September 05, 2003

The REAL Case Against Gold

A sharp reader writes in on why governments have always feared gold: Military powers have a legitimate case against gold; it is impossible to wage aggressive war and maintain a gold standard concurrently, let alone Bread and Circuses. The government has convinced the masses of the disutility of gold so successfully, that if you suggest reinstituting a gold-backed currency to any 'peace-loving' Democrat - there are a lot of those here in Portland, OR -, they are more likely to mention WJB than listen to any reasoned statements about gold's inherent ability to restrain military spending. Incidentally the WJB referred to is William Jenning's Bryan, who opposed the gold standard at the Democratic Convention in 1896. I wrote up a brief analysis of the speech which I published earlier this month to paid-up subscribers of Strategic Investment (where I do my weekly stock picking and follow up on our portfolio, as well as editing the 16 page monthly paper letter, with articles from Dr. Kurt Richebacher, Dr. Marc Faber, and the Daily Reckoning's own Bill Bonner). Here's the excerpt from my SI article from June 13 of this year: "Gold as been at war with paper money forever, and in the United States since the Federal Reserve was created in 1913. 1913 was arguably the worst year in American history for liberty. It saw the creation of the Fed, the creation of the income tax via the 16th Amendment to the Constitution, and the 17th Amendment -- popular election of Senators. Believe it or not, after the United States passed the Gold Standard Act of 1900 under William McKinley, the country enjoyed what is now known as the era of the classical gold standard. During that brief era, gold was fixed at $20.67 and every dollar was redeemable for gold. The U.S. Treasury was required to maintain a minimum of $150 million in gold reserves. And in language that would embarrass a modern central banker with a big printing press, the act brashly asserted that the gold-backed dollar "shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard, and it shall be the duty of the Secretary of the Treasury to maintain such parity." Imagine that, a stable currency backed by a real asset. The classical era fell apart when the world went to war in 1914. During wars, governments are fatally constricted by a gold standard. They can't print money to pay for the war. Under the gold standard, the money must be backed by an asset redeemable for paper. And seeing the wartime deficits, a skeptical populace would cash out its paper for gold -- thereby stripping the government of its ability to pay for war. That's why gold gets confiscated in wars. That's why Franklin Roosevelt made it illegal in 1933. That's why Nixon took us completely off the gold standard in 1971 and created the dollar standard. And that's why today, the government continues its war against gold. You have to wonder though, in a world increasingly at war and warlike, how long will the public keep paying for the government's wars? And not just the American public. The dollar is the world's reserve currency. If the U.S. government must borrow much more than it takes in to pay for wars that are not popular elsewhere, who will pay for them with dollars? Or will the rest of the world vote with its pocketbook... switching its dollars for gold, and bringing an end to the late, great U.S. dollar? P.P.S. For you hardcore historians, the heart and soul of the modern Democratic party has its roots in the debate over "the money issue." When William Jennings Bryan ran for President in 1896, he made the gold standard his enemy. Bryan took the floor in Chicago and gave birth to modern populism with his "Cross of Gold" speech in which he pitted Eastern business interests versus the backbone of the American Mid West. Bryan's money quote, from a populist perspective, his below. He's challenging the Democratic backers of the gold standard. He says: "They can find where the holders of the fixed investments have declared for a gold standard, but not where the masses have. Mr. Carlisle said in 1878 that this was a struggle between "the idle holders of capital" and "the struggling masses who produce the wealth and pay the taxes of the country;" and, my friends the question we are to decide is: Upon which side with the Democratic party fight; upon the side of "the idle holders of capital" or upon the side of "the struggling masses?" That is the question which the party must answer first, and then it must be answered by each individual hereafter. "The sympathies of the Democratic party, as show by the platform, are on the side of the struggling masses who have ever been the foundation of the Democratic party. There are two ideas of government. There are those who believe that, if you only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests up on them." You can hear the whole thing at . And as they say here in France, "plus ca change, plus c'est la meme chose."


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