The story I am about to relate to you was first told in a lecture hall at
the School of Political Sciences in Paris (L'École
des Sciences Politiques) on March 17, 1932, from the depths of the Great
Depression. It is, perhaps, more relevant today than it was on the day Jacques Rueff delivered it. Rueff
began with this:
"The story I am going
to relate covers a long period. It is the life story of the gold standard,
now afflicted with so grave an ailment that only time will tell if the victim
will succumb or be left, at the very least, in a state of virtual
He said “only time will tell”… well, some time has passed,
and it did "tell".
So what grave ailment was he talking about in 1932? What did time reveal
since then? And how has this important story been misread over the years? I
will try to answer these questions and to retell Rueff's
story the way I think it should be told today. And my hope is that this will,
in your mind, bring together many dissonant concepts, as it did in mine, into
a grand, unified, long-line view of Freegold.
Jacques Rueff told the story of two different
monetary conferences, two "committees of experts" that both met in
Genoa, and changed the course of monetary history. The first committee
gathered in October, 1445, and the second one began in April, 1922, so Rueff's
lecture had ten years on this second conference. The two committees gathered
under similar circumstances, to respond to monetary disorder in the aftermath
of a protracted war, yet they came to opposite conclusions.
The first committee declared gold the new, sole monetary reserve, unleashing
its 500-year reign as the governor of supply and demand that would act as the
natural counter-balance to international trade for the next half a
millennium. The second committee, under the guise of improving this system,
destroyed it, laying the groundwork for the unchecked growth of global
imbalance, perpetual malinvestment and the series
of periodic monetary crises we have experienced for the last 90 years.
The 1922 Genoa Conference. The British
Prime Minister Lloyd George on front row, left.
Prior to 1922, gold was a vibrant, fertile member of the global economic
ecosystem — what I like to call the Superorganism that governs naturally, far above the ability of mere mortals. Rueff put it this way:
"Gold… governs all the components of our
international transactions with faultless effectiveness… it is a
forceful but unobtrusive master, who governs unseen and yet is never disobeyed.
Nevertheless, it is too wise to oppose the inclinations of men. It never, for
example, prohibits the purchase of foreign securities; taking all their
actions into account, it guides the conduct of men in order to prevent the
upsetting of the balance it is supposed to maintain. We should also point out
that while guiding men's actions it respects their freedom of choice. They
are always at liberty to buy according to their preferences, but the monetary
mechanism, in its omnipotence, will raise the price of those items whose
purchase is contrary to the general interest, until such time as consumers
decide of their own free will to stop buying them. The gold standard thus
resembles an absolute but enlightened monarch; he does not destroy man's
freedom, but employs it for his own ends."
The sustainability (and, indeed, the very survival) of the global economic
ecosystem is predicated not on balance in the monetary realm, but on the
delicate balance between real production and real consumption.
It is the flow of actual physical gold that, at least prior to 1922,
moderates and regulates this complex balance because gold, like real
production and consumption, exists in the physical realm and is therefore not
subject to the politics of easy money. But following the economic destruction
of Europe in WWI (1914-1918), the US experienced high inflation accompanied
by a dramatic inflow of gold. So in the early 20s, along with raising
interest rates and federal budget cuts, the US began a policy of gold
"sterilization" to resist the natural price
mechanism—inflation—that would have otherwise acted not only as a
brake on the inflow of gold all through the 20s, but also as a spur on the
struggling European economy:
Federal Reserve Sterilization of Gold Flows
When a country imported gold, its central bank could
sterilize the effect of the gold inflow on the monetary base by selling
securities on the open market…
Sterilization of gold flows shifted the burden of
the adjustment of international prices to other gold standard countries. When
a country sterilized gold imports, it precluded the gold flow from increasing
the domestic price level and from mitigating the deflationary tendency in the
rest of the world. Under the international gold standard, no country had
absolute control over its domestic price level in the long run; but a large
country could influence whether its price level converged toward the world
price level or world prices converged toward the domestic price level…
Traditionally, economists and politicians have
criticized the Federal Reserve for not playing by the strict rules of the
gold standard during the 1920s.
…Federal Reserve sterilization in the early
1920s probably served the best interests of the United States.
-Leland Crabbe, Washington, D.C., 1988
Board of Governors of the Federal Reserve System 
The price mechanism is the Superorganism's governor
in the delicate balance between production and consumption. It is what keeps
the economy in a sustainable balance somewhere between starving shortages and
ruinous waste. And the flow of unambiguous real gold has always been a key
international transmitter of the price mechanism because gold is the
physical-monetary proxy for economic goods and services, subject to the same
physical limitations as goods and services. Modern currency, on the other
hand, even though it flows and trades like a commodity, is subject only to
political limitations, not physical ones, and is therefore qualitatively
different (an inferior, infertile transmission medium) from the perspective
of the Superorganism.
