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The abandonment of the
gold standard in 1971 is closely tied to the massive unemployment the
industrialized world has suffered in recent years; Mexico, even with a lower
level of industrialization than the developed countries, has also lost jobs
due to the closing of industries; in recent years, the creation of new jobs
in productive activities has been anemic at best.
The world's financial press, in which leading
economists and analysts publish their work, never examines the relationship
between the abandonment of the gold standard and unemployment,
de-industrialization, and the huge chronic export deficits of the Western
world powers. Might it be due to ignorance? We are reluctant to think so,
given that the articles appearing in the world's leading financial
publications are written by quite intelligent analysts. Rather, in our
opinion, it is an act of self-censorship to avoid incurring the displeasure
of the important financial and geopolitical interests that are behind the
financial press.
In this article we discuss the relationship
between loss of the gold standard and the present financial chaos, which is
accompanied by severe "structural imbalances" between the
historically dominant industrial powers and their new rivals in Asia.
World trade before 1971
From the end of World War II through the
1960s, all well-governed nations in the world sought to maintain a constant
balance between their exports and imports. They all wanted to maintain a
situation where they exported more than they imported, so that they could
accumulate growing Treasury reserves of gold, or in its defect dollars,
which, under the terms of the United States (US) promise in the Bretton Woods
Agreements of 1944, could be redeemed by any Central Bank that requested gold
in exchange for its dollars.
To be precise, we cannot fail to mention one
exception. The exception to the rule was none other than the US. All
well-governed countries sought to export more than they imported, except the
US.
The US was not overly concerned with
maintaining a balance between exports and imports, because - according to
Bretton Woods - the US could pay its export deficits by the simple expedient
of sending more dollars to pay its creditors. As the sole source of dollars,
the US had a clear advantage over the rest of the world; they could pay their
debts in (redeemable) dollars that they themselves printed.
Economists of the day warned of the danger of
this practice, which resulted in a constant loss of American gold. From over
20,000 tons at the end of World War II, US gold reserves dropped year by year
as certain countries, notably France, insisted on redeeming their dollars for
gold at a rate of 35 dollars per ounce of gold. France incurred intense
displeasure in Washington and New York due to its demands for gold in
exchange for dollars; some analysts attribute the unrest in France in the
spring of 1968 to covert operations by the US intelligence services, in a
show of America's disapproval of the behavior of France, led at the time by
General Charles de Gaulle.
The US did nothing to slow the loss of gold.
In the early months of 1971, Henry Hazlitt, a solid classical economist,
predicted that the dollar would have to be devalued; he said it would be
necessary to increase the number of dollars that would be needed to obtain an
ounce of gold from the United States Treasury. Only months after his warning,
the dam burst, and in August 1971 the US was forced to devalue its currency,
because the amount of gold in its reserves had fallen to a dangerous level.
(Today, many doubt that the US has the 8,000 tons of gold it claims to have
in its vaults at Fort Knox and the US Military Academy at West Point, N.Y.)
What Henry Hazlitt never imagined was that
instead of devaluing the currency - the recommendation of Paul Samuelson,
Nobel Prize Winner in Economics, published the week before August 15, 1971 -
President Nixon took the advice of Milton Friedman and declared that from
that time forward the US would no longer redeem dollars held by the world's
central banks at any price. The US unilaterally violated the terms of Bretton
Woods. In effect, it was actually financial bankruptcy.
Since then, all world trade - or most of it,
as the euro, the pound sterling, and to a lesser extent the yen all compete
with the dollar - is conducted using dollars that are nothing more than fiat
money, fake money. Because all the world's other currencies were bound to
gold through the dollar, the immediate consequence was that simultaneously
they also became fiat money, fake money with no backing.
Consequences of abandoning the gold standard
The consequences of that fateful day have
overthrown all order and harmony in economic relations among the nations of
the world, while facilitating and expediting the global expansion of credit
because part of the dollars exported by the US ended up in the reserves of
Central Banks around the world.
Countries began to accumulate dollars as the
expansion of credit in the US advanced inexorably, now free of the restraint
formerly imposed by Bretton Woods. The rest of the world was forced to
accumulate dollars in reserves, because having insufficient dollar reserves,
or having reserves that did not grow, or worse, having falling reserves, was
a clear sign for monetary speculators to attack a country's currency and
destroy it with devaluation.
