DJ Sunday Night 2-17-19 "Historical Perspective on Gold Backed Currency" 2/17/19

DJ:   DID YOU KNOW?

Good Evening, In a previous life, as a Civil Engineer, the first thing to consider when doing any project was to establish a “Critical Path”. A Critical Path is simple common sense. Things must follow a sequence of events.

You must run levels before moving earth, you must move the earth before installing the plumbing, you must install the plumbing before pouring the foundation , you must pour the foundation before you start the framing and so on. You can’t install the plumbing after the foundations are poured or start the framing without a foundation.

In this respect the GCR also follows a Critical Path. The Prosperity Programs must be paid first. The Prosperity Programs can’t be paid until currencies are gold/asset backed. Currencies can’t be gold/asset backed until countries have their spending under control (Stop WARRING), establishing sovereignties to be able to issue a currency, create secure delivery systems, synchronize 209 countries, and the list goes on an on.

So we should focus on the first step of the” Critical Path “of the GCR. Gold/Asset back the currencies and what it actually means, what needs to take place and how it works.


​Any currency is only truly "backed by gold" if it is convertible to gold or if backed by any other commodity, convertible to that commodity.

There is something appealing about the idea of a gold-backed currency, money backed by the tangible value of gold, i.e. "the gold standard."

Instead of worthless paper money (fiat currency), gold-backed money would have real, enduring value, it would be "hard currency", i.e. sound money, because it would be convertible to gold itself.

Many proponents of sound money identify President Nixon's ending of the U.S. dollar's gold standard in 1971 as the cause of the nation's financial decline. If our currency was still convertible to gold, the system would never have allowed the vast pile of debt to accumulate.

The problem with this line of thinking is that it is disconnected from the real-world mechanisms of capital flows and the way money is created in our financial system.

The reason why the USD was taken off the gold standard was because the U.S. was running trade deficits, all of America's gold would have been transferred to the exporting nations. America's gold reserves would have disappeared, leaving nothing to back the dollar.

The U.S. would have collapsed decades ago if it didn't abandon the Gold Standard.

The problem for sound money, is trade deficits. If the U.S. only had trade surpluses, then the gold would not drain away.

Triffin's Paradox explains why this doesn't work for a reserve currency. (Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies.)

A reserve currency has two distinct sets of users, domestic and global users. Each has different needs, so there is a built-in conflict between the two sets of users. Global users of the USD need enormous quantities of dollars to use as reserves, to pay debts denominated in USD and to facilitate international trade. The only way the issuing nation can provide enough currency to meet this global demand is to run large, permanent trade deficits, in effect, "exporting" dollars in exchange for goods and services.

This is the paradox: to maintain the “privilege" of a reserve currency, a nation must "export" its currency in volume. A nation that runs trade surpluses cannot supply the world with enough of its currency to act as a reserve currency.

A Post-Gold Currency

In the 40 plus years since, the world has been on a fiat currency system, meaning nothing is backing the dollar, yen, euro, etc., except the faith of the people using the stuff. The monetary system is overdue for a major correction after four decades of the current fiat system.

It will have to happen soon and abruptly. Historically, the monetary system changes every 30 to 40 years. The last one was in 1971, before that, it was in 1944 with the Brenton Woods Accord, where all the currencies of the world were pegged to the U.S. dollar (at that point, the U.S. dollar was still pegged to gold). Prior to that, the last change was in 1913 with the introduction of the Federal Reserve.

The likelihood is that, very soon, we’re going to see some sort of gold-backed currency again. Because of our trade deficits. It’s unlikely the USD will be first, simply because doing so would restrain federal spending. It’s more likely to be a currency from a country with a positive trade surplus like China and/or one that has an abundance of natural resources like Australia or Canada.

The country adopting some type of gold standard first is likely to do a partially backed gold currency, which means every dollar or equivalent would be backed by, say, $0.25 worth of gold. This would be a fractional system, a 10% backing of the currency with gold. Whichever country does this first will transform their currency into the global leader of stability, just as the U.S. dollar was for nearly a century. (Pay attention to what China is doing!)

Historical Perspective

What often goes without mention is that, for 99% of human history, money has been backed by gold. Gold and silver started off as a commodity money. This means the commodity is actually used as money. In this case, gold and silver coins were used as money and exchanged directly for goods and services.

The next evolution was a receipt system where the commodity was put into a depository or bank and the owner received a receipt. People started trading the receipts, because it was easier than carrying around the metals.

The receipts were portable and 100% backed by gold and silver, something real and tangible. The receipts were treated as money and could be freely exchanged for the actual gold or silver at any time. The certificates were strictly representative of the actual gold and silver supply, so every certificate was backed by an actual commodity.

