Gold Is a Political Metal

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When I imply
that there is a war against gold, gold bugs with silver hair nod
in agreement. When I say that the government is opposed to the
public’s using gold coins in exchange, gold bugs understand exactly.
They see that the war on gold is a war of government officials
against private owners of gold.

When I say
that gold is a political metal, I mean more than the obvious fact
that gold has political ramifications. I mean something more significant.
I mean that gold has always been intertwined with politics, that
gold, alone among metals until the success of the Manhattan Project
added uranium to the list, has been the uniquely political metal.

In some societies,
we can speak of "the silver wars." China used a silver
standard for generations. The same was true in the colonial United
States. "Pieces of eight" were Spanish silver coins
that served as America’s primary currency until the mid-nineteenth
century. (The most detailed and accurate Constitutional history
of American money is Pieces of Eight, by Edwin Viera. The
older, shorter edition is more suitable for normal people. The
two-volume edition is not aimed at normal people; it’s aimed at
legal historians.)

After the
end of the Napoleonic wars in 1815, Western European governments
moved to the gold standard for international commerce. This made
the gold standard the domestic monetary standard, too. But because
governments adopted fixed prices between gold and silver —
price controls — their laws would drive one or the other
metallic coinage out of circulation. The legally overvalued money
metal coins stayed in circulation. The legally undervalued money
metal coins went into hoards, the black market, or were exported.
This, of course, is the inevitable consequence of price controls:
shortages of the item whose legal price is below the market price.
Gresham’s law — bad money drives out good money — is
merely an application of the law of price controls.

WHY
POLITICAL?

Political
rulers throughout recorded history have asserted a monopoly over
money. They have argued that the State possesses legitimate authority
over the creation and distribution of money. Because gold and
silver have been widely used as money metals, the State has asserted
control over the monetary uses of these two metals.

This is the
origin of the war against gold. Gold is widely recognized and
desired as an investment. It is a highly marketable commodity.
This was far more true in 1913 than it is today. Prior to the
de-monetization of gold, which began in 1914, a person could take
a gold coin anywhere where international trade was common and
buy just about anything. It did not matter which ruler’s image
was on the coin. The coin was valuable because of its gold content.
The image may have helped to convey information about the coin
— so much gold of a certain fineness — but the face
on the coin had merely a brand-name recognition effect. The British
gold sovereign was so widely recognized that James Bond carried
sovereigns as late as the mid-1960′s. In "From
Russia With Love
," the coins were in the booby-trapped
briefcase. The ruler’s image verified the quantity of gold in
the coin. It did not add value except as a kind of Good Statekeeping
Seal of Approval.

Gold’s value
is not independent of governments. This is because governments
buy and sell gold. This activity affects its price. Gold’s value
is also affected by laws against the circulation of gold coins.
The Soviet Union had such laws. So did the United States, 1933—1974.
But gold’s value as a money metal can exist independently of a
government’s actions to subsidize or stigmatize gold’s use as
money. Gold circulates as money precisely because it has a value
independent of government policies. Or it did. It no longer does.
Gold has been de-monetized by governments and their acolytes,
the economists.

As with any
scarce resource, gold moves to those holders who bid highest.
The more widespread gold’s use as money becomes, the more likely
that trade will accompany gold. Gold reduces risk by reducing
the likelihood of default or fraud on the part of the State or
its licensed agents, fractional reserve banks. A government can
go bankrupt, but its gold coins will still circulate at gold’s
market value. The same is true of any coin-issuing agency. The
gold may be marginally more or less valuable in a particular form
because of the degree of recognition of the producer, but a government
that accurately certifies its gold coins will find that its coins
circulate at full value even if the government itself faces bankruptcy
or extinction.

Gold’s independence
from the fate of governments points to a political truth that
governments despise: governments are not the source of the value
of gold. To the extent that gold is money, gold testifies against
the sovereignty of the State in the realm of money. It testifies
to the sovereignty of consumers in a free market. The free market,
not the State, is the primary source of gold’s exchange value.

This means
that consumers can escape from the State’s anti-consumer policies.
They can buy gold. This provides them with international money,
black market money, and "hoard it and spend it later"
money. It provides one group of citizens with the personal escape
hatch from the effects of government power-seeking. Which group?
Political skeptics who do not trust the government’s money.

