The New Gold Standard E-Book

Paul Nathan

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 268

Veröffentlichungsjahr: 2011

Beschreibung

The guide to returning to a gold standard All that glitters is gold and gold has never glittered so much as it has in the last decade, reaching staggering new prices in recent years. The definitive modern argument to returning to a gold standard, The New Gold Standard succinctly and clearly explains the nature of sound money, the causes and cures of inflation and deflation, the importance of fiscal responsibility within a sound monetary system, and the reasons for recessions and depressions. * Little has been written beyond academic histories of the gold standard, but gold standard expert Paul Nathan fills that void for the first time * Written for beginning and professional investors, the book provides guidance on how a gold standard will strengthen the dollar, reduce debt, and help stabilize the economy, offering easily applied strategies for investing in gold now and in the future * The degree of depressions and recessions and the boom bust cycle can be avoided with a sustainable, stable monetary policy * The international return to gold is not a fad but a sign of a world in monetary transition As long as governments continue to print money and deficits continue to rise, gold will be a hot commodity. As inflation creeps up, more and more talk will turn to returning to some version of the gold standard, and The New Gold Standard is the first major work to explicitly address the challenges and benefits of such a move.

Leseprobe

Contents

Foreword

Preface

Part I: Gold and the Domestic Economy

Chapter 1: Why Gold?

Gold: The King of Metals

Chapter 2: The Gold Standard: A Standard for Freedom1

What Money Is . . .

. . . And What Money Is Not

Chapter 3: Why Prices Have Not Skyrocketed

On Human Action

Chapter 4: The Inflation/Deflation Conundrum

The Cause of the Recent Spike in Commodities

Chapter 5: Central Banking in the Twenty-First Century

The Rise of Populism

Part II: The International Gold Standard

Chapter 6: The Making of an International Monetary Crisis1

Monetary Theory: Past

Chapter 7: The Death of Bretton Woods: A History Lesson1

Fixed Exchange Rates, Flexible Rules

Chapter 8: Who’s Protected by Protectionism?

A Few Principles

Part III: Returning to a Gold Standard

Chapter 9: Are the Fiat and the Gold Standards Converging?

A Monetary System Needs to Know Its Limitations

Chapter 10: Gold: The New Money

Rediscovering Gold

Chapter 11: How Not to Advocate a Gold Standard1

The Intrinsic Worth Argument

Part IV: Investing in Gold

Chapter 12: Lessons of a Life-Long Gold Investor

On Trading

“Be Afraid. Be Very, Very, Afraid . . .”

Chapter 13: My Final Word on Gold

On Bretton Woods II

Recommended Reading

Bibliography

About the Author

Index

Copyright © 2011 by Paul Nathan. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Nathan, Paul, 1944—

The new gold standard : rediscovering the power of gold to protect and grow wealth / Paul Nathan.

p. cm.

Includes bibliographical references and index.

ISBN 978-1-118-04322-6 (cloth); ISBN 978-1-118-08421-2 (ebk); ISBN 978-1-118-08422-9 (ebk); ISBN 978-1-118-08423-6 (ebk)

1. Gold standard—United States. 2. Gold—United States. 3. Investments—United States. 4. Monetary policy—United States. 5. Inflation (Finance)—United States. I. Title. HG457.N37 2011

332.4'2220973—dc

222011005629

Dedicated to all those writers, past and present, who have helped make economics interesting and fun.

Foreword

How is it that a book about gold, indeed a book that advocates a return to a gold standard, can sound so, well, reasonable?

Maybe it’s because its author, Paul Nathan, is a very reasonable man. He’s no gold bug. As far as I know he doesn’t live in a fallout shelter. In fact he’s an extraordinarily successful investor who came through the market crash of 2008–2009 smelling like a rose. You don’t do that by being unreasonable.

Maybe it’s also because there’s nothing so unreasonable about gold. Maybe it’s because what’s unreasonable is saying that money ought to be just whipped up at the whims of government and not attached in any way to something of objective value—like gold.