The flow of gold is the flow of real capital, even if today it is obscured by
an electronic matrix of imaginary capital (infertile media). Today's debt
(the bond market) is imaginary capital in that it cannot perform in real
terms; with "real terms" defined as economic goods and services
(under current economic conditions) plus gold—and this part is
important—at today's prices. It is all nominal debt, but
the price of goods and services—as well as the price of gold—is
what connects it to reality. And at today's prices
of each, bonds are imaginary capital. It is our obsessive compulsion to
centrally control the price mechanism that sterilizes the vital signals that
would otherwise be transmitted to billions of individual market participants
keeping the monetary and physical planes connected.
The outflow of real capital from any zone signals the need to produce
more and consume less. The inflow of real capital signals the need to consume
more and produce less. The price mechanism transmits this signal to
individual actors in the economy. The inflow of real capital will raise
prices vis-à-vis real capital, which makes exports more expensive
abroad, lowering exports and raising imports. The country with an inflow of
real capital will have to start consuming more of its own production or else
it will just pile up and rot.
Likewise, the country with an outflow of real capital will have to start
producing more than it consumes. Again, this signal is transmitted to
individual actors via the price mechanism. With less real capital upon which
credit flourishes, credit will contract, general price levels
vis-à-vis real capital will drop, the purchasing power of real capital
will rise, and real capital will become more
expensive in terms of goods and services. Exports will rise because
exportable goods will fetch a higher price abroad, imports will slow because
local prices have fallen versus the vanishing real capital, and people will
have to begin producing more than they consume in order to survive.
The monetary plane, that electronic matrix of imaginary capital, obscures the
simplicity of what is actually happening today, and it does so by design. But
it's really simple, and hopefully I can help you see through all the noise.
Everyone knows that the sovereign debt in Europe is a problem today. But all
we hear are complex solutions proposed within the monetary realm. Consolidate
this paper, roll over that paper, haircuts, pay cuts, job cuts, interest rate
cuts, print, sell, buy, repo, reverse repo, reverse-reverse repo, rescue
funds, POMO, SOMA, EFSF, SMP, EMP, ETA, ESPN; it can make your head spin
after a while.
The lesson from the monetary changes made in the post-war 20s is that if you
want the debtors to ever be able to repay their debts in real terms, you do
not sterilize the vital spur and brake function of gold by locking its
purchasing power. It is the price mechanism—price changes in goods and
services—that transmits the arbitrage signal
that causes gold to physically flow to where it has the greatest purchasing
power. For a struggling economy to grow and expand to a point at which it can
repay its debts, the gold not only needs to flow, but it must be a fertile
member of the economic ecosystem so that it can perform its vital function.
I know this is difficult to see, so I want you to try a little thought
experiment with me for a moment. I want you to imagine that the complex and
confusing monetary plane doesn’t exist. You can still imagine the debt
existing, but imagine that the debt is denominated in physical goods and
services. So there’s only real goods and
services… and gold—gold being the proxy for goods and services
that floats in value against those goods and services.
(We can eliminate currency from the equation in our thought experiment
because we know that we want a relatively stable currency—not too much
inflation, not too much deflation—for the purpose of contracts and debt
if we want a vibrant economy.)
Now imagine you have one country with debts denominated in goods and
services. Let's call it Greece. Greece owes Germany X goods and services.
Meanwhile Germany is still exporting goods and services while Greece is still
importing. This leaves Germany with a structural surplus in its Balance of
Payments and Greece with a deficit. But gold can reverse this flow in an
instant on the BOP at a high enough price. And once it does, it will begin to
exert the brake and spur forces on the two countries until the flow of actual
goods and services finally corrects and reverses. Once that flow corrects,
the gold flow (which is opposite the flow of goods and services) will reverse
and subsequently the brake and spur forces will also reverse.
Gold flows in the opposite direction of goods and services. Remember when
ANOTHER said, "gold and oil can never flow in the same direction"?
Well it's the same thing with other goods and services. Germany and Greece
may both be exporting and importing, but Germany is exporting more,
which shows up on the BOP as a Trade Surplus and a Capital Account Deficit.
At a high enough price, a small amount of gold can (and will) flow in the
other direction, from Greece into Germany, and if its value exceeds the (net)
trade difference between Germany and Greece, it will turn Germany's Trade
Surplus into a Trade Deficit and a Capital Account Surplus.
Now jump back to post-WWI. Europe was the debtor with debts denominated in
goods and services owed to America. But Europe's economy was struggling to
get back on its feet, making it difficult to pay its debt in actual economic
goods and services. So the proxy—gold—flowed from Europe to
America in unprecedented amounts. This flow should have acted as an
incremental brake on the American economy and a spur on the struggling
European economy. But instead, the US sterilized the effects of this gold
flow in 1920 and '21 while implementing "intelligent and courageous
deflation" (President Harding's words), and then in 1922, the Genoa
Conference sterilized gold's natural mechanism globally.
