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"...The 'total war' of
the 20th century first required a 'total war' on freely held private
wealth..."
IT SEEMS AN ODD QUIRK of
history that Washington's
post-War obsession with its nationalized gold reserves – an obsession
which Ian Fleming neatly tapped into with Goldfinger in 1959 – came so long
after what historians call the "classical" Gold Standard ended.
Indeed,
central-bank gold reserves worldwide rose almost five-fold over the 50 years
following the start of WWI in 1914 – the date traditionally given as
the death of the international Gold Standard.
That
system, running roughly between Bismarck's
defeat of France
in 1871 and the bloody stand-off at Ypres
a half-century later, saw nations settle their
balance-of-trade debts with each other in bullion. Gold really was money, and
only gold (and, progressively less, silver) would do in payment. And just
like domestic cash transfers, the vast bulk of cross-border payments were
made by private individuals using privately-held gold and fully-backed gold
certificates.
But as
governments worldwide set about nationalizing welfare, health provision,
pensions, insurance and the "commanding heights" of industry, so
their nationalized gold reserves were also growing apace. The Gold Standard
collapsed not only into the mud of Verdun,
but also into state-owned and state-controlled gold vaults.
Put
another way – as Texas Congressman Ron Paul
did before the US House of Representatives in Feb. 2006 – "Though
money developed naturally in the marketplace, as governments grew in power
they assumed monopoly control over money."
That
monopoly power has only grown stronger now paper and photons have replaced
gold entirely as the world's means of exchange. Governments and their
central-bank agencies set the price – and thus value – of what we
now use to buy and sell, invest and spend. And since this control over money
rests with politicians and bureaucrats,
it's worth noting how the surge in nationalized gold reserves coincided
precisely with the surge in nationalist politics, war-mongering and state
controls that first sparked World War One, before leading to the horrors of
Nanking, Auschwitz, Stalingrad, Dresden
and Hiroshima.
Mass slaughter wouldn't come cheap, after all.
Rewind to 1875, and central-bank gold reserves "amounted to no more than
1,100 metric tonnes," wrote Timothy Green in a 1999 research paper for
the World Gold Council, "while gold coin in circulation was approaching 3,000 metric tonnes."
Private citizens, in other words, then held the vast bulk of the
industrialized world's wealth, and the international Gold Standard –
"a symbol of sound practice and badge of honor
and decency," according to one historian – had begun by default, not design. It was simply the way private
individuals the world over chose to meet and exchange wealth. Nationalized
money, at this stage, remained but a twinkle in the eye of would-be
technocrats and tyrants.
Come
1895, however, and "of the 6,100 metric-tonne of monetary stock, central
banks held around 2,750 metric tonnes," writes Green. "By 1905 the
balance had swung in favor of central banks, who then had 4,710 metric tonnes of the monetary stock
against private holdings of 3,916 metric tonnes." On the eve of World
War One – after a three-year surge in government gold hoarding –
sovereign states held some 8,100 tonnes in total.
This
race to nationalize gold sped up again as the world struggled – and
failed – to re-establish the classical Gold Standard after the big guns
fell silent in November 1918. "The days of widely circulating [gold]
coin were over," as Green goes on. "By 1929, central banks held an
estimated 92% of all 'monetary' gold." The impact on politics, wealth
and the world economy? It's been little examined to date; today's most ardent
"gold bugs" fret more about central-bank gold sales and loans than
about how that gold ever wound up in government vaults
in the first place. But nationalizing the world's monetary gold stock saw
governments take control of what had been freely exchanged as the final
– and freely chosen – arbiter of wealth over more than 5,000
years.
And here
at BullionVault,
we don't believe it was any coincidence that the "total war" of the
20th century first required a "total war" on freely held private
wealth.
When the
field guns withdrew and the poppies returned to north-eastern France in
1919, the economic disaster that followed only accelerated this
nationalization of what had until then been privately-held money.
Gold was
sucked into government vaults at
an ever-increasing pace, while personal freedoms and liberty were vacuumed up
by governments of all stripes – communist, socialist, national
socialist and imperial. Mass unemployment, fascism and European re-armament
saw a race to get gold and the power it brought under official control.
No bureaucracy seized control of this wealth more
urgently than the United
States. One evil day in 1933 – and
just ahead of the Nazi government in Berlin annexing gold from the vaults of Czechoslovakia, Poland, Austria, Belgium
and Holland, as well as from the Jews it murdered across central Europe
– the US government actually made private gold ownership illegal,
forcing people to sell their gold to the Treasury on pain of a $10,000 fine
or imprisonment.
Not
content with the tonnage he'd prized from American citizens, President
Roosevelt then devalued the Dollar, slashing its value from $20.67 to $35 per
ounce of gold and thus encouraging foreign-owned gold to pour into Washington's hoard at
the new, higher price. All told, during the final nationalization of
privately held Gold that swept the world during the 1930s, fully 60% of all
new central bank gold ended up in US reserves.
The United States
then acquired yet more gold during WWII, taking it from the British and
Soviet state vaults in return for
ships, tanks, food, boots, gasoline and warplanes. Its acquisition of gold
continued even after the war, when "European central banks sold what
little gold they had left to the US Treasury for badly needed dollars to
rebuild their shattered economies," as Timothy Green explains.
At high
tide, in 1949, the Treasury held more than 70% of all nationalized gold. Thus
did the United States
achieve the near-total annexation of the world's monetary gold stock. It coincided with America's financial and political
pre-eminence worldwide – a dominance which continues today.
Inside
the US,
privately-held gold remained illegal until 1974. Outside it, central banks
hoarded dollars – just as in 2008 – alongside their gold. The two
were fully convertible, after all, under the post-War Bretton
Woods settlement...if only for central bank ambassadors, rather than private
citizens wanting to swap paper for gold.
John
Maynard Keynes – chief architect of the new "Gold Exchange
Standard" – was so pleased with the potential wonders of this
Dollar-gold system, he twice jibed that the metal represented a
"barbarous relic", a prehistoric superstition than mankind would do
well to abandon.
The
world very nearly achieved that feat as the 20th century drew to a close. But only
nearly.
Conclusion to follow in Part III...
Adrian
Ash
Head of Research
Bullionvault.com
City correspondent for The Daily Reckoning in London, Adrian Ash is head of research at www.BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing
fees.
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