From 1935 to 1975 it was illegal for Americans to own gold. The only exception was jewelry or dental fillings—relegating generations of Americans to the status of refugees or prisoners of war, reduced to hiding wealth in and about their bodies.

Gold is vilified by the political class and its servants in the profession of economics. The most famous economist of the twentieth century, John Maynard Keynes, called gold a “barbaric relic.” Many scholars blame the gold standard of the years between the world wars for causing the Great Depression.

Yet I can’t think of a single politician or economist who would turn down a bar of gold if you offered it to him. Indeed, every government in the world—the same governments whose printing presses churn out so much paper—all hoard gold for themselves.

The height of irony (perhaps depth would be a better word) is that the world’s largest hoard of gold is stored in the basement of the Federal Reserve Bank of New York, a couple of blocks from the New York Stock Exchange.

I’ve seen it myself. You are taken by an armed guard five stories down into solid bedrock, 30 feet below the level of the New York subway system and 50 feet below sea level. You enter the vault through a person-sized slot revealed when a 90-ton steel cylinder is rotated. After you walk through the slot and the cylinder rotates back, you are in a watertight, airtight room half the size of a football field stacked to the roof with gold bricks weighing 27.4 pounds each.

At current prices this gold is worth more than $300 billion. There’s more here than in Fort Knox. Almost all of it is held for foreign governments—very little of it is owned by the U.S. government (that’s in Fort Knox), and none of it by individuals.

Gold is very dense. So each small bar is surprisingly heavy. Don’t try holding one in just one hand. Vault workers wear ultrastrong magnesium shoe-covers to protect their feet from accidental drops that, over the years, have left the cement floor with dozens of deep dents.

The vault was built in 1921 and looks it. The technology is all very old-school. An enormous scale used to weigh gold bars, tons at a time, looks like a giant balance beam you’d expect to see in an antique apothecary shop—yet it is accurate within the weight of a grain of rice.

When you’re in that vault, you know in your bones that there’s nothing unreasonable about gold. It’s not barbaric. It’s not just a hunk of metal, assigned arbitrary value only by the whims of greedy nut-jobs like Auric Goldfinger. It’s real wealth. It’s real value. It’s real money. It’s just plain real.

After I visited the gold vault, I went upstairs for meetings with Federal Reserve officials to discuss monetary policy. Normally it’s a rare privilege to talk to insiders about such market-moving matters. But after visiting the gold vault—after experiencing what real money feels like when you hold it in your own hands—all the talk about M2, the federal funds rate, and quantitative easing all seemed like nonsense.

It didn’t help that on the way out of the vault my escort gave me a souvenir. No, it wasn’t a gold bar. It was a little plastic bag, holding one ounce of shredded paper that had once been $100 bills.

After visiting the gold vault, it wouldn’t have made any difference to me if those bills had not been shredded. They could have handed me intact $100 bills—and it would have still seemed like just paper.

It wouldn’t have been gold. Which is to say, it wouldn’t have been real.

When I was done I walked out onto the streets of New York. It was just beginning to rain, and vendors seemed to magically appear on street corners to sell umbrellas. At that moment an umbrella was a very precious thing to me and to thousands of others caught in the sudden rain. Yet these vendors were willing to accept, in exchange for one, a little piece of worn paper. Why weren’t they demanding gold?

Would that have been so unreasonable?

Paul Nathan doesn’t think so, and neither do I.

Chances are you don’t, either. But maybe you don’t have the words or the arguments to really crystallize your intuition. For you, then, this book will give articulate voice—it will apply reason—to what you already feel in your bones.

Some of you are skeptics about gold. This book could change your mind. Be reasonable. Read it.

There’s one thing we can all agree on. Something has gone terribly wrong in the economic mechanism of the world. The terrible synchronized global recession we’ve just endured was a warning. How do we expect to recover, and how do we expect to avoid another financial crisis, if we don’t do something to fix that mechanism?

Printing more paper money is probably not the answer. Paper money likely contributed to the problem. Hair of the dog that bit you can be a palliative but not a long-term strategy.

Would it be so unreasonable to at least think about giving a greater role to the medium of exchange and the store of value that has endured for centuries—gold?

