Authored by Alasdair Macleod via GoldMoney.com,
"Naturally, the smooth termination of the gold-exchange standard, the restoration of the gold standard, and supplemental and interim measures that might be called for, in particular with a view to organizing international credit on this new basis, will have to be deliberately agreed upon between countries, in particular those on which there devolves special responsibility by virtue of their economic and financial capabilities."
General Charles de Gaulle, February 1965
We have been here before – twice.
The first time was in the late 1920s, which led to the dollar’s devaluation in 1934. And the second was 1966-68, which led to the collapse of the Bretton Woods System.
Even though gold is now officially excluded from the monetary system, it does not save the dollar from a third collapse and will still be its yardstick.
This article explains why another collapse is due for the dollar. It describes the errors that led to the two previous episodes, and the lessons from them relevant to understanding the position today. And just because gold is no longer officially money, it will not stop the collapse of the dollar, measured in gold, again.
General de Gaulle made himself very unpopular with the international monetary establishment by holding the press conference from which the opening quote was taken. Yet, his prophecy, that the gold exchange standard of Bretton Woods would end in tears unless its shortcomings were addressed by a return to a gold standard, turned out to be correct shortly after. What the establishment did not like was the bald implication that it was wrong, and that the correct thing to do was to reinstate the gold standard. Plus ça change, as he might say if he was still with us.
Those of us who argue the case for a new gold standard, and not some sort of half-way house such as a gold exchange standard to address the obvious failings of the current monetary system, are in a similar position today. The first task is that which faced General de Gaulle and Jacques Rueff, his economic advisor, which is to explain the difference between the two.[i] It is now forty-seven years since all forms of monetary gold were banished by the monetary authorities, and today few people in finance understand its virtues.
Furthermore, in the main, historians educated as Keynesians and monetarists do not understand the economic history of money, let alone the difference between a gold standard and a gold-exchange standard. These similar sounding monetary systems must be defined and the differences between them noted, for anyone to have the slimmest chance of understanding this vital subject, and its relevance to the situation today.
Defining the role of gold
To modern financial commentators, there is little or no significant difference between a gold standard and a gold exchange standard. Keynes’s famous quip, that the gold standard was a barbarous relic, was made in his Tract on Monetary Reform, published in 1923, before the gold exchange standard really got going, yet it is quoted as often as not indiscriminately in the context of the latter.
Yet, they are as different as chalk and cheese. The gold exchange standard evolved in the 1920s as America and Britain went to the aid of European countries, struggling in the wake of the Great War. It allowed the expansion of national currencies under the guise of them being as good as gold. It was not. In modern terms, it was as different as paper gold futures are to the possession of physical gold today.
A gold standard is commodity money, where gold is money, and monetary units are defined as a certain fixed fineness and weight of gold. The monetary authority is obliged by law to exchange without restriction gold against monetary units and vice-versa, and there are no restrictions on the ownership and movement of gold.
Under a gold exchange standard, the only holder of monetary gold is the issuer of the domestic monetary unit as a substitute for gold. The monetary authority undertakes to maintain the relationship between the substitute and gold at a fixed rate. Only money substitutes (bank notes and token coins – gold being the money) circulate in the domestic economy. The monetary authority exchanges all imports of monetary gold and foreign currency into money substitutes for domestic circulation at the fixed gold exchange rate. The monetary authority holds any foreign exchange which is also convertible into gold on a gold exchange standard at a fixed parity, and treats it to all extents and purposes as if it is gold.
The essential difference between a gold standard and a gold exchange standard is that with the latter, the monetary authority has added flexibility to expand the quantity of money substitutes in circulation without having to buy gold. A gold standard may start, for example, with 50% gold and 50% government bonds backing for money units, but all further issues of monetary units will require the monetary authority to purchase gold to fully cover them. This was the monetary regime in Britain and many other countries before the First World War.
