Gold Is the Public's Veto on Central Bank Monetary Policy. Gold Allows Us to Short the World's Fiat Currencies.
The price of gold after 2000 has been making another of its
upward moves. These upward moves have been beaten back so
consistently since 1980 that there is not much
interest by the financial press or investors. But there
will come a day when the threat of central banks to sell
gold -- mainly to each other -- will no longer scare gold
buyers. They will start taking delivery.
If officials in the central bank of China ever decide
to use the banks enormous reserves to start buying gold,
they will make that bank the dominant central bank. At
some point, they will do this. They will understand how
vulnerable the G-8 nations are to a determined central bank
that wishes to get their hands on the gold. If they follow
this with actual delivery from the vault in the New York
Federal Reserve Bank to Beijing, they will announce to the
world, "The days of wine and roses have ended. Call this
revenge for the opium wars."
The Chinese could do this tomorrow. I think they are
certain to do it sometime in this decade. When they do,
they will become the dominant central bank. I think this
is what they want: symbolic affirmation of their new-found
international economic might. They are fast becoming the
800-pound gorilla in the world's markets. By 2010, they
will be the gorilla, if you count Hong Kong, which they
control, and Taiwan, which has sent $180 billion in private
investment into China since 1991, and 40 million overseas
Chinese, who serve as the middlemen in the expansion of
Chinese foreign trade.
Why has the price of gold trended lower since January,
1980? Part of this drop was a reaction to the large price
rise in 1978-80, which had been driven by the inflationary
policies of the Federal Reserve System under the long-
forgotten and unlamented Chairman of the Board of
Governors, G. William Miller. He was not an economist. He
was a corporate executive without any known understanding
of monetary theory. His tenure of office was brief: March,
1978 to August, 1979, but public confidence had been lost.
He was replaced by Paul Volcker, who adopted tight money
policies in October, after being persuaded by other members
of the Board.
Meanwhile, OPEC had driven up the price of oil for the
second time in the decade, this time under Jimmy Carter.
By 1979, there was deep pessimism regarding Carter's
political leadership and the economy. This elected Ronald
Reagan in 1980.
In late 1979, Iranians kidnapped the staff of the
Throughout 1979, there was also Bunker Hunt's squeeze
on silver, which drove up the price to $50/oz from under $5
a year earlier. He had been taking delivery of silver
contracts all year, terrifying the shorts. Poor Hunt. He
was about to lose his second fortune. The first had taken
place in 1971, when Qadaffi had nationalized Hunt's oil
holdings. As soon as the Gulf sheikhs saw that Qadaffi had
gotten away with this massive theft, they decided to
squeeze the West. That fabulously successful oil squeeze
began in 1973, the same year that Hunt began buying silver
futures at $1.95/oz. What stopped Hunt in 1980 was two-
fold: Volcker's tight money policies and the COMEX, which
changed the rules. No further purchases of future
contracts were accepted by the exchange except for shorts
who were covering their positions. By March, 1980, the
price of silver was at $11. Hunt lost a billion dollars.
He had to borrow from the FED to cover his position. He
then uttered those memorable words, "A billion dollars just
doesn't go as far as it used to." Silver never has
The last two decades have seen a fall of the price of
all raw commodities. The nominal price of oil has stayed
up, but price increases of finished goods and services have
dramatically lowered the purchasing power of the dollar
since 1980. It costs $2,150 to buy what $1,000 bought in
1980, according to the inflation calculator at the Bureau
of Labor Statistics. (http:///www.bls.gov) The percentage
of American family incomes that is spent on food, for
example, has gone down year by year. So, the all metals
have dropped in price and have stayed down except for brief
Is this a permanent feature of the West's economy?
Those who think that we are running out of raw materials
say no. They are generally not economists. Most
economists say yes. They argue that improved extraction
techniques and resource-discovery techniques and
technological substitutes will continue to place a premium
on the knowledge-service economy in relation to
commodities. Throughout the twentieth century, the
economists have been correct about this except during
This scenario applies to commodities that are used in
production. But one commodity is not generally used in
production: gold. From about 2,000 B.C. until today, gold
has been used mainly as money. The issue is: Used by whom?
