The Gold-Plated Sting

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Any American
over age 50 probably remembers The
, the 1973 movie starring Paul Newman and Robert Redford.
Their characters were a pair of penny-ante crooks who got even with
a murderous criminal by setting him up for a scam. Like most scams,
it appealed to greed. They persuaded him that he could get something
for nothing. Then they stripped him of his money.

It was a great
movie. All you had to do was ignore the ending, which violated an
incontrovertible truth that had been revealed in a less well-known
The Gang That Couldn’t Shoot Straight
(1971). That truth
was announced by Big Momma, the Italian mother of an incompetent
gang: "If it ain’t in the Daily News, there ain’t-a
no murder."

Compared to
what central bankers have done to the general public, The Sting
was a con job run by amateurs.

So successful
has their sting been that it has taken in 98% of the gold bugs.


I am a gold
bug. In early 2001, there were hardly any of us remaining.

What is a gold
bug? It is a person who believes the following:

  1. The gold
    standard was good for world trade, 1815 to 1914.

  2. The gold
    standard was good for individual liberty.

  3. A gold
    standard reduces the likelihood of monetary inflation.

  4. Gold was
    a good investment, 1976—1979.

  5. Gold is
    still a good investment, despite 1980—2001, when it fell 70%
    while consumer prices doubled.

The problem
has always been this: there is almost no agreement among gold bugs
as to what features a gold standard should always have. Should a
gold standard be

  1. Guaranteed
    by law?

  2. Whose

  3. Enforced
    by which government agency?

  4. With the
    gold in which form?

  5. Stored

  6. At whose

  7. With what
    restrictions on entry?

  8. With what
    competition from government-issued money?

  9. With what
    competition from central bank-issued money?

  10. At what

Then there
is the question of silver. Gold bugs are usually also silver bugs.
So, all of the above questions apply to silver.

There were
gold coins in circulation in my parents’ youth. There were silver
coins circulating in my youth. These coins used to be money, all
over the industrial West. No longer. What happened?

The sting happened.

In June, 1914,
you could have walked into a bank anywhere in the West and handed
over the national paper money in exchange for either gold coins
or silver coins. You could have purchased these coins at a fixed
price: a specific quantity of paper money per coin. You would have
paid nothing for the transaction, other than standing in line.

The gold standard
was therefore a free lunch. So was the silver standard.

Problem: "There
ain’t no such thing as a free lunch."

So, there was
something rotten in Denmark — also in England, France, the United
States, and every other gold standard country. There was at least
one fundamental flaw in the international gold standard, which was
also a series of national gold standards. All of them rested on
a lie: "something for nothing."

Whenever you
are offered something for nothing, keep your hand upon your wallet
and your back against the wall.


The gold standard
as it actually operated, 1815—1914, was a gigantic fraud. That fraud
was revealed every time there was a major war. Commercial banks
suspended gold redemption on demand, and governments always legalized
this violation of contract.

The gold standard
in wartime wasn’t worth the paper it was written on.

In late 1914,
Europe’s banks suspended payment when World War I broke out. But
this time the central banks in each country confiscated the gold
that the commercial banks had just confiscated from their depositors.

After World
War I was over, in 1925, Great Britain re-established gold coin
redemption on demand, but at the pre-war, pre-wartime inflation
price. This meant that gold withdrawals would strip the Bank of
England of its gold unless it shrank the currency supply, which
it feared to do. In 1931, gold withdrawals threatened the Bank of
England’s gold horde. The Bank, with the government’s approval,
suspended payment. It has never been re-established.

In 1933, Franklin
Roosevelt imitated the Brits. He went even further. He made it illegal
for American citizens to own gold bullion or gold bullion coins.

Central banks
could redeem gold for dollars at the U.S. Treasury after 1934 at
$35/oz — not the previous $20. That policy ended on August 15, 1971,
when Nixon unilaterally broke the government’s contract with foreign
central banks.

So. . . .

The gold standard
was a restraint on governments . . . until the governments grew
tired of the restraint.

The gold standard
was a restraint on privately owned central banks after governments
turned their nations’ gold over to the central banks . . . until
the central bankers grew tired of the restraint.

The modern
gold standard was therefore from day one a gigantic con job. Governments
and later national central banks made this offer to the public:

your gold coins to your local commercial bank. Your bank will
give you paper money in exchange. Paper money is light. It’s easy
to carry. Any time you want gold coins rather than paper money,
just bring in paper money, and your friendly banker will give
you government-guaranteed gold coins at a fixed, government-guaranteed
price. This way, you can store your gold free of charge. Think
of the convenience. It’s a no-risk deal. Trust us."

Something for
nothing! The public bought it. In every nation, the public bought
it. In every gold standard nation, the governments allowed the central
banks to confiscate the public’s gold and never return it.

Silver, too.


The mark of
a successful sting operation is that the victim never knows that
he has been stung.

I know of no
more successful sting operation than the bait-and-switch scam known
as the gold standard.

Not only did
the general public in every nation shrug its collective shoulders
when the governments confiscated their gold "in the name of
the people," the voters re-elected the politicians who turned
over the government’s gold to the privately owned, barely regulated
central banks.

