This week saw the President of the World Bank, Robert Zoellick, talk about the need for a tangible basis for our global currency regime. Even though I was pleased to see some commentators support Zoellick, I also took note of more than a few snears, rolling of eyes, statements of disbelief, and attempts to discredit his speech by the usual suspects out there in media and government. On a related note, I also saw how quickly the austerity proposed by the Commission on Social Security was seen as unworkable by some and downright immoral by others. Unfortunately, we have a long way to go before our fiscal and currency house is put in order.
But back to President Zoellick. It appears that Zoellick, in advocating a role for gold in currencies, borrowed from ideas first proposed by David Ricardo, in his Principles of Political Economy and Taxation, published in 1817. In this book, Ricardo advocated a gold-measuring stick for currencies, where the supply of money would be regulated by the price of gold, but there would not be any need for convertibility, or even for banks to hold much gold at all. Of course, many others today advocate an overall commodity measuring stick for currencies, believing that some kind of basket of tangible assets besides gold should be used for the next currency regime. I realize there are numerous other ideas and possibilities out there: the simple reopening of the U.S. mint to gold and silver, the possible use of a bimetallic standard, or just a diversification away from the dollar in the settlement of certain global transactions. All or most of these proposals represent critiques of fiat money as defined by the American government since 1971. It is important that such proposals be voiced, but it will be very difficult to get actual results or actions. This is in part because of the inertia of central planners, and because our society has long been accustomed to the evil- yes, I said evil- of fiat money.
Fiat Currency At Its Logical End: Zimbabwe
The suffering of the people of Zimbabwe is unimagineable, all the more so because the regime of Robert Mugabe prevents sufficient media coverage of the plight of the people in his landlocked African nation. But some images and documentaries have trickled out. You can find the testimony of the Mugabe opponent Sam Chakaipa on youtube showing the desperate search most people of Zimbabwe now make for gold: the once, future, and- along with silver- only worldwide currency. The two main reasons the people of Zimbabwe are reduced to scraping through the ground for gold is because the government waged a war on the holders of capital and then decided to fire up the printing presses when faced with the inconvenience of fiscal insolvency. I understand that the United States- for now- is far removed from the plight of Zimbabwe. I also understand that many will accuse me of comparing apples to oranges by insinuating that “Quantitative Easing” will take us to complete social and economic ruin. Then again, I always encourage people “to never say never.”
At any rate, the case of Zimbabwe demonstrates the logic of fiat currency in extremis. A corrupt and abusive state arrogates total power to itself, destroys private property, and defines what money is-- “the public be damned.” When people, for whatever reason, live under rulers who are that tone deaf to the right of private property, there are only two options left for survival: revolt or flee. To all those who wonder why goldbugs are so incensed at the actions of Ben Bernanke, you need to understand that goldbugs are realists who believe that monetary fallibility, stupidity, and arrogance can destroy any nation, no matter how invincible that nation once appeared.
Remember your roots, Ben
I am not that familiar with Ben Bernanke’s background beyond his religion, but my understanding is that the Bernanke family came from the old Austrian-Hungarian Empire. Although my family is not Jewish, half of my family came from the same area of central and eastern Europe as the Fed chairman’s family: my maternal grandfather’s family came from Austria-Hungary, and my paternal grandmother’s family were ethnic Germans from the Soviet Union. In the case of my Austrian-Hungarian family, they possessed what Austro-Hungarians once called “Kaisertreue”- which meant love for the Emperor, especially due to the results of the assassination of Archduke Franz Ferdinand in 1914. For my relatives after 1914 in what became Hungary, their world collapsed in a heap of war, totalitarianism, and, yes, hyperinflation. Remember it was not just Germans who experienced the collapse of their paper currency in 1923- a similar devaluation occurred in Austria and Hungary in the early 1920s.
Things were much worse for my paternal grandmother’s family who remained in the Soviet Ukraine. These Germans were basically starved to death or sent to gulags (where many died) because they were identified with the kulak class of landowners, and became enemies of Stalin’s collectivization plans (implemented around 1930). After this point, Stalin assaulted his own economy in the Ukraine by instigating destructive fights over farm property and murdering those who tried to maintain livestock and farms. Most poor peasants- the supposed beneficiaries of these actions- were made worse off under Stalin than before his reign.