Open up your mind, and let Paul Nathan try to convince you. What’s in this book might just save the world.

Donald L. Luskin

Chief Investment Officer, TrendMacro

Co-Author, I Am John Galt

Preface

As we entered the twenty-first century, we may have well entered the century of gold. For the first time in a very long time we are hearing talk about returning to a gold standard. Whether or not governments choose to move toward some form of gold standard is less important than the fact that the free market already is.

The world is in the process of rediscovering gold and is, in effect, moving toward a de facto gold standard, whether governments like it or not. No one can know for sure what shape this new gold standard will take, but given new technologies and the freedom of choice, it will at some point take on a life of its own. That is reason enough to strive to understand what a gold standard is and how it is different from the monetary system of today.

This book is not intended to portray gold or the gold standard as Utopian. There is no Utopia. However, the years, decades, and centuries of the gold standard, and gold itself as a store of value, have served mankind well. When I talk of the stability of the value of money over the centuries during the gold standard, I am not referring to the government-created money under the gold standard—such as the Continental, which was supposed to be as good as gold but ultimately became worthless. Nor am I talking about the suspension of gold convertibility by governments during that period, which amounts to a broken government promise.

I am not talking about the banks that backed their notes with gold and could not redeem them during panic runs due to imprudence or fraud. And I am not suggesting that gold will prevent, nor could have prevented, financial and credit crises from occurring; it certainly cannot prevent recessions and depressions. Yet, gold and the gold standard have been wrongly accused of causing many of these occurrences. They did not. Gold preserves wealth. The gold standard creates monetary stability. That is its great virtue. That is its legacy. Under the gold standard of the nineteenth century the dollar bought at the end of the century approximately what it bought at its beginning. At the end of the twentieth century, after going off the gold standard, the dollar bought 97 percent less!

While a pure gold standard has never existed in our history, the gold standard functioned effectively in various forms as the monetary system of the civilized world from roughly the early 1700s to 1913, when the Federal Reserve System took over the control of money and credit. As with “complete freedom” or “totally-free markets,” a pure gold standard is an ideal. History has shown that—to the degree nations move toward these ideals of freedom, free markets, and sound money—people prosper. If there is one lesson that history has taught us, it is that money substitutes are merely promises. Every piece of paper that claims it is the equivalent of something else is a promise to pay. Promises can be broken. This should be painfully evident today after the Enron, WorldCom, AIG, and Lehman Brothers fiascos. Historically, it was never gold’s “promise” that was broken. Gold traded as an honest equivalent against other commodities and services, as always, through good times and bad. It was the paper money claims that were always the root of lack of confidence and suspicion, often due to fraud and theft, leading to panics and crises.

When a government imposes legal tender laws compelling its citizens to accept paper claims, which amount to floating promises, then and only then, does money become tied to political promises rather than to the reality of the marketplace. Except for very rare occurrences, when the medium of exchange becomes unstable under the gold standard it is the money substitutes that are the problem—not the underlying commodity represented.

We live in a world of money substitutes called credit and debt. We are struggling to understand where we have gone wrong, why our institutions have failed us, how we should direct ourselves as a nation, and how to insure our financial futures against inflation, deflation, credit crises, debt defaults, panics, stock market plunges, and real estate declines. All good questions.

Where to start? Let’s start at the beginning.

Paul Nathan

Part I

GOLD AND THE DOMESTIC ECONOMY

Chapter 1

Why Gold?

Our infatuation with gold has been around as long as mankind itself. Some call it mystical; others call it a barbaric metal. It is a love-hate relationship that has survived the ages. To some it is blind love. To others it is the object of a great quest. Whatever its role in society, it has never been a benign one. It has never been a metal you ignore. We, to this day, refer to the very best of things as “the gold standard of. . . .” We call a great find a “gold mine” and claim something you can count on to be “as good as gold.” We still “go for the gold” and present gold, silver, and bronze medals for achievement. When we hit our prime years, we call them “our golden years.” Gold folklore and all of its history is embedded in our culture.

