Gold Standards: True and False | Joseph T. Salerno

okay welcome to the lecture this this morning on a gold standards true-and-false usually since world war ii and especially since the 1970s every time we had a crisis of some sort of monetary crisis there have gone up from various people calls for return to the gold standard especially since the collapse of the Bretton Woods standard which was falsely believed to have been a gold standard and lately there are a number of what I would call neo supply siders people who thought that the Reagan era was great in terms of economic performance so these people have gotten behind a bill that has been introduced at the House of Representatives it was introduced last year and we'll talk a little bit about it but it's a bill purportedly to reestablish the gold standard but what I want to show you today is that there are gold standards and there are gold standards okay some gold standards are false gold standards others are genuine and so what I want to do is to give you an idea of how to distinguish between different kinds of gold standards we'll go through a true gold standard in history and then an historical gold standard that was a false gold standard and then talk a little bit more about this bill which was introduced by representative ted poe a republican so if you've studied international economics you've been told that a gold standard is a fixed exchange rate standard and that in distinction to that you have other types of flexible exchange rate standards so the defining characteristic of a gold standard is supposed to be the fact that it's fixed exchange rates that is that all the currencies on the gold standard are fixed their exchange rates are fixed in terms of them of the other foreign currencies and of gold but i want to show you that it's really an incorrect approach to looking at the international monetary system and the different types of monetary arrangements you could have under that system okay so this is more of an Austrian oriented approach to analyzing international monetary systems so all the way on the left as you can see there we have the market supply commodity money okay that is the distinguishing characteristic of the gold standard it's supplied by the market the supply of gold in circulation or the supply money in circulation the money supply is determined ultimately by the production of gold in the economy and the and the amount of gold that exists at any moment so we have the original money that arose on the market was always a commodity standard we've had a hundred percent gold standard for centuries okay gold silver going back even further copper brass leather in Roman times in electron money you should have been acquainted with these different types of commodity standards but eventually silver and gold arose as the best-qualified metals or items to to serve as money okay then we got a gold standard in which a government interfered to a greater or lesser extent but it was still a genuine gold standard that's the gold dinner I will talk about today it's a genuine gold standard okay that's the classical gold standard so as you go from left to right you go from the best systems to the worst systems okay what I'm gonna do is to talk about one of these bad systems false gold standard one of which is the Bretton Woods system which actually was formulated in 1944 though was put into operation in 1946 so we're celebrating the or not celebrating but we're marking the hundredth anniversary of the Bretton Woods system so I'll say some words about that that's the false system okay but the key here is that all the systems to the right our government monopolized fiat money they're based on government monopolized fiat money there's even the the Keynesian ideal which is Fiat reserves created by a world central bank okay that's what the Keynes himself would have liked to have seen okay and Keynesian every once in a while come back with this idea okay so what's interesting is in the neoclassical treatment of different kinds of monetary systems they this is a fixed exchange rate system all the currencies are based on one world fiat currency and this is a so-called fixed exchange rate system since everyone all countries use gold you have the best and the worst combined or put together under one category in the standard treatment where as you can see they're polar opposites according to Austrians okay because here the production of money is completely controlled by market forces here it's completely controlled by a unified political body okay so let's talk about the classical gold standard which I said had some government interference according to the classical gold standard or under the glass classical golf standard monetary unit is defined as a weight of gold okay gold and nothing else serves as money bank notes and deposits to the extent that they exist and they can certainly exist under a 100 percent gold standard or even under a under classical gold standard especially their instantaneously redeemable or redeemable on demand for gold or silver so when I say gold I mean gold or silver or any other type of commodity that the market has chosen his money okay and so we'll talk about this in a moment but in addition to those banknotes and deposits on the genuine gold standards gold coin is actually in circulation as it was during the 19th century the period of classical gold standard the the deposits and banknotes because under the classical gold standard individual banks private banks could issue not only their own checking deposits but also their own bank notes and we'll see that examples of that in a moment okay and also a central bank may or may not exist it did not exist in the u.s. a central bank under the classical gold standard until 1914 which was the beginning of the end for it but it did exist in Great Bridge and France Great Britain since 1916 92 was it was it was when the Bank of England came into existence as a quasi central bank so um it may or may not exist but it doesn't interfere with the the markets supplying goal there's the ultimate money okay so what is the monetary unit under the gold standard okay so let's take both the US and Great Britain in the u.s. you had from 1834 to 1933 about a hundred years you had the legal or the dollar legally defined as one twentieth of an ounce of gold more precisely as twenty 3.22 grains of gold the British Pound from time when they went back on to the gold standard after the Napoleonic Wars in 1821 until 1931 was legally defined as one quarter of an ounce of gold approximately okay or 113 