Once sterilized, gold flowed uncontrolled into the US right up until the
whole system collapsed. This would be similar to Greece selling gold at
today’s prices to pay off its debt. The gold would quickly be gone and
then the economy would collapse. The sterilization of gold may be at least
partly responsible for the roaring 20s, the Great Depression, the rise of
Hitler and the Second World War.
You can't squeeze blood from a turnip. That's an old saying. It means that
you cannot get something from someone that they don't have. In order to pay
its debt in real terms, Greece needs to ultimately get back to producing more
than it consumes. And as counterintuitive as this may sound, they will first
need to run a BOP surplus in order to get there. You do that by exporting
more value than you import.
I realize how backward this sounds, but that’s only because we
haven’t seen gold function properly in more than 90 years—beyond
living memory. And this is why the limited stock of physical gold is far
more valuable than the paper gold promises of New York and London would have
you believe. This is why Greece will never part with its gold at today's
prices. It is far more valuable. Greece ultimately needs to get back to importing
gold which is what happens when you produce more than you consume. But you
can't get back to that place by spewing your real capital at imaginary
At the true value of physical gold set by the Superorganism,
Greece will automatically start running a Trade Surplus on its BOP and
Germany will automatically run a Deficit with Greece. The high price of gold
is the only factor that can achieve this goal. At that point Greece will be
paying its debt in real terms and gold will be flowing. This will spur
the Greek economy until that flow of gold is reversed and it starts flowing
back into Greece. At that point Greece will have a vibrant economy. And then,
as the gold flows in, it will start to act as an incremental brake, a natural
governor that prevents the overheating of the new Greek economy. This will
occur naturally. This is the future in real terms, regardless of all the
monetary floundering. And this future cannot be managed by a committee of
experts no matter what economic school of thought they practice. This is Freegold.
The elegance of this natural regulator is that, as long as it is free from
systemic counterfeits, it functions regardless of the shenanigans of monetary
"experts". That's because the Superorganism's
price mechanism is a function of the purchasing power and flow of real
capital, not the purchasing power and flow of imaginary capital (paper
promises). To wrest control away from this "forceful but unobtrusive
master" one must render its purchasing power and flow infertile in the
global economic ecosystem.
What the 1922 Genoa Conference did was to institutionalize the
"sterilization" of gold for the rest of the world through the
reserve structure of the international banking system. And this bit of genius
was decided by a "committee of experts" from 34 different
countries. They did this by introducing paper gold—or paper promises of
gold—into the international banking system as reserves equal to the
gold itself. This wasn't the first paper gold, but it was the first time that
specific paper gold (that from New York and London) was used as an equal
reserve upon which credit can be expanded. What is acceptable as
international reserves is critical because trade settlement is a function of
the reserves. This conference was the birth of the $IMFS.
In 1922, they officially changed the old gold standard to the new "gold exchange
standard", which Rueff said was "a
conception so peculiarly Anglo-Saxon that there still is no French expression
for it." The stated purpose was "the stabilization of the general
price level" which you can feel free to read as code for sterilizing the
price mechanism and its elegant governance of an extremely delicate and
complex balance. This, of course, gave birth to the arrogance of the managed
economy and its attendant science, Keynesian Economics (est. 1936)
and its step-daughter Monetarism (est.~1956).
With the gold mostly staying put in London and New York, and paper promises
of gold flowing as equal base money elsewhere, the monetary base was
effectively duplicated. Credit could now expand without ever having to
contract, at least not because of the unwanted flow of gold. But of
course that's not how it actually works in practice. The "unwanted"
flow of gold is not the cause, but the effect of real imbalances (physical,
not monetary ones) between international production and consumption. So,
obstructing the adjustment mechanism of real gold settlement set the world up
for periodic busts, economically destructive punctuations and regular
To use a modern buzz word, they expanded the 500 year-old international
monetary base into a more flexible "basket" that included US
dollars, British pound sterling, and gold. As dollars began to accumulate
abroad, they would be deposited back in the New York banks in exchange for a
book entry reserve on the foreign country's balance sheet. In this way, the
unbalanced flow of trade acted only as an occasional spur, and never as a
brake. The only brake would now come in the form of destructive crises and
abrupt monetary resets.
Here's a comment I wrote back in May, 2010:
The US exorbitant privilege began at the
International Monetary Conference of 1922 when for the first time
international banks were allowed to accept not only physical gold, but also
US dollars (paper gold) as reserves. But all US dollars held by foreign banks
were put on deposit back in New York City banks. And there they were counted
as local US deposits, the same as if you and I put our gold into the bank, in
addition to being counted abroad.