As stated above, gold exchange standards evolved after the First World War, in the early 1920s.[ii] It was the taking in of foreign currencies, also on gold exchange standards themselves, and booking them as if they were the equivalent of gold, that allowed central banks to expand the quantity of monetary units domestically. To understand how this operated in practice requires us to work through an example between two countries on gold exchange standards. We will take the entirely hypothetical example of two countries, America and Italy, both of which have monetary gold in their reserves and operate on a gold exchange standard.
America lends Italy dollars by crediting its central bank’s account at the Fed with the dollars loaned. But while ownership has changed to Italy, dollars never leave America. And dollars, when drawn down by the Banca d’Italia are recycled into America’s banking system.
The economic sacrifice to America of lending money to Italy is therefore zero. America has simply created a loan out of its own currency, and in the process increased the quantity of dollars in circulation. And because in practice Italy does not encash dollars for gold, America expects to preserve its gold reserves.
Meanwhile, The Banca d’Italia has expanded its balance sheet by the inclusion of America’s dollar loan to it as a liability, and the dollars themselves as an asset regarded as the equivalent of gold. Because dollars are not permitted to circulate in Italy’s domestic economy, they can be used by Banca d’Italia, either to settle other foreign obligations, or as a gold substitute to back the issue of further lira. Meanwhile, the Banca d’Italia’s dollars are reinvested in US Treasuries, which give a yield. Banca d’Italia has little incentive to exchange its dollars for physical gold, because gold yields nothing and is costs to store.
If Banca d’Italia uses dollars to discharge a foreign obligation with another country, that third party will also end up investing the dollars gained in US Treasuries, assuming it also prefers yielding assets to physical gold. Alternatively, if the dollars are used by the Banca d’Italia to back an increase in the quantity of lira or to subscribe for government debt, the effect in the domestic Italian economy is an inflation of prices.
Therefore, the effect of a gold exchange standard is the opposite of a gold standard. A gold standard puts the requirements for the quantity of money in circulation entirely in the hands of the market, to which the central bank mechanically responds. A gold exchange standard allows a lending central bank to inflate its money supply through inward investment, and a borrowing central bank to inflate its money supply on the presumption the monetary substitutes borrowed to back it are monetary units of gold.
The gold exchange standard in the 1920s
After the First World War, both sterling and dollars were made available under the Dawes Plan of 1924, which provided non-domestic capital for Germany after her hyperinflation. France suffered a currency crisis in July 1926, which was successfully dealt with by the Poincaré government through raising taxes. The Bank of France was then enabled to borrow dollars and sterling and to issue francs and subscribe for government debt.
To summarise, these loans bolstered the balance sheets of the Reichsbank and the Bank of France, which invested the sterling and dollars borrowed in gilts and Treasuries respectively. If instead France and Germany had taken gold under the gold exchange provisions, they would have had an asset with no yield, though France did opt increasingly for some gold towards the end of the decade and beyond – by December 1932 she had accumulated 3,257 tonnes. So, by lending their monetary units, the creditor nations achieved finance for their own governments, as well as providing capital for foreign central banks. It was seen to be a win-win for all the central banks involved.
The accumulation of dollars in foreign hands from 1922 onwards accompanied and fuelled bank credit expansion in the US. This gave the roaring twenties an inflationary impetus, dramatically reflected in its stock market bubble. However, the increasing quantity of dollars in foreign ownership became an accident waiting to happen. There had been a mild thirteen-month recession from October 1926 to November 1927, after which the stock market boomed. The Fed was compelled to reverse earlier interest rate cuts and increased the discount rate from 3 ½% to 5% by July 1928.
French investors began to repatriate capital en masse, and the Bank of France’s gold reserves rocketed from 711 tonnes in 1926 to 2,099 tonnes by 1930.[iii]The gold exchange standard had spectacularly failed, and redemption of dollars for gold, being deflationary, exacerbated the Wall Street Crash. It certainly rhymed with Robert Triffin’s dilemma: the export of dollars into foreign ownership was monetary magic, until it reversed at the first sign of trouble.
