We’ve been looking into One Nation Under Gold (2017), by James Ledbetter.
Now, we will follow Ledbetter’s account of the end of Bretton Woods in 1971, up to the present.
The account of the 1971 devaluation was, following the pattern of this book, long on details but short on insight. It seemed to people at the time that they “had no choice,” that the system they inherited was breaking apart at the seams. We know today that this simply reflected the ignorance of that time — that it is actually quite easy to maintain a fixed-value currency system, such as the $35/oz. gold link, if you know how. It’s not just me: this is expressed in the “currency trilemma” that is well-known among academic economists today, and which I talked about in Gold: the Final Standard and Gold: the Monetary Polaris. Alas, we have here an account that is more-or-less from the perspective of those at the time, without this later insight. The conclusion is that the fallacious “Triffin Dilemmas” and so forth that people talked about at the time were real things, rather than made-up nonsense to try to explain something they didn’t understand.
We get the usual bashing of everything gold and silver-related, such as coin dealer scams. Ledbetter identifies one by the Pacific Coast Coin Exchange (run by the enterprising Louis Cabrini, who turned up earlier), which apparently amounted to a “paper silver” scam. Unfortunately, there is a lot of truth in all this: my general principle regarding actually purchasing gold or silver bullion is that “everyone is a crook.” It’s safest to take physical delivery, without delay. The main difference today is that these small-time scams have gone big time, via the London Bullion Market Association and the Comex, and most megabanks in the U.S. and Europe that offer to sell and warehouse nonexistent “bullion” for their wealthy private banking clients. Even the Federal Reserve is apparently in on it, as evidenced by the several central banks that asked for the Federal Reserve to deliver the gold bullion supposedly secure in the Fed’s vaults. These governments and central banks have been blocked from receiving their bullion by endless delays, which make no sense if the bullion is actually sitting in the vault as promised. When the government of Germany — not exactly a small-time customer — asks for its gold back, why delay?
Ledbetter then had a nice description of the process by which owning gold was legalized in the 1970s, after being made illegal in 1933. It’s not so important in the larger picture, but fills in a nice bit of history regarding these affairs. Another, related step was the process of legalizing contracts requiring payment in gold, which had been made illegal in the Supreme Court cases regarding pre-existing “gold clauses.”
Ledbetter then had a good description of the Gold Standard Commission of 1981. He emphasized especially the lack of consensus among gold standard advocates, with proposals all over the map including gold-coin fundamentalists following Constitutional dictum that only gold and silver coin be legal tender in payment, to technocratic solutions with no gold convertibility at all. Ledbetter described:
The Commission failed even to produce a parade of expert witnesses who genuinely advocated a full return to a gold standard. In the two hearings devoted to the role of gold in domestic and international monetary systems, twenty-three witnesses testified–and only two argued in favor of a return to a traditional gold standard. One of them should have carried a great deal of weigh: the economist Arthur Laffer, who was one of the most influential voices among Reagan’s supply-side advisers. He drafted a detailed plan for returning the country to a gold standard, but with a provision to protect US gold reserves from either being depleted or building up too high, to the point where they would be more than 175 percent of a stated target reserve. If such triggers were hit, Laffer’s plan called for a “gold holiday,” during which the official price of gold would be recalculated. Laffer pointed out that the gold market could be subject to sudden variations, such as a brand new discovery of gold. … [Ron] Paul told Laffer: “This may actually be worse than what we had before.” (p. 296)
I agree with Ron Paul. What is this stuff from Laffer? It would be interesting to look at Laffer’s original documents, since Ledbetter has a way of distorting things. There was a lot of concern in those days about making a smooth transition to some sort of new system. Bretton Woods had its own transition period — a lot of the original currency parities were radically adjusted between 1944 and 1949, before things settled down. In part this was a matter of domestic “easy money” policies, but it may have also represented original parities that were not realistic. (There weren’t really any free or liquid “currency markets” in 1944, so they were sort of guessing.) Laffer’s plan may have been describing something of an early-stage adjustment mechanism. Nevertheless, the general impression was that the gold standard guys were Not Ready For Prime Time, which is my conclusion too. One of the reasons I do all this stuff today is so that we will be Ready For Prime Time, whenever that time may come. I have also made some effort to try to weld together a consensus between the “Austrian” Constitutionalists, who also tend to be End the Fed-ers, and the Supply-Side group, which tends to be comfortable with the continuation of Federal Reserve currency monopoly. Even if we disagree, we can see that we disagree along a certain spectrum of agreed-upon solutions — that gold coin Constitutionalism and something more exotic, such as a Federal Reserve-managed gold-linked Bitcoin-like cybercurrency, all share a basic foundation of economic principle and theory. (This basic foundation, from which many specific variants may derive, is the subject of Gold: the Monetary Polaris.)
Ledbetter finished up with a chapter called “God, Gold and Guns,” representing recent events. God, Gold and Guns are all basics of the U.S. Constitution, the founding principles of the government and society we live in today. The rationale for the U.S. Republic lies here:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.
