James Grant NYT Op Ed on Gold Standard

[Master Shake]

Re: James Grant NYT Op Ed on Gold Standard

Could you provide some examples of these severe financial crises before the Fed was created and while on a gold standard? What were the causes? How did they compare in severity and duration to the Great Depression, 1970's, and current crisis?

Here's a link providing an overview of financial crises in US history. One could argue that the Panic of 1873, which set off the Long Depression, should be number one and not five.

http://akorra.com/2010/03/03/top-10-...n-u-s-history/

[ThePythonicCow]

Re: James Grant NYT Op Ed on Gold Standard

Could you provide some examples of these severe financial crises before the Fed was created and while on a gold standard? What were the causes?

Analysis of the causes will be a point of controversy. One can usually guess what solution an analyst is supporting by the nature of their analysis.

My search now for where I read this failed, so I don't have sufficient links. However my recollections are that

• the Constitution provides for gold and silver coinage
• the most common coin of that time was the Spanish silver dollar
• the Coinage Act of 1792 set forth a bimetallic standard, with the value of gold set to 15 times that of silver, per unit weight (link http://www.silverbearcafe.com/private/honmoney1.html)

This fixed ratio of gold to silver contributed to the end of the use of either metal to base the U.S. Dollar. First gold was made or became more precious, causing silver coins to be melted down and sent overseas to other regions valuing silver more highly. Currency became desperately short in poorer regions of the nation, such as Midwest farmers. This led to America bearing its "Cross of Gold" (William Jennings Bryan), a gold-only backed currency. Then the Federal Reserve was instituted and gold became more precious than the paper it supposedly backed, leading to the end of gold backing as well.

The lesson from this (my apologies for not having a link to where I first read this) is that the gold-silver ratio should not be fixed by the government, as such a ratio can not be held forever, and can cause financial distress when the fixed ratio is too far out of line with current market forces (P.S. -- or the forces of manipulation by the banking oligarchy.)

P.S. -- Here's a link to an article discussing this matter in more detail: HONEST MONEY, Part III: Coinage Acts From 1834-1900, by Douglas V. Gnazzo.

[ThePythonicCow]

Re: James Grant NYT Op Ed on Gold Standard

I just noticed an article by Douglas Gnazzo, the same author I just linked above, that he has written more recently, proposing a solution to the financial crisis. See further Is America Broke Part III - A Solution for the Financial Crisis, by Douglas V. Gnazzo, Wed, Jan 28, 2009.

I've not read much of the article myself yet, but so far it looks worthy of further consideration.

The article opens with this Abstract:

This is the third and final paper in the Is America Broke series. In the first two articles, several of the contributing factors to today's financial crisis were discussed. Several important questions were asked:

Why is the most advanced economy in the world buckling at the knees, acting like a punch weary fighter? How did the largest creditor nation on earth become the largest debtor nation? Are soaring debt levels consummate with wealth creation or a diminishing standard of living?

In the process of finding answers to these questions, we were led to the root cause of our economic problems: the monetary system itself, and more specifically - the unit of money of that system.

Our present day unit of money is the Federal Reserve Note or dollar bill. A dollar bill is not, however, the same as the dollar of the Constitution. The first is a piece of paper; the latter a weight of silver.

A system of paper fiat debt-money is diametrically opposed to the monetary system of gold and silver coin mandated by the Constitution. Paper money is unsound and unconstitutional.

Such a system allows excess credit and money creation to run amuck, resulting in huge sums of debt that can never be paid off. This reduces the purchasing power of the money-unit (dollar bill).

The more money that is created, the greater is the loss of purchasing power, and the poorer we all become. The solution to the debased condition our monetary system is in is to return to sound money of gold and silver coin. We should never have wandered off the path laid out in the Constitution.

It is too easy to point the finger and say: the system is broke; Wall St. is to blame; there was not enough oversight, etc. These are all valid concerns, but what good does it do to expose them, if a viable solution is not offered?

The following work offers a solution. It does not provide all the answers; it does, however, provide a starting point from which the healing process can begin. The information is from the 18th chapter of Honest Money.

I consider the explanation of our problems that Gnazzo offers here to fit in many ways hand and glove with the explanations of Damon Vrabel and Antal Fekete, both of whom have been discussed in other iTulip posts.

They all agree that our current debt-issued currency is unsound (that's easy to see.)

• Gnazzo seems (from my first glance) to be focused on the need for a sound basis of currency in precious metals.
• Fekete adds the refinement of real bills of trade, which provide self-extinguishing paper bills in proportion to short term commercial trade needs, in a quantity determined by the actual buyers and sellers of trade items, at the point of trade. This provides essential short term flexibility to the monetary worth of the total of trades in progress.
• Vrabel adds insight to the nature of the financial elite who control our current broken system for their benefit, and appreciates the requirement for individual and community growth to counter the oppression of these elite.

[gnk]

Re: James Grant NYT Op Ed on Gold Standard

I read most, not all of this thread, and it's an interesting debate. But all the economics debate on gold doesn't matter when push comes to shove and fiat collapses. I've said it before - gold by default, not by design.

And if need be, the US will take the custodial gold because that's what superpowers do. They act in their own self interest.