These deposits were used as the basis for credit
expansion in both the US and in the foreign countries claiming them as reserves.
This process doubled the money supply paid out through the US
balance-of-payments deficit for the last 88 years (except that money which
France demanded in gold). US deficits never contracted the aggregate
purchasing power of the US after 1922, the way deficit settlement is supposed
to. It also exported US inflation outward. And it continues today.
The only solution to this problem is the explosive
expansion of the gold base (volume x price). Volume can be expanded through
mining, but not fast enough to suffice in a crisis. Therefore price will take
the brunt of this reset. The price of gold will explode.
1971 was the first step toward Freegold.
The final step is today.
Now let's look back at the first monetary committee that deliberated in Genoa
from October, 1445 until June, 1447. The Hundred Years' War was already more
than a hundred years old at that time, as was the economic and monetary havoc
that protracted war brings. By 1420, the French currency, the livre, was under severe market pressure to devalue. The
King valued his livres at .78 grams of gold each,
relative to the gold mark, the contemporary unit of weight for gold. But the
marketplace was trading livres at only about 11% of
that official value, or .09 grams of gold. The market had already devalued
the livre by 90%.
Jacques Rueff describes the French King's response:
In 1421 Charles VII "resorted to a series of measures bearing a
remarkable likeness to those which were to be adopted in France five
centuries later: the prohibition of exchange transactions by unlicensed
dealers and the fixing of a scale of fees for such transactions; a ban on the
export of gold and silver specie; the imposition of fines on notaries who
stipulated payments in gold and silver marks, that is, in bullion rather than
in livres, the intensive exploitation of France's
silver mines; and an attempt to achieve a balanced budget by rigorous and
methodical management… But all these efforts did not succeed in
alleviating the financial distress. A variety of monetary
adjustments—which might be termed devaluations—were devised, as
usually happens in such troubled times."
Genoa spent 15 years under French domination during the war, but by 1445 it
was its own city-state, a maritime republic and an important trading center and port for international commerce.
It was also home to the Bank of St. George (1407-1805), one of the oldest
chartered banks in the world. In 1444, the Bank was chartered to manage the
public debt and make loans to the government, not unlike a modern CB or
Treasury. "Niccolò Machiavelli
maintained that the Bank's dominion over Genoa made possible the creation of
a 'republic more worthy of memory than the Venetian.'" 
The Bank of Saint George
So when the fluctuations, weakness and debasement of the local and foreign
exchange currencies "gravely unsettled" its marketplace in 1445,
the Genoese government convened a "committee of experts" consisting
of mint officials and Bank of St. George trustees to figure out a solution to
all the monetary turmoil. The committee labored for almost two years, but
could not come to an agreement. So instead, it issued a report in which the
majority and minority set forth their views.
The minority report, which was rejected, recommended a "basket"
monetary standard (although they didn't use the word "basket")
consisting of 1/3 gold, 1/3 silver and 1/3 in the depreciating currencies of
the countries involved in any transaction. The majority report on the other
hand, signed by 15th century "Trail Guide" Benedetto Centurione of the house of Centurione
and trustee of the Bank of St. George, recommended the adoption of the gold
standard pure and simple.
Benedetto Centurione appears to have been the head
of the house of Centurione, one of the wealthiest
influential houses of international commerce. It had many foreign branches,
each run by one or more of the Centurione brothers.
As Rueff told it, "Nicolo
and Giovannie were in Majorca, Raffaelo
was at Bruges, and Paolo at Lisbon." They later opened branches in
Antwerp and in the Indies, "and Christopher Columbus [a Genoese native]
was undoubtedly one of their traveling salesmen."
But in 1445, as Rueff tells it, Benedetto "was
quite aware of the fact that for half a century a large number of trading
countries had adopted the gold standard. One after the other, Egypt, Syria,
Yemen, Hedjaz, and some parts of the Greek world had adopted…
gold." (Reminds me of a more recent Trail Guide who noted a certain Eastern
taste for gold.)
In his majority report, Centurione wrote, "The
banks will be obliged to pay in [gold] florins, exchange will take place in
[gold] florins; in this way gold will not leave the country and, in time, by
driving out bad money, it will constitute the wealth of the people."
This was the opinion that prevailed in 1447. Soon the banks were required to
settle credit imbalances in gold, the new banking system reserve, and to
deposit one hundred gold pieces as security for fines in case they broke the
rules. And all bank drafts drawn on Genoa abroad had to also be denominated
in gold, thus making it the new international bank reserve, in the modern
sense of the term.
As Jacques Rueff described it in 1932, this
"plain and simple" recommendation would "endow the world with
the most marvelous instrument of international co-operation in its
history… The system was to function perfectly well until it was
shattered—also at Genoa—by the second committee of experts, which
in April and May, 1922, contrived to demolish the work of the house of Centurione."
