, and social apocalypse are on the march.
China burns through its currency reserves as billions in yuan flee the mainland for safe harbor. Japan prints mountains of yen debt in an effort to create inflation – and thereby the conscious devaluation of its citizens’ purchasing power.
Saudi Arabia’s gamble of cutting oil prices to the bone in an effort to break the back of the shale oil industry is becoming so costly that it may have to sell a portion of mighty Aramco to outside investors, while keeping secret the amount of its U.S. debt.
The U.S. government holds an incomprehensible $19 trillion dollar debt, in a presidential election year where the programs offered by front-runners of both parties would increase that amount… by trillions more!
And to top it off, many nations – the U.S. included – are moving to implement a policy of negative interest rates (NIRP), where the bank charges you the customer for the privilege of holding a cash balance! Think about how corrosive NIRP would be. And while that’s going on, the government is actively working to promote inflation – in order to pay its social security and government pension obligations – while your purchasing power continues to decline.
In Europe, NIRP is causing large corporations to hoard cash and buy gold rather than keep a large bank balance. In Japan, home safes, in which to store cash, are being purchased in record amounts, and demand for 100,000 yen (c. $1000) notes is going through the roof.
Since 2010, central banks have become net buyers of gold
As the world’s governments come face to face with the prospect of currency collapse, something’s going to give. Confidence in (acceptance of) fiat money is literally all that holds things together.
Let a run out of a country’s paper money get underway – into anything of tangible value – and it’s GAME OVER. Even the ability of banks to suspend redemptions from your money market funds – instituted by federal decree last year – will prove to be nothing more than a metaphorical finger in the dike.
What is to be done? How can the central banks of countries around the globe, as they slip into a synchronized recession (or worse), dig themselves out of the approaching monetary-debt abyss without going through a systemic collapse first?
There is an answer… it’s written about occasionally, but scoffed at by virtually every “intellectual” and “economist” who has cared to give its backers the time of day.
That “answer” is born and nurtured through centuries of history in the crucible of economic need: There will be a revaluation in the price of the most powerful, effective, and durable store of value humankind has ever utilized – gold.
Talking heads and politicians like to say, “but there wouldn’t be enough gold for that!” Oh, yes there is… but only at the right price!
Gold revaluation (not monetization – where gold is redeemable in exchange for paper script as a monetary medium), would be instituted by central banks – perhaps first by the U.S. Federal Reserve, with others in tow…
Revaluing All Currencies against Gold Is as Simple as Eighth Grade Math
So far, the world’s major currencies have been taking turns devaluing against each other, to improve their country’s trade position in the global economy. It’s mathematically impossible to devalue all currencies at the same time, so as the “currency wars” intensify, the inevitable result is a spiraling race to the bottom.
Jim Rickards, in his recently-published seminal work, The New Case for Gold, shines a light on the way out for these dysfunctional entities, saying:
“..if you devalue it against gold – because gold is money. It’s not the kind of money that can be printed by a central bank… (but) with gold, everybody can devalue (their currencies) at once… It’s eighth grade math.”
In order to derive a per ounce dollar figure at which gold needs to be priced, in order to restore public confidence, and jumpstart inflation – central bank goals – Rickards suggests the following formula:
First take 40% of global money supply (M-I x 40%), then divide this figure by the official gold holdings of the world’s central banks (35,000 tonnes), and you get $10,000 an ounce as a realistic gold revaluation price. This action would stop deflation – a central bank’s worst nightmare – dead in its tracks. And they might not even have to reduce the money supply!
Other thinkers, including Antal Fekete and Hugo Salinas Price, have toyed with a gold figure of between $10,000 and $50,000. Price, who has been a tireless advocate for using the silver Libertad in Mexico as a circulating parallel currency, selects $20,000 as a realistic figure.
Price says, “The discipline of gold as Reserves backing currency at a revalued price will restore order to a world that has refused to adopt the necessary discipline until forced to do so in the desperate situation now evolving, where there will be no other alternative but to accept the detested fiscal and financial discipline imposed by gold.”
Exchanging a “Paper Promise” for Real Money
The idea of backing a large portion of the floating debt that David Morgan of The Morgan Report has long referred to as “paper promises“, looks like it may be moving from a once far-fetched idea towards a place on center stage.