I wrote this on my blog:

Don't Discount the US or the Dollar Just Yet



In 2004, writing for the New York Times Magazine, Ron Suskind interviewed amongst others, an aide to then George Bush's administration. The article covered Bush's handling of world affairs, and the US's role in the world. There is an interesting quote in that article that conveys, to me, the reality of a superpower. And even though the early 2000s were emerging "war years" for the US in Iraq and Afghanistan, there is a quote in that article that also applies, in my view, to all US Presidential Administrations and their actions, which covers the economic sphere as well.

Ron Suskind was speaking to this aide about how solutions are promulgated - through the "judicious study of discernable reality." To which this Presidential aide elaborated:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

SOURCE

So why do I bring this up? I want to make a point clear. Although my blog is titled fiat collapse, and I write about the US Dollar paper standard's inevitable collapse, I am not discounting the US or the Dollar. Notice, I say "paper" dollar. That is, the debt based system that was begun under Nixon when the gold window of convertibility was shut. So yes, I believe that debt based fiat money is on its last legs, but that doesn't mean the US Dollar disappears. It can transform and so, my views are still open on the US's future role in the world. I will not underestimate the US - not yet. But I also believe that American banks have cost the US dearly, in both power and national security - but all is not lost - as I said, not yet. The US has something up its sleeve that can't be ignored. Gold.

Writing for the Gerson Lehrman Group, George Anastasiadis comments in his summary:

"The U.S. message at the G20 is the following: if we do not act together to rebalance the world economy, the US will act unilaterally to rescue its economy. This will entail a change in the rules of the global game as the U.S. will try to impose its will via the printing press by inflating the rest of the world or forcing their currencies to appreciate relative to the dollar."

SOURCE

I agree with the above comment on the US acting unilaterally, though I disagree with the success of quantitative easing ("QE"). I think the US's QE is plan "A," but there is also a plan "B," in my view.

So what is this plan "B"? Gold, in my opinion, is plan "B." The US has by far, the largest gold reserves of any other nation. And it doesn't just end there. The US, acting as custodian, also stores many other nations' gold. Under the Bretton Woods system, as many may already know, the US Dollar was converted to gold. But that didn't mean it also went across the Atlantic either. More often, all that transpired was a book entry. The gold went to another nation's balance sheet, while it sat in a vault in the US.

According to Jim Rickards, the US has over 6,000 tons of gold stored in custody for other nations. This makes the US the "Saudi Arabia" of gold. In a recent interview at King World News, Rickards has stated the following:

"In a way, the Fed can afford to trash the paper dollar, or at least experiment and risk trashing the paper dollar because if the dollar collapses we can go back to gold pretty quickly."

"We have the world over a barrel; the US wins either way... we have a plan 'B' and the rest of the world does not."

SOURCE

In 1933, then President Franklin Roosevelt signed executive order 6102, "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates." The US purchased gold, from its citizens, at $20.67 an ounce. It then proceeded to devlaue the dollar against gold. The US can do the same thing with its custodial gold. It can write a check to say, Germany, and then devalue the dollar against gold. I have speculated how the gold bubble would end in the past - and I covered this type of "sovereign revaluation of gold" scenario in my post: Gold Will Be A Bubble Until It Isn't.

I want to note that much of this custodial gold is Europe's. Thus, for those that follow FOFOA's blog, it makes me wonder if the Euro-Gold connection is really that solid? Isn't possession 9/10ths of the law? Overall, Rickards still believes that most US policymakers are not thinking about gold and so we'll stumble into it in a "chaotic way."

About a month after that Rickards interview Robert Zoellick, President of the World Bank, started a gold debate, which I covered in my post The Gold Standard Debate Unleashed. This article in the Financial Times sure enough created quite the buzz of academic thinking on the gold standard. Most main stream economists are trained in the Keynesian school and thus furiously disagree with gold. But what they miss, what they ignore, is the quote I posted above. Let's look at it again:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

To me, this quote hits the nail on the head. It not only describes journalists and analysts, but economists as well. It basically states: let the eggheads debate all they want, when push comes to shove, when national security is at stake, we act in our own interests, and everyone else reacts. Now that's Realpolitik. And for those that may have missed it, James Grant wrote an article on the gold standard in the NY Times yesterday. The article is titled: How to Make the Dollar Sound Again.

[Diarmuid]

Re: James Grant NYT Op Ed on Gold Standard

Excellent point, Master Shake. If senior managers decide to cheat at every point, no system will work.

The problem at the moment is the rationale to cheat is based on insolvency for many, if they do not, corruption is forced upon some, who might given a reasonable alternative, not. The whole system stinks and is rotting from the inside out because it is based on a lie and an immorality. Usury.

[oddlots]

Re: James Grant NYT Op Ed on Gold Standard

Errrr... Barry Ritholtz with a pretty devastating critique of who Jim Grant is keeping company with:

http://www.ritholtz.com/blog/2010/11...r-to-bernanke/

(I know it's a slightly different issue than Grant's piece in the NYT but it's still an interesting lens to zoom out on.)

I still think Grant is a hero of clarity and integrity - the perennial market values. Just food for thought.