Like Centurione, Rueff
also turned out to be a bit of a monetary architect himself in his later
years. During the Great Depression, Rueff was a
major figure in the management of the French economy. In 1941 he was
dismissed from his office as the deputy governor of the Bank of France as a
result of the Vichy regime's new anti-semitic laws.
After the war he served in political office as the Minister of the State of
Monaco, as a judge on the European High Court of Justice, and later as a key
economic advisor to French President Charles de Gaulle. The 1958 "Rueff Plan" balanced the French budget and secured
the convertibility of the French currency.
Rueff was highly critical of the use of the dollar
as a unit of reserve, which he warned would cause a worldwide inflation. He
was strongly in favor of European integration, and always remained a firm
opponent of Lord Keynes' ideas. In 1947, Rueff
critiqued Keynes' magnum opus, The General Theory of Employment, Interest
and Money. After his critique of Keynes, Rueff's
main critic became James Tobin, a Keynesian economist who would later serve
as an advisor to both the Federal Reserve and the US Treasury where he would
help design the American Keynesian economic policy during the Kennedy
administration. It is somehow fitting that Rueff's archnemesis, Tobin, would be best remembered for his 1972
suggestion of the "Tobin Tax", a tax on the exchange of foreign
currencies in response to Nixon ending Bretton Woods. 
The London Gold Pool
Jacques Rueff's advice led Charles de Gaulle to
begin withdrawing physical gold from the US Treasury during the later years
(1965-1967) of the London Gold Pool, and then to withdraw altogether from the
Pool in 1968 which ultimately led to the closing of the US gold window in
1971. Here is de Gaulle speaking in 1965:
And here is a description of the subsequent failure
of the London Gold Pool that I wrote for my 2010 post Living in a Powder Keg and Giving
The London Gold Pool was a covert consortium of
Western central banks, a 'gentleman's club' of sorts, that agreed to pool its
physical gold resources at predetermined ratios in order to manipulate the
London gold market. Their goal was to keep the London price of gold in a
tight range between $35.00 and $35.20US.
London had become the world's marketplace for gold. For more than a half
century nearly 80% of the world's gold production flowed through London. The
"London Gold Fix" daily price fixing began in 1919 and only
happened once a day until the London Gold Pool collapsed in 1968 and an
"afternoon fix" was added to coincide with opening of the New York
In 1944 the Bretton Woods accord pegged foreign currencies to the US dollar
and the dollar to gold at the exchange rate of $35.20 per ounce. At that time
gold was not traded inside the US, but in London it continued to trade
between $35 and $35.20, rarely moving more than a penny or two in a day.
Through the first decade of the Bretton Woods system there was generally a
shortage of US dollars overseas which lent automatic support to the fixed
gold peg. But the US was running a large trade deficit with the rest of the
world and by the late 1950's there was a glut of dollars on the international
market which began draining the US Treasury of its gold.
Then, in one day in October 1960, the London gold price, which would normally
have made headlines with only a 2 cent rise, rose from $35 to over $40 per
ounce! The Kennedy election was just around the corner and in Europe it was
believed that Kennedy would likely increase the US trade deficit and dollar
That October night, in an emergency phone call between the Fed and the Bank
of England, it was agreed that England would use its official gold to satiate
the markets and bring the price back under control. Then, during Kennedy's
first year in office the US Treasury Secretary, the Fed and the BOE organized
the London Gold Pool consisting of the above plus Germany, France, Switzerland,
Italy, Belgium, the Netherlands, and Luxembourg.
The goal of the pool was to hold the price of gold in the range of $35 -
$35.20 per ounce so that it would be cheaper for the world to purchase gold
through London from non-official sources than to take it out of the US
Treasury. At an exchange rate of $35.20, it would cost around $35.40 per
ounce to ship it from the US to Europe. So the target range on the London
markets acted as a shield against the US official gold which had dwindled
substantially over several years.
The way the pool was to work was that the Bank of England would supply
physical gold as needed into the public marketplace whenever the price
started to rise. The BOE would then be reimbursed its gold from the pool
according to each countries agreed percentage. If the price of gold fell
below $35 an ounce, the pool would buy gold, increasing the size of the pool
and each member's stake accordingly. The stakes and contributions were:
50% - United States of America with $135 million, or 120 metric tons
11% - Germany with $30 million, or 27 metric tons
9% - England with $25 million, or 22 metric tons
9% - Italy with $25 million, or 22 metric tons
9% - France with $25 million, or 22 metric tons
4% - Switzerland with $10 million, or 9 metric tons
4% - Netherlands with $10 million, or 9 metric tons
4% - Belgium with $10 million, or 9 metric tons
And since they, as a group, were doing this in secret, it turned out that
they were able to make a substantial profit in the first few years of the
pool. Since they were buying low and selling high within a fixed trading
range that only they knew was fixed, they reaped substantial profits and even
increased their reserves as much as FIVE-FOLD by 1965!