You may think that if a gold revaluation happens, you will be able to quickly go to the local coin shop and pick up a handful as soon as the possibility of a gold price rocket launch becomes obvious. But think again. Most likely announced on a Sunday evening, by Monday morning the precious metals supply would be gone. And mining stock share prices would go through the roof. Rickards notes:
“Gold will be in such short supply that only the central banks, giant hedge funds, and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super-spike even more extreme than in 1980. The time to buy gold is now, before the price spikes and before supplies dry up.”
In summary, continue to buy and hold physical gold (and silver) as insurance first and for possible profit generation second. But now you have a third compelling reason – if gold revaluation does come to pass, those who have it will also have a personal financial game-changer of the first order!
About the Author:
David Smith is Senior Analyst for TheMorganReport.com and is a regular contributor to MoneyMetals.com where this article was first published. For the last 15 years, he has investigated precious metals mines and exploration sites in Argentina, Chile, Bolivia, Mexico, China, Canada, and the U.S. and shared his findings and investment wisdom with readers, radio listeners, and audiences at North American investment conferences.
Mike Gleason, Director, Money Metals Exchange: It is my great privilege to welcome Steve Forbes, Editor-in-Chief of Forbes Magazine, CEO of Forbes, Inc. to our Money Metals Exchange podcast. Steve is also author of many fabulous books, including Flat Tax Revolution, How Capitalism Will Save Us, and his latest work, Reviving America: How Repealing Obamacare, Replacing the Tax Code and Reforming the Fed Will Restore Hope and Prosperity. He’s also a two-time Presidential candidate, having run in the Republican primaries in both 1996 and 2000. It’s a tremendous honor to have him with us today. Mr. Forbes, thank you so much for joining us and welcome.
Steve Forbes, CEO of Forbes, Inc.: Good to be with you, Mike. Thank you.
Mike Gleason: I want to start out by getting your take on the 2016 Presidential election cycle, especially given your first-hand experience in the whole process. We’re seeing an anti-Washington voter revolt of sorts… it’s the anti-establishment candidates that have been getting all the momentum. This is especially true on the Republican side, where we see an outsider like Donald Trump currently leading and guys like Ted Cruz, Ben Carson and others having garnered a lot of support. But also on the Democratic side we’re seeing admitted Socialist Bernie Sanders starting to overtake Hillary Clinton with his outsider bid. What’s driving this phenomenon, and is this a good thing or a bad thing?
Steve Forbes: What it demonstrates is the intense, deep voter dissatisfaction with where the country is and fears about the future. There’s contempt for the political class for not being able to handle things. There’s the feeling that those who are in charge either don’t know what to do, or if they do they don’t know how to do it, so people are looking for outsiders for a fresh perspective. Just as in business where incumbents get too comfortable, you always find the entrepreneurial outsiders to challenge the status quo and upend things, and you’re seeing the same thing happening on the political side.
So who knows if Trump will go all the way, how far Bernie Sanders will go, but it’s a way of (at least for now) voters expressing dissatisfaction, unhappiness, and saying we want positive change. You cannot continue doing what you’re doing.
Mike Gleason: The issue of sound money has been getting more attention during the GOP debates than it has in several decades. It’s quite encouraging to us at Money Metals Exchange, as proponents of precious metals ownership, to hear Cruz, Paul, Carson, and even Trump bring up issues related to sound money such as reigning in the Federal Reserve. returning to some sort of a gold standard, and adoption of other measures to get America’s fiscal house back in order. I’m guessing you probably felt like a lone voice in the wilderness when you raised these subjects during your Presidential runs. So among the current candidates, who do you think best understands the problems created by our current monetary policy and might actually do something about it if elected President?
Steve Forbes: I think it’s encouraging that a growing number are recognizing there is a problem. Even before you get to solutions you’ve got to recognize and acknowledge that the way things are being done is not working and that the Federal Reserve has been a huge factor in the sluggishness of the U.S. economy; very, very destructive actions they’ve taken. I was delighted that Ted Cruz in one of the debates brought up the idea of a gold standard. Rand Paul of course was suckled on the idea of safe and sound money. Ben Carson has made reference to it. Donald Trump has made noises about the Federal Reserve. I think that’s a good sign.