The gold exchange standard of Bretton Woods
In 1944, the monetary panjandrums of the day, led by Harry Dexter-White for the US and Lord Keynes for the UK, designed the post-war gold exchange standard of Bretton Woods. No doubt, Dexter-White fully understood the advantage to the US of forcing all countries to accept dollars with a yield, or gold with none. When American payments abroad exceeded receipts, the difference was generally reflected in dollars issued to foreign central banks, kept on deposit in New York, or invested in US Treasuries.
Throughout the ‘fifties, America recorded a surplus on goods and services, which declined as European manufacturing recovered. But other factors, such as investment abroad and the Korean war resulted in an overall balance of payments deficit totalling $21.41bn, the equivalent of 19,024 tonnes of gold at $35 per ounce. However, US gold reserves declined only 4,457 tonnes between 1950 and 1960, which tells us that the balance was indeed invested in US bank deposits and US Government notes and bonds.
The respective figures for the 1960s were total payment deficits of $32bn, the equivalent of 28,437 tonnes of gold, and an actual decline in gold reserves of 5,283 tonnes.
The accelerating increase of foreign ownership of dollars over these two decades meant the world, ex-America, was awash with dollars by the mid-1960s. By the end of that decade, America’s gold reserves had declined from 20,279.3 tonnes in 1950, two-thirds of the world’s monetary gold, to 10,538.7 tonnes, 29% of the world’s monetary gold in 1970.
The effect was to remove trade settlement disciplines on net importing nations, and to cause inflation in net exporting nations, the opposite of the disciplines of a pre-WW1 gold standard on global trade. It was this effect that was central to the second Triffin dilemma, whereby dollars became wildly over-valued in gold terms through their excessive issuance.
In the mid-sixties, Washington became increasingly alarmed that foreigners weren’t playing by the assumed rule that they should take dollars and not redeem them for gold. By then, France and Germany between them had increased their gold holdings from 487.1 tonnes in 1948 to 7,089 tonnes at the time of de Gaulle’s press conference. General de Gaulle’s press conference, from which this article’s opening quote is taken, had touched some very raw nerves.
It was clear that the dollar, with the overhang of foreign ownership, had become horribly overvalued, and so should have been devalued, perhaps to over $50 or $60 per ounce, for a gold peg to stick. A devaluation of this magnitude might have been sufficient at that time to stem the outflow of gold.
Both Washington and American public opinion were set strongly against any devaluation. Instead, the London gold pool, designed to ensure the major central banks supported the Bretton Woods System, collapsed in 1968, when France withdrew from it. A dollar devaluation to $42.2222 shortly after was simply not enough, and in 1971 President Nixon suspended the Bretton Woods System, and the new regime of floating exchange rates that is still with us to this day began.
The situation today
Following the Nixon shock, official monetary policy towards gold was to ignore it, and to persuade other central banks and financial markets it was irrelevant to the modern monetary system. To this day, the Fed still books the gold note from the Treasury at $42.2222 per ounce, even though the price has risen to over $1300.
We can simplistically value the dollar in terms of gold, which is certainly a valid, perhaps the most valid approach. But to merely conclude that the dollar has collapsed since 1971, while true, side-steps an analysis that points to the risk that even today’s value may still be too high. Furthermore, with the dollar acting as the world’s reserve currency, all other fiat currencies, which are priced with reference to it rather than gold, are to a greater or lesser extent in the same boat.
Taking a cue from our analysis of the workings of cross-border monetary flows, which allows America to have its privilege of foreigners financing its deficits, we can estimate the approximate extent of the accumulated imbalances that could lead to the dollar’s collapse.
We know that the US balance of payments deteriorated from 1992 onwards, though those figures did not include military spending abroad, which has been a significant and unrecorded addition to dollars both in cash circulation outside America, and also to estimates of the balance of payments.[vi] Official balance of payments figures are therefore understated and have been for at least a quarter of a century.