grains of gold okay the French franc was defined as one hundredth of an ounce of gold and so on okay so there weren't three distinct monies in the u.s. France and Great Britain during that time there's only one money it was gold okay dollars pounds francs were just names for different weights of gold just like nickels quarters dimes are names for different fractions of a dollar okay so gold is not a fixed exchange rate system okay biggest look it's simply a law of arithmetic if the dollar a pound exchange rate for 100 years was four dollars 86 cents plus or minus one percent and the reason why was because 113 grains of gold which was the definition of the pound contained five times the amount of gold approximately as as the dollar did which was defined as twenty three point twenty two ounces so you had to give five dollars for one pound precisely because that those quantities represented the same amount of gold in the same way we don't say this fixed exchange rates between nickels and quarters in the u.s. monetary system today a Nicholas defines the 20th of a dollar a quarters defined as one a dollar there for five nickels exchange they don't exchange their equal to a quarter okay that's an Arif medical equality it's not a fixed exchange rate so bottom line is that there weren't different quantities of goal are there weren't different currencies under the gold standard they were all the same currency that is gold so here are twenty dollar pieces and five dollar pieces from 1921 1906 respectively okay and here's a British sovereigns okay so it didn't matter but whether you actually had dollars in Great Britain or you carried sovereigns into the United States as long as these the seller who's accepting your gold was convinced it was confident that it wasn't counterfeit it would be they would be accepted okay you'd have to change money to go from one country to the next you could just carry gold but it was important to the seller was what the weight of gold that he or she was receiving in exchange for the goods that they sold you so a bank Nelson governor issued notes did exist as I said on the gold standard but they were not money proper they were substitutes for money they substituted in exchange for money that was held in the bank vaults or in the government Treasury okay they're a part of the money supply but only because they represented a certain quantity of gold and in fact you can see that on these notes which were a privately issued notes in 1903 this is a claim for $20 notice what it says here it's from a private bank the farmers and merchants National Bank of Los Angeles it says we'll pay to the bearer on demand $20 does it say that that's $20 that's not $20 that's a claim the $20 $20 is one ounce of gold okay so it's a claim for money it isn't money per se and just the same thing here the First National Bank of Fort Myers in Florida will pay to the bearer on demand $5 doesn't say this is $5 simply claim okay just like the claim to your laundry or the claim to a suit that dropped off to be dry-cleaned is not the suit itself okay it has the exact same value as the suit you can sell it to someone else who has already seen your suit maybe want some and allow him to pick it up if you could sign it over to him alright it's simply the claim now the value of that note was precisely five dollars to the extent that people had confident confidence that it was an immediately redeemable claim to gold okay once they lost confidence the value of that note would either go to zero if the bank collapsed or it would go to a discount if there was a probability that the bank wouldn't pay off we would only circulate three dollars or 450 okay so here are some of the principles of operation okay so as I pointed out no fixed exchange rate just one money under the gold standard okay which is supposedly the Keynesian dream well it's right it was right in front of them or right behind them okay that's what we had in 19th century we had one world money though in the far east they use they use silver more than gold so in redeeming $20 for one ounce of gold the central bank or the government is not selling gold for dollars because the monetarist economists led by Milton Friedman always claim that the gold standard is a price-fixing scheme that the government sells sells dollars for gold at a fixed price or sells gold for dollars at a fixed price to fix the price at $20 per ounce that's not the case they're simply fulfilling their contract they've received some of your property the bank and in exchange you receive a claim that to that which they are contractually obligated to honor as soon as you appear okay you're the bearer of that claim and then they'll give you the gold so that's not a price-fixing scheme it's absurd to call at that okay you're not fixing the price of gold in the long run the money supply is strictly limited by gold mining even on the classical gold standard okay it was the old days was called golden handcuffs if the government had his hands in handcuffs in a sense that they couldn't expand the money supply beyond the of gold that was flowing into the country because if they did sell would cause inflation and it would cause a loss of gold reserves and a loss of confidence as these gold reserves Florida of the country in the banks and and in the government Treasury okay and finally prices tended to fall over time under the gold standard because the production of the per the annual or per annum production of gold was very small compared to the amount of gold in existence and compared to the rate of growth in a vibrant capless economy of the amount of goods and services in the economy so the amount of goods and services increased yearly at a more rapid rate than the amount of money in the economy which meant that you had a fall in prices the supposedly fear feed greatly feared and dreaded deflation okay but deflation was the natural outcome of a gold standard operating in a capitalist economy okay so he had more more saving and investment which went into producing more and better capital goods as you had better technology improvements in technology that were incorporating to these capital goods you had greater and greater rates of growth of goods okay so notice that there was a there was a gentle price deflation throughout the 19th century and especially from 1880 after the u.s. went back on the gold standard after the Civil War until 1896 when new processes for extracting gold from low low-grade ore came into being there was a increase in the amount of gold produced from 1896 to 1914 but prior to that