THE INVENTION OF COINAGE
To facilitate exchange, a medium of exchange is
crucial. Barter is too inefficient. If you don't have
what I want to obtain, or I don't have what you want to
obtain, there will not be an exchange unless a third party
steps in. He will get a high commission for his
specialized knowledge of markets.
Money reduces these commissions by making exchange
between producers easier, i.e., converting them from
producers into consumers. The best definition of money was
provided by Ludwig von Mises in 1912: "the most marketable
commodity." Historically, the most widely acceptable money
commodities have been gold and silver. We read of the
patriarch Abram, "And Abram was very rich in cattle, in
silver, and in gold" (Genesis 13:2).
Sometime between 700 B.C. and 635 B.C., the king of
Lydia, in Asia Minor, began producing the first coins.
They were round, uniform, and stamped with a lion's head,
the symbol of the Lydian dynasty. This invention was soon
imitated by the Greeks. Originally, the coins were
electrum: silver and gold. Under King Croesis ("Creesis"),
all of the Lydian coins were gold. He was the famous king
discussed by Herodotus, who made war on the Persians and
lost his empire. But his economic innovation reigned until
1933. I think it will reign again, but that's another
The world was re-shaped by that invention: the
extension of trade and the division of labor. Wealth
increased. But there was another consideration, one which
became the basis of the visible destruction of the gold
standard in the 20th century. Lydia's invention carried
with it an assertion, an implication, and a symbol: the
sovereignty of the State over coinage. The stamp of the
dynasty marked the coins as the monopoly of the State.
Civil governments have claimed this sovereignty over money
ever since. The stamp not only announced the coin's
authenticity; it announced a monopoly. He who
counterfeited a coin by adding base (cheap) metals was a
violator of the State's exclusive right. The State had to
authority to bring negative sanctions against the violator
-- not on the basis of his having committed a fraud, but on
the basis of violating the exclusive authority of the State
to produce the coinage.
The practice of debasement had been condemned by the
prophet Isaiah two generations before the invention of
coinage. "Thy silver is become dross, thy wine mixed with
water" (Isaiah 1:22). His condemnation was an extension of
the law against false weighs and measures.
Ye shall do no unrighteousness in
judgment, in meteyard, in weight, or in measure
But thou shalt have a perfect and just weight, a
perfect and just measure shalt thou have: that
thy days may be lengthened in the land which the
LORD thy God giveth thee. For all that do such
things, and all that do unrighteously, are an
abomination unto the LORD thy God (Deuteronomy
The presence of an authoritative stamp made a coin
more acceptable in trade. It reduced the product-seller's
risk of not weighing or testing the coins. The fact that
the stamp was imposed by the authority of the king did not,
in and of itself, make the coin a monopoly instrument of
trade. What made it a monopoly was the decision of the
king to monopolize the production of coins. He did not
authorize others to use his stamp even when their coins
matched the weight and purity of his coins. He could have
charged them a stamping fee for use on their coins -- a
trademark fee, in other words. He refused. From that time
on, civil governments resisted the production of coins by
private parties. Coins were deemed an aspect of State
So, three separate analytical issues were involved:
(1) the reduction of transaction costs associated with
small coins compared to large ingots; (2) the reduction of
transaction costs associated with officially stamped metal;
(3) the assertion of State sovereignty over coinage. The
third was not necessary to the first two.
THE FINAL COURT OF APPEAL
The judicial issue of sovereignty in the pre-modern
world (say, pre-1660) was the issue of divine right. The
assertion of divine right was the judicial-theological
issue of the final earthly court of appeal. He who
possesses legal sovereignty cannot be sued, apart from his
permission, for he is judged by no human court.
Sovereignty is why the U.S. government cannot be sued
without its permission, according to the Constitution.
