A Red-Alert Threat to the Regime

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“Show me the money!” Cuba Gooding made this phrase famous in the 1996 movie, Jerry McGuire. The phrase soon got into the language.

“Follow the money!” That came from the movie, All the President’s Men. No one knows who said it. “Deep Throat” didn’t. The screenwriter says that he does not know where he got it. It has entered the language.

“Trust me.” That was Jimmy Carter’s phrase in 1976. It also got into the language. It has been used ever since as satire. It has been the mantra of every Chairman of the Federal Reserve System.

“Don’t ask. Don’t tell.” That was Bill Clinton’s phrase. I think he got it after watching Congress deal with Alan Greenspan.

“Never give a sucker an even break.” That was W. C. Fields’s famous line. This has been the FED’s operational policy since 1914.

AUDIT THE GOLD

In 2011, Congressman Ron Paul will introduce a bill in the House of Representatives calling for an audit of the gold held by the Federal Reserve System on behalf of the United States government. If he can successfully promote this bill by the phrase, “Show us the gold!” he will inflict enormous damage on the American Establishment. This damage could conceivably spread to the entire international Establishment, which rests on the sovereignty of the central banks over their domestic governments.

Most of those few Americans who have ever heard of the Federal Reserve System operate under the illusion that the government is sovereign over the FED. On paper, this is true. Operationally, it isn’t. We know this, because no government agency audits the FED.

You are surely not sovereign over the United States government. The United States government is sovereign over you. The supreme mark of this control is the fact that the Internal Revenue Service can tax you. It requires you to sign your tax forms, on penalty of perjury. You can be sent to jail if you lie about these forms. It can require you to provide evidence that you have filled out your income tax forms accurately. If you refuse to provide this evidence, the IRS will simply assess whatever it wants, and you will be required to prove that its assessment is inaccurate.

If you want to find out who is really in control in any situation, find out who has the legal right to audit the other one.

This is easy to understand with respect to individuals, corporations, and other organizations that are under the thumb of the tax man. This is understood by taxpayers all over the world. They fully understand who is in charge. In a modern society, the agency in charge is the agency that can and does compel other individuals and agencies to supply records relating to their income, capital, and bank accounts.

The Federal Reserve System has never been audited by an agency of the United States government. The FED hires private auditing firms, rotating them year by year, which undermines continuity, making it more difficult for them to follow the money. The FED limits those firms with respect to what they are allowed to audit. The FED then submits these internally audited facts to the United States Treasury.

Each year, the FED pays the Treasury any excess money beyond the FED’s operations expenses, if the money came from interest earned from its holdings of U.S. government debt. This has been the law since the early 1940s. In the good old days, the FED kept all of the money that it earned as interest payments from the Treasury. It paid nothing to the Treasury. That was a sweet deal.

When Congressman Paul persuaded the House of Representatives in 2009 to vote in favor of a general audit of the FED by the Federal government, the bill was blocked in committee. His original version of the audit bill never came to a final vote in the House as part of the banking reform legislation. The Senate never considered the amendment.

So, it is obvious who is in charge. Congress pretends that it is in charge, but in fact the Federal Reserve System is in charge. Congress accepts the word of the Federal Reserve System with respect to how much it cost the FED to keep its doors open, and it accepts whatever payment the FED makes to the Treasury.

It is obvious that if the Internal Revenue Service did not have the power to audit taxpayers, and if taxpayers have the authority to decide how much it cost them to “keep their doors open,” and pay the Treasury only that amount of money that is in excess of their costs of operation, the government would go bankrupt. It is equally obvious that the government does not intend to go bankrupt. The government does not intend to let individuals decide on their own authority how much to pay the government. This is because the government is in charge, and taxpayers are not in charge.

The Federal Reserve System is in charge of Congress; Congress is not in charge of the Federal Reserve. You can say that, on paper, the Congress is in charge. In response, I argue that this paper is rarely used, and with respect to an audit, it has never been used.

WHERE IS THE GOLD?

This leads us to what I think is the symbolic heart of the matter: the gold that the Federal Reserve purchased from the United States government in 1933 and 1934, when Roosevelt confiscated the citizens’ gold.

Officially, that gold belongs to the United States government. Unofficially, it does not. It no more belongs to United States government than Congress has authority over the Federal Reserve System. It doesn’t matter what is on paper. What matters is what Congress is willing to enforce.

There has been no audit of the gold held by the Federal Reserve since the mid-1950s. The government does not know how much gold is in Fort Knox. It does not know how much American gold there is in the vault of the Federal Reserve Bank of New York, located at 33 Liberty St., New York City.