One of the things that really most of the economics profession doesn’t seem to get is that money is simply a means for us to buy and sell with each other. It’s like a claim check. You go to a restaurant, check your coat, the claim check has no intrinsic value, but it’s a claim on the coat. Money is a claim on products and services. It has no intrinsic value. What it does, it’s like a claim check on products and services. It works best when it has a fixed value.
Money measures value the way scales measure weight or clocks measure time or rulers measure space and length, and it works best when it’s stable. The best way to get stable money, as we explained in our book Reviving America, is precisely to link it to gold the way we did for a hundred and eighty years. It works. Gold is like a ruler. It has a stable value. When you see the price fluctuate, that means that it’s the dollar’s value that’s fluctuating, people’s feeling about it for the present and for the future. But gold is like Polaris. It’s the North Star. It’s fixed.
Mike Gleason: That leads me right into my next question here. About a year ago you and Elizabeth Ames co-wrote the book titled Money: How the Destruction of the Dollar Threatens the Global Economy and What We Can Do About It. You proposed a modified gold standard… and I’ll quote here, and then I’d like to get your comments.
The twenty-first century gold standard would fix the dollar to gold at a particular price. The Federal Reserve would use its tools, primarily open market operations, to keep the value of the dollar tied at that rate of gold.
What would be the main benefits of such a reform? And also I’m curious why you stopped short of calling for an end to the Fed all together and a return to true free markets when it comes to gold and the rate of interest?
Steve Forbes: In terms of the role of the Federal Reserve, I think you’ve got to take one step at a time. One of the fears is that if you didn’t have the Fed you get a panic, which happens for whatever reason every few years, the thing would spin out of control. I think the key thing now is to get the dollar fixed in value, which we propose in that book, whether it’s a thousand dollars an ounce or eleven hundred dollars an ounce.
I think the best way to understand this is to imagine what would happen if the Federal Reserve was in charge of the time bureau, and the Fed decides to float the clock, sixty minutes to an hour one day, thirty-five minutes the day after, ninety minutes the day after that. Everyone would know that if you had a fluctuating clock, if your timepieces couldn’t keep accurate time, life would be chaotic. The same is true of money when it has a floating value. If you had the floating clock, imagine baking a cake. It says bake the batter thirty minutes. Is that inflation adjusted minutes, nominal minutes, a New York minute, a Mexican minute?
Gold is the best way to fix that value. The only role for the Fed, at least for now, would be to keep that fixed value and then deal decisively with the occasional panic, just as the British showed us a hundred and fifty years ago. If you have a panic where banks need the temporary liquidity, they go to the Fed with their collateral, borrow the money at above market interest rate, and then, as the crisis recedes, they quickly pay it back and it’s done. So the Fed’s role could almost be done by summer interns if they knew what they were doing, so it would not be the monster that it is today where the Fed tries to dictate where credit goes, what happens to the economy, etc. It’s really bizarre and destructive.
Mike Gleason: They certainly have a whole lot of control and a lot of people have a lot of interest in Fed policy, way too much for our liking, and I’m sure yours as well.
Steve Forbes:One other example on that is Janet Yellen, the head of the Federal Reserve, says that we should have two percent inflation, which in her mind is seeing the prices rising two percent a year. If you take a typical American family making fifty thousand bucks a year, that means their costs would go up a thousand dollars a year, two percent of fifty thousand. Who gave her the authority to raise the cost of living, which is an effective tax, a thousand dollars on a typical American family? Yet Congress, they just nod their heads. It’s a travesty.
Mike Gleason: I’ve always wondered if two percent is good, isn’t three percent better? What about four percent? It seems like it could just go on and on and get higher and higher.
Steve Forbes:Yep, which is what happens. An unstable dollar, whether it’s weak or strong, is like a timepiece, a watch that is too slow or too fast. Neither one is going to help you.
Mike Gleason: The equity markets have been quite vulnerable here in the early part of 2016 and a lot of that seems to stem from these over-valuations we were starting to see. Do you believe the recent pullback is just a short-term market cleansing? Or do you expect a bigger, more dramatic event to occur with this just being the tip of the iceberg?