But with the cost of US involvement in Vietnam rising substantially from 1965
through 1968, this trend reversed and the dollar came under extreme pressure.
From 1965 through late 1967 the gold pool was expending more and more of its
own gold just to keep the price in its range. Seeing this, France (who was
one of the insiders and knew of the price fixing operation) began demanding
more and more gold from the US Treasury for its dollars.
And as this trend progressed, the world was flooded with more and more
dollars that were backed by less and less gold, creating an extremely
volatile situation. Public demand for gold was rising, the war was
escalating, the pound was devalued, France backed out of the gold pool, and
in one day, Friday March 8, 1968, 100 tonnes of
gold were sold in London, twenty times the normal 5 tonne
The following Sunday the US Fed chairman announced that the US would defend
the $35 per ounce gold price "down to the last ingot"! Immediately,
the US airlifted several planeloads of its gold to London to meet demand. On
Wednesday of that week London sold 175 tonnes of
gold. Then on Thursday, public demand reached 225 tonnes!
That night they declared Friday a "bank holiday" and closed the
gold market for two weeks, "upon the request of the United States".
(So much for "the last ingot", eh?)
That was the end of the London Gold Pool. The public price of gold quickly
rose to $44 an ounce and a new "two tiered" gold price was
unveiled; one price for central banks, and a different price for the rest of
us. Even today official US gold is still marked to only $42.22 per ounce, $2
LESS than the market price in 1968!
In my opinion, there are two things we learned from ANOTHER via his
mouthpiece FOA that outweighed all the other great insights they shared.
Those two things are:
1. The true purpose behind the euro and its architecture, and
2. The effect the approaching euro launch would have on gold.
Following ANOTHER's revelations, Jacques Rueff was
the first name I put on my own personal list of early ideological euro architects
a couple years ago. The ECB itself pegs the beginning of "The Road to
the Single Currency, The Euro" at 1962 with the "Marjolin-Memorandum". 
The Marjolin-Memorandum was the European
Commission's first proposal for an economic and monetary union. Robert Marjolin (1911-1986) was a French economist and
politician involved in the formation of the European Economic Community
(EEC). He was 15 years Jacques Rueff's (1896-1978)
junior and, like Rueff, he was an economic advisor
to Charles de Gaulle. I mention this only to further the connection between
the modern euro and Charles de Gaulle of the 1960s who complained publicly
about the exorbitant privilege afforded the US by the use of dollars as
international CB reserves, demanded physical gold from the US Treasury, and
pulled out of the London Gold Pool which led to the end of Bretton Woods
three years later.
What we learned from ANOTHER thirty years later was:
1. The purpose of the euro was to provide an international transactional
alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo
"the most visible transformation since it was first used as money."
Quote - Monday, August 6, 2001 - GOLD @ $267.20 -
FOA: "The result will be a massive dollar price rise in gold that
performs over several years."
Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600
Monday, August 8, 2011 - GOLD ABOVE $1700
Thursday, August 18, 2011 - GOLD ABOVE $1800
What I can tell you with full confidence is that this is only the very
beginning of gold's functional transformation.
Here are a few more quotes from A/FOA:
It's important to understand that most of the world
wanted to at least see another currency that could share some of the dollar's
function. It didn't have to replace it. To this end, most every country gave
some philosophical and political support in its creation.
Within this change, gold would undergo one of the most visible
transformations since it was first used as money.
We are, today, at the very conclusion of a fiat architecture that is
straining to cope with our changing world. Neither the American currency
dollar, its world reserve monetary system or the native US structural economy
it all currently represents will, in the near future, look anything as it
presently does. Trained from birth, as all Western thinkers are, to read
everything economic in dollar system terms; we, too, are all straining to
understand the seemingly unexplainable dynamics that surround us today.
Western governments, the public and several schools of economic thought are
attempting to define and explain what extent these changes will have within
our financial and economic world.
Asking more; what if the architects of a competing currency system and the
major players that helped guide its internal construction, all took a hand in
promoting the dollar's extended life, its overvaluation and its use; so as to
buy time for this great transition in our money world?
The actual debt machine that built much of America's lifestyle is now going
into reverse as it destroys its own currency; one built upon a stable debt
system with locked down gold prices.
To compete in the new architecture of a Euro System currency, unrestrained
trading of gold will advance its dollar and Euro price significantly.
This not only has "everything to do with a gold bull market", it
has everything to do with a changing world financial architecture. And I have
to admit: if you hated our last one, you will no doubt hate this new one,
too. However, everyone that is positioned in physical gold will carry this
storm in fantastic shape. This is because the ECB has no intentions of
backing their currency with gold and every intention of using gold as a
"free trading" financial reserve. None of the other metals will
play a part in this.
