With about 1.6 Billion US dollars of customer’s money ‘disappearing’ in the MF global bankruptcy, you may be wondering what is going on… and exactly where is the world heading. These are good questions, but to answer then we need more than a sound bite… we need to examine a particular bit of world history… the history of the destruction of the Classical Gold Standard.
The Classical Gold Standard as practiced during the nineteenth century, while less than perfect, was a thousand times better than the ‘system’ of fraud and theft that we are seemingly stuck with. The Classical Gold Standard helped to propel the world economy to unimagined heights, bringing unprecedented prosperity to millions, and helped to make the nineteenth century the most peaceful century mankind has ever experienced. It has taken the best part of a century to destroy this Gold Standard.
The most devastating blow… but not the first… was delivered on the eve of WWI… the Great War. As war clouds gathered, the future combatants called their loans, to fill their vaults with Gold… but even vaults bulging with Gold would not be enough to fund a protracted war. Indeed, pundits of the day were predicting that any possible war could not last more than a few months at worst, as the combatants would run out of money.
All governments knew this… and their choices were limited; raise funds through war taxes, borrow by issuing war bonds, or… or what? At the time, Gold was money, and bank notes were clearly recognized as just that; ‘notes’, that is IOUs redeemable into Gold money. They came up with a truly insidious plan.
New ‘legal tender’ laws were passed, decreeing that henceforth the IOUs themselves were money, legal for all payments. Think about this for a minute. Gold is a present good, just like an apple, or sugar, or oil, or any other real, physical commodity… with the only difference being that Gold is a monetary commodity, not a commodity that is directly consumed. Imagine passing a law that decrees that an IOU for an apple, an IOU for sugar, or an IOU for oil is now the apple itself, or the sugar itself, or the oil itself. Is this insane or what?
Insane or not, the laws were were passed, first in France then quickly thereafter in England and Germany. To help mislead people of this grand larceny, Gold remained in circulation along with the new Bank Notes, the so called Legal Tender paper… but not for long.
To top this off, Real Bill circulation was shut down. There is no space here to give justice to the vital importance to the circulation of Real Bills to the viability of a Gold Standard, but appreciate that multilateral trade underpinned by Real Bills circulation is so efficient and productive that total volume of world trade before WWI was not surpassed until the nineteen seventies… nearly sixty five years later… three human generations; this in spite of enormous growth in the world economy. Simply, Real Bills are the commercial clearing system of the Gold Standard, and no Gold Standard can possible survive without a fully developed Bills market.
This double whammy was to prove to be fatal to the Classical Gold Standard. After the Great War ended, Britain ‘tried’ to get ‘back on Gold’… but without resuscitating the Real Bills market. Furthermore, the attempt at going ‘back on Gold’ was made without devaluing the Pound… to account for the enormous number of Pound notes printed to finance the war.
Returning to the pre-war ratio was considered highly deflationary. This is more of a red herring than anything else, designed to draw attention away from the real cause; the failure to allow Real ill circulation to resume.
The effort was doomed to failure, and indeed it did fail. Great Britain went ‘Off Gold”. Soon the Us followed… and to rub salt into the wound, President Roosevelt confiscated all the Gold held by US citizens, then a few months later devalued the Dollar from $22 per once to $35 per ounce.
This was the death knell of the Gold Coin Standard, the Classical Gold standard of the nineteenth century. The world retreated to the so called Gold Bullion standard, where only large entities were entitled to hold or trade Gold. No ordinary citizen was allowed to do so. The power of Gold was concentrated into the hands of an ‘elite’ minority, while the large majority had to be content with irredeemable paper… IOU nothing bank notes.
After WWII, the carnage continued. The Bretton Woods system was brought into play, whereby only the US Treasury was entitled to hold Gold, supposedly to ‘back’ the US Dollar… and the US Dollar was used as a reserve to ‘back’ local currencies, such as the British Pound and the French Franck. Gold was still in the system, but farther and farther away from the people. The concentration of Gold… and of monetary power… continued unchecked.
The last nail in the coffin of the Classical Gold Standard was delivered in nineteen seventy three, by President Nixon. By ‘closing the Gold window’, or more accurately by reneging on the international Gold obligations of the US just as Roosevelt had defaulted on the national Gold obligations of the US government, the last official link to Gold was cut. The whole world was now officially ‘off Gold’… and ‘on Fiat’.