Steve Forbes: Well, when you get a big change in the stock market it’s usually because of a surprise. People talk about oil, people talk about China, the pressure on earnings, those things are already known. It’s the unknowns that hit you. I think one of the things that has hit the markets – and they can’t be able to know the exact consequences – is precisely what’s happening in our politics. The idea of Bernie Sanders winning is still remote, but now you can’t rule out the possibility. What does Donald Trump want to do about trade? Well he’s been all over the map, to be blunt about that. He says he’ll negotiate it, but with that kind of uncertainty, people stay on the sidelines.
Mike Gleason: Looking at the current economic landscape and the debt-based dominated markets that we have now, the situation appears to have only worsened since the ’08 financial crisis, how do you envision this playing out? Are we looking at some kind of economic collapse again or will the Fed and the central planners be able to keep the wheels on this thing?
Steve Forbes: Those words “central planners” get to the very problem with the Fed. The idea that the economy is a machine is a preposterous one. The economy is individuals. The idea that you can control people the way you can modulate an automobile is… that’s how you get tyranny. That’s why in the third part of our book, Reviving America, we talk about Soviet style behavior by the Federal Reserve and by economic policymakers. When you look at the great disasters of the past – like the Great Depression, the terrible inflation of the 1970s, what happened to us in the panic in 2008-2009 – all of those had at their roots disastrous government policy errors.
Mike Gleason: I want to talk to you about the role that gold, and to some extent silver, can play into all of this. In your book you’ve written about gold and its role in an investor’s portfolio, but we shouldn’t necessarily look at it as an “investment.” Talk about that and then also whether you view gold ownership as more or less important now versus say ten, twenty, or thirty years ago.
Steve Forbes: In terms of gold, unless you’re a jeweler, I see it as an insurance policy. It doesn’t build new factories or things like that, new software. What it is is insurance that if things really go wrong you’ve got something that will balance your portfolio. So whether it’s five percent, ten percent, it shouldn’t be dominating your portfolio. But since you cannot trust this right now, what politicians do, what you have working out here is a situation where yes, the price of gold has come down since 2011 when it looked like the U.S. Government might default, but today in this kind of environment, is probably a good time. Not that you’re going to make quick money on it, but it’s like an insurance policy. You hope it doesn’t have to be used, but if it does you’ve got it.
Mike Gleason: We talked about how anti-establishment forces are starting to get some momentum. Do you see any real change coming about in our monetary system without some kind of crisis event forcing it? Generally it seems like things don’t change unless they’re forced. What do you think, is now maybe the time in Washington for some of these politicians to seize on the fact that a lot of Americans are very frustrated and maybe there is the ability to get some traction with some of these radical reforms and getting us back to sound money?
Steve Forbes: Well, this is one of the reasons why we did the book. It was to lay out what needs to be done so, if the opportunity or the crisis arises, we have the tools to do it. We had this terrible crisis in 2008-2009, but because policymakers were still holding these obsolete theories and dangerous notions about money, which got us in the crisis in the first place, they not only made mistakes, they invented new mistakes such as Quantitative Easing or zero interest rates.
Zero interest rates sounds great, like price controls sound great. You’re in an apartment, you only pay ten dollars a month, boy, that sounds great if you don’t mind having no maintenance. But when you suppress prices you distort the marketplace, deform the marketplace, people don’t invest, and you get stagnation. If the Federal Reserve announced that it was going to put price controls on Big Macs at McDonald’s and what you pay for a rental car and things like that, people would say that’s outrageous. And the Fed would say we want to suppress prices to stimulate the economy so you have more money to spend. We know it just wrecked the economy.
Yet when they do the same thing with interest rates, Congress hardly says boo! The Fed has distorted markets to the point where on zero interest rates, what the Fed in effect did was seize almost four trillion dollars of assets out of economy, made it very easy for those assets to go to the government and the large companies, and starved credit to small and new businesses.
Just one statistic, in the last five years the growth of credit to government has gone up thirty-seven percent, growth of credit to corporations thirty-two percent, growth of credit to small businesses and households only six percent. As you know, small and new enterprises are where the bulk of the jobs are created. So the Fed is in the business of credit allocation. That is profoundly wrong and must be changed.
