Vox Populi, Vox Suckers

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Vox populi:
the voice of the people. The louder it gets, the faster you should
run . . . in the opposite direction.

Thirty-five
years ago today, Richard Nixon went before the TV cameras and announced
that he was unilaterally ending the convertibility of the U.S. dollar
into gold at the fixed price of $35/oz. That was a punch in the
solar plexus of central banks around the world, but it was a sucker
punch against the American public. Call it a two-fer.

That announcement
was the latest in a series of moves against the economic freedom
of Americans. The government’s war on the dollar then escalated
in earnest. Today, using official statistics provided by the U.S.
Bureau of Labor Statistics, the American price level is five times
higher than in 1971. (Use the inflation calculator here: www.bls.gov.)

The 1971 gold
price had prevailed ever since 1934, the year after Franklin Roosevelt
had unilaterally confiscated gold coins and gold bullion owned by
American citizens and U.S. residents, paying them $20 per ounce
(Executive Order 6102).

As soon as
the government had its hands on as much of the gold as it was likely
to get from compliant, law-abiding citizens, it hiked the price
to $35, immediately making the government’s stash worth 75% more.

The U.S. Supreme
Court upheld Roosevelt’s move by a 5 to 4 vote. It did so by ignoring
the history of Constitutional monetary law, a fact explained in
1,660 pages by Austrian economist and Harvard Law School graduate,
Edwin Viera, in Pieces
of Eight
— a book that ought to be put back in print
in digital format on a CD-ROM for (say) $29.95.

This official
price hike produced a windfall profit for three major groups: (1)
the thieving U.S. government; (2) investors in gold mining shares;
and (3) all those Americans who disobeyed the law and kept their
coins.

How many Americans
did not cooperate? We don’t know and obviously cannot know — an
era before coordinated paper trails and digital trails — but we
do know this: You can still buy a circulated U.S. $20 gold piece
(liberty head) today for a premium of about 10% over the spot gold
price, or a St. Gaudens for a 20% premium. This indicates that the
vast bulk of America’s coins were sent out of the country to Switzerland,
where coin dealers can still buy them.

Burt Blumert
of Camino Coin Company is the Grand Old Man of retail gold coin
dealers. He makes an interesting observation. Prohibition ended
in 1933. The criminal syndicates that had been violating the Constitution
had brought in the booze from Canada and sold it here. There is
little doubt that they were getting paid in gold coins for most
of the period, 1920—1933. They surely were not getting paid
by check! So, when Britain de-monetized the pound in 1931, refusing
to exchange gold for pounds sterling, any gangster who understood
politics — and to survive, the syndicates had to — could
have seen what was coming. The U.S. would de-monetize gold. The
wise ones among them figured out the second step: a hike in the
official price.

It was not
just the Mafia that did well. Joseph Kennedy had ships filled with
Canadian liquor anchored off the shores of America just before the
repeal of the 18th Amendment went into effect. He was not your average
Joe.

So, the fact
that you and I can buy American gold eagles from the pre-1934 era
is the Mafia’s gift to us. The syndicates cleaned up in 1934 at
the expense of the Average Joe, who obeyed the law and turned in
his coins at $20/oz. Such is the recurring history of democratic
civil government: Vox populi, vox suckers.

MONETARY
AMNESIA

Sometime around
1965, my father-in-law, R. J. Rushdoony, persuaded a group of his
followers to invite Blumert to San Marino, California, to sell some
pre-1933 gold coins. Blumert came with bags of coins, which were
legal as collector coins. This was the biggest sale of gold coins
in his career at that time. He had been in the coin business for
about six years.

It was not
just big for Blumert; it was big for the entire industry. In one
shot, Blumert became the biggest retail dealer in American gold
coins in the U.S. How could this be? Because nobody else in 1965
knew about these coins. The market for gold coins deemed numismatic
— pre-1934 — was either for rare coins in superb condition or
for people buying one coin to commemorate a birthday or a wedding
date.

The market
for post-1933 foreign gold coins was illegal until 1975. We forget
that E. C. Harwood, of the American Institute for Economic Research
in Great Barrington, Massachusetts was prosecuted by the SEC in
this period for daring to sell to Americans paper certificates for
gold bullion stored in Zurich.

San Marino
was where the wealthiest residents of the San Gabriel Valley lived.
Rushdoony had a few of the almost wealthy on his mailing list, who
attended his Sunday evening Bible studies. But, mostly, they were
middle-class people, though older folks — as I incorrectly
and navely thought at the time.

I was by then
part of Rushdoony’s group. So, I thought nothing of Blumert’s event.
It was not until yesterday, when I talked over the history of the
American gold coin market with Blumert, that he told me this story:
his overnight elevation to #1 in the gold coin retail market. There
was no other dealer in the U.S. who could sell this many coins in
one day.

He says that
there was universal amnesia in 1965 regarding gold coins as currency.
The era of gold coins in circulation was no longer understood: vox
populi, vox amnesiacs. There was also no perception that the coins
could be a source of profits to speculators if the price of gold
rose.

Over the next
few years, members of the John Birch Society in California also
began buying coins from Blumert. JBS headquarters in Southern California
were San Marino.

Two years
later, in November, 1967, the British government devalued the pound.
The Chancellor of the Exchequer had of course sworn that this was
not being contemplated.

A few weeks
before this event, I attended the first international gold conference
in history. It was sponsored by Harry Schultz, the hard-money newsletter
publisher. It was held in Los Angeles. Rushdoony paid my admission.
I wrote it up in a report dated November 17, 1967, “The Coming Credit
Crunch.”