we had inflation of 30% during those six to sixteen years okay prices fell by 30% that meant that without doing anything without getting a raise you gain 30% in income okay and the value of your dollar was 30% greater but at the same time that deflation that didn't cause a depression it didn't cause people to be thrown out of work didn't cause an increase in unemployment because known as real GDP went up by 85% or 5% per year okay why because this is when the u.s. was rapidly transforming itself into a major industrial economy so with the improvement in technology with the tremendous increase in saving and investment after World War two I have - after the Civil War excuse me we had a tremendous growth in the amount of goods and services produced that outstripped the growth in the money supply during that period and so and so so costs fell the cost of different things fell and it didn't cause these industries to go out of business just as for example in 1980 you know a computer a person who pyramid have cost $20,000 prices have fallen by 35 percent per year between 1980 and 2000 and while in 1980 there were half a million personal computer shipped there were 11 million units in - in 2000 shipped so as prices fell and costs fell the industry didn't have a lot because of deflation okay what happened was that it flourished because of the the innovations and and the fall in the course of production here's the price level from 1800 to 1900 so notice in 1800 it's right here 150 by 1900 it's fallen 50 percent so there was a downward trend in prices now notice the increases when you think those happened well that that increase in the price index occurred during the era of the first bank of the United States the first quasi central bank that we had which for it to paper money like crazy the second increase occurred during the Civil War when we had gone off the gold standard okay and then after we turned the Gulf's dinner we began to get the again the decline in prices okay now prices rose a little bit from 1902 to 1914 and people actually called it an inflation but it was less than one percent per year that prices rose and that was as I said because it became more technologically logically feasible to extract gold from very low-grade ore that used to just thrown away when was taken out of the mine okay okay one of the key aspects of the gold standard is something called the price specie flow mechanism specie simply refers to the special metals gold and silver other precious metals excuse me gold and silver professor her burner if you were in his free trade and it's enemy's lecture talked about the price specie flow mechanism but I'll explain it and it's what kept inflation in check under the gold standard it was very effective was actually first discovered by an 18th century philosopher economist which I think I mentioned my first lecture his name was David Hume and that was Hume discovered it but then it was it was refined and elaborated and probably the best statement of it was given in 1937 in a book by FA Hayek an Austrian but in any case what did it do well maintained equilibrium Bo p o e stands for balance of payments in the balance of payments it made sure that there weren't huge surpluses or huge deficits that went on for years and years okay it distributed gold throughout the gold standard area according to the relative demands for money the US was a bigger economy for example then let's say France or Italy well then the US would get more of the gold in the world because it had more goods that had to be bought and sold it also operates into regionally between states in the US for example we know that the Rust Belt parts of the Midwest have have shrunk tremendously take Detroit it's lost tremendous industry jobs and so on it doesn't need as much money to transact its business so without any fanfare the amount of dollars circulating in the Detroit area has shrunk and some of these dollars have gone to an area where there's a greater demand for money let's say the Silicon Valley okay does anyone know what the balance of payments of Detroit is or was no because fortunately the the government we shouldn't care first of all bounce of payments don't matter the government doesn't collect statistics on interstate trade trade between the states okay and within the country so we're fortunate but but but states always have surpluses and deficits and a balance of payments all the time no one knows what they are no one cares it doesn't matter the market in that area in the dollar area keeps the balance between the various states as they grow or decline whereas some states grow more than others money will be shifted to those states that have an increase in the demand for money okay and that's the way the gold standard operated on an international level okay no one was really worried about the balance of payments you never it was never became a problem until governments began interfering after World War one after 1914 okay so it limited the increase of the money supply and inflation that is the price pc4 mechanism okay by the central bank and the banking system so let's look at what it is let's say the US banks increase the money supply okay and what what happens well notice it causes the the sideways arrow indicates a cause polarization causes prices P sub us to go up in the US above or more then prices in the world so now suddenly prices are higher in the u.s. than they are in the rest of the world what's the natural effect of that well X for exports US exports going to become more expensive and they're going to fall and on the other hand US citizens are going to buy fewer domestic products and buy more foreign products so imports are going to go up we're suddenly going to have the dreaded balance of payments okay so the balance of payments is now going to be negative it's going to be less than zero meaning more money is spent abroad that is being spent on our products so the next step is that you'll get a deficit okay which is another way of saying that the balance of payments is negative and once that happens Gold will begin to flow out of the country because foreigners who have these excess dollars they don't use dollars in their economy okay under the gold standard they want gold so when those dollars get turned in to their their banks their we're gonna demand gold from the US what's going to happen gold is gonna begin to flow out of the US as gold flows out of the US the banks are going to have to reduce the money supply or stop increasing it okay as they do that as the US money supply Falls then you're