Mike Gleason: We’re talking here in advance of the January Fed meeting. By the time this interview will air that decision will be known. But just more generally speaking, where do you see Fed policy going here? Are they truly stuck between a rock and a hard place? What do you think their policies are going to be as we go throughout the year?
Steve Forbes: They’ll be tempted to stop allowing the market interest rates in the name of saving the economy, which is like taking an anemic patient, a patient suffering from anemia, and bleeding them. With the Fed the “rock and a hard place” (idea) is only in their minds. What they should do is just step aside, let borrowers and lenders determine what interest rates should be, and let the markets function again instead of trying to control them like commissars in the old Soviet Union. Free markets always work when you let them, but the Fed has to be pushed on that.
Mike Gleason: As we begin to close here, what do you think it’s going to take for gold and silver to become a mainstream asset class again? For example, will it be China or Russia backing its currency with precious metals because the devaluation has gone too far too fast? Something like that? What are your thoughts there as we wrap up?
Steve Forbes: Well I think if they see precious metals for what their historic role has been, we have gold-based, gold-backed money today. Remember, gold is a ruler. Because it’s got that fixed value, it makes sure that the politicians don’t muck around with the integrity of the U.S. dollar. We had a gold standard from the 1790s right through the 1970s, a hundred and eighty years, and it worked very well. We had the most phenomenal growth of any country in the history of the world.
Since then we’ve had more financial crises, more dangerous banking crises, lower economic growth, and we see the stagnation that we have today. So maybe the Russians will get it, maybe the Chinese will get it, but the reason we have this book Reviving America, is to help activist citizens have the tools they need to push and get integrity back to the U.S. dollar, get rid of this horrific tax code, and get patients in charge of healthcare again. We do those things and you’ll see the American economy will roar off like a rocket. You should have your gold as that insurance policy and life will be good again.
Mike Gleason: Mr. Forbes, I can’t thank you enough for your fantastic insights and for being so generous with your time. I very much enjoyed reading your latest book in advance of this interview. You give the reader a great explanation of the history behind all of this, and then also more importantly some practical things that they can do to protect themselves, and we certain urge everyone to check that out.
It was great speaking with you today and we wish you and your family and your team there at Forbes and Forbes.com all the best. Thank you so much, and thank you for your continued efforts to spread the ideals of free market and liberty. It’s been a real pleasure to talk with you.
Steve Forbes: Great pleasure to talk with you. Don’t lose faith. Markets are people, and people thrive most when they are free.
Mike Gleason: Excellent way to end. That’ll do it for this week. Thanks again to Steve Forbes, CEO of Forbes, Inc, Editor-in-Chief of Forbes Magazine, and best-selling author, including his latest work,Reviving America: How Repealing Obamacare, Replacing the Tax Code and Reforming the Fed Will Restore Hope and Prosperity. You can obtain a copy of your own at Amazon.com, download it onto your Kindle or iPad, or purchase it at other places where books are sold.
*Mike Gleason is a Director with Money Metals Exchange, a U.S. precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.
Ever since the U.S. left the gold standard for good in 1971, some politicians and investors have called for its return. At one of the Republican presidential debates in October, Texas Senator Ted Cruz became the latest, touting the stability and booming prosperity the U.S. economy enjoyed in the years when the dollar was pegged to the yellow metal.
In previous Frank Talks, I’ve highlighted some of the consequences of having a free-floating fiat currency, one of them being soaring national debt. When money is limited, as it is in a true gold standard system, so too is reckless government spending.
You can see how dramatically all debt in the U.S., both public and private, began to soar past economic growth once the gold standard was ended.
But my goal today isn’t to argue for or against a gold standard. The system worked well in the second half of the 19th century, but economies have grown so large that there’s no longer any way they could be sustained by such a limited commodity.
Even former Federal Reserve Chairman Alan Greenspan, who has consistently supported the idea that gold is money, agrees, telling the Gold Report in 2013: “A return to the gold standard in any form is nowhere on anybody’s horizon.”
So instead, I want to lay out the facts of America’s past relationship with gold as a currency and dispel some of the misconceptions people might have.
For the first 40 years of its existence, the U.S. operates on a bimetallic system of gold and silver—officially, at least. Practically, silver coins are the favored currency, and domestic purchases made with gold are rare.
