In 1999 The New York Times ran an obituary of
the "barbarous relic" from the pen of Floyd Norris under the title
"Greenspan Has Become the New American Gold Standard" (op-ed page, International
Herald Tribune, May 5, 1999). It alleged that the process of removing the
glitter from gold has been a gradual but inexorable one and the world was
more than happy to accept the greenback backed by Greenspan (no pun
intended), just as earlier it had accepted the yellowback backed by the
precious yellow. The earmark of the new millennium is people's unshakeable
faith in the dollar. My rejoinder suggesting that "rumors about the
demise of gold were grossly exaggerated", written over six years ago, is
reproduced below. It goes without saying that The New York Times refused to
publish it. The occasion for publishing it now is the impending historic
changeover from the Greenspan standard to the Bernanke standard.
factory on the Potomac
There is nothing new about premature
obituaries for the gold standard. In 1936 John Maynard Keynes noted in the
book that has made his name world-famous (The General Theory of Employment,
Interest, and Money; Macmillan, 1967, p 235) that people habitually scramble
for gold, which is to say that they crave for the moon. But the government
cannot let them have the moon. A good central banker, by definition, is one
who can persuade people that green cheese (sic!) is practically the same
thing, and will go on to parcel it up and dish it out for their delight and
satisfaction. Nomen est omen: Greenspan was destined to be the first (and
probably the last) green cheese monger on the Potomac. Mr.Greenspan certainly
understands gold and the reasons why people habitually scramble for it. He
also understands why the government wants people to take green cheese for
gold. It is not my intention to ridicule the deep-rooted yearning in the
human psyche for Santa Claus. But to me, instead of cutting a happy figure of
Santa Claus, Mr.Greenspan cuts the sorry figure of the Sorcerer's Apprentice.
He learned the magic word how to start green cheese production; his tragedy
is that he has forgotten to learn the other magic word how to stop it when
enough is enough. Apart from that, the problem is that too much green cheese
is not good for you. It may cause diarrhea (inflation) and constipation
(deflation), although it is impossible to say in which order.
gold to irredeemable promises is too telling for comfort
According to Norris, gold's reputation as a
store of value has been eroded while its price fell by more than two-thirds
from $873 in 1980 to $251 in 1999,
in contrast with the Dow which at the same time
increased more than 12-fold. This is not a new story either. Gold's
reputation as a store of value had been eroded many times before, to wit,
during such historical episodes as the Tulipomania, the South Seas Bubble, the Mississippi Bubble and, more recently, during the
Roaring Twenties of the Twentieth Century.
Norris informs his readers that the IMF is to
sell "surplus" gold, a move applauded (ordered?) by the U.S.
Treasury, to help finance the laudable program to forgive debts owed by the
very poor countries. He explains that money from gold sales is to be invested
in U.S. Treasury securities and the income from the investment will pay off
the loans. He concludes that "gold, which does not pay interest, is a
Here Norris betrays how badly misinformed he
is. As every central banker and gold miner knows, gold can earn interest even
in the Twenty-First Century, provided that you can find trustworthy
borrowers. It is true that the interest rate on gold loans (euphemistically
called the "lease rate") is but a small fraction of what the U.S.
Treasury is forced to pay on its debt. Yet this does not make gold a lousy
investment. Quite the contrary, it is this very fact that makes gold such a
superb investment. Financial writers ought to know that yield varies
inversely with quality. By Norris's logic a government bond is a lousy
investment in comparison with a junk bond because the yield on it is lower.
The reason why the U.S. government is so anxious to push gold out of the
international monetary system is that the competition gold offers to
irredeemable promises is too telling for comfort. The fact remains that when
a central bank or the IMF sells gold, it is replacing the best kind of
monetary asset, one that is nobody's liability, with the worst kind: the
irredeemable promises of devaluation-happy governments. In selling gold
central banks and the IMF make their balance sheet weaker, not stronger.
central banks fall over themselves to sell gold
Norris gleefully reports that the Swiss
National Bank has also joined the "let's junk gold" contest. He
mockingly adds that the Swiss defection is not unlike Rome embracing
Protestantism. Of course, he fails to mention that the Swiss were put under
duress: Paul A. Volcker was dispatched to Zürich to twist their arm.
Even so, I concede that an explanation is in order. When a weak central bank
is selling gold to meet its maturing liabilities, it is acting logically. It
is using gold to maintain its credit standing. That is what gold is for. But
when strong central banks, such as the Swiss National Bank and the Bank of
England are falling over themselves to sell monetary gold from reserves under
the full glare of publicity, knowing that the inevitable result of the
fanfare will be the worst sales price for the asset on the block, then logic is turned upside down. The lame explanation
that gold sales are designed to raise funds to perform good deeds is for
simpletons only. If the motif were really charity, then there would be all
the more reason to cut out glare and fanfare, lest the trustees open
themselves to charges of unfaithful stewardship. We are fully justified in
looking for a hidden agenda. I do not pretend to know the real reason for
this "negative gold rush". I can only speculate: central banks are
desperately trying to prevent a melt-down threatening the financial system.
This crisis is largely unknown to the public, even though it is potentially
more damaging than any previous one in the 20th century. It has to do with
"naked" selling of call options on gold bullion and other forms of
forward sales by banks. This activity has been officially encouraged by
government as a way to finance the stock market and real estate bubble, the
bursting of which would cause great damage to the
world economy. Central bank gold sales are designed to bail out short interest
in a futile effort to stave off a corner in gold.
the value of irredeemable promises.