Gold is in Article I, Section 10 of the Constitution, and Guns are of course in the Second Amendment. Ledbetter naturally mocks these notions, and people who held them, especially Glenn Beck. Was Beck so silly? Gold had been the best-performing asset of the 2000-2009 decade. There had been a tremendous financial crisis, in 2008-2009, that very nearly led to serious collapse; the reason things didn’t collapse had something to do with “QE” money-printing by the Federal Reserve, which drove the dollar price of gold from $700 in late 2008 to $1900 in 2011. Many governments in Europe neared default in 2012, and would have defaulted if not for direct intervention by the ECB, which in turn required more money-printing. Also in 2012, the Federal Reserve, which had taken a money-printing holiday, ramped up its own printing presses again for “QE3”, which began in late 2012. There was a lot of good reason to think that things were in bad shape at the time, and that gold would continue to outperform stocks and bonds, both of which were still overvalued by historical metrics, especially bonds. Anyway, you can certainly “get right with God,” own some gold (billionaire hedge fund manager Ray Dalio recently suggested 5%-10% of one’s assets), exercise your Second Amendment rights — and even have a month or two of food handy, and a plan to get out of major urban areas if necessary — without very much trouble or difficulty. Given what we know today, why wouldn’t people do this? For some reason, people think that supermarkets will always be full and police always on call (Puerto Rico?), that bank ATM machines will always work (Cyprus? India?), or that urban violence (Ferguson? Baltimore?) is impossible.
Beck got into some trouble for promoting Goldline International, an advertiser on Beck’s program. Goldline sold numismatic pre-1933 coins, which were popular for a while due to widespread fears that regular bullion coins would be made illegal, as in 1933. (Collectible numismatic coins were immune from the 1933 prohibition.) The result was that the market value of numismatic coins were at a substantial premium to their bullion value. It appears that many people who bought numismatic coins from Goldline thought that they were buying bullion coins, at a price that reflected the market price of bullion, and complained that they had been sold numismatic coins at a substantial premium to bullion. Goldline was later sued.
Ledbetter finished up with a brief look at more theoretical issues surrounding gold. Most of it is silly, but it didn’t seem so to Ledbetter (I assume), and probably doesn’t seem so to most people who get this far in his book.Ledbetter talked about gold investing:
“One of the properties that makes gold attractive to many of its admirers is that is cannot be physically destroyed.” (p. 315) Huh? You could simply take a ship and sink it in deep water, which Ledbetter described back on page 26. I’ve never heard a gold investor make this argument. I suppose he means that gold remains gold even if other things go to hell, like all forms of wealth based on legal contracts.
“And therefore, the only normal way for the value of any particular cache of gold to increase is for private-market demand to increase. Usually, gold market prices rise when people think the economy is weak or weakening (lots of people want to buy gold, because they fear that other assets will stagnate or lose value), and fall when the economy is strong or optimism is rising … At least since the days of Harry Browne, predicting economic disaster has been a useful way to try and stoke the market for gold and drive up the value of existing gold owners’ investments.” (p. 315)
It’s almost inconceivable to me that Ledbetter could have come this far and make such claims. (That’s why I say the book smells like propaganda.) The basic characteristic of gold is that it is a stable store of value — that it is, in shorthand, “money.” Gold “rises” in value (compared to some currency) because the value of that currency is declining in value. This is certainly true for the big moves in gold, from 1970-1980 or 2000-2011. This basic idea is widely held among the gold investing community, and expressed in many ways. Certainly Harry Browne thought so — and he was right, and his followers vastly outperformed stocks and bonds in the 1970s. Most all the situations where gold is a superior investment are conditions of economic decline. If you had bought $1 million of gold coins in 1970, and held them to 1980 — a decade of stagflationary disaster — the result would have been great. If you had bought $1 million of gold coins in August 1929, and held for a decade, you would have again outperformed stocks and debt, which had terrible default rates. Sometimes, gold can do well even when economies don’t really have any kind of big disaster (2000-2007). The real fact of the matter is: sometimes gold does well vs. stocks and bonds, and sometimes stocks and bonds do well vs. gold. Actually, since the introduction of floating currencies in 1971, the total return of gold, stocks and bonds is about the same. Gold has been no better than stocks or bonds, but also no worse. The timing is different, though.
Ledbetter went on to describe some gold standard proposals for the present or future, concluding that they would not be feasible. This is to be expected for someone who can’t figure out the basic problems and errors of Bretton Woods. For him, it would be unfeasible, because he doesn’t know how to do it — just as the $38/oz. gold peg of Nixon’s Smithsonian Agreement in 1971 was “unfeasible,” because they didn’t know how to do it then either.