More recently, from September 2008 the Fed began expanding its balance sheet by policies designed to increase commercial bank reserves, as a response to the financial crisis. That August, they were $10.5bn, increased to $67.5bn the following month, and peaked at $2,786.9bn in August 2014, since when there has been a modest decline. From our analysis of the run-ups to the two previous dollar crises, we know we should try to estimate how much of the increase was effectively funded from abroad. Treasury TIC Data gives us a fairly good steer to what extent this has happened. We find that between those dates, (August 2008 – August 4014) foreign ownership of dollars increased by $6,237.7bn, over twice as much as the increase in the Fed’s record of commercial bank reserves.
This is Triffin at its most fast and furious. Since then, foreign ownership of dollars has increased a further $2,142.4bn to a record $18,694.1, even though bank reserves declined by $572bn.[viii] In other words, the accumulation of dollars in foreign hands now stands at over 95% of US GDP.
Another way of looking at it is to assess the market values of US securities held by foreigners and relate that to GDP, though this information is less timely,. This is shown in the following chart.
The build-up of foreign investment in America, in large measure the counterpart of dollar loans to foreigners, has been remarkable. At the time of the dot-com bubble, it had jumped to 35% of GDP, from less than 20% in the nineties and considerably less before. At over 90% of GDP in recent years, there can be no doubt that the next financial event, whether it be derived from a rise in interest rates or a general weakness in the dollar, can be expected to trigger a substantial flight out of the dollar.
The pricing of financial assets, and today’s extraordinarily low interest rates indicate that a flight from the dollar is the last thing expected in financial markets. If they were still alive, de Gaulle and his economic advisor, Jacques Rueff, would be instructing the ECB, as successor to the Bank of France, to dump all dollars for gold immediately. And probably to dump all other foreign fiat currencies for gold as well. However, today, it is likely that other actors will blow the whistle on the dollar, such as the Chinese, and the Russians.
For it is clear that when the over-valuation of the dollar is corrected, the downside of a dollar collapse is far greater than it was in the early-thirties or the early-seventies. All other fiat currencies take their value from the dollar, not gold. So, the destabilising forces on the dollar, the other unexpected side of Triffin’s dilemma, could take down the whole fiat complex as well.
Comments
We're all gonna die!!
Blow up the Fed and the IRS...back the dollar by gold and silver.
Problems solved...overnight
In reply to We're all gonna die!! by YourAverageJoe
If you had the gold or silver, which they don't.
In reply to Blow up the Fed and the IRS… by Mr Pink
Besides, the FED keeps printing and printing for their buddies
and killed the hell out of the dollar.
In reply to If you had the gold or… by tmosley
The Dollar was designed to fail.
In reply to Well, the FED keeps printing… by beepbop
"I make money off gold, therefore currency is bad."
-Alasdair MacLeod, talking his book.
In reply to The Dollar was designed to… by Mr. Universe
"I see the brilliantly hot, glowing flaws in fiat currency; therefore, I focus on fiat resistant value for protection."
-Alasdair MacLeod, putting his money(his stored labor) where he perceives safety
In reply to "I make money off gold,… by bluecollartrader
Perhaps. But none of these gold "experts" have been right about timing in seven years.
In reply to "I see the brilliantly… by SunRise
ZH front page starting to look like some sort of Doom Enquirer.
In reply to "I make money off gold,… by bluecollartrader
So the moon is made out of chalk, not cheese?
In reply to "I make money off gold,… by bluecollartrader
Back the dollar with Bitcoin! Now THERE'S real tangible wealth.
In reply to Well, the FED keeps printing… by beepbop
When does Germany repatriate remaining 50% gold reserves held at Liberty Street...
In reply to Back the dollar with Bitcoin… by J S Bach
The actual composition of currency reserves around the world:
http://thesoundingline.com/is-the-dollar-losing-its-reserve-currency-st…
In reply to When does Germany repatriate… by Déjà view
When they pay us back for WW2.
In reply to When does Germany repatriate… by Déjà view
Electron currency can also disappear at the speed of light.
