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The Gold-Plated Sting

By Gary North

March 3, 2007

Any American over age 50 probably remembers The Sting, the 1973 movie starring Paul Newman and Robert Redford. Their characters were a pair of penny-ante crooks who got even with a murderous criminal by setting him up for a scam. Like most scams, it appealed to greed. They persuaded him that he could get something for nothing. Then they stripped him of his money.

It was a great movie. All you had to do was ignore the ending, which violated an incontrovertible truth that had been revealed in a less well-known movie, The Gang That Couldn’t Shoot Straight (1971). That truth was announced by Big Momma, the Italian mother of an incompetent gang: “If it ain’t in the Daily News, there ain’t-a no murder.”

Compared to what central bankers have done to the general public, The Sting was a con job run by amateurs.

So successful has their sting been that it has taken in 98% of the gold bugs.

THE GOLD BUG’S CREED

I am a gold bug. In early 2001, there were hardly any of us remaining.

What is a gold bug? It is a person who believes the following:

The gold standard was good for world trade, 1815 to 1914.

The gold standard was good for individual liberty.

A gold standard reduces the likelihood of monetary inflation.

Gold was a good investment, 1976—1979.

Gold is still a good investment, despite 1980—2001, when it fell 70% while consumer prices doubled.

The problem has always been this: there is almost no agreement among gold bugs as to what features a gold standard should always have. Should a gold standard be

Guaranteed by law?

Whose law?

Enforced by which government agency?

With the gold in which form?

Stored where?

At whose expense?

With what restrictions on entry?

With what competition from government-issued money?

With what competition from central bank-issued money?

At what price?

Then there is the question of silver. Gold bugs are usually also silver bugs. So, all of the above questions apply to silver.

There were gold coins in circulation in my parents’ youth. There were silver coins circulating in my youth. These coins used to be money, all over the industrial West. No longer. What happened?

The sting happened.

In June, 1914, you could have walked into a bank anywhere in the West and handed over the national paper money in exchange for either gold coins or silver coins. You could have purchased these coins at a fixed price: a specific quantity of paper money per coin. You would have paid nothing for the transaction, other than standing in line.

The gold standard was therefore a free lunch. So was the silver standard.

Problem: “There ain’t no such thing as a free lunch.”

So, there was something rotten in Denmark — also in England, France, the United States, and every other gold standard country. There was at least one fundamental flaw in the international gold standard, which was also a series of national gold standards. All of them rested on a lie: “something for nothing.”

Whenever you are offered something for nothing, keep your hand upon your wallet and your back against the wall.

THE FRAUD OF THE GOLD STANDARD

The gold standard as it actually operated, 1815—1914, was a gigantic fraud. That fraud was revealed every time there was a major war. Commercial banks suspended gold redemption on demand, and governments always legalized this violation of contract.

The gold standard in wartime wasn’t worth the paper it was written on.

In late 1914, Europe’s banks suspended payment when World War I broke out. But this time the central banks in each country confiscated the gold that the commercial banks had just confiscated from their depositors.

After World War I was over, in 1925, Great Britain re-established gold coin redemption on demand, but at the pre-war, pre-wartime inflation price. This meant that gold withdrawals would strip the Bank of England of its gold unless it shrank the currency supply, which it feared to do. In 1931, gold withdrawals threatened the Bank of England’s gold horde. The Bank, with the government’s approval, suspended payment. It has never been re-established.

In 1933, Franklin Roosevelt imitated the Brits. He went even further. He made it illegal for American citizens to own gold bullion or gold bullion coins.

Central banks could redeem gold for dollars at the U.S. Treasury after 1934 at $35/oz — not the previous $20. That policy ended on August 15, 1971, when Nixon unilaterally broke the government’s contract with foreign central banks.

So. . . .

The gold standard was a restraint on governments . . . until the governments grew tired of the restraint.

The gold standard was a restraint on privately owned central banks after governments turned their nations’ gold over to the central banks . . . until the central bankers grew tired of the restraint.

The modern gold standard was therefore from day one a gigantic con job. Governments and later national central banks made this offer to the public:

“Bring your gold coins to your local commercial bank. Your bank will give you paper money in exchange. Paper money is light. It’s easy to carry. Any time you want gold coins rather than paper money, just bring in paper money, and your friendly banker will give you government-guaranteed gold coins at a fixed, government-guaranteed price. This way, you can store your gold free of charge. Think of the convenience. It’s a no-risk deal. Trust us.”

Something for nothing! The public bought it. In every nation, the public bought it. In every gold standard nation, the governments allowed the central banks to confiscate the public’s gold and never return it.

Silver, too.

THE STING

The mark of a successful sting operation is that the victim never knows that he has been stung.

I know of no more successful sting operation than the bait-and-switch scam known as the gold standard.

Not only did the general public in every nation shrug its collective shoulders when the governments confiscated their gold “in the name of the people,” the voters re-elected the politicians who turned over the government’s gold to the privately owned, barely regulated central banks.

