Streams

War and Gold

Thursday, May 29, 2014

Gold coins Gold coins (Copyright: LU YAO/Shutterstock)

The world has always been wild for gold. Gold became synonymous with financial dependability, and following the devastating chaos of World War I, the gold standard came to express the order of the free market system. Warfare in pursuit of wealth required borrowing, and when people lost confidence in the promissory notes and paper currencies issued during wartime, governments again turned to gold. In War and Gold: A Five-Hundred Year History of Empires, Adventures, and Debt, Kwasi Kwarteng exposes a pattern of war-waging and financial debt, from the French Revolution to the emergence of modern-day China.

Guests:

Kwasi Kwarteng

Comments [16]

Fred Philibert

Leonard,

Please read the book "The Creature from Jekyll Island". While the subject of the book is the creation of the Federal Reserve system, it also covers Gold and it's role in wars and explains where our money comes from.

Available for download at: https://archive.org/details/CreatureFromJekyllIslandByG.Edward-G.EdwardGriffin

May. 29 2014 11:09 PM
David

Silver money and inflation.

https://www.youtube.com/watch?v=18py2R71LI8

May. 29 2014 07:38 PM
David

You want a medium of exchange that it not that easily reproducible, e.g., gold. People erroneously believe that if we went back on a gold standard, there isn't enough gold to divide equally among everyone in the world. But that is NOT what a gold standard means. A return to a gold standard would mean that what ever money you currently have would now be backed by whatever the current price of gold is. A gold standard does NOT mean that if there were, hypothetically, 10 billion ounces of gold in the world that that amount was supposed to be divided equally among the 7 billion people on the planet.

Let's say you had a net worth of $6,000. If an ounce of gold was currently $1,200, it would mean you had a net worth of 5 ounces of gold.

I again suggest to all of you who think you understand what a gold standard is to read the book I posted above. Here is the link again.

What Has Government Done to Our Money?

http://mises.org/books/whathasgovernmentdone.pdf

May. 29 2014 04:26 PM
David

"The reality is that the production of gold and silver could not keep up with the productions of goods as the industrial revolution commenced and accelarated. The quantity of lucre simply could not keep up with the quantity of goods. So the use of IOUs or paper money was made inevitable by the industrial revolution.

The problem became the production of paper money and what it does to the economy."

You do not understand how a gold standard works. The more goods produced against the limited quantity of gold and silver in the economy, the more the gold and silver can buy, i.e, one's personal wealth goes up because the purchasing power of one's medium of exchange is increased. THAT is how the standard of living grows in a health economy.

May. 29 2014 04:19 PM
jgarbuz from Queens

To JF

Please go get a basic college education before you post. Please.

May. 29 2014 12:44 PM
jf

MONEY IS NOTHING BUT NUMBERS IN COMPUTERS. BANKS ARE ALLOWED TO COUNTERFEIT THIS MONEY. THE GOVERNMENT SHOULD JUST PRINT MONEY INSTEAD OF LOANING IT INTO EXISTENCE FROM A PRIVATE CORPORATION. MAKE INFLATION ILLEGAL.

May. 29 2014 12:39 PM
jgarbuz from Queens

In order for something to be accepted as "money" and willing to exchange something tangible in exchange for it, this "money" has to be able to hold a certain level of value for a reasonable period of time. Since governments have a tendency to print too much of it ("money supply") people try to get rid of paper money and "invest" or gamble it in something else they hope will go up in value, such as homes, businesses, rare paintings, equities or stock and bonds, and yes even in certain commodities like gold hoping it will hold its value or go up. If you track the value of gold vs the Dow Jones average over time it has been not all that different. But some individual stocks have rocketed, while companies have died and their stocks have become worthless. On average though, gold prices and the stock markets have had average returns about par over time.

May. 29 2014 12:38 PM
jgarbuz from Queens

In order for something to be accepted as "money" and willing to exchange something tangible in exchange for it, this "money" has to be able to hold a certain level of value for a reasonable period of time. Since governments have a tendency to print too much of it ("money supply") people try to get rid of paper money and "invest" or gamble it in something else they hope will go up in value, such as homes, businesses, rare paintings, equities or stock and bonds, and yes even in certain commodities like gold hoping it will hold its value or go up. If you track the value of gold vs the Dow Jones average over time it has been not all that different. But some individual stocks have rocketed, while companies have died and their stocks have become worthless. On average though, gold prices and the stock markets have had average returns about par over time.

May. 29 2014 12:38 PM
Amy from Manhattan

I was on a summer study program in Spain when Nixon resigned. Later that day I was in a store using my traveler's checks, & the owner charged me more on the assumption that the dollar's exchange rate would go down. When the new exchange rate was actually announced, it turned out the dollar went up! Tells you something.

May. 29 2014 12:38 PM
Joe Mirsky from Pompton Lakes NJ

New Gold Rush

59 bars Leaving Every Hour
New Gold Rush: Out of U.S.

That was the headline in a Life Magazine article December 12, 1960. Those 59 bars weighed 28 pounds each and were worth $823,000 ($6.5 million 2013 dollars.)

Although President Roosevelt took the U.S. off the gold standard in 1933, gold was still used for international settlements. The Bretton Woods Conference in 1944 set up fixed exchange rates to the dollar for other currencies and the dollar was pegged to gold at $35 an ounce. So if we imported more than we exported, gold went out as foreigners redeemed dollars for gold. (Actually, it was just moved from one vault to another in the basement of the New York Fed.

The U.S. bestrode the world as an economic colossus after World War II, with half the world’s gold reserves and the ruined countries of Europe clamoring for our cars, steel, and machines to rebuild.