This is why there is so much political pressure on the U.S.
government to allow American or foreign citizens to appeal
to the World Court and other international jurisdictions
above the U.S. Supreme Court. To be the King of the Hill,
a court must be the final court of appeal. Without a world
supreme court, there cannot be world government.
The final judicial court of appeal for money is a
nation's supreme court. But the final economic court of
appeal is the free market. A court can determine what is
lawful money. The free market determines what is actual
money. A civil government can legislate the price of
money: exchange rates between two forms of money; price
controls on goods. The free market will determine what the
rates of exchange are in actual exchanges: the black market
rate of exchange.
Gresham's mid-16th century law says, "Bad money drives
out good money." This form of Sir Thomas's law is
imprecisely stated. Here is the correct version: "The
monetary unit that is artificially overvalued by law will
drive out of circulation the monetary unit that is
artificially undervalued by law." This means that there
will be a shortage of any artificially undervalued
currency. The best recent example was the U.S. dollar in
relation to Argentina's currency unit in December, 2001.
The dollar was artificially undervalued by Argentina's law.
Almost no one could buy dollars at the government's fixed
exchange rate. There was a shortage of dollars at the
phony low price.
As always, government-enforced price ceilings create
shortages (too much demand). Government-enforced price
floors create gluts (too much supply).
The government can pass all the price controls it
wants. The free market will respond: shortages and gluts.
Whenever you hear of a shortage or a glut, think: "At what
price?" Whenever a price is established by law, the
shortage or glut will remain until this legislated price
randomly matches the free market price, at which time,
there is no further need for the legislated price.
Politicians do not understand that the final court of
appeal is the free market. The economy trumps the State.
Governments, by imposing added risk for the detection of an
illegal transaction, do raise transaction costs, but
governments cannot establish the price at which exchanges
will take place. There is no appeal beyond the free
market. The market, not civil governments, is sovereign.
Politicians rarely believe this. So, they play power
games with prices. By establishing by law which currency
unit is acceptable for paying taxes, politicians can
determine which currency unit functions as money in tax-
related transactions. But politicians cannot determine at
what prices this tax/currency unit will function as money.
The free market -- buyers and sellers of money -- establish
the money prices of goods and services. Consumers, not
governments, are sovereign over the value of money.
COUNTERFEITING: LEGAL AND ILLEGAL
Gold has served as money in free markets for over four
millennia. Paper money was an invention of the Mongols
less than a millennium ago. Within a century, they had
destroyed their currency. Commercial bank-created money is
less than six hundred years old. Central bank-created
money began in 1694, with the Bank of England.
Here is a nearly unbreakable rule: politicians serve
their own self-interest by paying off their constituents
with money collected from their opponents' constituents.
When the taxation of their opponents' constituents
threatens to create a tax revolt, or the defeat of the
incumbents at the next election, or both, incumbent
politicians seek ways to keep the money flowing to their
special-interest voting blocs without visibly taxing their
opponents' special-interest voting blocs.
The key word here is "visibly."
Monetary inflation is the preferred solution of
politicians. The real cause of the public's increased cost
of living can be hidden from most voters, who are
economically ignorant, naive, and trusting. Price
increases can be blamed on profit-seeking speculators and
If the currency system were exclusively private, then
there can be no element of sovereignty for counterfeiters.
Counterfeiters could be brought into a court of law and
prosecuted for fraud: false weights and measures. They
could not claim that they are beyond the law, above the
law, and immune from law suits.
Governments can and do make these claims of immunity.
They transfer by law to central banks this same political
sovereignty. This is why the mixing of judicial
sovereignty over money and economic sovereignty over money
eventually leads to fraud on the part of governments:
monetary debasement, either openly ("thy silver has become
dross"), or through the printing of more paper IOU's for
gold or silver than there is metal on reserve, or through
the adding of digits in bank computers.
When a national government has established a State-run
gold standard by persuading the public to exchange their
gold for the government's IOU's of gold at a fixed price,
then the public can retaliate against future monetary
inflation. Prices rise due to the increase in the money
supply. This would raise the money-price of gold, except
that the government or its central bank has promised to
sell gold at an official price to anyone who brings in an
IOU. The demand for gold therefore rises at the
government;s artificially legislated price. This is a
rational response of the IOU-holders. The government is
subsidizing the price of gold.