Here's something interesting. In Indonesia, CPI includes gold! This is very $IMFesque.
Inflation up, exports down
Esther Samboh, The Jakarta Post, Jakarta | Tue,
An uncertain global economy has put pressure on Indonesia’s economy, as
the yearly inflation rate grew in August for the first time since January
over surging gold prices, while export growth slowed due to sliding global
Core inflation — the primary measurement of the country’s
inflation rate, which includes gold but excludes volatile food and
government-controlled prices — accelerated faster than headline
inflation to 5.15 percent, well above Bank Indonesia’s 5 percent
“The increase in core inflation is not across the board. The impact of
the gold prices increase is small, as gold is not a primary or secondary need
for the people,” Eric Sugandi, an economist
at Standard Chartered Bank Indonesia, told The Jakarta Post over the phone.
“In August, there was no help from lower import prices to offset the
surge in gold prices,” Destry told the Post
in a telephone interview.
Rusman announced that the surplus in the
nation’s trade balance fell to $1.36 billion in July, its lowest level
so far this year, halving June’s surplus of more than $3 billion.
“The trade surplus narrows as exports slide and imports surge,”
Exports slowed 5.23 percent in July as compared to June, reaching $17.43
billion, while imports grew 6.57 percent to $16.06 billion.
BI governor Darmin Nasution
said increasing fuel imports and a slight slowdown in global demand may
continue to pressure the nation’s current account — which
includes trade balance — to book deficits starting in the fourth
quarter of this year. “The fluctuation in the current account will be
“If the current account books a deficit, we will need capital
inflows” to maintain a surplus in the nation’s balance of payment
to build up the central bank’s foreign exchange reserves, he added.
This is a very interesting news article because it not only demonstrates how
90 years of the $IMFS has distorted foreign government benchmarks at the
highest levels, but also how ass-backward this view actually is. Indonesia's
Consumer Price Index should include food and exclude gold, not
the other way around! In a fiat regime, you want your fiat to be relatively
stable against the goods that make the economy healthy. But in this case,
what they are registering as inflation (rising price of gold) is actually deflation
in real terms because the purchasing power of gold in Indonesia is rising
against things like food.
In Freegold, this rising purchasing power of gold
against food would have the effect of an inflow of physical gold and a spur
on the economy as exports rise due to being cheaper in gold elsewhere. But
here's the catch: the signals are all messed up by the $IMFS! Indonesia is
already running a trade surplus. And gold is rising versus food everywhere.
It doesn't matter if you're producing or consuming more in your country
today, gold is still rising. In this way we can know for certain that today's
price of gold is not really the true value of gold (gold priced
And that's because the price of gold today still does not reflect the
physical flow of gold that would normally be a function of arbitrage, with speculators
transporting gold to where its purchasing power is highest. The flow of gold
today is still sterilized by the paper gold trade within the LBMA bullion
banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the
mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every
ounce of gold that has ever been mined in all of history changing hands in
just the first three months of 2011. That's what the LBMA members,
themselves, voluntarily reported. And that's a lot of paper gold that
is still sterilizing the economically beneficial price mechanism that physical
gold would otherwise be transmitting.
Yet things are changing, even today. That's what the rising price of gold
since 2002 tells me. This is about much more than just a rising price. It's
not just about a gold or even a commodity bull
market. As FOA said, "it has everything to do with a changing world
financial architecture." Gold's function in the monetary
system is changing. And as FOA also said, "None of the other metals will
play a part in this."
Gold will return to its pre-1922 function, but that does not mean we will
return to a pre-1922 gold standard. This post is not about the merits of the
gold standard. It is not about praising the hard money camp’s decision
in 1445 over the easy money camp’s decision in 1922. It is about the
choice of the Superorganism over the management of
men. The pre-22 gold standard, although it allowed gold to function, still
carried the same flaw I point to so often; that using the same medium for
exchange and savings leads to regular recurring conflicts between the debtors
and the savers.