Congress adjusts the silver-to-gold ratio, from 15-1 to 16-1. This makes gold cheaper relative to the world market price ratio. Silver begins to be exported, and by 1850, silver coins all but disappear in the U.S. The yellow metal becomes the principal form of currency.
The U.S. abandons the gold standard briefly during the Civil War. For the first time, it issues fiat money with no convertibility into silver, gold or any other metal. In 1879, Congress freezes the amount of paper money in circulation at $347 million, where it remains for about a century.
The U.S. finally adopts a “classic” gold standard, one that proponents such as Senator Cruz wish to revive. In such a system, a standard mass of the yellow metal defines the value of a currency unit. Paper money, then, is not a separate good from gold and is fully convertible.
This system lasts until World War I. Although this period isn’t free of financial crises, it’s still widely considered to be one of the most economically stable in American history.
But let’s not overstate this stability. The table below shows us that between 1879 and 1913, when the classic gold standard is in effect, the U.S. actually experiences an average deflationary rate of -0.02 percent. At the same time, consumer prices have a standard deviation of only 1.98. Inflation never falls below -4.74 percent or rises above 4.53 percent. The other periods, by contrast, have huge swings in consumer prices.
Concerned that the U.S. might be returning to a bimetallic system, Congress passes the Gold Standard Act, making the gold dollar the official unit of currency. Greenbacks remain as legal tender but for the first time can be redeemed in gold.
In response to periodic banking panics when gold reserves fell short, the Federal Reserve is established as a lender of last resort. The Fed is not only charged with maintaining the gold standard but also starts issuing Federal Reserve notes that are 40 percent backed by the yellow metal.
Four years after the Wall Street Crash of 1929, the Fed removes the U.S. from the gold standard to expand monetary policy. Convertibility, therefore, is ended.
“The free circulation of gold coins is unnecessary,” President Franklin Roosevelt tells Congress, insisting that the transfer of gold “is essential only for the payment of international trade balances.”
Roosevelt nationalizes gold by issuing an executive order requiring all gold coins, bullion and certificates to be turned over to the Fed at $20.67 per ounce. Hoarding gold in coin or bullion is punishable by a fine of up to $10,000 and/or jail time. These policies are reinforced in the Gold Reserve Act of 1934.
Representatives from the U.S. and 43 other countries meet in Bretton Woods, New Hampshire, to normalize commercial and financial relations. The agreement is a quasi-gold standard whereby each currency other than the U.S. dollar has a fixed parity to the dollar, which itself is pegged to and can be exchanged for gold at $35 per ounce. (This does not apply to Americans, however, who still can’t hold gold.) The dollar becomes the world’s reserve currency.
President Richard Nixon “closes the gold window” after announcing the U.S. would no longer convert dollars into gold. This move is initially supposed to be temporary, but in 1976 the U.S. monetary system officially becomes one purely of fiat money. Gold rises 2,330 percent during the decade, from $35 per ounce to $850.
On December 31, President Gerald Ford permits private gold ownership again in the U.S.
For more on the gold standard, I want to direct you to a chapter in my book The Goldwatcher: Demystifying Gold Investing, written by its coauthor, John Katz. In the chapter, titled “The Rise and Fall of the Gold Standard,” John asks whether the gold standard was to blame for the Crash of 1929 and, subsequently, the Great Depression. No matter your opinion on the topic, it’s a fascinating read.
About 100 years ago, in his testimony before Congress, banking giant J.P. Morgan famously stated: “Gold is money, and nothing else.”
At the time, this was true in every sense of the word “money,” as the U.S. was still on the gold standard.
Of course, that’s no longer the case. Despite the fact that previous attempts in other countries to adopt fiat currency systems wreaked havoc on their economies, the U.S., under President Richard Nixon, cut all ties between the dollar and gold in 1971. Gold rose 2,330 percent during the decade, from $35 per ounce to $850.
Today, money supply continues to expand while federal gold reserves remain at the same levels.
Many people still view the yellow metal as something more than just another asset. They also contend that it’s grossly undervalued. In a recent interview with Hard Assets Investor, author and veteran gold investing expert James Turk explained that the money we use now in transactions is not real money at all but a substitute for gold—real money—which he sees fundamentally valued at $12,000 per ounce.
