At the end of a good movie, oftentimes apparently unrelated events are woven together and it becomes clear how and why things happened. If, today, it feels as if we are at the end of an era, it is because we are; and, just like the movies, only at the end do certain events and the reasons for them become clear.
The removal of gold from the global monetary system was not by accident. It allowed governments to do what they could not otherwise do. Gold cannot be printed. Paper money can. Therein lays the cause and consequence of what is happening today.
BEFORE THE WELFARE STATE WAS THE WARFARE STATE
The introduction of paper money allowed war to be conducted on credit with credit-based paper money. In return for allowing bankers to issue England’s money in the form of paper script, bankers allowed King William, England’s king, to wage war on credit, giving England an advantage over other nations which England parlayed into world dominion.
Good ideas spread and the idea of waging war on credit also spread. Prior to World War I, both France and Germany went off the gold standard in order to go to war backed by limitless amounts of paper money, instead of being constrained by limited amounts of gold.
The resultant carnage would not have been as extreme had France and Germany been forced to pay good money, instead of bad, for their arms. But even after WWI and WWII, in the wake of the greatest suffering humanity ever endured, the desire to wage war on credit continued.
When WWII ended, the US emerged as a world power. Unlike Europe and Asia on whose continents the conflict was waged, the US emerged relatively unscathed and realizing it was now the world’s only superpower, the US decided to insure its new found status by maintaining and enlarging its already formidable military machine.
It did so by spending all the gold it had accumulated; up to that time, the largest amount of gold ever owned by any nation in history. In 25 years, from 1946 to 1971, the US overspent its entire gold reserves of 21,775 tons in the pursuit of world dominion.
During those 25 years, the US had a positive balance of trade with the rest of the world so its gold reserves should have substantially increased, not disappeared. Prior to 1971, gold was used by nations to settle trade imbalances but the US imbalance was not caused by trade, it was caused by the costs of maintaining a worldwide military presence and the overseas expansion of US corporations.
GOLD—THE LAST STRAW
The complete removal of gold from the world monetary system finally occurred in 1971 when the US refused to pay other nations in gold what it then owed. The US refused to do so because the US no longer had enough gold to redeem the vast amount of US dollars it had printed and spent (the US did keep what gold it had).
To this day, what was set in motion in 1971 has yet to be fully grasped and understood. Lack of understanding, however, will not prevent its consequences and the US and, indeed, the world, are now about to experience what was then set in motion, an economic meltdown of epic proportions.
When the US removed gold from the world’s monetary system, it removed the one critical element upon which the entire world economy was based. Because the removal had been gradual, the essential role gold performed had been forgotten—but forgetting gold’s role did not mean it had none as many believed, e.g. Keynes, Friedman, Krugman, Volcker, Bernanke, etc.
A description of the critical role of gold and the gold standard was written by Professor Antal Fekete in his essay The Gold Standard Strikes Back……With A 36-Year Lag
…Gold has the same role to play in the monetary system as the fly-wheel regulator does in an engine, the brake does in a train, and circuit-breakers do in an electrical network. Gold is the regulator of the quantity of debt in the economy that can be safely created and carried. It is also safeguarding quality by rejecting toxic debt before it can start metastasis. Debt-based currency utterly lacks safeguards limiting quantity and vouching for quality of debt. Debt-based currency is an invitation to disaster, that of the toppling of the Tower of Babel. Its effects are far from being instantaneous. There is a threshold and there is a critical mass involved. We have long since crossed that threshold and passed that critical mass. By no rational calculus can the outstanding debt be expected to be repaid without inflationary or deflationary adventures, even if further increase were stopped dead in its track. The discussion of the present financial crisis by academia and media avoids all reference to this fact. Under the gold standard a fast-breeder of debt was unthinkable, and debt was retired in an orderly manner.
Using Professor Fekete’s metaphors, with the regulator of debt now disabled, the brakes discarded, and the circuit breakers removed, it is now understandable, as the last and final act of our financial drama plays out, why we now find ourselves buried beneath unbearable and unpayable quantities of toxic debt.
Removing gold from the international monetary system in 1971 allowed the US to then begin issuing US dollars in increasingly excessive amounts as the US was no longer constrained by gold to maintain any semblance of fiscal restraint.
While consequences may be delayed they cannot be avoided. It’s been 38 years since the US removed gold from the international monetary system. As a consequence, the system is now beginning to collapse. Someday, it will collapse completely.
FEAR-BASED OPTIMISM
Increasingly, the sound-bites of politicians, economists and the media are becoming more positive, indicating that an economic recovery is underway. It is not. If it were, governments would be able to slow or stop the spending they are desperately hoping will rescue their respective economies. None are so doing.
But despite trillions of dollars, the global economy is still contracting. Signs of improvement are due only to the massive amounts of government aid being spent in the hopes of reviving private demand, demand irrevocably crippled by now unpayable levels of debt.