gonna get us prices again falling okay and they're gonna go back they're gonna go back below world prices or at least the rate at which they're rising and eventually they'll be equal to world prices in which case you're going to get US exports picking up again imports going down because now it is cheaper to buy in your country many goods and then you'll get a balance of payment surplus and the goal will flow back in that was what I Matic you'd have to worry about that happening okay the only problem was if the banks continued to increase the US money supply it would continue to cause prices in the u.s. to rise more more rapidly and it would cause goal to flow out okay so that's the amount of the price specie flow mechanism so it is true on to the classical gold standard because we didn't have 100 percent gold backing of the money substitutes of the notes and deposits the banks could temporarily increase the money supply and that would cause temporary inflationary boom deficits and eventually when the banks were forced by the outflow of gold or or in Britain's case the the central bank of the Bank of England was forced by the outflow of gold to stop increasing the money supply or continue to lose gold at that point then the there would be a recession okay but these booms and busts were very minor compared to what occurred after 1914 after we left the gold standard okay okay so here's the the money pyramid on the classical gold standard note that let's say the country has two billion dollars in gold let's say the central bank is two billion dollars in gold and the central bank decides to keep a reserve ratio forty percent they're only gonna back up their notes by 540 percent okay so for every let's say dollar of gold there's going to be two and a half dollars of notes okay so that means if they have two billion in gold that's gonna allow them to issue five billion dollars in in in their notes now the commercial banks they use the central bank notes under the classical gold standard to back up their commercial bank notes and deposits so if they keep 20 percent reserves that means if there's five billion dollars in central bank notes in their vaults well then they can issue twenty five billion dollars in checking account money and and and in their own private notes so you had this pyramid and it can become dangerous right because if everyone who had that twenty five billion or who was holding that twenty five billion came to demand their their money back what would happen the banks would have to then go to the central bank with their their their reserve with their own central bank notes and demand goal but there's only two billion ultimately backing up twenty five billion so that was a problem with the classical gold standard and that's why the the central bank and the private banks are very very careful about increasing the money supply okay because once they began to lose gold to foreign countries then American citizens became nervous and they would begin to go to their banks and pull gold out that's called an internal drain okay the external drain is a balance of payments deficit and at that point other people become nervous because they would see more gold leaving the vault and you could be a bank run and there was a car under the gold standard but it was a good thing because it taught them a lesson and caused them to be more prudent and responsible okay now let's see what what if they increase you can see here if they lower the reserve ratio the central bank and issue another one they don't have any more goal but they issue another 1 billion dollars of notes well then that will get into the the system here that extra billion the banks can it can now issue five billion dollars more that increases the money supply in the US okay and let's say we have the Fed at this point that increases the my supply in the u.s. to thirty billion and what does that do prices go up we have the whole price specie flow mechanism we begin to our prices look higher than or are higher than the world prices and we begin to lose gold to the rest of the world because of a balance of payments deficit so you get an expansion an unhealthy expansion of this pyramid of money and it could tip over okay if it gets too big at top at the top because people begin to worry so let's say you have a 1 billion dollar deficit well one central bank loses 1 billion dollars of gold and they begin to worry and people begin to worry and that's when they stop increasing the money supply or they actually begin to deflate the money supply ok so even though the classical gold system standard was not a perfect monetary system it had mechanisms that restrained inflation by the central banks or by the banking system itself so the end came in began in 1914 it ended by 1933 in the United States and what's interesting you know is some people say the classical gold standard was unstable and collapsed in the 1930s know what didn't collapse it was it was as Mises pointed out it was destroyed by deliberate government policies in which they tried to loosen these golden handcuffs and and so they could inflate the pay for wars or to pay to get us out of depressions and so on so during World War 1 gold reserves so there was a first step was taken they were centralizing the Fed the banks were no longer permitted to hold their own reserves they would have to instead of the reserves they would hold the Federal Reserve notes as backup ok though people demanded gold they would then turn those reserves in to the central bank to the Fed and get the gold a heavy tax was placed on the private issue of banknotes 10% so that only a few banks would issue notes so there wasn't much much competition in private issue of notes by the mid 1920s the private issue of banknotes was eliminated it's declared illegal ok and in 1917 we prohibited the export of gold which is a way of interfering with the price specie flow mechanism but only occurred for about one year during World War one and then also to pay for World War one the Fed cut reserve requirements in half so before banks had a hold about 20% of their notes and checking deposits in the form of gold it was it was cut to about 10% what happened the money supply double between 1913 1919 we had a huge inflation post-war inflation and then we had a crash it was a very deep crash but it didn't last long because the government didn't interfere what was called at the time the depression of nineteen twenty twenty-one okay but at least the government did not attempt to cure the depression okay so the cure is like trying to cure a heroin