The public
still had one possible recourse: to go to the local bank and demand
paper money. That act is deflationary. Every dollar withdrawn in
the form of paper currency and not redeposited in another bank shrinks
the money supply by nine to one. Paper currency is not fractionally
reserved. Deposits are. Paper money is the bottom of the inverted
pyramid of money.

That threat
no longer exists. The February 17th issue of The Economist
ran a cover story: "The End of Cash." The cover featured
a picture of dinosaurs.

Today, the
only institutional restraining factor to protect the public from
mass inflation is the bond market. If long-term rates climb in response
to price inflation, bonds’ prices fall. That threatens institutional

The sting has
removed the ability of the public, person by person, to penalize
the commercial banks by withdrawing money and not re-depositing

The public
is unaware of any of this.

The politicians
are unaware of any of this.

The media
are unaware of any of this.

Academic economists
are vaguely aware of some of this, but they don’t really care. They
do not mention any of this in class or in their textbooks. They
approve of central banks’ efficiency. Those few who do voice objections
do not receive tenure, and surely not in any of the high-prestige

Most amazing
of all, the vast majority of gold bugs are unaware of any of this.
Authors still write their unread book-long defenses of the gold
standard, 1815—1914, as if the system had not been designed and
implemented by the Bank of England to further the British Empire’s
commercial interests and the interests of the commercial banks that
served commerce.

And the beat
goes on. And the beat goes on.


In theory,
there are two possible solutions, neither of which has any possibility
of being implemented in my lifetime or yours.

One solution
is free banking. This was Ludwig von Mises’ suggestion. There would
be no bank regulation, no central bank monopolies, no bank licensing,
and no legal barriers to entry. Let the most efficient banks win!
In other words, the solution is a free market in money.

Another solution
is 100% reserve banking. Banks would not be allowed to issue more
receipts for gold or silver than they have on deposit. Anything
else is fraud. There would be regulation and supervision to make
sure deposits matched loans. This was Murray Rothbard’s solution.
The question is: Regulation by whom? With what authority?

There would
be no government-issued money. There would be no government mint.
There would be no legal tender laws. There would be no barriers
to entry into coin production.

There would
also be no free services. There is no such thing as a free lunch.

Anything other
than free banking or 100% reserve banking is a pseudo-gold standard
or silver standard. It is just one more invitation to confiscation.

There is no
organized movement today to establish either free banking or 100%
reserve banking. There has never been a movement to impose 100%
reserve banking. It has been well over a century since a handful
of economists and pamphlet writers recommended free banking.

Anyone who
tells you that it would be easy to switch over to a gold standard
has either no understanding of the politics of money and banking
or else has been smoking some funny-smelling leaves.

To switch by
official decree to a non-governmental banking system would require
the wholehearted co-operation of central bankers, commercial bankers,
politicians, academic economists, and political parties, all of
which have a vested interest in controlling the money supply at
the expense of the public. They fear above all the depositors’ ability
to bring down the entire international cartel through bank runs.

These bank
runs would create massive deflation, international depression, and
the collapse of the division of labor.


If a free market
gold standard ever arrives, it will be the result of an unplanned
response by men and women to a disaster created by the existing
central bank cartel. This would require that the switch be preceded
by massive inflation, followed by deflation, producing the bankruptcy
of the existing banks and brokerage houses.

Problem: Where
will we buy our gold coins? With what?

In the summer
of 1963, I began buying silver coins at face value at a local bank.
By 1964, there were no more silver coins to buy at banks. The run
on silver coins had begun. Only in tiny coin stores could you buy
silver coins at a premium over face value.

Where could
you buy numismatic U.S. gold coins in 1963? At those same little
coin shops.

For example,
you could buy gold coins from Camino
Coin Company
in Burlingame, California. Today, over four decades
later, you can still buy coins there. It is still tiny. The same
guy owns it and runs it. I was 21 back then. I am 65 today.

The more things
don’t change, the more they stay the same.

An international
gold standard requires widespread access to gold coins or digital
warehouse receipts to gold coins. There is no network of easily
accessible local dealers. Banks do not buy and sell them. More important,
it requires widespread awareness of the government-restraining aspect
of gold coins.

Problem: the
sting was completely successful. Almost no one today understands
the power of gold coins and silver coins in relation to the rival
power of governments to buy votes. Among those who think they understand
— the gold bugs — almost none of them really do understand. They
are advocates of stage one of the sting operation, as if time could
run back. They want a return to the good old days, when governments
issued honest money and central bankers were public-spirited seekers
of legitimate profits.

That’ll be
the day.


Gold coins
once provided a degree of personal liberty because governments were
forced by public opinion regarding the money supply to maintain
convertibility of paper money into gold coins. But war by war, central
bank by central bank, economic emergency by economic emergency,
textbook by textbook, central bank insiders have persuaded politicians
to authorize the removal of gold from the public’s bank accounts.
They have also persuaded academic economists and the media to re-shape
the public’s opinion regarding gold:

"A barbarous

all goes back to the original lie: something for nothing. It also
goes back to the lie’s corollary: guaranteed by law. Those two lies
made possible the creation of a government-guaranteed gold-plated
gold standard. They were part of the sting.

3, 2007

North [send him mail] is the
author of Mises
on Money
. Visit
He is also the author of a free 19-volume series, An
Economic Commentary on the Bible

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