An interesting change has been taking place in the editorial policy of the
Financial Times. For 30 years, there has been what has amounted to an
embargo on articles about gold. Occasionally -- perhaps once a year -- an
article appeared of an historical nature -- and scathing in tone -- about
that 'barbarous relic', as Keynes had once called it (Monetary Reform, 1924).
Second only to the most famous quotation of Keynes -- "In the end we are
all dead" -- the tag of "barbarous relic" has stuck to gold, monotonously,
patronizingly, ever since -- whenever the subject has been mentioned. No
modern person in full possession of his faculties, it is laughingly
suggested, should ever believe that a gold standard for national currencies
could ever return.
Not so, more recently. Officially, propaganda by Western Treasury
officialdom -- and faithfully parrotted by their naive pupils, politicians
-- still continues. Now that the official line has radiated outwards to the
masses and believed by almost everyone, the subject of gold has scarcely
needed to be mentioned. This has been particularly so since 1980 when an
enormous spike in the price of gold subsequently collapsed and left gold
speculators with vast holes in their pockets.
After that bruising episode, the price of gold lay low for many years.
Indeed, it was additionally suppressed for many years by all sorts of
secret devices by central banks. One of them, in fact, was so secret that,
when West European central bankers met in person to concoct it, not a
single word of it was recorded on paper. This has only been revealed in
recent years -- and so thoroughly, too -- that it's now officially graced
as the CBGA (Central Bank Gold Agreement). Gordon Brown, then Chancellor of
the Exchequer, started the first CBGA with a whoosh by selling a quarter of
the UK gold stock at a knock-down price in 1999. It was a knock-down price
because he'd also told the world about the sale beforehand! When the price
was even lower a year later, he then sold another quarter of the Bank of
England stock. Other European central banks obligingly followed suit in the
following five years -- the period of the first CBGA.
By the time the second five-year CBGA started late in 2004, the cat was out
of the bag. Indeed, the official propaganda -- bravely whistling in the
dark -- took the line that it was sensible to sell gold because, in the
meantime, the price of gold, perversely, had been rising and so central
banks were getting plenty of money by doing so! This was totally illogical,
of course, because their main intention was to reduce the price of gold
but, never mind, when the second CBGA came to an end late in 2009, they
kept on whistling and embarked on yet another CBGA phase of selling gold
with agreed large sales of gold in order to moderate the price of gold and
keep it in its lowly place.
But gold was no longer in its lowly place because, after a brief dip caused
by Brown's first sale in 1999, the price had been rising despite the hopes
of the central banks. Since about the year 2000 the price has been rising
at close to 17% a year and there has been a four-fold rise altogether. In
fact, the price rise this year is nearer a rate of 20% p.a. and, if
anything, gently accelerating. Although a third CBGA had been formally
initiated and European central banks could now make a lot more money, they
are no long selling. In truth, the third CBGA was dead in the water before
it started.
So European central banks are now much more circumspect about gold. They
never mention the brat, but at least they are not trying to pour scorn on
it. And this is also why the Financial Times has been running a spate of
articles about gold in the past year. But, actually, central banks never
did have the confidence to truly believe what they said they believed. If
gold was finished forever as a currency then why didn't the European
central banks -- and the US Fed also -- sell all their gold in a great
Closing Down sale which would, in theory, have killed gold forever? Why,
for example, when the new Euro currency started in 1999, did the European
Central Bank feel it had to back it up with a very large amount of gold in
its vaults (20% of its reserves)?
Gold, in fact, had never lost its potency as a currency. In 1944 when it
was apparent that America was winning the war against Germany on behalf of
the European nations which were bombed-out and destitute, America could
seal its supremacy by holding a currency conference at Bretton Woods.
Despite John Maynard Keynes' desire to institute a world-wide dependable
currency, which he named as the Bancor, America's negotiator, Harry Dexter
White, browbeat him and the 'negotiators' of 43 other countries (except
Switzeland) into accepting the dollar as the world currency. All their
currencies would be fixed to the dollar, but the dollar alone would be
fixed to gold.
But this wasn't a true gold standard whereby the price of the dollar would
be fixed to a particular weight of free-priced gold. Because gold is a
scarce metal and is expensive to mine, it had, for 6,000 years, been a
valuable commodity which scarcely altered its value from year to year
despite occasional discoveries such as the Californian Gold Rush of 1849
and a later one in Australia. Currencies which consisted of gold, or paper
banknotes that were tied to gold, couldn't inflate. This had been the case
during the first exuberant phase of the industrial revolution in the 19th
century. The value of the British pound -- and all other currencies --
scarcely changed at all for 100 years. There was no inflation whatsoever.
However, Harry Dexter White imposed a gold 'standard' which wasn't a real
gold standard at all but a reverse gold standard. Gold was thenceforth to
be tied to the dollar. It is actually a 'gold exchange standard'.
Henceforth the American dollar was the anchor, not gold. This is so simple
an aberration that the vast majority of people have been confused about it
ever since, even economists.
What has happened since this was imposed? The dollar became overwhelmingly
supreme after Bretton Woods. If any nation had the temerity to have a
trading surplus against America from then onwards, it could, if necessary
exchange its earned dollars against American gold in Fort Knox and, if it
were really cheeky, ask for it to be shipped to its own central bank vaults
across the water (pretty well empty of gold after paying for wartime
armaments). And they did -- for a while -- until America started to become
really churlish about this and threatened to withdraw its troops from NATO
or its ships protecting Japan. American was becoming resistant because the
true market price of gold was rising far more than the official one of $35
to the ounce. America got away with printing whatever dollars it need to
pay for its imports. Inflation started raging.
It was President De Gaulle of France -- who hated America anyway -- who
brought the whole thing to a head by insisting on gold payments. Present
Nixon responded in 1971 by detaching the link between the dollar and gold
completely. Since then inflation has gone haywire. The dollar and the Euro
and the Yen and other currencies have all been seesawing against one
another and, when compared with the price of basic commodities, have
seesawed downwards. The two major trading currencies in particular, the
Dollar and the Euro, now without any sort of anchor at all , will continue
to seesaw downwards until they will have no value at all.
As has happened many times before in history to other government
currencies. This, of course, is what the Treasuries of America and Europe
are badly frightened about at the present time. They don't know what to do
and nor do most economists. They're almost equally divided between those
who say we ought to inflate further with quantitative easing and those who
say, like it or not, the healthy thing to do is to deflate and go through a
purge.
What they can't yet admit is that national currencies need an anchor. This
is why China (with its superabundant production of consumer goods) and
Russia (with its superabundant supply of natural gas) and the Middle East
countries and Emirates (with its still abundant reserves of oil) no longer
want American dollars. They are calling for a new world currency and --
certainly not by accident -- buying gold. That's why the price continues to
go up.
Also, incidentally, the Financial Times has a good article on gold today.
Not at all sarcastic this time. (And for those of my readers over the water
this conversion has also been going on in the Wall Street Journal.)
Keith
Keith Hudson, Saltford, England
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