That was the nature of the banking system until the banks started playing games with pure one-to-one backing and, out of pure greed, created fractional reserve lending.

The bankers realized people weren’t actually coming back to get the gold and silver, but instead were just trading the certificates or receipts.

The bankers realized they could print more certificates and loan them out, charge interest, and make more profits based on something they created out of thin air. This type of plan would work unless people panicked and wanted their gold back. If the bankers printed twice as many receipts as they had gold for and all the receipt holders demanded gold for their receipts at the same time, the bank would fail.

Fractional Reserve Lending

The system of issuing more receipts or currency than the bank has the reserves to cover is called fractional reserve lending, and it’s rampant all over the planet today.

The difference today is that the actual gold backing the receipts has been eliminated from the equation. The banks now have deposits of currency that they lend out, but they lend multiples of what they have on deposit. They lend “money” out to people that is made up out of thin air.

For more on this, pick up a copy of G. Edward Griffin’s book, The Creature from Jekyll Island.

During the most recent financial crisis, fractional reserve lending was as high as 42 to 1. That means the banks lent out 42 times as much currency (not gold) as they had in reserve. In some cases, the reserve went to zero, so the bank didn’t have to have any type of reserve at all.

The banks just created money and lent it. They made profits from interest charged on loans of money they didn’t even have. That’s essentially what you have in your bank account, made-up cash that doesn’t exist. There is nothing backing it. (The Basel Accords are supposed to handle that reserve issue)

This can seem a little crazy, and it is! That’s why gold and silver, physical gold and silver, are so important, because they’re real and can’t be manipulated by anything like the fractional reserve system.

The reason central bankers and banks in general don’t like gold and silver is because it’s impossible to play games and make up money if the money is gold and silver. The banks lose their power to scam the populace.

Before 1971, the dollar was backed by gold. In the 1960s, French President, Charles de Gaulle, saw the United States spending on the Great Society and the Vietnam War and started getting a little bit leery of the U.S. government spending all this cash.

President de Gaulle took action to protect France from the wild spending of the United States, and France started trading its dollars for gold, pushing the U.S. to the brink. By 1971, the draining of gold was unsustainable.

Either the U.S. had to slow its spending or sever the link between gold and the dollar. Thus, Nixon chose to preserve spending and closed the gold window, ending the gold standard with one quick swipe of the pen. And because the USD was the currency reserve the rest of the world had to follow suit.


So we must take lesson from prior failures and not recreate the same scenario from the application of a gold standard. Only this time it will be on a global scale. Once a country engages a gold standard it must control its spending and balance their trade or suffer the same draining of reserves that the U.S. suffered.

The problem is, we don’t know what the sequence of events are in the “Critical Path” or where the GCR (The end goal) fits in to the sequence of events. We can only use common sense and speculate what steps must come first to allow the next step.

If gold is to be the major factor in backing the global currencies where is it going to come from? There are many different factors that affect gold prices, including gold production and consumption patterns. Understanding more about where gold is produced, where it is consumed, and even why it is consumed can help provide a better understanding of its reserve capabilities.

Each year, global gold mining adds approximately 2,500-3,000 tons to the overall above-ground stock of gold. While gold production has shown an upward trend in recent years, it is still approximately 1000 tones per/ yr. behind money supply demand this is likely to level off in coming years but for the now we have to deal with reality.

Mining companies estimate how much gold remains at each mining project they operate. These can be split into two categories: reserves (gold that is economic to mine at the prevailing gold price); and resources (gold that will potentially be economic to mine, subject to further investigation or at a different price level).

So allow for the designated sequence of events to unfold, don’t let your expectations or circumstances dictate your perceptions. There isn’t enough gold capacity to back this event strictly with gold. It will most likely be a basket of globally recognized assets. The price of gold would have to rise dramatically just to be at 10% of what would be needed.

I have to retract a statement from the Feb 10th post. Australia, has NOT gone “Gold backed”. After a conversation with the RBA who stated they are still Fiat but have “intentions” of going gold backed.

DJ

Not enough gold in the world for any large country to become gold-backed.  It is possible, but doubtful, a country's currency would become asset-backed, but this is almost impossible.  How does one calculate what an asset is worth?

Nixon didn't take us off the gold standard.  FDR did in 1933.  Nixon took us off Bretton-Woods.  The author of this drivel clearly hasn't studied the gold-backed dollar's dismal history.  Banks were failing left and right.  People were hoarding gold.  There was no way to expand and contract the money supply when needed.  There's a very good reason FDR took us off the gold standard.  It wasn't viable.  We had to find a new system and the current system is far superior.  Witness the near zero bank failures in recent years.