That is to say, if the U.S. government decided tomorrow to return to the gold standard, one ounce of the metal could be valued as high as $12,000, according to Turk’s model.
The current fiat currency system in the U.S. is more than 40 years old. That’s much longer than many in the past lasted, including two of the earliest attempts by central bankers Johan Palmstruch and John Law, both of which I summarize below. Some readers might identify more than a few parallels between then and now.
Johan Palmstruch, the Dutchman Who Started a Paper Ponzi Scheme in 1661
In the mid-1600s, a Dutch merchant named Johan Palmstruch founded the Stockholms Banco in Sweden, the first bank in Europe to print paper money. The Swedish currency at the time was thedaler, essentially a copper plate. Palmstruch’s bank began holding these and issuing banknotes, which were exchangeable in any transaction and fully backed by the physical metal.
At least, that’s what customers were told.
As you might imagine, people found these notes to be much more convenient than copper plates, and their popularity soared. But there was one (huge) problem. Palmstruch had been doling out so many paper bills, that their collective value soon exceeded the amount of metal on reserve. When customers heard the news, a major bank run occurred, but Palmstruch was unable to honor the rapidly-weakening notes.
By 1664, a mere three years into his monetary experiment, the Stockholms Banco was ruined and Palmstruch was jailed—just as Bernie Madoff would be three and a half centuries later.
John Law, the Infamous Scottish Gambler Who Defrauded the French with Worthless Paper
A little over 50 years later, in the early 1700s, a similar experiment was conducted in France, with even more disastrous consequences. This time, the perpetrator was a Scottish gambler and womanizer named John Law, who as a young man had been forced to flee Britain after he killed a man in a duel over a love interest—and bribed his way out of prison. After escaping jail time, Law spent 10 years or so gallivanting about Europe and developing his economic theories, which he outlined in an academic paper.
It was the Age of Enlightenment, when great iconoclastic thinkers such as Descartes, Locke and Newton emerged, changing our understanding of consciousness, politics and physics. Baroque music was all the rage in Europe, as were composers like Bach, Handel and Vivaldi. It was also a golden age of get-rich-quick schemes, and as investors, it’s important that we be aware of the history of human behavior.
In 1715, France was insolvent. It had just lost its king, Louis XIV, and the Duke d’Orléans was named regent until the late monarch’s great-grandson came of age to rule. Familiar with Law and his unorthodox ideas, the duke established him as head of the Banque Générale in hopes that he might reduce the massive debt Louis XIV left behind.
To this end, Law began printing banknotes—lots of them—and flooding the economy with easy money. Doing so, he believed, would expand employment, boost production and increase exports.
It indeed had those effects—for a time. Paris was booming. The number of millionaires multiplied.
Unlike Palmstruch, Law made no claims that the notes could be converted back into gold or any other metal. He believed that a currency, whether gold or paper, had no intrinsic value other than as a government-sanctioned medium of exchange. Instead, his notes were “secured,” vaguely, by French land, including its colonies in the Americas. There was also no limit to the amount of money that could be pumped into the French economy. Like many of today’s central bankers, Law was of the opinion that if 500 million notes were good, a billion were even better.
But to make it all work according to plan, he had to take extreme measures. Law outlawed the hoarding of money, the use of coins and the possession of more than the minimalist amount of gold and silver.
The system turned out to be untenable and the paper money became worthless. After only four short years, the currency bubble burst. Law was not only removed from office but exiled from the country. Until his death in 1729, he roamed Europe heavily in debt, making his way by his former occupation, gambling.
The incident had long-lasting effects. It sustained the country’s economic woes for years and contributed to the start of the French Revolution later in the century, as it stoked working class disenfranchisement.
Just as we still read Locke and listen to Bach, we should remember what Palmstruch, Law and other reckless central bankers did—which was essentially pull the rug out from under their countries’ monetary systems. It would be extreme to suggest that a similar collapse in currency might one day happen in the U.S., but it’s worth repeating that the gold supply has not kept pace with the money supply.
This could have huge implications.
As James Turk points out:
Eventually people are going to understand that all of this fiat currency that is backed by nothing but IOUs is only as good as the IOUs are good. And in the current environment, the IOUs are so big, a lot of promises are going to be broken.