In olden
days, this escape hatch was an insult to a king, whose face was
on the coins that he was debasing by adding metal of lower value.
The king wanted to increase his spending, but there was tax resistance.
So, he would call in the old coins, melt them, add cheap metal,
and try to spend them into circulation at the old rate for coins
with higher gold content. The plan never worked. The new coins
would always fall in value.

This enraged
the government. It made theft through deception less effective.
The citizens who spotted the fraud early would buy gold by exchanging
the debased new coins for old gold coins, leaving the less perceptive,
more trusting citizens holding depreciated new coins. Private
citizens did what the king was trying to do, and this invasion
of the king’s asserted prerogative to steal enraged kings for
centuries.

Today, there
are no kings, other than "King" Farouk’s famous kings
of clubs, diamonds, hearts, and spades. But politicians still
play the old games, and play it much better. They want the monopoly
of theft that comes from passing the new, counterfeit money to
the suckers (citizens) at yesterday’s lower prices. So, when a
few of the recipients of the new, phony bills and credit money
start unloading them to buy gold, the politicians take action.
They do not want to share the benefits of being able to buy at
yesterday’s prices with today’s more plentiful money.

When gold’s
price rises steadily when there seems to be no war imminent or
other international disaster, people start looking for a reason.
The main reason is that the government is inflating. If gold’s
price is rising in one currency but not others, this is additional
evidence of policies of monetary inflation.

The government
wants people to believe in "something for nothing."
It wants people to believe that digital money creates wealth.
But if one group seeks to gain a disproportionate share of wealth
by exchanging fiat money for gold, only to see gold’s price rise,
the politicians try to stop this. They cry out against "speculators"
who are "acting against the public interest" by "profiting
at the expense of widows and orphans." This is a more acceptable
way of saying: "These private amateurs are invading our turf
in the ever-profitable business of looting widows and orphans."

A rising
price of gold is like a trip-wire alarm that announces: "The
politicians are at it again. Bolt down the furniture." It
is a signal, published in the newspapers, that there is something
untrustworthy about the central bank’s monetary policies. It alerts
entrepreneurs to start buying goods before prices rise further.
So, prices rise even faster. This makes it even more expensive
to buy votes with fiat money. The new money buys fewer of the
goodies that politicians hand out to buy votes.

The skeptics
who say "the government should never be trusted" get
rid of the new money and buy at yesterday’s prices. The trusting
souls who say, "The government is our friend" hang onto
the money, only to see it fall in value. The skeptics win; the
State-trusting citizens lose. This is an affront to the politicians.
It raises the cost of trust. Economic law then takes over: "At
a higher cost, less will be supplied." More citizens begin
to distrust the government.

The politicians
deeply resent this aspect of gold, for the same reason that a
burglar resents the widespread installation of burglar alarms.

THE
CAMPAIGN AGAINST GOLD

The State
has adopted several strategies in undermining the use of gold
as coinage. Here are a few of the more common strategies.

  1. Issue
    paper IOU’s for gold, called gold certificates.
  2. Issue
    more of these certificates than there is gold to redeem all
    of them on demand on the same day. "Suckers!"
  3. Allow
    commercial banks to do the same thing. "Suckers!"
  4. Create
    a central bank that stands ready to issue gold to bail out any
    bank that experiences a gold run.
  5. Allow
    commercial banks to suspend redemption of gold during a national
    emergency. "Suckers!"
  6. Allow
    the central bank to confiscate the gold of the now-protected
    commercial banks. "Suckers!"
  7. Make
    the ownership of gold illegal for citizens.
  8. Create
    a gold-exchange system internationally in which foreign central
    banks buy interest-bearing bonds from one or two countries that
    back their currencies in gold: IOU’s for central bankers.
  9. Create
    a central bank for central banks that will lend gold during
    a national bank run. Call it something other than a bank, such
    as the International Monetary Fund.
  10. Suspend
    gold payments to foreign central banks when too many of them
    catch on that there are more IOU’s out there than gold to redeem
    them. "Suckers!"
  11. Persuade
    all of the other central banks to store their gold in the senior
    branch of a central bank whose nation used to redeem gold on
    demand by foreign governments, but which defaulted decades ago.
    "Suckers!"
  12. If
    the price of gold rises, calling attention to the monetary fraud
    of legalized counterfeiting, sell some of this gold to the grandchildren
    of those trusting citizens from whom you stole the gold. But
    call the sales something else, such as gold leasing. Don’t reveal
    a reduction in the official reserves of gold.
  13. Allow
    central banks make a substitution:
    written promises to pay gold, issued by private organizations
    called bullion banks, instead of actual gold.
  14. Wait
    for the price of gold to rise, thereby bankrupting the bullion
    banks, which will not be able to repay. These are all corporations,
    and so enjoy limited liability benefits. No one goes to jail.