This tradition did not endure because the years of gold as money were tarnished. On the contrary, gold is as American as apple pie. But, among intellectuals, economists, and policy makers today, gold has a more mixed reputation.

Gold has been praised and denounced; called immaterial and impractical. At the same time it has been craved and adored. Governments have adopted gold as their money, denounced it, confiscated it, demonetized it, and hoarded it. Passions run high when it comes to gold. And so they should. One of the most contested and debated of all subjects is not just gold, but gold as money, gold as a standard of value, gold as an investment, and its role within our national and international monetary systems.

Gold: The King of Metals

Gold is a proven successful monetary standard because of its unique properties. Mankind has valued gold for 5,000 years. Through some 2,500 years of formalized monetary systems almost every conceivable commodity has been used as money: stones, tobacco, wheat, pottery, coconuts, beads, and bananas. After years of trial and error individuals selected precious metals as the premier money and gold rose to the top to become the king of metals. Why?

It wasn’t an arbitrary choice. Gold is scarce, and in being so it is precious to individuals. It is easily identifiable. Nothing quite jumps out at you like the glitter of gold. Since it is easily recognizable it is easily marketable, which is essential to any medium of exchange. It is accepted by almost anyone anywhere in the world. It has utility. If need be it can be melted and used in various forms as a commodity—such as in the fields of dentistry, medicine, high tech, and others. The fact that it can be melted and utilized in various forms allows it to be made into rings, coins, ingots, or bars and used as money. Or it can be held as gold dust or nuggets. It’s small in bulk and therefore portable. Artisans love it for its pliability and beauty. They use it in jewelry and use it in other art forms as well.

Whether as a commodity, money, jewelry, or art, gold has value to most individuals. It has become a way of storing value. It isn’t perishable like tobacco or wheat. It doesn’t evaporate or disintegrate. All of the gold in the world ever produced still exists. And because the total amount of gold above ground is always substantially greater than the supply that is found yearly, its supply remains stable year after year, century after century, in relation to other goods. Sudden changes of value are possible, but throughout history they are, like gold itself, very rare.

Gold Becomes the Standard of the World

The purchasing power of money under the gold standard, and the silver standard before it, remained fairly constant for over 200 years. Gold’s price was fixed at $22.67 per ounce between the years 1792 to 1933, and the value of the dollar during that time was the same as an ounce of gold. During the years 1880 to 1914, the inflation rate was .01 percent. This 34-year period is known as the years of “the classical gold standard,” when a dollar remained a dollar, and gave rise to the term “as good as gold.” Since we have abandoned the gold standard the value of the dollar has fallen by 97 percent. The case for the gold standard and against the fiat standard is that simple and that strong.

Today, we prefer the virtues of paper. One of my favorite economists, Ludwig von Mises, once said, “Government is the only entity I know of that can take a perfectly good commodity like paper, slap some ink on it, and make it totally worthless.” The same cannot be said for gold. Gold has withstood the test of time. Its virtues have been discovered and rediscovered throughout the years.

Our founding fathers went as far as declaring nothing but gold and silver shall be this nation’s money. And in Europe it is common knowledge that “one should always have just enough gold to bribe the border guards.” There are a lot of myths and misunderstandings about gold and its credibility as money. But once inspected, the myths pale next to the facts and documented history of gold. We will explore some of them now.

Too Little Gold—Or Too Much Paper?

Usually the first argument given by those that claim returning to a gold standard is impractical is that there isn’t enough gold in the world to use for money. This argument makes more sense if you stand it on its head. It’s not that there is too little gold—it’s that there are too many paper dollars around, too many claims to gold.

First of all, it should be pointed out that during the gold standard there were never complaints of too little gold to use as money, even though both population and the amount of goods and services grew over its 200-year history. Tell people back in the nineteenth century that there was not enough gold to use as money and they would start looking at you sideways. Back then gold had been used as money for generations.

Banks were the major holders of gold. They kept about one quarter to one third of their capital in gold. They made loans based on their capital. A three- or four-to-one capital ratio was commonplace. Today it is closer to 14:1, and Lehman Brothers was said to have leveraged positions that exceeded 40:1. This kind of excessive leverage and inadequate capital contributed to the panic of 2008. During the gold standard, the amount of gold was leveraged—but only as long as it was redeemable on demand. Redemption placed limits on leverage.