Should those IOUs one day become as worthless as Palmstruch’s or Law’s paper—however unlikely that might be—I suspect many readers would feel relieved to know that they had had the prudence to invest in gold.
I always advise investors to hold 10 percent of their portfolios in gold—5 percent in bullion, 5 percent in gold stocks, then rebalance every year.
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Earlier this week I penned an article based on a talk by Ken Hoffmann, Bloomberg’s Global Head of Metals & Mining Research at the Global Mining Finance Precious and Base Metals Conference in London. This was published on Mineweb and has already attracted extremely strong readership from around the world – See: Will China go for a gold standard? The jury is out!
In it, Hofmann set out what some might consider an off-the-wall appraisal of possible Chinese moves to back its currency with gold to try and help cement the yuan’s position as a potential future reserve currency. This, it feels, could go a long way towards other countries’ central banks accepting the yuan as an integral part of their foreign currency holdings, perhaps even pari passu with the U.S. dollar.
Hofmann puts forward the viewpoint that the Chinese are exasperated by the West trying to treat the nation as a second class citizen on global trade and economic organisations, despite it being the world’s second largest economy – or some would even put it at No.1. The Chinese administration is also of the opinion that the U.S. is obstructing Chinese efforts to gain a place at the global table commensurate with its economic standing as the U.S. sees China as a competitor to its global dominance of trade, and all the advantages that brings to the U.S. economy and place in the world order.
Other media picked Hoffmann’s hypothesis up, but in effect only appeared to look at how much gold China would need, or what gold price would be required, to fully back the yuan with gold in the manner of the old gold standard – perhaps with the implication that this is some kind of crackpot idea which puts Hoffmann in the ‘gold cultists’ mega-price camp.
Yet this was not really what Hoffmann was suggesting. He effectively said that he did not know how China could achieve this but that the Chinese tend to view things in a totally different manner to the West and can move at lightning speed in comparison and might, by thinking outside the box, come up with some solution which could satisfactorily at least partially link the yuan to gold. This would hugely enhance the currency’s status in the eyes, perhaps not of the major Western central banks, but for state banks in other parts of the world – notably in Asia, Africa and Latin America where there may be a more natural positive association with gold as a key indicator of financial strength. Indeed in many cultures gold is viewed as the ultimate in financial probity and a symbol of wealth and power, regardless of the opinions of today’s mostly Keynesian economists who say that gold has no place in the modern financial system.
Central bankers are opposed to gold because it imposes disciplines, and ever since President Nixon dropped the dollar’s gold backing, the world’s central banks have seemed to have gradually seen this as carte blanche to allow monetary easing on an unprecedented scale and bring the global economy to the perilous state it finds itself in today. Today’s economists, except perhaps those who follow the Austrian School, and bankers are almost unanimous in their opinions that gold should play no place in global economic thinking. Yet the major Western nations’ central banks are for the most part hugely reluctant to part with any of their accumulated gold reserve – something of a contradiction in attitudes. Gold obviously still has a place deep down in their collective psyches!
Today, at Bloomberg’s own Precious Metals forum in London, Hoffmann gave a further short talk setting out the hypothesis – seeing the possibility of China going down this route as a possible Black Swan scenario. While, in a short article released at the event he admits that the backing of the yuan fully by gold is an exercise that is highly unlikely and that in any case the Chinese government would not wish to have its monetary policy hands tied to the extent a traditional gold standard would suggest. Indeed he admits that while the debate on this is an interesting one, ‘the idea of China on the gold standard is likely to remain in the alchemist’s lab for now’.
So what Hoffmann has done is to bring the idea of a Chinese introduction of some form of gold standard into the debate and for that he should be praised rather than vilified by those who find the whole idea counter to their own views. The Chinese are indeed capable of springing surprises on the West. As pointed out earlier the Chinese have a different way of thinking than us westerners. They tend to operate with the kind of long term game plan no longer even considered in most capitalist countries and with a centrally controlled economy are perhaps far better placed to implement economic reforms which are to their ultimate benefit which might be considered impossible in the Western thought train.
So while a Chinese return to some kind of gold standard may be extremely unlikely, one perhaps should not write the idea off as totally impossible, and Hoffmann has done us a favour in getting us to think outside the box ourselves.