addict let's say by giving him more heroin okay because as he starts to because what recession is is going cold turkey okay inflation is like a drug that you become addicted to in order to stop you know what to be health you have to stop it you have to stop it immediately but if you stop it immediately you get signs of a recession okay or a depression like in 2021 and there's a lot of pain but if you try to stop the paint by giving the guy more heroin it just postpones the pain it doesn't cure the victim okay so there are other things that led to the destruction of the classical gold standard the bank expen expanded reserves during 1920s it wanted to help Britain which would very high price level after World War one want to help Britain to return to the gold standard so remember if Britain's prices which were ten percent higher than the rest of the world which has very high prices it can't tell its goal its can't sell its coal and other products it's the price specie flow mechanism so Britain is losing gold to the United States and elsewhere how do you prevent Britain from losing gold you inflate yourself so you push your prices up as high as Britain's prices so that they get a balance of payments of that that is balanced okay so we were trying to help Britain and in doing that we set off inflationary booms in our stock market in real estate markets which ultimately led to the Great Depression okay we wound up with a gray crash and then the great depression set in and by 1933 had so many banks failing between 1931 and 1933 and by on May 1st 1933 FDR issued an executive order wasn't even an act of Congress that ended the gold standard okay you were also prohibited from owning gold American citizens could no longer own gold and gold was devalued that means a dollar was now I'm sorry the dollar was devalued which means that a dollar was no longer defined as one twentieth of an ounce of gold it was now shrunk to 135th of an ounce of gold okay so here's the order and it says honor before May 1st 1933 all gold coin gold built bullion bars and gold certificates now owned by them now owned by them to a Federal Reserve Bank's a branch or agency or to any member bank of the Federal Reserve System and at the bottom says criminal criminal penalties for violation of executive order $10,000 fine or 10 years imprisonment or both and provided section 9 of this ridiculous monstrous despotic order okay so they so that's how the goldstein was destroyed by raw government power okay so the 1930s was a period of monetary chaos all countries had their own fiat currencies at this point it all got on the go off the gold standard Britain went off at 31 us 33 the Latin Union which was France Switzerland a number of other countries went off in 30 they tried to hold out heroically but they went off in 1936 so what happened was there was when it was clear that the Allies were going to win the war there began to be planning for a new world monetary system because of all these currency wars during the 1930s between different countries each country had tried to devalue their their money more to make their goods cheaper but of course then other countries wouldn't wouldn't sit still they would print their money like crazy to make its value go down to make their goods cheaper okay on foreign markets so the Bretton Woods system what was what came out of these deliberations which began in 1943 okay and that was put together in 1944 as a plan the main architects were the US and British governments and there was a lot of tension between the two but the American government came out victorious the US government wanted the dollar to be the dominant currency in the post-war world okay so when we go back Harry Dexter white was the US financial expert that represented the US government at Bretton Woods and John Maynard Keynes father of macroeconomics and of of modern depressions and financial crises was the British representative that's Bretton Woods okay they didn't just go to a regular little convention center I mean these guys you know they all were living it up in this posh setting in the White Mountains of New Hampshire it's still standing I visited last last year it still operates it's beautiful hotel there's a monster Keynes and there is the communist Harry Dexter white which will see that he was it turns out the Soviets fly after the Venona files were released by the Soviet government in 1980s it turned out that in fact he was suspected to be a Soviet spy an attorney he was so he testified defendants record to the house on American Activities Committee but historians now agree that he passed secret information in the Soviet Union during World War two he died three or six days after after his testimony I'll refrain from saying something I'm charitable about that Ben Stiles written a good book on this came out in 2013 or 2012 says that white acted out of idealism not as a member of the Communist Party now he never did join the American Communist Party not simply because he believed that the Soviet Union was a vital US ally but because he also believed passionately in the success of the bold experiment with socialism so whenever you have a lot of murder and bloodshed and killing by government squats a bold experiment right they never say it's good or successful it's bold they took a bold step okay so I wouldn't put it that way if I were Styles but as he points out white was not a communist party member because he would not take orders from Moscow he take their money for the secret for the secrets he sold but he wouldn't take orders okay he worked on his own terms okay and everyone said he wasn't really a bright guy but he was a hard worker and he sort of knew the nuts and bolts of the monetary system you have to him that credit so what how did this system operate it what was it here were the key characteristics the US dollar was was denominated or was was given the role of a key current of the key currency okay it was the only currency under Bretton Woods system that was directly convertible into gold at the devalued rate of $35 per ounce okay but you or an i or or our parents and grandparents and great-grandparents couldn't get gold for their dollars they couldn't convert their dollars into gold okay the only people that could convert our agencies that could could convert dollars into gold were foreign official institutions central banks and governments okay US citizens could not convert my their dolls into gold and still were not even permitted to own gold under penalty of law US citizens were not permitted to own gold until 1976 okay