In 1971, the US abruptly went off the gold standard, and in making the public announcement, US President Richard Nixon looked into the television camera and said, “We’re all Keynesians now.”
I was a young man at the time and had previously bought gold, albeit on a very small scale, but I recall looking into the face of this delusional man and thinking, “This is not good.”
However, the world at large apparently agreed with Mister Nixon, and within a few years, the other countries also went off the gold standard, which meant that, from that point on, no currency was backed by anything other than a promise.
It didn’t take long before countries began playing with their currencies. At one time, the German mark, the French franc, the Italian lire, and the British shilling had all been roughly equivalent in value, and four or five of any one of them was worth about a dollar.
That had already begun to change prior to 1971, but following the decoupling from gold, the governments of the world really began to see the advantages of manipulating their own currencies against the currencies of other nations.
From that point on, a currency note from any country, which was already no more than an “I owe you,” was increasingly degraded to an “I owe you an undetermined and fluctuating amount.”
This fixation with monetary manipulation began much like the 1960s youths’ experimentation with drugs, and by the millennium, had morphed into something more akin to heroin addiction. Unfortunately, those who had become the addicts were the national leaders in finance and politics.
Well, here we are, in the second decade of the millennium. The party has deteriorated and is soon to come to a bad end.
As we get closer, those of us who have, for many years, predicted an eventual realisation that Mister Keynes and Mister Nixon were dead wrong and that the world will once again look to gold are, at this late date, gaining a bit of traction.
We’re seeing an increase in the number of people who recognise that all fiat currencies eventually come to an end and gold will continue to shine.
But there are two remaining questions that have even the best of prognosticators puzzling.
1. What Will the Role of Gold Be in the Future?
When currencies collapse, will there be an immediate and complete switch to gold? Unlikely.
Will further fiat currencies be put forward as solutions to paper money? Almost definitely.
Will future currencies be backed by gold? Probably, especially as so many governments and banking institutions are quietly scrambling to buy gold whilst trying not to let on the extent of their stockpiling.
Will gold-backed currencies stabilise money for the rest of our lives? Quite unlikely.
Even those countries who may agree to audits to demonstrate they own the gold they claim to own will, at some point in the future, look for ways to “do a Nixon” and once again get off the gold standard. (The short-term benefits of fiddling with currency is too tempting.)
2. Who’s Got the Gold?
Currencies come and go in the world with remarkable frequency (the last hundred years has been witness to over twenty hyperinflations worldwide).
In that quiet scrambling we were talking about, no one is being really truthful about how much gold they have. In addition, even between the foremost experts on the subject (and here, I refer not to the pundits on television, but to those economists that I personally hold in the highest regard), there is broad speculation as to who holds what.
One school of thought has it that, although the US has long claimed that it possesses roughly 8,000 tonnes of gold in Fort Knox, there has not been an audit of Fort Knox since 1953. (That’s not encouraging.) Is it 8,000 tonnes? 4,000? None? We’re unlikely to ever get a truthful answer on this question.
In addition, the US has held roughly 6,000 tonnes of gold for European countries since the Cold War.
Now that the US has become the world’s foremost debtor nation, Europe is getting a bit antsy, and some are asking to have it back. In response, the Federal Reserve has sent Germany a small portion of their gold but avoids shipping the remainder and denies them even the ability to inspect the remainder. (Again, not encouraging.)
On the other hand, we have equally astute economists—US government insiders—who state that they are fairly certain the gold is there—in both Fort Knox and the New York Federal Reserve Bank's underground vault. In the latter case, they state that, although much or all of the gold has been leased to the bullion banks, it has never left the building.
What does this mean to the rightful owners? There are multiple legitimate claims on the very same bars of gold.
Might the Fed burn the rightful owners—the European nations—and burn the bullion banks? Might they just confiscate the gold (assuming it’s still there) to create a new gold-backed currency for the US, and thumb their collective noses to all other claimants?
And does the People’s Bank of China hold roughly 2,500 tonnes of gold, as has been suggested? Or do they hold 5,000, or even more? Certainly, it’s to their advantage to claim the lowest amount that might be believable at present. Some US government insiders have insisted that the low number is the true number.
The argument over this question may seem moot, but it is not. “Who has the gold” may very well decide which countries will recover from the currency crashes with their skin still on.
Whoever holds the most gold will hold the most real wealth and, by extension, gain the most prominent seat at the bargaining table for decades to come. Whether that table will be the IMF, the new AAIB (Asian Infrastructure Investment Bank), or any future central economic entity, the future will go to the player with the most metal, as he will be able to create the most currency, in whatever form it may take.
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