Once the ratio has been determined, the prices of all things adjust and stability prevails. For every new ounce of gold discovered, four new dollars could be created. Throughout our history there has never been a time when there was too little gold to act as a medium of exchange. On the contrary, the gold strike of 1849 was more problematic than any problem arising from a shortage of gold, as the supply of money suddenly increased.

Secondly, other metals have been and can be used alongside gold. Silver, nickel, and copper all served as money during the gold standard. Those metals were also leveraged about four to one. As long as gold, silver, nickel, and copper circulate as coins, there is no reason that paper cannot also circulate as money substitutes, as long as they are at all times convertible on demand. The four to one capital ratio was not arbitrary. It was time tested and was deemed a safe ratio by markets in times of stability as well as times of panics and bank runs throughout the gold standard’s existence to protect a bank against insolvency.

Today, the great debate the world is having is, “How much capital should banks maintain to prevent insolvency?” Stress tests are being conducted to determine that ratio. If governments would just look at the years of the gold standard they would have a model to emulate that is proven to have succeeded for centuries. We need not impose the exact same ratios, but an increase in capital and an increase in reserve requirements will do wonders to strengthen the banking system around the world.

The “Gold Prevents Prosperity” Myth

A companion argument to “There’s not enough gold to be used for money” is that a gold standard is too rigid and restricts the expansion of business and therefore prosperity. This argument asserts that there is not enough gold to allow enough credit expansion to provide for a vigorous robust economy. This argument can be refuted with one simple historical fact: the industrial revolution. During the two centuries where the gold standard reigned, the world enjoyed the greatest amount of growth in mankind’s history. The standard of living for the entire population of those nations tied to the gold standard rose to levels never before dreamed of. The world immersed itself in free trade and there was not a world war fought for a hundred years. And in the United States we transformed ourselves from an agrarian society to an industrial one. Those that claim that gold limits the amount of growth must have somehow missed this fact.

In the words of Nobel Prize winner Robert E. Lucas Jr., “The industrial revolution marks a major turning point in human history; almost every aspect of daily life was eventually influenced in some way. Most notably, average income and population began to exhibit unprecedented sustained growth. In the two centuries following 1800, the world’s average per capita income increased over tenfold, while the world’s population increased over sixfold. For the first time in history, the living standards of the masses of ordinary people have begun to undergo sustained growth. . . . Nothing remotely like this economic behavior has happened before.”

No, gold does not prevent prosperity. It furthers it. For centuries this argument never ever occurred to people. Even though gold became relatively scarcer each year, during the industrial revolution, its value remained stable. There was always enough gold to serve as an effective medium of exchange. Only after we abandoned the gold standard did money claims become abundant rather than scarce and prices begin to rise progressively. The problem became a problem of not too little money but too much money. A term never heard before among common people emerged in the 20th century: inflation.

Those who argue that the gold standard is impractical because there is too little gold in circulation are overlooking what it means to have too many excess paper dollars in circulation. More paper dollars does not equate necessarily to more wealth. Many times just the opposite is true. I give you Zimbabwe as an example. According to the country’s Central Statistic Office, the estimated rate of inflation rose to 11,200,000 percent in August of 2008. The Central bank introduced a new $10 billion note. Everyone had money. Except everyone was broke.

This is the illusion that can come with inflation. This is the illusion of having more money. The argument given that did away with the gold standard was that we needed an expanding monetary unit with less rigidity, one with greater flexibility. Once we did away with limitations on money and credit creation the result was a depreciation of the value of our dollar by 97 percent over the last century compared with the gold standard preserving 100 percent of its value the two centuries before. At the end of a century under the gold standard, one could buy a suit of clothes for approximately the same coins he did at the beginning of the century. Today we would have to drop a zero off our money to buy the same house we could have 40 years ago.