As the loss of gold ceased to be a limiting
factor, the last restrictions on the expansion of credit were stripped away.
A heavy flow of dollars to all parts of the world spurred the expansion of
global credit, which did not stop until 2007. The international banking elite
always strive to obtain greater profits and to that end always seek to expand
credit. Starting in 1971, freed of the restraint of being required to pay
international accounts in gold, or with dollars redeemable for gold, the
constant unfettered creation of credit and still more credit ensued. It was
boom time in the US.
The US, which paid the rest of the world with
its own irredeemable dollars of no intrinsic value, lauded the adoption of
"free trade" and "globalization". The US could buy
whatever it wanted, anywhere in the world, in any quantity, and at any price.
Starting in the 1990s, its export deficits became alarming, but nothing was
done to reduce them; on the contrary, they grew year by year.
Mexico, following the US example, joined NAFTA
- the North American Free Trade Association. Down with import tariffs! Free
trade with the world! The new vision offered the enthralling, seductive
picture of a globalized world without borders, where everyone could buy and
sell where they liked, with no limits. The 90's were years of unbridled
optimism for globalization!
Free Trade is unquestionably beneficial for
humanity at large. It is good to be able to buy goods where they are
cheapest; some countries enjoy conditions that favor them in production of
certain things; each country should produce those things in which it has an
advantage over other countries. Thus, the whole world can benefit from the
good things each country has to offer. It is an appealing and sound doctrine,
but… there is a crucial catch: the doctrine of Free Trade was conceived
for a world where the sole means of payment was gold. When the doctrines
of "Free Trade" and the "Comparative Advantages of
Nations" were developed, the economists of the day could not imagine a
world that did not use gold, but instead relied on a fiat money that could be
created at will by a single country.
The "globalization" of the 1980s and
1990s and to date is based on the ideas of "Free Trade". However,
in the absence of the gold standard that existed when the doctrine was
conceived, "globalization" had completely destructive results,
which have caused the de-industrialization of the West and the rise to power
of Asia.
In the decades prior to 2007 a massive fleet
of cargo ships was created, which sailed for the US and Europe - the West in
general, Mexico included - bearing all kinds of inexpensive, quality products
made in Asia. The flood was so great that local factories in the Western
World were forced to move to Asia, to employ cheaper labor and continue to
sell their products in the West.
My readers will know how many industries,
large and small, have ceased to exist in the US and the West in general,
because Chinese competition killed them. They will know as well how hard it
is to find a product that can be produced at a profit in the developed
countries. It is very difficult to find a niche for any product to be
manufactured locally. The flight of factories to Asia to take advantage of
lower wages caused unemployment where local factories were closed. For the
same reason job creation is slow or non-existent.
A taxi driver in Barcelona told us:
"Spain is a service economy. Industry is no longer our foundation. If
tourists stop coming, we'll die." By the same token, it has been said of
Greece: "It produces olive oil and tourism, and nothing more." The
US, industrial colossus of the post-war world, has been de-industrialized.
Now, what are developed countries to do to create jobs?
Diagnosis of the evils of de-industrialization
and unemployment
These evils appeared because gold was
eliminated as a) a constraint on the expansion of credit and the creation of
money, and b) the only form of payment of international debt.
Under the gold standard all players in
international trade knew that it was only possible to sell to a country that
sold something else in turn. It was not possible to buy from a country that
did not buy in turn. Trade was naturally balanced by this restriction. The
"structural imbalances" so commonplace today were unheard of.
For example, in 1900, Mexico could export
coffee to Germany because Germany, in turn, exported machinery to Mexico.
Germany could buy coffee from Mexico because Mexico, in turn, bought
machinery from Germany. Each transaction was denominated in gold, and as a
result there was a balance based on an economic reality. Because there was
balance in world commercial relationships, a relatively small amount of gold
sufficed to adjust the international balance. The world financial center
which acted as a "Global Clearing House" was London. A few hundred
tons of gold were sufficient to meet the needs of that Clearing House. For
further reading on the function of London as a clearing centre for world
commerce, see "Real Bills" and associated articles by Antal E.