Two groups want access to the promised gold: (A)
people who think the government will soon change the rules
and (1) stop paying gold for IOU's (default), or (2) reduce
the amount of gold that has been promised (devalue the
currency); (B) industrial or ornamental users of gold who
want to take advantage of the subsidy.
If the government wants to maintain full value of its
IOU's for gold, then it must stop inflating the currency.
This will cause a recession: the reversal of the prior
policy of monetary inflation, and the restoration or
prices, especially of capital goods.
Politicians lose elections during recessions. "It's
the economy, stupid." So, they want the good times to
continue to roll, which means the printing presses must
continue to roll. But then the gold reserves of the
government will be depleted.
What's a government to do?
Franklin Roosevelt's answer was two-fold: (1)
confiscate the gold of American citizens in 1933, and, once
the gold had come in and had been turned over to the
privately owned Federal Reserve System, (2) raise the price
by 75% in 1934, thereby transferring to the FED a huge
windfall profit. The FED's monetary base rose because of
the higher monetary value of its newly received gold, so
commercial banks created new credit money to take advantage
of these increased central banking reserves. The result
was the economic recovery of 1934-36. But when the FED
raised bank reserve requirements in 1936, this produced the
recession -- a whopper -- of 1937.http://www.independent.org/tii/news/990500Timberlake.html
Because the government also raised taxes in 1936, this
added to the economy's woes: a double-whammy.
After 1932, Americans were no longer able to pressure
the government to change its monetary policies. They lost
the right of redemption. This abolition of the public's
right of redemption had been the decision of European
governments, 1914-1925, in response to the war: a
suspension of gold payments. Whenever a major war broke
out in Europe, governments suspended gold redemption. Why?
Because they planned to inflate the money supply to pay for
the war. It happened during the Napoleonic wars. It
happened in 1914. In between, 1815-1914, Europe enjoyed a
century of price stability.
The public's right of redemption of gold serves as a
veto on the government's expansion of fiat money, or the
central bank's expansion of credit money. Until the right
of redemption is suspended by the government, the public
holds the strong hand.
Every government-run monetary system is a compromise
with the free market. Every government-run gold standard
is based on promises: IOU's issued for gold at a fixed
price. This promise is no better than the promise of
politicians. The government can always invoke its
sovereign right to change the rules. It can legally renege
on its promises. It is judicially sovereign.
This is the war of political sovereignty -- the
State's self-imposed immunity from law suits -- against
free market sovereignty: the public's right to select
whatever they as individuals want to use as their currency
unit, and their right to bring counterfeiters to justice in
the State's courts. Private, profit-seeking counterfeiters
have no immunity from law suits, unlike legalized private
counterfeiters (central bankers).
In the case of the law suits brought by Americans
against the Roosevelt Administration in 1933, the Supreme
Court refused to hear the cases. (The most detailed
account of this subterfuge will be available in a few weeks
in a 1,600-page book on the Constitutional history of the
dollar, written by Ed Viera, author of the shorter but
excellent book, PIECES OF EIGHT. Viera is a Harvard-
trained lawyer who has devoted his career to the money
question. He is also an Austrian School economist.)
Every gold standard that is established by a civil
government is a pseudo-gold standard. It is no better than
a government promise, a government that claims sovereignty
over money, i.e., legal immunity from prosecution for
breaking its promise to redeem gold for its earlier IOU's.
WHO VETOES WHOM?
With any pseudo-gold standard, the government retains
the right to veto any attempt by the public to veto the
government's monetary policies. When holders of government
IOU's for gold begin to present their IOU's and take home
their gold, the government can intervene and refuse to pay.
Remember, it is not the government's gold; it is the IOU-
holders' gold. Anyway, that was what was originally
promised. But agents of governments lie. This is their
primary function operationally in every democracy: to
deceive the citizenry. A pseudo-gold standard allows
undeceived citizens to call the deceivers' bluff until the
government publicly reneges. This is why any gold standard
is hated by all modern political liberals and most
conservatives: it places a veto in the hands of citizens.