The gold remains in the possession of the Federal Reserve System. Most of the governments around the world have agreed to keep their gold stored at 33 Liberty St. This enables the employees at 33 Liberty St. to move bars of gold from one government’s pile to another government’s pile. This also lets them keep the records. The trouble is, no government anywhere has the authority to audit the holdings of gold at 33 Liberty St. The governments simply take the word of the Federal Reserve Bank of New York that their gold is properly monitored and allocated in the New York FED’s vault.

It is quite possible that, beginning in 1968, the gold held in the vault at 33 Liberty St. was transferred to the London Gold Pool, a consortium of European central banks. From 1965 until the Pool collapsed in 1968, this gold was sold at $35 per ounce when the world market price began to climb above $35. You can read about this here.

Finally, in August of 1971, Richard Nixon unilaterally closed the American gold window. He refused to sell gold to other central banks at $35 an ounce, which the United States government had agreed to at the Bretton Woods meeting in 1944.

The government of the United States maintains the illusion that it owns all of the gold that is stored by the Federal Reserve System on its behalf. It also maintains the illusion that it is in control of the Federal Reserve System, merely because it is officially in charge of the Board of Governors of the Federal Reserve System. But the 12 regional banks of the Federal Reserve are not part of the government. You can prove this by going to any of the Federal Reserve bank websites. They end in .org. This includes the Federal Reserve Bank of New York. Only the website of the board of Governors of the Federal Reserve ends in .gov.

FAITHFULNESS OR BETRAYAL?

Ron Paul will wait until 2011 to introduce his gold audit bill. He seems to be assuming that Republicans will be in control of the House of Representatives in 2011. He also seems to be assuming that the House of Representatives will be more aggressive passing legislation that will embarrass the Obama administration, assuming that a House bill gets through the Senate.

Obama will veto any bills that he does not like, which will be a lot of them if Republicans control both branches of Congress. If Republicans do take control, and if they are successful in getting such legislation onto the desk of the President, this will undoubtedly embarrass the President. Short of that, bills from the House can embarrass Democrats in the Senate.

As part of positioning for the Presidential election of 2012, a bill to audit America’s gold could play havoc with the Federal Reserve. The bill will not be seen as an audit of the FED’s operations in general — only an audit of America’s gold, which has been justified by the FED in its supposed capacity as a trustee. It is the issue of the FED as trustee, not the FED as a lender, that will be the heart of the audit.

Will the House pass a bill to audit the gold that is supposedly held in Fort Knox and also in the vault of the Federal Reserve Bank of New York? Will Congressman Paul be able to gain support from the rest of the Republicans in Congress? If he can’t, then it will be clear who is really in charge. But if he is able to get the bill passed, and if it somehow gets through the Senate, then Obama will veto it. Whether that will be a big deal politically remains to be seen.

The problem that such a bill poses to the Federal Reserve is obvious. On paper, Congress has the right to audit the Federal Reserve. On paper, Congress also has the right to make certain that the gold reserves of the United States government are still available to be used by the United States government, should the United States government ever decide to do something with the gold.

Any attempt by the Federal Reserve to argue that it must not allow the United States Congress to see if there is really any gold in its vaults is going to be a very difficult public relations exercise.

It is one thing for the FED to say that a full audit will interfere with the privacy necessary for the conduct of central bank operations. Some voters might actually believe this. But it is something completely different to say that the Federal Reserve should not be required to prove that it still has possession over the gold that it purchased with the money created by the FED in 1933 and 1934. Its reports have always said that it does. If it doesn’t, then there will be a huge scandal. “Who got America’s gold?” That would force Congress to conduct a full-scale audit.

The public really does believe that the gold belongs to the government. Legally, the gold does not belong to the government. The Federal Reserve bought it fair and square back in 1933 and 1934 with newly created money. The gold is on the books of the Federal Reserve System. But the public, which is nave, has the illusion that the government did not turn over the gold to the bankers in exchange for bookkeeping entries created out of nothing by the Federal Reserve System. The public thinks that whatever is in the vault at Fort Knox is in the vault of the government entity. Voters do not know that deliverable gold — 99.9% pure — is stored in the vault of a private entity, the Federal Reserve Bank of New York. The gold in Fort Knox is probably coin melt: 90% pure.

So, the Federal Reserve is going to be facing a big problem in 2011. If the Democrats lose control of the House, and Dr. Paul introduces his legislation as announced, the FED will have to invent some kind of believable reason why the United States government does not have the right to find out if the gold that is supposedly owned by the United States government is really in the vaults of the Federal Reserve Bank of New York and the other vault in Fort Knox, Kentucky.