if you were a licensed jeweler or licensed dentist you could get you get gold only for those purposes of that you that you know related to your work okay if you have found taking the gold selling to someone else then you would be prosecuted you couldn't even I found out you couldn't even own gold in Canada in other words you couldn't hold own and hold gold outside the US okay now what about the other currencies like the pounds and the German mark and so on okay they were not the key currencies and they were backed by dollars so they held dollars instead of gold okay their currencies now that is a very pernicious system as we'll say okay the system that self-contradictory and that will lead to its own collapse if the dollar is treated as good as gold then people if the US government has deficits foreign countries will never send the dollars back for gold if they believe that that the dollars as good as gold and they did for a while but after a while they lost confidence fortunately so under the principles of operation were as follows foreign currencies works were expanded and permitted on top of dollars and ultimately the u.s. gold stock so in other words if the US had balance of payments deficits people the exporters in foreign countries who sold us stuff took these dollars they didn't want the dollars they went to their central bank and they demanded their own currencies so let's say you were a French exporter you earn dollars you went to the central bank you turned in the dollars where did the central bank get the francs to pay you created it out of thin air so US inflation was exported to foreign countries they gave us real goods we gave them paper dollars okay and I'll show you this a little bit more detail so the balance of payments mechanism didn't work under the Bretton Woods system and that was the key here if the US now increased the money supply the u.s. price would go up above worl prices our exports we go down we get a lot of imports from foreign countries we'd ever balance of payments deficit but guess what here's the key Gold would fly out of the country dollars would and when these dollars flows to other countries their central bank's bought them and they bought the by printing their own money so we caused world inflation this system caused world inflation and the US had strong reasons to be inflationary okay but by the way here's a pyramid now you have gold in the fat the Fed the Fed notes and deposits bank deposit banks deposit their reserves at the Fed and the Fed issued notes which we all carry in our wallets those backed up the commercial bank deposits but now what was backing foreign currencies his backup foreign currencies were bank deposits and US banks okay which that when they got they usually sold for US government securities so now you had a huge and very unstable pyramid that was all based on the u.s. gold stock so one French economist pointed out that the US could run deficits without tears that is without any concept any bad consequences so we ran from 1958 onward reran continual balance of payments deficits because we were just giving them our paper we're printing our paper giving them our paper and they were giving us real goods and services we were we were we were getting cheap foreign imports as long as the foreign governments and central banks were willing to accept and hold our dollars we never worried about deficits and Jacques Rueff was the French economist who used that term and he was also an adviser to the President of France Charl degaulle who did not like the fact that the US dollar was dominant and that the US dominated the Western world so-called so what happened the u.s. prices continued to go up so that one gold ounce could buy foreign currencies that purchased more Goods than the $35 did which what you could get for the dollar so what happened is people began to sell gold now Europeans were allowed to own gold there be I'm sorry they begin to sell their dollars so they would sell their dollars for golf or gold in in London and Zurich and that would push the price of gold up to 38 to 40 dollars but the US had to keep the price of gold to $35 so it would have to send gold out of the country to foreign governments that would then sell gold in these markets to push to keep the price of $35 so we began to hemorrhage gold okay so it paid to buy foreign currencies and use them to buy gold let me explain why something called arbitrage if you had $35 you would go to these foreign free gold markets buy an ounce of gold you get let's say 70 German marks because the exchange rate was 2 marks to $1 but since there was no inflation in Germany you could buy more goods in Germany with 70 dirt marks than you could buy in the US with $35 so guess what you would take the 70 German marks you'd buy all these goods in Germany you'd export them to the US we could get $40 for them so you turn 35 dollars into $40 okay because he was prices were higher all right so the US had to continually sell gold because everyone was trying to get it was selling dollars to get gold these free markets eventually we had we had the Vietnam War beginning we were President Johnson promised that we would have guns and butter that even though we had to pay all this money for Fort Ord defense defense for fighting in Vietnam we would not be taxed they would not raise taxes to pay for the war okay so we would have butter to guns and butter was was the motto of the Johnson administration so what happened we forced in a way the dominance of the dollar caused Europeans to pay for our war us living standards didn't go down during the war which I usually do during Wars why because we were just paying dollars that were going out through a balance of payments we were buying more imports than we were selling to them so we get real goods and services consumer prices wouldn't rise as much and they would get dollars that were decreasing in value okay eventually they got fed up okay especially France and Germany Germany was still a key is that it was an occupied country to steal US troops so Germany couldn't do too much about it but they wanted to now turn their dollars back in they wanted goal themselves France pulled out of NATO because the u.s. blackmailed France in Germany and said you know okay we'll give you your goal back for your dollars but the problem is of course then we won't be able to afford to keep our nuclear defense against the Russians so we blackmailed and so France thumb their noses at us they dropped out of NATO they built up their own nuclear defense force and they demanded gold and the