The public still had one possible recourse: to go to the local bank and demand paper money. That act is deflationary. Every dollar withdrawn in the form of paper currency and not redeposited in another bank shrinks the money supply by nine to one. Paper currency is not fractionally reserved. Deposits are. Paper money is the bottom of the inverted pyramid of money.

That threat no longer exists. The February 17th issue of The Economist ran a cover story: “The End of Cash.” The cover featured a picture of dinosaurs.

Today, the only institutional restraining factor to protect the public from mass inflation is the bond market. If long-term rates climb in response to price inflation, bonds’ prices fall. That threatens institutional investors.

The sting has removed the ability of the public, person by person, to penalize the commercial banks by withdrawing money and not re-depositing it.

The public is unaware of any of this.

The politicians are unaware of any of this.

The media are unaware of any of this.

Academic economists are vaguely aware of some of this, but they don’t really care. They do not mention any of this in class or in their textbooks. They approve of central banks’ efficiency. Those few who do voice objections do not receive tenure, and surely not in any of the high-prestige universities.

Most amazing of all, the vast majority of gold bugs are unaware of any of this. Authors still write their unread book-long defenses of the gold standard, 1815—1914, as if the system had not been designed and implemented by the Bank of England to further the British Empire’s commercial interests and the interests of the commercial banks that served commerce.

And the beat goes on. And the beat goes on.

WHAT IS THE SOLUTION?

In theory, there are two possible solutions, neither of which has any possibility of being implemented in my lifetime or yours.

One solution is free banking. This was Ludwig von Mises’ suggestion. There would be no bank regulation, no central bank monopolies, no bank licensing, and no legal barriers to entry. Let the most efficient banks win! In other words, the solution is a free market in money.

Another solution is 100% reserve banking. Banks would not be allowed to issue more receipts for gold or silver than they have on deposit. Anything else is fraud. There would be regulation and supervision to make sure deposits matched loans. This was Murray Rothbard’s solution. The question is: Regulation by whom? With what authority?

There would be no government-issued money. There would be no government mint. There would be no legal tender laws. There would be no barriers to entry into coin production.

There would also be no free services. There is no such thing as a free lunch.

Anything other than free banking or 100% reserve banking is a pseudo-gold standard or silver standard. It is just one more invitation to confiscation.

There is no organized movement today to establish either free banking or 100% reserve banking. There has never been a movement to impose 100% reserve banking. It has been well over a century since a handful of economists and pamphlet writers recommended free banking.

Anyone who tells you that it would be easy to switch over to a gold standard has either no understanding of the politics of money and banking or else has been smoking some funny-smelling leaves.

To switch by official decree to a non-governmental banking system would require the wholehearted co-operation of central bankers, commercial bankers, politicians, academic economists, and political parties, all of which have a vested interest in controlling the money supply at the expense of the public. They fear above all the depositors’ ability to bring down the entire international cartel through bank runs.

These bank runs would create massive deflation, international depression, and the collapse of the division of labor.

IMPLEMENTING THE SOLUTION

If a free market gold standard ever arrives, it will be the result of an unplanned response by men and women to a disaster created by the existing central bank cartel. This would require that the switch be preceded by massive inflation, followed by deflation, producing the bankruptcy of the existing banks and brokerage houses.

Problem: Where will we buy our gold coins? With what?

In the summer of 1963, I began buying silver coins at face value at a local bank. By 1964, there were no more silver coins to buy at banks. The run on silver coins had begun. Only in tiny coin stores could you buy silver coins at a premium over face value.

Where could you buy numismatic U.S. gold coins in 1963? At those same little coin shops.

For example, you could buy gold coins from Camino Coin Company in Burlingame, California. Today, over four decades later, you can still buy coins there. It is still tiny. The same guy owns it and runs it. I was 21 back then. I am 65 today.

The more things don’t change, the more they stay the same.

An international gold standard requires widespread access to gold coins or digital warehouse receipts to gold coins. There is no network of easily accessible local dealers. Banks do not buy and sell them. More important, it requires widespread awareness of the government-restraining aspect of gold coins.

Problem: the sting was completely successful. Almost no one today understands the power of gold coins and silver coins in relation to the rival power of governments to buy votes. Among those who think they understand — the gold bugs — almost none of them really do understand. They are advocates of stage one of the sting operation, as if time could run back. They want a return to the good old days when governments issued honest money and central bankers were public-spirited seekers of legitimate profits.

That’ll be the day.

CONCLUSION

Gold coins once provided a degree of personal liberty because governments were forced by public opinion regarding the money supply to maintain convertibility of paper money into gold coins. But war by war, central bank by central bank, economic emergency by economic emergency, textbook by textbook, central bank insiders have persuaded politicians to authorize the removal of gold from the public’s bank accounts. They have also persuaded academic economists and the media to re-shape the public’s opinion regarding gold:

“A barbarous relic.”

It all goes back to the original lie: something for nothing. It also goes back to the lie’s corollary: guaranteed by law. Those two lies made possible the creation of a government-guaranteed gold-plated gold standard. They were part of the sting.

March 3, 2007

From Lewrockwell.com, here.

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