Fekete at www.professorfekete.com
Another example: In 1930, the US could sell
very little to China, because the Chinese were poor and lacked purchasing
power. Because the US sold very little to China, at the same time it could
buy very little from China. Although prices of Chinese products were very
low, the US could not buy much from China, because China did not buy from the
US - China was poor and could not afford American products. Thus, trade
between China and the US was balanced by the need to pay the balance of their
transactions in gold. Balance was imperative. There was no chance of
"structural imbalance".
Under Free Trade with the gold standard, the
great majority of transactions did not require movement of gold to complete
the exchange. The goods exchanged paid for each other. Only small remainders
had to be paid in gold. Consequently, international trade was limited by the
volume of mutual purchases between parties; for example, Chinese silk paid
for imports of American machinery, and vice-versa.
The gold standard imposed order and harmony.
If President Nixon had not "closed the gold window" in 1971, the
world would be radically different today. China would have taken a century or
more to reach its present level. China could not buy much from the US,
because it was poor; therefore, China could not sell much to the US.
All this changed radically with the abolition
of the gold standard.
Everything changed because the United States,
having removed gold from the world monetary system, could "pay"
everything in dollars, and without the gold standard as a limiting
institution, it could print dollars ad libitum - without limit. Thus,
in the 1970s the United States started to buy huge amounts of high quality
products from Japan, while the Japanese boasted: "Japan sells; Japan
does not buy." A situation that was impossible under the gold standard
became perfectly possible under the fiat dollar standard. The Japanese became
gigantic producers, their country an island transformed into a factory. Japan
accumulated vast reserves of dollars sent from the US in exchange for
Japanese products. This in turn triggered the de-industrialization of the US.
Take for example the US manufacturers of T.V.
Some of the famous US factories that built TV receivers by the millions were
"Philco", "Admiral", "Zenith", and
"Motorola". The Japanese had better and cheaper products, and since
the abandonment of the gold standard allowed Japan to sell without buying
in turn, and allowed the US to buy without selling in turn, the result
was that all the huge factories producing these TV's in the US were closed
down. That's how "going off gold" closed down US industry.
Unlimited purchases from Japan flowed to the
US and the world, because they were paid in dollars, which could be created
in unlimited quantities. The balance the gold standard had imposed
disappeared and imbalance took its place.
After 1971, the US embarked on a protracted,
large-scale expansion of credit. As the nation was de-industrialized and
high-paying jobs in industry disappeared, a lack of disposable income for the
population was replaced with easy and cheap credit, to conceal the stagnation
in per capita income. Consumer credit drove imports from Asia and furthered
de-industrialization even more. The great expansion of American credit was
made possible because the gold standard, which restrained the expansion of
credit by the banking system, had been abandoned. It is no coincidence that
some analysts have observed that in real terms, American workers have had no
real increase in their income since 1970.
All mainstream economists consider the
elimination of the gold standard perfectly acceptable. They still do not see,
or do not want to see, that the "Law of Unforeseen Consequences" is
at work: the enormous advantage the US gained by being able to pay unlimited
amounts in irredeemable dollars has become the fatal cause of the industrial
destruction of the US - and of the West in general. A Mexican saying applies:
en el pecado llevas la penitencia - "sin brings with it its own
punishment".
The current malaise: financial crisis,
industrial crisis, crisis of unemployment
Today the situation is far worse. China, with
a population of 1.3 billion, has become a formidable power. No one can
compete with China in price. China sells vast quantities of goods to the rest
of the world, without the rest of the world having any chance of selling
similar quantities to China, and China can do so, because today trade
deficits are "paid" not in gold, but in dollars or euros or pounds
sterling or yen, which will never be scarce: they are created at will by the
USA, the European Central Bank, the Bank of England, or the Bank of Japan.
A fearful monster has been created as a
consequence of the elimination of the gold standard, which imposed a limit:
"You can only sell to those who sell to you; you can only buy from those
who buy from you." This limit no longer applies; everything is disarray,
inequality, imbalance; "structural imbalance" prevails because we
no longer have the gold standard.