This is an important distinction to understand. Gold's true function is
relative to the real, physical balance of trade, not man's
flawed, political-overvaluation of debt and other monetary schemes. In 1971,
the entire planet switched to using a pure token money as its medium of
exchange. These symbolic tokens do fail miserably and regularly as a store of
value, but they work remarkably well as a medium of exchange. They are not
The whole ECB/Euro architecture was built to turn Genoa 1922 on its head, to
reverse the damage done and to restore the function of gold which Jacques Rueff knew all too well. The ECB has one plain and simple
mandate, to act with regard to a target CPI that is statistically harmonized
across different economies dealing with different economic factors. In other
words, the job of the ECB is to maintain stability in the purchasing power of
a common currency against the general price level in many different
This simple architecture is designed to work best in Freegold,
where the price and flow of physical gold will
automatically regulate and relieve the pressure of economic differences
between member states. If the ECB had been designed to assist the European
economies, it would likely have been given the second mandate, same as the US
Fed. The Fed has two mandated targets: CPI and full employment. These dual
mandates are like fair weather friends, because when the heat is
on—like it is today—they actually become dueling
mandates. The ECB, on the other hand, is not mandated to assist the economy
like the Fed is. In fact, FOA wrote back in 2000:
"Basically, this is the direction the Euro
group is taking us. This concept was born with little regard for the
economic health of Europe. In the future, any countries money or economy
can totally fail and the world currency operation will continue. What is
being built is a new currency system, built on a world market price for
Like I said earlier, the monetary plane, which includes all that nominal
sovereign debt in Europe, is only connected to the physical plane by two
things, the price of goods and services (CPI or the general price level, on
which the ECB has a mandate) and the price of gold (which the ECB happily
floats). I think we can all agree that the aggregate debt is doomed at
today's prices. It is fictional, imaginary capital. But those of you
predicting the imminent collapse of the euro as a medium of exchange need to
explain how nominal euro debt is more likely to break its connection with
goods and services than its imaginary connection to gold at today's prices.
I'll give you a few hints. Unlike the US, where the expenses of the same
government that calculates CPI rise along with CPI, and where the CB has
conflicting mandates that benefit from a statistically-lowered CPI, the ECB
has not only met its mandate, but done so credibly. And unlike Indonesia, the
ECB does not count gold in its CPI (HICP). Instead, the ECB floats its
gold publicly and without worry. So while you're wondering in which of the
two choices the disconnect will happen in Europe, consider this: Over the
last decade, the general price level has performed more or less as expected
while the gold price in euro broke off in 2005 and rose 325% in six years:
January 1, 2002 – GOLD @ €310.50
Tuesday, November 15, 2005 - GOLD ABOVE €400
Tuesday, April 18, 2006 - GOLD ABOVE €500
Thursday, January 10, 2008 - GOLD ABOVE €600
Friday, January 30, 2009 - GOLD ABOVE €700
Wednesday, December 2, 2009 - GOLD ABOVE €800
Tuesday, May 4, 2010 - GOLD ABOVE €900
Monday, May 17, 2010 - GOLD ABOVE €1000
Monday, July 11, 2011 - GOLD ABOVE €1100
Tuesday, August 9, 2011 - GOLD ABOVE €1200
Monday, August 22, 2011 - GOLD ABOVE €1300
And those of you that incessantly argue that gold is just one of many
commodities—an asset like any other that, when push comes to shove,
will ultimately be liquidated in favor of symbolic token currency
units—need to explain how the monetary plane, insolvent at today's low
prices, will maintain any grip on reality at even lower prices.
The fact is it can't. And that's why you can only maintain your arguments
with fantastic stories of modern day all-powerful overlords enslaving the
serfs to their graves. But unfortunately, that's not how a diverse global economic
ecosystem actually works.
Our money is credit. “The people’s” money has always been
credit. Credit expands and contracts based on the availability of actual
money, the monetary base. 1922 was the first time they included a form of
credit as the base itself. A Pandora’s box if ever there was one!
But don't assume there is coercion involved when I say credit is our money.
It is the best possible money for a vibrant economy. It is how the pure
concept of money emerged in the very beginning. When gold first became money,
it was as the mental unit of account. I'll give you five ounces of gold worth
of cattle and you'll owe me five ounces worth of milk and other goods and
services. When we participate in a vibrant economy, we deal in credit
denominated in money. When we withdraw from a mismanaged economy, we withdraw
into the monetary base, we hoard the reserves. Holding credit is our vote for
vibrancy. Hoarding reserves is our vote against the current economy.
Gold is in the process of changing functions in the global economy. And in
this transition, "the most visible transformation since it was first
used as money," it will plateau at a new, mind-blowing level before it
resumes its proper function. This is happening. It must happen, because bullion
bank paper promises cannot function like gold. So be careful what kind of
gold you're holding (physical is what you want), or you might just miss out
on the revaluation of the millennium. Gaining a deeper understanding of what
is happening, as you can here, here and here, should help those of you that worry
about buying gold now because a few analysts, who have no idea what they're
talking about, keep saying this is the top. This is the "top range"
prediction I made two years ago:
Here's the main thing, gold will work the same way as a reserve asset in Freegold as it did before 1922, even without going back
to being the sole monetary base. Gold is superior to even the entire monetary
plane in this regard. It is the sole monetary member of the physical realm.
Whether it is part of the transactional currency system or not doesn’t
matter to its balance-governing role. It can fulfill that role even in Freegold. That’s what the architects figured out!
That was their Grand Induction. That’s how the euro architects are
comparable to the Genoa Conference of 1445. And that's how Jacques Rueff is comparable to Benedetto Centurione.
Probably far superior!
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