The problem in 1960 wasn’t the trade deficit: we had a $5 billion surplus. It was that our troops stationed around the world, foreign aid, and private investment in overseas business resulted in a $3.2 billion balance of payments deficit ($25.3 billion in 2013 dollars).

Gold continued to flow out of the U.S. until by 1971 there was only half the gold there was in 1960 and foreign banks held a lot more dollars than we had gold. President Nixon on august 15, 1971 issued an executive order ending the convertibility of the dollar to gold, thus ending the Bretton Woods system and ushering the era of floating currencies. This is called the Nixon Shock.

Copyright © Joseph Mirsky 2014

May. 29 2014 12:35 PM
Joe Mirsky from Pompton Lakes, NJ

In Gold We Trust

Money backed by gold! Hard money! How macho! Without getting in the middle of all the crackpot discussions about gold and the gold standard (99% of the Googleverse is crackpot on this), I’ll give you two reasons why it would be a problem.

1. There ain’t enough of it. Let’s do the math. The money supply is $10.536 trillion according to the Fed in April, 2013 and 261,499,283.502 troy ounces of gold are stashed in the basement of the New York Fed, Fort Knox, West Point, and various mints. That works out to about $340 billion at $1300 gold, or about 3.2% of the money supply. Under the gold standard, 40% of the money supply had to backed by gold. All the gold ever mined would only add up to 7.62 trillion.

2. Where do you think money comes from? The Fed Fairy, right? Wrong! Banks create money. I’m sure you’re shocked!, shocked! to learn this. We have a fractional reserve banking system. Banks only have to keep 10% of deposits on hand and can loan out the rest. So if you deposit $100 in a bank, the bank only has to keep $10 and can loan out $90, which gets deposited in another bank and so on. The upshot is that your $100 deposit results in $900 in new money — out of thin air.

That’s how the economy grows. Money is created to loan to new business ventures. It works because not everyone wants to pull out his* money at the same time — a run on the bank — and because the FDIC insures bank deposits. It’s not new. It’s why banks run out of money in a run on the bank, even in ancient Rome. (Google the panic of 33 A.D.) Gold can’t grow to back up an expanding money supply and a gold standard is incompatible with how a modern economy works.

And the gold standard was an international system. You can’t set it up in just one country. If you did, all the gold would flow out to pay for imports as the dollars we used to pay for them were redeemed for gold, and none would come in as payment for exports. In fact, with our $540 billion trade deficit (2012), all our gold would be gone in less than a year.

To state the obvious, if the gold standard had worked, we would still be on it.

May. 29 2014 12:26 PM
Jessie Henshaw from Way Uptown

I don't know why all the historians I know, even economists (or maybe especially?) seem convinced that wealth is created by the discovery of money, not the discovery of how to use resources.

Leonard, I tend more to agree with you, that money is just a token to be exchanged for whatever the economy can give you in exchange.

Wealth is produced by organization, not my coins, is what I say.

May. 29 2014 12:26 PM
jgarbuz from Queens

In the final analysis, the value of a country's paper money is essentially based on the amount of tax revenues a country is capable of raising from its population. Today money is based on credit, which is based on the assessment of credit worthiness of the country. Obviously when the debt is very great, others will sell off that currency and its relative value declines. But if a country shows economic growth and in its ability to raise tax revenues, the value of its currency strengthens as more people are willing to accept it.

Gold is still an important commodity, and still accepted as money but barring total economic collapse of the world economy, it can only play a marginal role at most.

May. 29 2014 12:26 PM
jgarbuz from Queens

The reality is that the production of gold and silver could not keep up with the productions of goods as the industrial revolution commenced and accelarated. The quantity of lucre simply could not keep up with the quantity of goods. So the use of IOUs or paper money was made inevitable by the industrial revolution.
The problem became the production of paper money and what it does to the economy.

May. 29 2014 12:16 PM
Joe Mirsky from Pompton Lakes NJ

In the summer of 1914, on the cusp of World War I, British and French investors were selling American securities for dollars to be converted into gold. The dollar was depressed on the prospect of this outflow of gold and it would have caused a depression due to the contraction of the money supply and might have forced the U.S. off the gold standard. It might also have caused a run on banks caused by customers spooked by the shortage of money.

The Federal Reserve wasn’t up and running yet so, alone among nations, the U.S. had no central bank to counteract that. Treasury Secretary William McAdoo prevented the liquidation of $4 billion ($93 billion in 2013 dollars) in railroad stocks and bonds held by foreigners by closing the New York Stock Exchange for four months, from July 31 to December 12, a bold and unprecedented move.* He then allowed banks to issue emergency currency authorized after the Panic of 1907 and made a show of armored trucks bringing gold and emergency currency to the New York subtreasury building across from the Stock Exchange on Wall Street.

McAdoo then got Congress to create the Bureau of War Risk Insurance that provided government backed insurance for wartime shipments of U.S. agricultural products, cotton especially, that helped reverse the gold outflow. He also helped establish the U.S. Shipping Board. (In 1916 the U.S. Shipping Board was created to ensure there would be enough merchant shipping during World War I. In 1917, the Shipping Board set up the Emergency Fleet Corporation to build the ships for a merchant fleet, owned and operated by the U.S. Government. 2247 ships were built or commandeered by the EFC.)

He is credited with establishing New York as the world financial center at the expense of London. McAdoo was President Wilson’s son-in-law. He went on to become a Senator and died in 1941 at 77.

* Of course, the capitalist spirit could not be that easily repressed. An informal market sprang up on the curb on New Street behind the New York stock Exchange building.

Copyright © 2014 Joseph Mirsky

May. 29 2014 10:46 AM
David

What Has Government Done to Our Money?

http://mises.org/books/whathasgovernmentdone.pdf

May. 29 2014 06:09 AM

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