The credit expansion boom has ended, and in
its place we have a global financial crisis. Today the problem of "structural
imbalance" and the de-industrialization and unemployment it has produced
in formerly industrialized countries acquires greater relevance with every
passing day. What is to be done with the masses of jobless men and women? No
one knows the answer, because the answer is not acceptable to the thinkers of
today: the correction of "structural imbalances" and
re-industrialization, in other words the creation of new jobs, lies in
restoring the gold standard worldwide.
The "globalization" so highly
praised by the financial press in recent years, has become the worst
imaginable nightmare. It is no longer possible to support the unemployed with
government handouts. The Sovereign State is close to bankruptcy. Thus, nature
takes its revenge on those who dared violate its laws by seeking to impose
false money on the world.
Richard Nixon's elimination of the gold
standard has proven to be the US's best possible strategic gift to China and
the rest of Asia. Today, China has a colossal industrial base that might have
taken centuries to build, while the US is to a great extent devoid of
factories and incapable of reclaiming its former glory. How tragic a fate for
the US!
International and National Commerce
The word "commerce" is defined in
the Concise Oxford English Dictionary as "Exchange of merchandise or
services, esp. on a large scale [ French or from Latin COM (mercium
from merx mercis merchandise)]
Note that the "exchange of merchandise or
services" cannot include as a complement to that exchange a fictitious
payment with fiat money, which is neither merchandise nor a service, but
rather a paper note or digital entry denoting a debt payable in nothing. In
the case of the dollar, the debt is a debt of the Federal Reserve and
registered accordingly on its balance sheet. A debt cannot be settled by
tendering a debt instrument (which is payable in nothing in any case) and in
effect, Balance of Payments debts have not, by any means, been settled in
international commerce since 1971.
The non-settlement of international balance of
payments debts has produced the accumulation of huge fictitious dollar
reserves on the part of exporting countries, since 1971. The same holds for
fictitious payments of export deficit debts with euros, pounds, yen or any
other present-day currency. See the following graph:
Gold, up until the Bretton Woods Agreements of
1944, figured as the complement to the international exchange of merchandise
or services and did settle outstanding balance of payments deficits, because
it was a merchandise or commodity used as money.
According to the Bretton Woods Agreements, the
fiduciary dollar was accepted as being as good as gold, with trust on the
part of Central Banks upon the ability to redeem the dollar into gold. From
1944 up until 1971 then, these fiduciary dollars were held in Central Bank
reserves as a credit call upon US gold; the final payment had not been
effected and was delayed as a credit granted to the US until the dollars held
in reserves were to be cashed in for gold at some future date.
As it turned out, the "fiducia" or
"trust" was misplaced, for in 1971 the US reneged on the Bretton
Woods Agreements of 1944, "closed the gold window" and stiffed the
creditor countries. No final settlement of international commerce debts
took place in 1971, nor has any taken place since then; the truth of
this statement is obscured by the mistaken idea that tendering a fiat
currency in payment of an international debt constitutes settlement of that
debt.
Once that false idea - that fiat money can
settle a debt - is accepted as valid, then the problem of the enormous
"imbalances" in world trade becomes an insoluble enigma. The best
and brightest of today's accredited economists attempt in vain to find a
solution to a problem that cannot be solved except by the renewed use of gold
as the international medium of commerce.
Regarding national commerce, the same
reasoning applies. In reality, no one engaging in commerce in any country in
the world today is actually paying for purchases, that is to say, there is no
any actual settlement of any debt. All individuals, corporations and
government entities are merely shuffling debts (payable in nothing) between
themselves, in the form of either paper bills or digital banking money,
whether in dollars or any other currency in the world.
For internal national commerce the smaller
value of the silver coin was convenient for day-to-day transactions at the
popular level and did constitute settlement of debt when tendered in payment,
for silver is a merchandise or commodity which, like gold, can participate in
commercial exchange.
Today, China and the other great Asian
exporters have belatedly realized that the dollars they received as
"payment" for their mass exports are nothing more than digits in
American computers. If the Chinese do not cooperate, the bankers in New York
can erase those digits in half an hour, and leave China with no reserves. For
this reason, the Chinese and Asians in general are buying gold, and will
continue to buy it indefinitely: computers cannot erase gold reserves.