Mind you, WWI was not the first attack on the Gold Standard by any means. The demonetization of Silver, the change from a bimetallic standard to a Gold only standard was such an attack… although at first glance this seems contradictory. After all, should not removing ‘competition’ to Gold not make Gold supreme? The answer is not by any means. Demonetizing Silver meant that about half the money in circulation was suddenly removed. This blow to the monetary system was far more devastating than the attempt by Britain to return to Gold at pre war Pound parity… yet the system survived, although not without unnecessary stress.
The only reason it survived is that Real Bills circulation was not destroyed when Silver was demonetized. Real Bills continued to function unimpaired, fulfilling their role as the clearing system of the Gold Standard… and after a brief deflationary episode, the Gold standard continued to soldier on.
But this ‘crime of 1873’… the year that Silver was demonetized… was by no means the very first blow to the Gold Standard, the very first blow delivered against honest money. The first blow came early, before the Gold Standard was even fully established. The first blow was a legally sanctioned violation of money ownership; a violation of property rights.
Judgments were made in British jurisprudence, and legal precedents set, that money ‘deposited’ in a bank account was no longer the property of the depositor, but somehow became the property of the bank. This is another incredible farce of law; it is as if the furniture you take to a warehouse for safe keeping is deemed to suddenly become the property of the warehouse!
Of course, once the bank acquires ownership of the money, IT decides what to do with it… like using demand deposits to buy high yielding long term bonds… the notorious practice of borrowing short to lend long. As if the warehouse owner decides to lend out your furniture for his own profit, or trade it for some other stuff.
This is where the very first cracks appeared, the vulnerable spot where the shenanigans begin. The customer is disempowered, and the power over his money… and the power inherent in his Gold… is transferred to the banking system. The so called business cycle, in reality a credit cycle, is put into motion by the fraudulent credit thus made possible. If the depositor decides to withdraw his money, the money is simply not there… having been used to buy a high yielding long term bond… and the run on the bank begins.
So where are we today? The cancer of property rights invasion that first disturbed the inherent stability of an unadulterated Gold standard, a Gold standard where property rights and contract law are sacrosanct, is metastizing.
First came the perversion of declaring that the Bank owns and has rights to dispose of deposits as it sees fit, not as the rightful owner wishes. Next, the abomination of decreeing that an IOU for something is the thing itself… followed by outlawing citizens from even holding Gold…. and then, taking Gold completely out of the system.
Today, the speed of slippage down the slippery slope towards Hades is increasing rapidly. Mf global, the large international futures clearing house recently went bankrupt, and about 1.6 Billion dollars of customer property accounts in the form of futures contracts from ‘segregated’ customer accounts simply ‘disappeared’. The ‘furniture’ you took to the warehouse for safekeeping was not returned to you when the warehouse went bankrupt… but given to creditors, along with the warehouse itself. The creditor in this atrocity was… surprise… a ‘too big to fail’ bank, namely J.P Morgan.
Moreover, a US federal judge ruled that ‘yes, the value disappeared, but there was no criminal intent, just chaos’… and so Mr. Corzine, the CEO of JP Morgan, is innocent. Right. In a world of computerized audit trails, where every penny transaction is tracked with Argus eyes, $1,600,000,000 simply ‘disappears between the cracks’! If you believe that the ‘honorable judge’ made a fair and honest judgment, then I suggest you go out and make a fair and honest offer to buy the Brooklyn Bridge.
So what is next? Could it be that the rumors of the upcoming demise of Morgan Stanley are more than just rumors? Could Morgan Stanley be the next Mf Global? Is it be possible that after the violation of property rights to money, after the violation of property rights to futures contracts the violation of property rights to equities is next? Would anyone be shocked if this rumor comes true?
Bah. Before any honest money system becomes possible, the invasion of property rights must be reversed. The very first property rights invasion that started the slide towards Hades must be reversed. Only then will it become possible to resolve the Global Financial (Money) Crisis, instead of constantly making it worse.
Rudy J. Fritsch
Editor in Chief
The Gold Standard Institute