Among those who don’t know how to do it, we must include one Kenneth Dam, part of the Reagan administration, quoted by Ledbetter:
The case for a gold standard is most appealing when inflation is rampant but, paradoxically, rapid inflation makes a gold standard impracticable. (p. 321)
Ledbetter uses this to supposedly make a point, but this is just another one of those dopey assertions common among knownothings. There was a whole heck of a lot of inflation in Germany in 1923. “Inflation” was 12,677,900% from the beginning of that year to the beginning of November 1923, when a new gold-linked Rentenmark was introduced. That new currency was set up in one week, and managed by one man in a former broom closet at the Ministry of Finance.
Germany had hyperinflation again after WWII; so did Japan. Both were solved by Chicago banker Joseph Dodge, who relinked both currencies to gold in 1949.
The real difference was that Hjalmar Schacht in Germany was a genius; Dodge was, at least, able and competent. There was nobody around in 1971 or 1980 with those skills. It was “impracticable” because they didn’t know how to do it.
There have been many, many examples of countries going from hyperinflation to some form of fixed-value system, commonly a fixed value with the euro or dollar. Most Latin American countries had hyperinflation in the 1980s, which ended with an eventual dollar link such as Argentina’s currency board. Many countries formerly of the Soviet sphere had hyperinflation in the early 1990s, followed by a currency whose value was linked to the deutschemark. This included Estonia, Latvia and Lithuania. It turns out that linking a currency to some standard of value — gold, the dollar or euro — is not that hard, and often done after a time of currency crisis which can include hyperinflation.
Even assuming that American gold-standard advocates could agree on a system, it’s nearly impossible to imagine a desirable political scenario under which the system would be imposed. For better or worse, big, groundbreaking monetary changes are almost always timed due to crises, not careful and inclusive debate, and they are often badly executed. (p. 320)
This is sort of true: a new gold standard system, for the U.S. or the world, is most likely now after some kind of crisis which makes the present fiat system not a viable option. It is not too hard to imagine how this would take place. It is already taking place: many think today that several Eurozone governments would have already defaulted, without the support of the ECB and its money-printing ability. The U.S. has its own debt issues, plus unfunded liabilities of all sorts from entitlements to pension programs to State bankruptcies. Many people have thought that this would have started to take place already. Even if it takes a little longer, I personally think that we are in a Winter Crisis era similar to that described in The Fourth Turning, and that we aren’t really going to get out of it until things go up in flames.
Nevertheless, the U.S. has a pretty long history of returning to a gold standard system, not in a crisis, but afterwards: after the War of 1812, after the Civil War, after WWI, after the devaluation of 1933, and after WWII. Usually, this was actually done rather deliberately.
One of the most appealing ideas behind American support for gold-backed money is this: if you make the government stick to money backed up in gold, you actually remove both the ability and the temptation for Congress and the Federal Reserve to screw the economy up. …
For all its obvious appeal, this argument has repeatedly been trampled by war. (p. 321)
The U.S. has continually left strict gold-standard discipline during wars, from the War of 1812 to the Civil War to WWI to WWII, and also, to some degree, the Vietnam war. And yet, that was never an excuse not to have a gold standard system during peacetime. The notion that money-printing was necessary to fight wars was never really true. Even the Civil War was financed with $2.04 billion of bond issuance, against $450 million in “greenback” fiat money-printing. The reason for the “greenbacks” was mostly that there was so infrastructure in place to sell large amounts of bonds when the war began. If the infrastructure in place by the end of the war was available at the beginning, no issuance of fiat money would have been necessary at all.
The mother of all bond-financed wars was of course World War II. The U.S. did not finance that war with money-printing at all, and maintained the principle of the dollar at $35/oz. throughout the conflict. In practice, however, the Federal Reserve was asked to “help” bond sales by manipulating interest rates; this required monetary overissuance, and the value of the dollar did indeed sag vs. gold. This was a deviation from gold-standard discipline, but it was relatively minor. The Bank of England itself was created to finance Britain’s wars with France.
Thus, the notion that wartime money-printing prevents use of a gold standard during peacetime is totally contrary to U.S. history, and you would expect someone who wrote a history of gold in the U.S. to recognize that. World War II certainly demonstrated that giant wars could be completely financed with bonds.
And Richard Thaler, an economist at the University of Chicago, asked, “Why tie to gold? Why not ’82 Bordeaux?” (p. 327)
This is supposed to be an insight of great value, from an economist whose opinions are of great value. I would ask: well, what is the answer? Having written this book with the help of six named research assistants, over a period of four years, I hope it is not too hard for Ledbetter to answer.
I answered it in three books, two of which were available during the writing of this one. The first was translated into four languages. If you search for “gold standard” among “books>economics” at Amazon.com, all three books are in the top ten search results.
Much of One Nation Under Gold actually consists of valuable descriptions of some interesting moments in U.S. history as it related to gold and the gold standard. Yet, the theme throughout is that basing one’s money on gold is silly, irrational, stupid, bizarre, and inexplicable. The question of why, if that were so, most every major civilization did so for five thousand years; and how, if that were so, the results that were obtained were so impressive, goes unasked. But, you would expect that from someone who, after four years of research, can’t tell the difference between money based on gold and money based on wine.