In reply to When does Germany repatriate… by Déjà view
yea seems to be with all the government panties in a twist... they dont seem scared of gold at all
In reply to Back the dollar with Bitcoin… by J S Bach
buttcoin...worth $0.00....except to gamblers and manipulators. I'd take black tulip bulbs any day. 🐂💩💣
In reply to Back the dollar with Bitcoin… by J S Bach
It's funny how the libtards , that know nothing about finance, swoop in like Vampire Bats, when the Sun sets.
Free Shit Vampires.
In reply to Back the dollar with Bitcoin… by J S Bach
Watch what you say you might get a bullet in the head. Just ask Jfk and Lincoln. Can't produce those greenbacks without usury attached. Heil hitler!
In reply to Blow up the Fed and the IRS… by Mr Pink
Andrew Jackson lived to tell us about the den of thieves.
In reply to Watch what you say you might… by masada
Andrew Jackson is Satoshi
In reply to Andrew Jackson lived to tell… by Seasmoke
Satoshi is <the usual suspects>.
In reply to Andrew Jackson is Satoshi by dark pools of soros
Adolph, (peace be unto him) told the bankers to get fucked. He was printing his own money, the Deutsch Mark.
Ah, they don't make men like him anymore! Men with balls of steel.''
In reply to Watch what you say you might… by masada
Not without the money-changers getting their politician puppets to blow us up first.
In reply to Blow up the Fed and the IRS… by Mr Pink
https://www.youtube.com/watch?v=MSGzJ05OWgI
In reply to We're all gonna die!! by YourAverageJoe
Indeed. Looking forward to a long uninterrupted sleep. And No more taxes. Liver is getting used up anyway.
In reply to We're all gonna die!! by YourAverageJoe
Dollar bullish.
In reply to We're all gonna die!! by YourAverageJoe
After reading the Lords of Finance
Its obvious that the "gold exchange" standard didnt work..I dont think the gold standard will work either....as a solution to the problem.
The problem is debt...in WW1 American banks loaned money to the allies to win. Then the banks wanted to be repaid. The allies attempted to get the money from Germany...who was broken
They couldnt pay for garbage collectors.
The countries and their banks will corrupt any system because they need to spend more than they have...to win wars, to go to moon, to go to mars, to pay people welfare.
But will gold go higher than 1300 $/oz, or rather will dollar go lower than 1300 $/oz. Yep probably but the problem will remain
In reply to We're all gonna die!! by YourAverageJoe
A good exercise would be to look at what has replaced failed currencies in the past. What % of the time did a failed fiat currency lead to a return to the gold standard? Were there circumstances that were common among those that did or did not make that return?
every gold system has been replaced by a fiat system. that's the backwards answer.
In reply to A good exercise would be to… by tmosley
Inflation is the cruelest tax of all. The Federal Reserve banking cartel was set up to extract wealth from the US citizen. For life. People will realize the value of gold. When it is too late.
I agree , inflation is theft of our labor. As a country, and as a people . The FED has stolen so much of our wealth, we should / could be so much wealthier. The ignorant population are debt slaves, struggling to survive, while we are distracted by “bread and circus “. I pray this house of cards collapses sooner than latter. The longer this goes on, the harder the fall before we can reset. Going off the gold standard was the beginning of OUR end as a wealthy country and a people.
In reply to Inflation is the cruelest… by HRH of Aquitaine 2.0
Sorry, but I disagree. It is possible to hedge yourself against inflation.
VAT is far worse.
You pay tax on any profit you make, which may be bad, but you do have the profit. With VAT, you have to pay it, even if you did not make a profit. And you can be fined massive amounts of money for non or late payment of IVA. I know, €21,000 in one year.