The overwhelming majority of the intellectual defenders of
State power dismiss the gold standard as a barbarous legal
institution based on a barbarous relic (Keynes). Why
barbarous? Because it places a veto in the hand of the
barbarians: citizens and non-citizens who can legally buy
up the IOU's with depreciating paper money and then launch
a gold run on the government's treasury or the government-
licensed counterfeiters: central banks and their clients,
The monetary skeptics announce, "There's gold in them
thar vaults!" When the gold flows out, the day of
reckoning draws closer for the purveyors of counterfeit
IOU's for gold. The counterfeiters grow desperate.
"Their" gold is now being demanded by barbarians --
arrogant citizens who think that a government promise is
worth its weight in gold. Finally, the counterfeiters end
the illusion of their pseudo-gold standard. They had
persuaded the public to sell the government their gold in
exchange for IOU's. Then the government defaults. "Tough
This has been going on for three hundred years. The
suckers -- IOU-holding citizens -- never learn. We are
more trusting of known crooks (legally immune politicians)
than money center bankers are who lend money to Latin
The public trusts the government, which claims
sovereignty: immunity from law suits. The public also
trusts Alan Greenspan. The American public has not had
legal IOU's to gold in their collective hands since 1933.
They have voluntarily renounced the power of the veto. It
has been even longer for most Europeans.
The economic veto over monetary policy has been
transferred to bond speculators. There are fewer of them
than citizens who used to hold gold coins. But they do
have a lot of power. They are hated by the government.
The Street.com's Daniel Gross reminded us in November,
In 13 years at the helm of the Fed,
Greenspan has built up an enormous amount of
credibility and clout -- in Washington and New
York. His actions in controlling the movement of
interest rates have been credited with making or
breaking the past two presidencies. George Bush
-- the elder -- explicitly blamed Greenspan for
dooming his one-term presidency by not cutting
rates quickly enough in 1991. "I reappointed
him, and he disappointed me," Bush said.
Greenspan, on the other hand, made Clinton's
presidency. The Fed Chairman strongly suggested,
early on, that the president focus on deficit
reduction because that would please him and, in
turn, the bond market. Clinton exploded: "You
mean to tell me that the success of the program
and my reelection hinges on the Federal Reserve
and a bunch of [bleeping] bond traders?" But
with the market-savvy Robert Rubin whispering in
his ear, Clinton chose the path of budgetary
restraint. Greenspan ratified his 1993 budget
plan, and the rest is economic history.
In today's political/investing culture, it is
difficult for policymakers to make much progress
without the cooperation of the bond market. And
because the bond market regards Greenspan as an
oracle par excellence, the 74-year-old former
devotee of Ayn Rand now occupies the catbird
The bleeping bond traders today are called "bond
vigilantes." This fits. Vigilantes in the old West used
to string up suspected malefactors when the government
refused to prosecute, or when, in some cases, the people at
the end of the ropes were the local government.
For politicians, the free market's speculators who
publicly expose the government's monetary policies as
detrimental to the public are regarded by the government as
barbarians or vigilantes. Politicians hate any veto power
held by the public. Bond market speculators are exercising
a veto on behalf of the public. The government will do
what it can to bankrupt them, hamper them, or in some way
remove their veto power. But, in the long run, there is no
escape. The free market will veto bad economic policies.
The free market, not the State, is economically sovereign.
Economic sovereignty trumps judicial sovereignty in the
Keynes dismissed the long run. "In the long run, we
are all dead." Well, Keynes is dead, and his theoretical
legacy is dying. But, for the moment, the rival
sovereignties are about equally matched. That's why veto-
holding citizens can get burned in the short run when we
attempt to exercise our veto.
If you think price inflation is coming, sell bonds and
buy gold. If you think the opposite, do the reverse.
I think price inflation is coming. That's because
monetary inflation is here, all over the world.