Immediately
after the devaluation of the pound, gold began to rise. In 1968,
the U.S. and European central banks imposed a two-tier gold market.
Central banks could buy gold from the U.S. at $35, but agreed not
to sell gold to the public at this price. Gold’s free market price
began to move up by a few dollars above $35. Still, the outflow
of gold from the Treasury continued. So, on August 15, 1971, Nixon
“closed the gold window.”

The Secretary
of the Treasury, John Connally, had sworn to the media for weeks
that no such move was being contemplated. I shall never forget his
press conference on August 16. He admitted openly that he had lied.
“If I had told the truth, there would immediately have been a rush
by foreign central banks to buy our gold.” The press nodded dutifully,
and nobody in the mainstream media complained.

PRICE
CONTROLS

Nixon also
froze all domestic prices that day. No discussion, no democracy,
just one-man rule.

Within days,
the U.S. Chamber of Commerce backed this move against freedom. So
did the National Association of Manufacturers.

Normally,
a gallon of gasoline sold for over 35 cents in Southern California,
but there was a gasoline price war that week. You could buy gasoline
for about 22 cents — a loss-leader. Those stations got locked in.
A lot of them went bankrupt over the next two years. That was when
the shift to convenience store gas stations began: profits on the
sale of candy, packaged foods, and sodas. It marked the end of the
“service” station era.

I had predicted
this move in a 1970 article in the Whole Earth Catalog. I
had told readers to buy U.S. silver coins.

In 1970, I
bought British gold sovereigns for $10 each — $40 an ounce.

Nixon ran
back-to-back Federal deficits of $23 billion each, 1970 and 1971,
which were considered staggeringly high in that era. Ever since
the end of World War II, the largest one-year deficit had been $28
billion in 1968. In no other year did it reach double digits. The
deficits receded for two years after 1972, then jumped to $53 billion
in 1975 and $66 billion in 1976 under Ford. Then, under Reagan,
they jumped to the $200 billion range in 1983. In 1977, I had publicly
predicted a $200 billion deficit for 1984. It arrived a year early.

This was an
era of monetary inflation and price inflation. The Republicans got
most of the blame, and deserved most of it. The Federal Reserve
System under Arthur Burns and the forgettable G. William Miller
destroyed the foundation of monetary stability. Only under Paul
Volcker, beginning in late 1979, did the brakes get slammed on.
This led to the two worst recessions, 1981 and 1982, in postwar
America.

The dollar
has continued to slide. The rate of depreciation has slowed, but
it has not approached zero percent per annum. The Federal Reserve
always comes to the rescue in a recession, and in doing so, creates
the misallocation of capital that produces the next recession.

WHAT
LIES AHEAD

We are in
an economy comparable to the one facing Johnson and Nixon. We are
at war in two countries. The U.S. government is running huge deficits.
Unlike that era, Americans are corporately running balance of payments
deficits in the range of $750 billion a year.

The dollar
is not tied to gold, as it was for central bank dealings until 1971.
There is nothing except the fear of rising bond rates to put the
fear of free markets into the Administration.

Yet long rates
are dropping. Mortgage rates are dropping. Why? Because of a perception
of a looming economic slowdown. Investors are looking for ports
in the looming storm, and 30-year bonds and mortgages seem to provide
a safer haven than other markets.

The recession
of 1970 scared Nixon into running back-to-back deficits, after
a small surplus in 1969 — counting the debt-based Social Security
surplus as true revenue, which was Lyndon Johnson’s statistical
gift to the voters, which the Republicans in Congress accepted:
vox populi, vox suckers.

The next recession
will produce the same sort of response. But next time, there will
be no restraint provided by even the dim remnant of a gold standard,
as there was in 1968—71. Next time, there will be no trade
surplus, as there was in that era. Next time, there will be no semi-balanced
Federal budget to use as a launching pad for fiscal red ink, as
there was in 1970.

Next time,
there will be no mainstream media monolith to cover up the truth.
Next time, there will be a more shallow reservoir of trust to tap
into. Next time, a significant percentage of the populi is less
likely to be suckered. We are in a unique period. The deficit numbers
are shouting: “yellow alert!” Yet the markets have not blinked.
The Dow Jones Industrial Average stock market is still flirting
with 11,000. The S&P 500 is still playing peek-a-boo with 1,300.
But both averages are stuck.

Meanwhile,
the lake of aging post-Depression baby boomers is rising behind
the earthen dam of Medicare and Social Security. That pressure is
statistically inevitable and politically unstoppable. We can all
hear the creaking of that dam. But the vast majority of voters believe
that there is some painless solution that the government will figure
out, which as yet is not visible. Vox populi, vox suckers.

CONCLUSION

We have seen
the steady erosion of the dollar’s purchasing power since Lyndon
Johnson’s Great Society. It became visible in 1968, accelerated
in 1971, and went over the top in 1979—80. Since then, the
erosion has slowed, but only by comparison to what took place in
the aftermath of the two-tier gold market of 1968.

The history
of the demise of the dollar is the history of the replacement of
a gold coin standard with the Federal Reserve System. The decline
began in 1914. But it has come in waves of depreciation.

We
are on the cusp of the dollar’s next great decline.

Now, as always,
pay no attention to vox populi — except to run the other way.

August
15, 2006

Gary
North [send him mail] is the
author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 17-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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