In reply to I agree , inflation is theft… by It's by Design
There is no reset since there is no fabric of society... it will just be the cutting of the leash to let the beast die in the wild
In reply to I agree , inflation is theft… by It's by Design
As a guy that bought some in 2011, I hope yer right
In reply to Inflation is the cruelest… by HRH of Aquitaine 2.0
The fall in the value of the dollar (usually) happens so slowly that its not too noticeable for most people. But if you step back and expand the time scale, that's a different story. I'm in my early 60s. Since I was young, the dollar has lost 90%+ of its purchasing power. Now if the idiots in Washington could manage the dollar's future decline at the same rate, they could probably continue to get away with it. But our current levels of debt and spending lead me to believe the next 90% fall in value will happen virtually overnight when compared to 60 years.
In reply to Inflation is the cruelest… by HRH of Aquitaine 2.0
Any system setup by the IMF cannot and should not ever be.trusted.
I think madame Legarde is very beautiful.
For a 3000 year old mummy.
In reply to Any system setup by the IMF… by goldwetrust
I'd fuck her with Hillarys cock
In reply to I think madame Legarde is… by loveyajimbo
The $usd is going to retrace some more of it's move over the last couple of weeks.
going lower > for the next week or two, for the dim witted ones<
As Geo macro, earnings, and the midterms approach, the $usd is going to move significantly higher.
A stronger $usd also puts more pressure on the Yuan/Dollar trading band. [ Daily fix has to be adjusted higher, making the Yuan less competitive]
Reduces the cost structure of the Chinese tariffs. {stronger $usd =less moneytariffs paid for Chinese imports}
And if China/Russia unilaterally raise the price of gold to $10,000/oz? And/or back their currencies with gold?
The dollar would drop faster than Barry Obongo's panties at a foam party.
In reply to The $usd is going to… by Yen Cross
Does a frog with wings, bump it's ass when it hops?
If you want to play with the big dogs, learn to pee in tall grass.
In reply to And if China/Russia… by loveyajimbo
OMG YC! That was funny!
In reply to Does a frog with wings,… by Yen Cross
Have a wonderful weekend, and thanks for the kind comment.
In reply to OMG YC! That was funny! by HRH of Aquitaine 2.0
Bamboo is considered a type of tall grass I guess. So the Chinese have learned to pee in it. As far as gold prices I think someone would be pretty hard pressed to be able to buy a real ounce of gold at the price that is being quoted. From what I have read people are saying it costs a lot more. Also when buying I would not trust it unless I melted it down in one of those little electric smelters at the counter before walking out the store with it. I think I would be more inclined to buy silver seeing that there is a little less incentive for crooks to mess around with it.
In reply to Does a frog with wings,… by Yen Cross
Splitting hairs young lady?
I don't recall any reference to China in my comment? {do you?}
"As far as gold prices,one would be pretty hard pressed to be able to buy a real ounce of gold at the price that is being quoted. "
Allow me to point you in the right direction. https://www.jmbullion.com/
You can purchase a few grams to start out. https://www.jmbullion.com/gold/gold-bars/
I have a lot of respect for you! You took the time to ask, and will be rewarded many times over. Quit overthinking things.
If you want to sell gold, I'll speak with you in the chat room. Next week please.
Have a good [safe] weekend.
In reply to Bamboo is considered a type… by COSMOS
That's hot
In reply to Bamboo is considered a type… by COSMOS
A foam party?
You're still the reigning
pornmeister of Tylertopia
In reply to And if China/Russia… by loveyajimbo
You're an idiot for trading FOREX. Just as manipulated as every other legacy market. Ultimately, every sovereign is going to race to the bottom. I think you know that. So your well-dressed analysis is moot.
In reply to The $usd is going to… by Yen Cross
Do you feel better now?
You've NOT the slightest inking of what I trade.
I bagged $8k trading usd/jpy today.
Stay under the porch, you snowflake rookie!
BTW, I wear swimming trunks to work!
Have you checked your financial ETF's lately?
Dumb ass snowflake inverse retard!
You can make money selling the ponzi!
BTW. I know my tax liabilities.
In reply to You're an idiot for trading… by ZIRPdiggler
Pagination