In Gold We Trust

We live in a time of great mistrust—mistrust of our banking system, of our debt, of our money, of our politicians, and our ability to return to a period of growth, prosperity, and stability. We live in a world of reckless government spending, fiscal irresponsibility, and trillions in unfunded liabilities. Until we correct these things, we need to deal with the monetary system as it is.

Interestingly, since the financial credit crisis, most would agree today that an increase in the capital requirements of financial institutions is a good thing and would have perhaps prevented the financial meltdown. A return to gold standard ratios is not out of the question given this realization. Adequate capital requirements and the subsequent decreased leverage they would bring are essential to the solvency of any monetary system.

The best we can hope for today is to improve the present system from within by making it more prudent and more honest. Financial reform would be best achieved by moving toward the operating principles of a gold standard. To build a better financial system we need to know what to aim for—what works, what doesn’t, and why. Gold represents a two-century history lesson in which the value of money remained constant. This is something no other monetary system can claim.

The years in which gold, silver, nickel, and copper were used as money represent years of growth, prosperity, and relative stability. The gold standard does not claim to eliminate panics, crises, greed, or irrationality. But it does guarantee that the purchasing power of money will be preserved as long as the rules of the gold standard are adhered to.

The rules of the gold standard come from the natural automatic flows of money and trade between individuals throughout the world; from a government committed to defending the value of its currency; through the certainty of convertibility of paper money to a commodity at a fixed ratio. The rules require both free trade and fiscal discipline. To exist, a gold standard requires a system of limited government, limited spending, limited debt and credit creation, and the protection of individual and property rights under the law.

Why gold? Because gold is a time-honored and time-tested honest currency. It establishes a system based on financial, monetary, and fiscal discipline. Today’s fiat standard is barely a century old and may not make it to its hundredth birthday. My guess is that if it does, it will be with the help of gold, or at least by moving toward the principles of sound money and the discipline that a gold standard requires. Without these, financial reform efforts will be meaningless. No paper money system can survive without them. None ever have.

Chapter 2

The Gold Standard: A Standard for Freedom1

At one time the case for the gold standard was practically self-evident—undisputed by most economists and appreciated by both laymen and professionals. Today, however, the case for gold is buried under decades of propaganda, misconceptions, and myths. It has been only recently that the case for the gold standard has begun to surface from under the policy makers’ anti-gold debris. Consequently, gold is once again gaining the attention and interest it so rightly deserves.

Today’s free-market advocates of the gold standard differ from past advocates. For example, free-market advocates do not exclude silver or other commodities from their concept of a gold standard. Indeed, they do not even insist that gold must be money. The case for the gold standard is actually the case for market-originated commodity money, and the case against government-regulated fiat money. It is simply an extension of the case for free markets that respect the rights of individuals, and the case against controlled markets that violate the rights of individuals.

To be concerned with the gold standard is to be concerned with a free economy, regulated by the values and choices of individuals, rather than a controlled economy in which the values and choices of individuals are regulated by government. This concern for an individual’s freedom to express values and exercise choices is derived from a deeper concern for justice and for an individual’s right to property. The individual concerned with justice does not aim to force others to use gold as money. Rather, he insists that government has no right to prevent him and other individuals from using gold as money if they choose. The individual concerned with property rights does not urge government to legislate pro-gold policies in order to arbitrarily increase the value, popularity, or status of gold. Rather, he insists that government stop inflating, since this arbitrarily decreases the value of his monetary claims to property.

Antagonists of the gold standard claim that it is impractical. They cite such myths as we have too little gold, and gold restricts prosperity, while ignoring the virtues and history of the gold standard. But the gold standard is, in fact, the most practical monetary system yet conceived by individuals. However, the gold standard’s primary virtue does not lie in its practicality: It lies in its morality. Those concerned about such things as freedom, justice, the preservation of property rights and purchasing power, would do well to consider the moral case for the gold standard, for, once understood, it is the individual’s best defense against government confiscation of property through inflation.

The fact that prevents a government from indulging in inflationary schemes under the gold standard can be best summed up in a phrase: governments can’t print gold. But to understand the implications of this statement, and the virtues of having gold as money, it is first necessary to understand what money is—and what money is not.

What Money Is . . .