u.s. gave them gave him the gold and the French didn't just send like free to get their goal they sent a warship they didn't trust that there wouldn't be some sort of an accident on the way back with that goal and so they got they got the gold out and that was Jacques Rueff was a friend of Mises advising shard the goal the president who was behind all of that which was it was a great thing to embarrass the US like that yeah so for the that period when French was out of NATO it was because the US had blackmailed him basically okay and here's what happened the gold stock we had more than half the gold in the world this is at $35 per ounce okay there was 25 billion dollars in the u.s. gold stock the rest of the world had dollar liabilities of only 12 billion so at that point foreigners were convinced that look there's more than enough gold to pay off all dollars that we're holding so the dollars as good as gold okay and and since US citizens couldn't demand gold well then all that gold was more than enough to cover the foreign liabilities and then because of what what I explained to you we began to get a fall on the gold stock okay by 1967 there was 12 billion dollars in our gold stock and 50 billion dollars of foreign liabilities that's when they started getting very nervous and demanding their gold back in 68 we were down to 10 and by 71 there were 9 billion dollars the gold stock there was a run on the dollar okay the foreign garments were demanding gold so that they could keep the price of gold down and it was said that there was we had about two weeks left of gold it would have all run out and there was 80 billion dollars of foreign liabilities by 1968 they stopped worrying about what was happening in the free gold markets they allow the price to go up the u.s. demanded that only central banks buy and sell gold to one another at the fake price of $35 even though in the free gold markets that was selling for 38 or sometimes we go up to 40 and finally Richard Milhous Nixon you got to know something wrong with the guy with Milne a McNeill house closed the gold window okay so he said I have directed secretary you got to find this video on lines on lines look he looks ridiculous I've directed secretary Connally to suspend temporarily yeah that means forever the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of the monetary stability in the best interest of the United States well that's of course what he was saying so the u.s. reneged on a solemn pledge that it made in 1944 when it formulated this book Bretton Woods system so negs on its own system okay we then went back to a system for about thirteen months I was called a Smithsonian system it was a monetary system where there was no gold involved but there was still fixed exchange rates Nixon called it the greatest monetary agreement in world history it collapsed 13 months later okay all right so now here we are today we've had the financial crisis the Great Recession we've had a very slow recovery and people are starting to look around for alternative monetary arrangements quantitative easing forward guidance of interest rates all this nonsense that the Fed has been spouting for since 2008 none of this stuff has worked so understandably there are some people that want the return restoration of a gold standard so there's a recent proposal that wants the Fed to target the price of gold okay and it's the basis of this bill the dollar bill Act of 2013 introduced by representative ted Poe of Texas okay it's a totally phony gold standard as I'll show you worse than Bretton Woods okay so the Fed would fix the price of gold within a narrow band within plus or minus 2% of the target price how would you get the target price well you have the Board of Governors designated some target week 90 days from between 90 days 120 days from now and of course this is conceived in secrecy so he does is a problem here using a random process some computer random process on a computer the board would designate a special week and a target moment and they wouldn't publicly disclose it at that moment what they would do was they would find what the price of gold is on the commodities exchange standard the commodities exchange market and at that moment it would fix the price of gold that would be the price of gold in terms of dollars Fed would have to maintain that price okay plus or minus two percent they would do it by open market operations buying and selling government bonds okay and it would be barred they would not be allowed to use indirect methods they couldn't target the Fed Funds rate like they do now well I mean so what I mean they're still using able to use open market operations gold would play no role really in all of this okay the dollar would still be a pure fiat money controlled by the Fed the monetary base would still be can be what it is today meaning the monetary base is what the Fed directly controls it would be the amount of Fed notes held by the public that you and I have in our wallets and purses the amount of reserves that banks have in their banks and a tiara in their vaults and ATM machines plus the reserves held by the banks on deposit at the Fed that's exactly what the monetary base is today so it doesn't change it doesn't make all the ultimate money it's still these fake reserves or reserves that could be printed out of thin air okay just with one one stroke one keystroke okay and that existed in cyberspace the Fed would still control the monetary base okay so suppose it was established at $1300 per ounce the Fed would be legally compelled to conduct open market sales okay when the monitor when the price of gold rose above two percent over 1300 that's thirteen hundred and twenty six dollars so in other words if the price of gold went to that limit the Fed would then have to sell bonds and reduce the amount of money in the economy okay to keep it in that limit on the other hand if it went below twelve hundred and seventy four dollars means they to avoid deflation they would have to then buy bonds and print new money okay okay where is gold in all this okay it's just this price of gold that they fixed okay so the main problem is it's it's a gold standard in name only in fact the supporters call it the gold with gold standard I think it's a great thing there will be no gold dollar coins gold dollars coined or in circulation okay the Fed would not be required to maintain convertibility between dollars and gold or to hold any gold reserves at all at least under Bretton Woods they were forced to hold gold reserves and they had to convert them at