In this final
scenario, who wins? All those people who bought gold while the
gold-leasing operations lowered the market price of gold.

Today, the
central banks’ gold is steadily being repatriated to private owners.
The central banks are subsidizing the future net worth of gold
buyers.

When there
is finally no more gold to lease, or when central bankers at long
last figure out that IOU’s issued by recently bankrupted gold
bullion banks are not really what central bankers need to establish
public confidence in their forecasting abilities, the price of
gold will skyrocket. At that point, the public will decide it’s
time to buy — at high and rising prices.

Those who
have already bought will then look at the rest of the population,
which failed to buy while the buying was good, and very quietly,
in private circles, issue their unofficial assessment: "Suckers!"

THE
SHORT RUN

Politicians
are guided by the short run. Central bankers take a longer view
than politicians, but ultimately, they are the handmaidens —
if that’s the correct metaphor — of the politicians. They
do what they are told during a political crisis.

Politicians
care nothing about gold today. This is something new. This was
not true in 1971 or 1931. The economists care just as little.
What gets politicians’ attention is the interest rate. The same
is true of investors. So, the central bankers can play games with
gold, lending it at 0.3% per year, as if this were a wise move.
Of course, this arrangement is a whale of a deal for bullion banks,
which borrow low, sell the gold, and lend high.

But what
about the day of reckoning? What about when gold starts up, and
bullion banks cannot afford to buy it back and pay off the central
banks in the commodity borrowed? Central bankers don’t care. They
think that gold will never again be a factor in the monetary affairs
of mankind. When they think "never," they mean in their
lifetimes.

They may
be right. But the lifetime of one generation is short compared
to the affairs of mankind.

Events will
speed up and opinions will change fast when the public at last
figures out that they have once again been the victims of the
government’s experts. They will see the price of gold rise. They
will once again pay attention to the price of gold. This will
focus attention on monetary policies. This will put central bankers
in the place they hate to be: the spotlight.

But, in the
meantime, central bankers can create short-term losses for the
long-term winners. They can sell (lease) more gold and turn gold
price increases into spikes. They can scare off most gold investors
for a long time: skeptics who don’t have deep pockets. They can
restrict the speculative gains and increase the set-backs by dumping
gold.

They will
do this. Count on it. Central bankers do not want to let the public
know that "the public’s gold" (ha, ha) is gone, that
it has been sold to jewelry wearers and industrial manufacturers.
The game must go on, but a rising price of gold reveals the corruption
and deception of the players who make the rules.

What is happening,
unseen, is that what was the public’s gold in 1913 is being sold
back to them. The whole idea of "the public’s gold"
was a sham from day one, a way to get the suckers to turn over
their gold for IOU’s issued by commercial banks or governments.
Deposit by deposit, the public’s gold was turned over to professional
liars and counterfeiters: fractional reserve bankers and politicians.
When the gold was confiscated by central bankers in 1914 and 1933,
in the name of "the public good," the public ceased
to own any gold. The entire notion of "the public’s gold"
that is held in trust by the government and the central bank is
the very reverse of the actual situation. The public’s gold ceased
to be the public’s gold when it became "the public’s gold."

CONCLUSION

The common
man will lose. He always loses when fraud is legalized by the
government. The common man wins only when markets are free, contracts
are enforced, and fraud is prosecuted. None of this applies to
the gold market because the State asserts a higher law than the
law of contracts: the law of State sovereignty over money.

What, then,
of the not-so-common man? If he distrusts the promises of the
politicians, then he will take advantage of the fraud of gold
leasing. He will buy the leased gold, which becomes his, leaving
the bullion bankers to worry about repayment.

In the era
of the international gold standard, the public trustingly handed
over their gold coins to scam artists in three-piece suits who
issued IOU’s and then defaulted on the contracts, with the government’s
approval. Today, the spiritual heirs of the scam artists are selling
back the confiscated gold to the biological heirs of those long-dead
trusting souls. You and I can buy gold today at lease-subsidized
prices in exchange for fiat money. I say, "This is an opportunity
not to be missed."

October
27, 2003

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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