The awful truth about China is that the
Chinese acquired their formidable industrial power in the short span of
thirty years at a tremendous cost: for thirty years they worked for
nothing. China has $2.5 Trillion of reserves; China does not have any use
for these reserves, they have no intrinsic value and China does not know how
to get rid of them in exchange for something tangible of value; these
reserves are nothing more than digits in computers in the Western world. Net,
net, net: China worked for thirty years to provide the world with a vast
quantity of merchandise, in return for: nothing! Thirty years of slavery,
to build an industrial empire!
Mexico: forced to use the protectionist
"Band-Aid"
Mexico has its oil, perhaps more than we are
told. Let's hope so! Our economy is less complex, less sophisticated, than
the US's. According to a Mexican Treasury study carried out in 2007, 85% of
Mexicans have no bank accounts - a good sign that they can get by on paper
money and are not getting into trouble with credit card debt. The Mexican
economy, as we see it, is like a broad, low pyramid. It is more stable than
the American "skyscraper" economy, a highly complex economy. Mexico
is better equipped to survive the present crisis than the USA.
In today's great world financial crisis of
false money, we are likely to see countries around the world resort to
protectionism: the leaders will be the same countries that so recently sang
the praises of "globalization". In this probable case, Mexico will
have to do the same. It is a far from ideal scenario, but it is imperative
for lack of the gold standard. Protectionism limits productive efficiency in
any country because it limits the market for its protected products to its
own national market. A limited market hampers efficiency. The supply of goods
available to the population will be more limited and probably of lower
quality at higher prices. (Protectionism will have similar effects in the
US.)
Mexico will have to restrict imports in the
near future. Otherwise, we will suffer serial currency devaluations.
Protectionism is not the best policy, but Mexico will probably be forced to
resort to it, for lack of the gold standard, which would be the best means of
creating jobs in the US, in the rest of the "developed" world and
here.
The effective cure
If Mexico aspires to anything more, we shall
have to wait for the restoration of the gold standard worldwide. In the
meantime, neither demagogy nor Socialism will solve our problems. Only the
gold standard can do that.
For our industrial capacity to gain access to
international markets - and for Mexicans to gain access to products from
international markets - it will be necessary to restore the gold standard.
Bilateral trade agreements are not optimum. The optimum is to have the world
as a market, where payment for exports is balanced by imports and residual
balances are paid in gold. Payment in gold of export deficits and collection
in gold of export surpluses is sine qua non. Under the gold standard,
Mexico would achieve sustainable prosperity and full employment for our
admirable workforce.
Products from China and Asia in general, which
today undermine our industrial capacity and create unemployment because we
cannot compete with the extremely low wages of the Asian countries, would
cease to be a problem under the gold standard; if the Asian countries, which
today invade our markets, do not buy similar quantities of Mexican products -
which today they do not - they would not be able to export their products to
Mexico. The gold standard would fairly balance exports with imports; it would
prevent the strategic destruction of our industry and protect us naturally,
without the need for protectionist barriers.
The same therapy Mexico needs - the
restoration of the gold standard - is what the world requires to regain
economic health and sustainable prosperity.
Under a restored gold standard, Americans will
not be able to purchase goods from China, unless China purchases American
goods with a similar value. If the Chinese find nothing of value to purchase
in the US, then Americans will be unable to purchase Chinese goods. It's as
simple as that! To continue selling to the West, China will have to open wide
its doors to imports!
If Americans find they simply cannot purchase
Chinese goods, Americans will manufacture those goods themselves. Industries
and new jobs will spring up like mushrooms immediately, to satisfy American
demand. International balance will be restored, unemployment will disappear.
Protectionism is not a cure, it is a Band-Aid.
Mexico will not achieve the prosperity of which it is capable through protectionism
nor by resorting to Socialist measures that crush the creative spirit of the
individual. Nor can we succumb to renouncing our nationality and accepting
absorption by the US, imitating all the (very costly) measures the current US
administration imposes on its citizens. The ideal combination for Mexico
includes a moderate dose of nationalism, a government that does not incur
deficits, the institution of a monetized one-ounce silver coin, the
"Libertad", to stimulate and protect savings, and eventual
participation in a new global gold standard, in which our nation can find the
opportunity to fulfill its destiny.
"The gold standard is the generator and
protector of jobs."
Hugo Salinas Price
President, Mexican Civic Association Pro
Silver
www.plata.com.mx/plata/
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