least for foreign governments that would be gone now so this pose pose act would leave the Fiat dollar fully intact and the supply of dollar would dollars would still be subject to the Fed okay and of course if you went into a recession or if you had an emergency in the Middle East and you had to intervene what would they do they would suspend that I mean you know it's just a matter of saying well now the price of gold can go to 1400 so we can flake more okay they wouldn't say that but they they would change the price of gold it's you know simple stroke of the pen it's the same old fed monopoly okay what I want to get to and before I end it is the supporters the supporters are you know very famous supply siders steve forbes has written up a book that's just come out on this type of gold standard there's an economic journalist named louis wood hill and then Nathan Lewis has written two books on the gold standard I think he calls it gold the monetary Polaris this one one book that's very interesting and shows what they really want they all of them recognize that fiat currency would be the thought would be a fiat currency and it will be controlled by the Fed okay but here's some of the interesting things they say they still believe that the gold standard even in history was an invention of government that it didn't come or uh that it didn't arise or evolve on the market okay so Forbes himself says well there's countless varieties of gold standard's yes Steve but there's only one real gold standard and he says the common characteristic is the following and listen he says theoretically you don't need an ounce of yellow metal to operate a gold standard so you can have you don't need any gold to operate a gold standard all you need is to refer to the price in the open market okay so who ever heard of such a thing why would I call goal stated then okay Nathan Lewis who wrote to is written two books on this he says that all these systems even 100% Goldstein it was an invention of government that's just bad history okay it's not true he calls it the no gold gold standard that's his favorite term in which the money manager does not buy or sell gold but instead targets the gold price by buying or selling bonds and he even says they could even buy fine art it what doesn't matter what they buy ourselves well they're producing dollars when when when when the the the price of gold is falling and a big thing is they say well gold is a completely fixed in value it has an intrinsically fixed value what does that even mean okay so lewis says gold standards could be used as a measuring rod to keep the value of money stable and he says it keeps its intrinsic value better than anything on the planet well we know as Austrians all value subjective the reason why people value gold is for using it directly or because it provides them with a good money okay there's no entry don't good has an intrinsic value and they don't define it Woodall says Woodhill says something like the same the most fundamental thing about a unit of measurement is that it be constant Gold is not money and it should not be money however we can should use gold to define the value of the dollar so what he's saying is that gold isn't money it's some kind of a measuring rod and you'll see something weird here when Forbes says he compares gold to a foot the value bill to a foot that has 12 inches that doesn't change or a pound that has 16 ounces it doesn't restrict your weight so those things are completely fixed and he's claiming the value of gold is saying is the same that's that's totally ridiculous okay gold goes up and down in value and it seems the key is they want the room to have inflation so he says the virtue of a properly constructed gold standard is that it's both stable and flexible its stable in value and flexible in meaning the market places natural need from money so he's worried if economy is growing rapidly as it did under the gold standard he doesn't want prices to fall he's afraid it's gonna lead to a depression so he says such a gold based system would allow for rapid expansion of the money supply rapid expansion of the money supply so their motto is we want sound money and plenty of it okay this is totally you know self-contradiction and then louis takes it to its logical and ridiculous conclusion he says you know if gold is intrinsically constant in value then we can find out what's happening to people's real incomes by stadia in terms of gold and so what he does is this he starts in 1955 goes to 2010 knows what he does he does this is the median male full-time income in gold ounces so he's telling us that people were richer in nineteen sixty-five or so than they are in 2010 and even at fifty-five they're richer they weren't 2010 okay because because their income can buy more gold ounces did you ever think of the fact that gold was worth the price goes thirty-five dollars here and it's you know got up to well you know eighteen hundred dollars and now is it thirteen hundred or so okay so the value of gold is changing and so he uses it to make the following claim so here's the real income and gold ounces it went from 125 ounces per year to 250 in 1970 so people getting richer and getting their income was going up and suddenly collapsed that's when gold prices went up the first time into 25 ounces went up 250 and then when the gold price rose it collapsed again so according to a little it's real income in 2010 was only 14% of what it was in 1970 and 28 percent of what it wasn't in 2001 so he's telling us that we're maybe only one one-fifth as riches or less than one-fifth as rich as we as we were our incomes or economies one-fifth the size of because the gold prices have changed okay so that's just nutty that's not the way to defend gold standard okay so summing up it's not a gold standard doesn't restrain the Fed from increasing the money supply in fact it gives it a window to increase the money supply okay when the gold price raw what a goal price falls okay imagine when the goal price is going from 1800 to 1300 as it did he would have tremendous increases the money supply to push it back up to what it was a few years ago 1800 dollars and it would collapse even more quickly than the Bretton Woods system collapsed okay and thank you for your attention

Channel: misesmedia

Views: 20,795

Rating: 4.9223299 out of 5

Keywords: Mises Institute, Speech, Joseph Salerno (Person), Gold Standard, Austrian School, Mises, University, Economy, Money, Inflation, Prices

Id: CscG1x6-QUk

Length: 58min 43sec (3523 seconds)

Published: Tue Jul 29 2014