Norris does say that gold has once served as
protection against government plunder through deliberate currency debasement.
Moreover, he admits that there is still plenty of it going on in the world.
But he contends that, with Mr.Greenspan in charge of green cheese production
and distribution, the answer to the problem is no longer gold. It is, in the
lingo of the day, "dollarization", a sort of gold standard without
gold. This is not a new story either. In the 1960's governments were
experimenting with what they used to call "paper gold".
In order to appraise the idea of putting the
whole world on a dollar standard, we may recall some basic facts. The
American dollar is an irredeemable promise, no better and no worse than the
Russian ruble. The value of either stands or falls on one thing,
and one thing only: the support of currency speculators. It is a fable that
the difference between the dollar and the ruble is the difference between the
professionalism of the Fed and the dilettantism of its Russian counterpart.
Exactly the same knowledge is available to central bankers in Moscow that is
available to Mr.Greenspan in Washington. Before currency speculators decide
which currencies to support and which ones to dump they look at three factors
as follows, in the same order of priority: (1) the balance sheet of the
central bank issuing the currency; (2) the trade accounts of the country; (3)
the history of the government honoring its promises to pay. On the last two
counts the dollar is an unmitigated disaster. The U.S. has been running a
horrendous trade deficit for decades which still keeps growing. Twice in the
20th century the U.S. government broke faith with its creditors: in 1933 it
defaulted on its domestic and, forty years later, in 1973, on its
international obligations. In the latter instance the U.S. government was the
perpetrator of the debasement of all the currencies of the world, in wiping out
more than 90 percent of the purchasing power of the dollar in less than a
decade, including the non-gold reserves of central banks - the greatest
monetary destruction on record.
The only count on which the dollar still
shines in comparison with the irredeemable promises of other central banks is
the balance sheet of the Federal Reserve banks, showing a higher ratio of
gold assets to liabilities. In fact, one reason why American officials are
pushing other governments to get rid of their gold while they themselves hang
on to the "barbarous relic" is that, thanks to Mr. Greenspan's
tutorials, they understand the role of gold in the balance sheet. They
understand that the moment American gold reserves cease to be second to none
speculators will unceremoniously dump the dollar. In the meantime the more
other central banks can be pushed around to get rid of their gold the better
it will be for the political, economic, and military hegemony of the United
The discriminating observer would look at gold
not just as an investment the glitter of which can be tarnished by central
bank gold sales. He would also look at it as an insurance against disaster
caused by recklessness at the helm, whether the boat of the world economy is
run onto a reef or whether it is run into an iceberg. For the prudent, gold
is an insurance policy the importance of which increases with the dangers and
uncertainties growing in the world with the passing of every day. The price
of gold is of secondary importance. A low gold price simply means that
insurance is momentarily cheap. Why is it cheap? To put it bluntly, it is
cheap because foolish people are selling their life-savers while staring at
the iceberg which is about to hit the "unsinkable" Titanic.
However, as long as some people are willing to hold on to their life savers,
gold cannot be demonetized through wishful thinking.
This exposes the myth of the "new
American gold standard". It is solely based on the hoard of fraudulently
and unconstitutionally confiscated gold which the American government still
retains while exhorting other governments to get rid of theirs.
Little needs to be added to update this piece
written over six years ago. At the close of the Greenspan Fed the boat of the
world economy is still buffeted between Scylla (inflation) and Charybdis
(deflation). If it is not smashed to pieces on the rock of Scylla, then it
will be sunk on the reef of Charybdis. Part of the myth is that we are having
low inflation thanks to the adroitness of helmsman Greenspan. However, as the
new helmsman Bernanke has warned, deflation may well be the greater danger of
the two. He is getting ready to load the helicopters for the dollar-drop
while gearing up the printing presses for a fresh run.
In spite of all the anti-deflationary
maneuvers the Bernanke standard is still vulnerable to deflation. This is
because Mr. Bernanke, who is a devout believer in the quantity theory of
money, sees the essence of deflation in falling prices rather than in
collapsing demand and its corollary, vanishing pricing power. Obviously, the
printing-press remedy of Mr. Bernanke does not address these. Because of
collapsing demand and loss of pricing power, businessmen will remain
lethargic regardless how much manna is dropped from Bernanke's helicopters.
The dollar bills will be picked up by speculators who thereupon join the
Fed's mad spending spree in the bond market offering risk-free bets. The
result will be falling interest rates further deepening the deflationary
This is not to say that Bernanke's helicopters
cannot frighten the speculators. They certainly can. If and when they do,
speculators will dump bonds, currency, and all. Mr. Bernanke is confident
that he can cure deflation through hyper-inflation. He cannot. Under
hyper-inflation the currency is losing value faster than can be replaced by
printing more of it. That is precisely the difference between inflation and
hyper-inflation. It spells further decline of demand and vanishing pricing
power, that is, more deflation, not less.
The success of the Greenspan standard was due
to Mr. Greenspan's steadfast refusal to authorize plans to sell U.S. gold.
The downfall of the Bernanke standard will follow Mr. Bernanke's decision to authorize
it when he finds, much to his chagrin, that hyper-inflation is no cure for
November 15, 2005
Dr. Antal E. Fekete