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.
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 naïvely 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.
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.
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
Copyright © 2006 LewRockwell.com