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With their money and banking system having presented them with a case
of system failure by disintegrating before their eyes and taking the economy
with it, America’s economic experts who support and run the FED’s
central banking–inconvertible paper dollar system cannot place the
blame for this where it belongs, which is on the system itself, its
supporters, and those who make its policies. They cannot bring themselves to
diagnose the system’s ills and rectify them because they are at the
center of them. They cannot stare the failure of inconvertible paper money
squarely in the face and move to eliminate it. If they did, they’d be
out of jobs and out of power.
American central bankers, manned by expert economists, have in vain
dealt with the crumbling banking system and dollar by manufacturing massive
new credits infused into the players with the most leverage and the weakest
balance sheets. In the not-too-distant future, this promises to unleash a
second and greater credit debacle that may unravel the entire system and
bring down the government with it.
A good many foreign central bankers are no better at the inflation
game than the FED, as they too have presided over banks swollen with
overpriced real estate and other loans. Many of these central banks, sharing
the aversion to non-income-producing gold, have elected to hold U.S. Treasury
securities as assets and to issue their individual currencies against these
assets, thereby producing a derivative currency whose value depends on the
value of U.S. Treasuries and the dollar in which they are denominated.
Suppose a foreign central bank holds U.S. t-bills as its main asset.
Against this it issues its main liability, which is its own currency. Now
suppose that the U.S. dollar falls in value by depreciating against gold. The
reserve asset, t-bills, is now worth less against gold. Hence, its currency
must be worth less against gold too.
Suppose that the central bank held ruble bills, and Russia drove the
ruble to much lower worth, then the bank's derivative currency would also
fall in worth. But this might not happen right away because the people who
use the currency cannot redeem it in anything of value. People will continue
to use the overvalued currency as money for a period, until they recognize
that it has no backing. At that point, they will attempt to rid themselves of
their low-worth currency. They will shift to currencies, goods, and assets,
such as gold, that have known values. Prices in terms of the low-worth
currency will rise.
Foreign central banks have often ignored or sold off gold. The central
banking experts have not understood the central position of gold as a reserve
asset of unquestioned liquidity, acceptability, and value. Instead they have
fallen into the trap of holding securities as reserves. They have taken on a
counterparty risk that gold does not present, that counterparty being the
central bank that issues the currency in which the securities are
denominated. For what happens to the values of these foreign currencies when
these securities held as assets decline in value, which they do when the
dollar declines against gold? Since these dollar assets stand behind the
foreign currencies, these currencies must also decline in value against gold.
U.S. inflation in this way, through central bank holdings of U.S. securities
as reserve assets, is exported to the world.
The fateful step away from gold occurred on August 15, 1971 when
President Nixon closed the gold window and stopped redeeming the claims of
foreign central banks in gold. Now, 38 years later, some of these banks are
in the most halting fashion taking steps to get off their self-chosen hook,
which is the connection of their currencies to a watered-down dollar whose
own link to gold grows weaker with every FED purchase of mortgage-backed
securities.
If one or more foreign central bankers, such as those in China,
Russia, Brazil, and the Middle East, have finally decided that they no longer
wish to accept dollars that are inconvertible into gold, they have no choice
but to establish their monetary systems with gold as a reserve asset. Press
reports suggest that they do not yet acknowledge such a move in the full
totality of its meaning or in their own actions. We read of replacing the
dollar by the SDRs of the IMF. We read of replacing the dollar by a basket of
currencies, such as the yen, the euro, and the yuan.
These are less-than-halfway measures and they cannot succeed in producing a
sound and stable international monetary system.
Replacing one currency that is inconvertible into gold with a mix of
several other currencies that are also inconvertible into gold won’t
produce sound currencies and sound banking systems. The central bankers want
freedom from the dollar and FED slavery. This they have made clear, but they
still want to maintain the discretion to inflate their own currencies. The
statements of central bank experts and officials do not remotely acknowledge
that they wish to produce a fully gold-based system.
Their actions, however, can only go in one direction: toward holding
more gold as a reserve asset. There is no other way to sever the link to the
dollar. If securities denominated in yen, yuan, and
euro become major reserve assets, what is to stop the respective central
banks that produce these currencies from inflating them? Only if they hold
gold in a respectable proportion to their currency liabilities (at least 40
to 50 percent) can a degree of stability in exchange rates be
produced. Foreign central banks cannot obtain a final divorce from the dollar
without marrying gold. If they seek the mistress of a basket of currencies
that is not firmly linked to gold, they substitute one unstable partner for
another.
Intellectual experts turn dangerous when they acquire a degree of
unchecked power. Central bankers have this now, and they are dangerous now.
They are not anxious to give up this power. Divorce from the dollar is a
means of acquiring more power. This will not solve the people’s
problem, which is to have a stable money and a
stable banking system, not unless the system moves toward gold as the reserve
asset.
The last thing that an expert with a high degree of unchecked power
wants to do is publically admit deep error on his part or that of the system
of which he is a part. This is tantamount to admitting his responsibility to
the public. It means that his power is in some degree not unchecked but
conditional on public approval and confirmation. It means that his expertise
is questionable and/or the system of expert rule is itself questionable. The
rightness of one’s power does not inspire confidence when one admits
that one is continually misusing it.
One cannot expect Ben Bernanke or Alan Greenspan to defrock themselves
as priests of the order of central bankers. What they do in the face of
difficulties for which they are responsible is blame someone or something
else. They obfuscate and cloud the issues. They use complex language. They
fabricate stories and make up history so as to extract benefit from their own
errors. They paint themselves as essential saviors for any problems that have
arisen. According to their self-promotion, they are working tirelessly to
come up with remedies for these unforeseen problems. They are quick to devise
and advertise new solutions. These always involve the further use of even
more experts, not to mention themselves. Their remedies always involve more
power to the experts, never less, except as a tactical maneuver.
Nevertheless, the day is approaching when these experts will be forced into a
position of uttering a syllable that they now are reluctant to acknowledge.
That syllable is – GOLD.
On the first day of 1975, gold became legal for U.S. citizens to own.
This was an enormously important step toward reinstating gold as a reserve
asset. As foreign central banks move out of dollars into currencies with
greater gold backing than the U.S. dollar, and as people in their own wisdom
move out of U.S. Treasury securities and into gold, for the sake of safety
and wealth preservation, the gold window closed by Nixon will be, for all
practical purposes, reopened.
It is of the utmost importance that the private market in gold be kept
open so that its discipline, brought about by those who seek gold out, can
act, albeit indirectly, upon the FED and the other central banks. Stressing
the economic importance of having this market open does not mean that I now
see a substantial risk of the market for gold being closed to U.S. citizens.
I do not. There is some risk, however. Desperate officials can take desperate
actions in desperate circumstances. I can imagine scenarios in which powerful
experts and officials blame a rise in the price of gold for inflation that
they have caused or in which they take action against gold because of severe
economic problems that they have brought about. Such moves would, in
conjunction with other such controls, tend to isolate the U.S. from the world
economy, which would drastically undermine the U.S. economy. I certainly hope
that nothing like this transpires, and I don’t think it’s the most
likely possibility. I believe that, rather than going the way of Argentina,
currency reform is a more likely outcome if the economic problems mount up to
an unmanageable level.
In the end, no matter how the divorce from the inconvertible dollar
occurs or what travails we must go through to get the final decree, the
outcome is going to be a marriage to gold.
Michael S. Rozeff
Also by
Michael S. Rozeff
Michael S. Rozeff is a retired Professor of Finance living in East
Amherst, New York. He publishes regularly his ideas and analysis on www.LewRockwell.com . Copyright © 2009 by LewRockwell.com.
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