If it were to turn out most of the gold in Fort Knox and New York is not there, the price of gold will rise. The investing public will figure out that the price of gold has been kept low by means of secret government sales of their nations’ gold reserves — what Gordon Brown a decade ago did publicly with half of Britain’s gold. With a scandal brewing, there will be no more central bank “leasing” of gold. That will dry up the supply.

If it turns out that the gold in Fort Knox is melted coins, and not deliverable gold for international markets, international markets will respond accordingly. Gold will go up.

If the physical inventory indicates that much of the gold that is stored at 33 Liberty St. has in fact been transferred to other central banks, then there is no legal way for the United States government to audit the reserves of those other central banks. But the pile of American gold that is supposedly under the jurisdiction of the Federal Reserve Bank of New York would turn out to be much smaller than what has been reported.

Here is my tip for any future auditors. Get a definition of the phrase “deep storage gold.” Then find out where this gold is stored . . . if anywhere.

If all the gold is not there, there will be enormous pressure from voters on governments around the world to audit the gold reserves of their central banks. If the gold held in trust by the New York FED is not there, foreign voters will conclude that their governments’ gold may not be there, either. The reason is obvious: if a lot of American gold is missing from America’s pile of gold at the Federal Reserve Bank of New York, it is quite possible the gold is no longer inside that vault.

It will occur to Website editors that other central banks have leased their gold to bullion banks, which then sold the gold and invested the money in high-yield government bonds. This would mean that the supposed reserves of the world central banking system have been depleted. It would also mean that the bullion banks, which are privately owned, are in hock to the central banks, because they borrowed the gold from the central banks. Then they sold the gold. They cannot get the gold back to repay the loans, because the price of gold would skyrocket. So, the bullion banks could default, and the central banks could be left holding IOUs from bankrupt private institutions.

If this were to take place, the financial dominoes would begin to fall. There would be outrage around the world by voters, and politicians would hold central bankers accountable for having in fact sold the gold, and hidden the fact by calling the transaction a lease.

AN INTERNATIONAL SCANDAL

Politicians, of course, don’t care about any of this, at least not until voters begin to put pressure on them. But the scandal that would result from an audit of the Federal Reserve that revealed the gold is not all there would spread very rapidly around the world. This would be the biggest news on the Internet relating to money and banking that there could possibly be. The major news media, of course, would attempt to cover it up, but at some point the pressure of the leaks into the web would force them to cover the story.

Under these circumstances, Congress might reassert its legitimate authority over the Federal Reserve System. Under these circumstances, the entire monetary structure of the West would be called into question. It would mean the end of the rule of central banks.

That rule has been almost complete since the outbreak of World War I in 1914. When the governments allowed the private banks to default on their contracts to pay gold to the public on demand, which took place within weeks of the outbreak of the war, the governments of the world transferred both gold and sovereignty to the central bankers. An audit of the Federal Reserve system that would reveal the gold, or most of the gold, is not there would begin to reverse the sovereignty of central banking over international and domestic politics. The fallout from an audit that indicates the gold is not all there is the greatest threat to central banking that it has ever faced.

This is why Congressman Paul is the most dangerous politician to the Establishment that the Establishment has ever faced. He has targeted the soft underbelly of the entire system. The soft underbelly is public trust in the Federal Reserve System.

The public cannot grasp the sophisticated operations of central banking. Neither can Congress. But the public can grasp the idea that the government’s gold — gold held in trust by the Federal Reserve — is supposed to be in some vault. The American public believes that there is physical gold held somewhere on behalf of the United States government. If it turns out that a lot of the gold is gone, the public will understand this. The public will not be bamboozled into believing that the sale of the gold, quietly done under the secrecy provided by Congress to the Federal Reserve System, was necessary to maintain the prosperity of the United States.

CONCLUSION

Consider the dilemma that the President would face if Congressman Paul’s bill lands on his desk. Should he take the risk of signing the bill into law, and thereby take the risk that gold is missing? Or should he veto the bill, with some kind of lame explanation as to why he vetoed the bill? He will then face a public relations disaster. He will be seen as an agent of Ben Bernanke. Is this wise political positioning for 2012? I don’t think so.

I think the President will veto the bill. His advisers will tell him that this is necessary, even though it requires him to fall on his sword.

People don’t understand the Federal Reserve System, nor do they understand the need for an audit of that system. But they do understand that the gold that is supposedly in the vaults of the Federal Reserve belongs United States government. This concept is much easier to understand than any other aspect of central banking.

This is why a bill to audit the gold is the biggest threat the Federal Reserve’s secrecy and autonomy that has ever been posed to the FED . . . if any of the gold is missing.

It is no threat at all if it is all there. If it is all there, why would the FED resist?

And so, I close with this thought: “Show us the gold!”

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 20-volume series, An Economic Commentary on the Bible.

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