I make this digression into family history to try to remind those in power of why their families came to the United States in the first place. Yes, the United States is by no means perfect. Yes, our love for individualism and consumption can at times be excessive. But if we forget the dangers of totalitarianism, we are in trouble. I believe “quantitative easing” bears similarities with totalitarian thinking, and I have always suspected that there is something evil with fiat currencies. The evil being that leaders can be trusted to create wealth out of nothing. At the risk of sounding sanctimonious, I fear the evil of fiat currencies is the evil of man playing God. In terms of this high moral standard, it may also have been true that under the Gold Standard the State and bankers also played God with an economy. But at least under a gold standard there was an acknowledgement of a tangible basis for money. A tangible basis which people can use to take back some control over the economy for themselves. During the central European hyperinflations mentioned above, it was often commented how society “reverted to the middle ages,” by which it was meant that people had to trade real, tangible things, for other real, tangible things. There was no cheating this, even though leaders tried.
Herr Bernanke, meet Herr Havenstein
Which brings me to the central banker of the Weimar Republic, Dr. Rudolph Havenstein. According to Adam Ferguson, an important chronicler of the German hyperinflation, Dr. Havenstein officially maintained that there was no connection between the supply of money he was emitting and the price levels or exchange rates in the early 1920s. That bears repeating, folks: the man who destroyed the Reichmark consistently claimed that there was no connection between money supply and price levels or exchange rates!!! (Although perhaps I am naïve for thinking a system Apparatchik would ever say anything different.) And am I crazy in thinking that this reminds me of Helicopter Ben??? Oh don’t worry, I heard this morning on CNBC, there is no need for fear- all of this money being created will be sterilized. And besides, there really isn’t any inflation that we can see…..
If anyone out there still thinks that the Federal Reserve has your interests at heart, or that the people who comprise the Fed are incorruptible, please remember the strange career of Alan Greenspan. Alan Greenspan, who began his career as a devotee of Ayn Rand, and who wrote articles in defense of gold, ended his career as a pump priming Keynsian monetarist (to me these things are all inseparable.) I am glad that Greenspan is now at least trying to come back to his goldbug roots, and that Sir Alan recently lectured the Council on Foreign Relations regarding the dangers of fiat money. But the damage has already been done, and I doubt that Ben Bernanke finds anything other than bemusement from the kinds of proposals or ideas put forth by Greenspan or Zoellick.
Allow the voice of the ages to speak regarding paper money
To give further historical support for precious metals as money par excellence, allow me to list all of the luminaries in the recent and distant past who took a dim view of paper money or fiat currencies- or both. Many of these quotes, by the way, can be found in Nathan Lewis, Gold: The Once and Future Money:
“And God created the two precious metals, gold and silver, to serve as the measure and value of all commodities.” Ibn Khaldun, Al Muquaddimah, circa 1380
“Paper should never be money but only employed as a representative sign of value existing in metals or produce….When the [Chinese] government borrowed the invention from private individuals, and wished to make a real money of paper, the original contrivance was perverted.” Ma Twan-lin, Chinese historian, circa 1350
“[Debasement of the currency] is taken into account by few persons and only the most perspicacious. For it undermines states, not by a single attack all at once, but gradually and in a certain covert manner.” Nicholas Copernicus, “Treatise on Debasment,” 1517
“The whole paper money of any kind which can easily circulate in any country never can exceed the value of the gold and silver…[which] would circulate there, if there was no paper money.” Adam Smith, The Wealth of Nations, 1776
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” Thomas Jefferson, 1783
“Gold…thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.” Karl Marx, Capital, 1867
“ The [human] race has instinctively always sought for the one article in the world which most resembles the North Star among the other stars in the heavens, and used it as money- the article that changes least in value… [Gold] is the star which changes its position least in the heavens….” Andrew Carnegie, The ABC of Money, 1891
“Gold is money. That’s it.” J.P Morgan, attributed, circa 1907.
“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” V.I Lenin, 1919
“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” John Maynard Keyens, “Inflation and Deflation,” 1919
“The first panacea for a mismanaged nation is inflation of the currency; the second is war.” Ernest Hemingway (unknown citation)
“You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” George Bernard Shaw, 1928
“There can be no other criterion, no other standard than gold. Yes, gold which never changes…the fiduciary value par excellence.” Charles DeGaulle, 1965
“Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted.” Alan Greenspan, 1966
“No nation in history has ever survived fiat money, money that did not have precious metal backing.” Ronald Reagan, 1980
“…Freely floating exchange rates are inherently unstable; moreover, the instability is cumulative so that the eventual breakdown of a freely floating exchange rate system is virtually assured.” George Soros, The Alchemy of Finance, 1987
“ High interest rates, withdrawal of subsidies [to the developing world] and floating the exchange rate have further worsened the economy and resulted in instability. Those who benefitted were the currency speculators. Indeed, economic terrorists do not differ from other terrorists.” Mahathir Mohamad, Malaysian Prime Minister, September 20, 2002
And now, a word from the Chairman:
“The U.S. government has a technology, called a printing press (or today its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services….We conclude that under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” November 21, 2002.
If God can’t save us, then maybe gold and silver can.
