The Day the World Changed14 February 2006
The Impact 14 March 1968 had on Money,
Gold & Mining Shares
Part 1 of this article will examine the significance of the London Gold Pool and the global monetary regime from the Bretton Wood's Accords, to the present time. It also examines the shallowness of the digital financial archives. In the age of information, investors, economists and makers of "policy," may not have the necessary information to properly examine our current age of inflation.
Part 2 of this article will examine the effects of monetary inflation on the seven decades of recorded price history found in the Barron's Gold Mining Index (BGMI). Gold mining shares have proven to be a powerful indicator of future financial trends that everyone with money in the markets should be aware of.
The current bull markets in precious metals and the companies that mine and explore them have their foundations laid in 1944. In 1944 the Bretton Woods international monetary conference was convened and then submitted its recommendations to the world for approval. In 1945 this conference's recommendations were ratified and signed into law by the United States and adopted by the United Nations.
The Bretton Woods Accords (BWA) created a workable post war monetary regime. However the world's central banks and national governments refused to submit to the monetary restraints provided by this conference. The results, a bull market of historic proportions for precious metals in the early 21st century. The world is about to abandon the US dollar, just as the United States abandoned the Bretton Woods Accords fifty years earlier.
On the evening of 14 March 1968 the following press release was issued from Buckingham Palace, United Kingdom.
The London Gold Market will be closed today, Friday, March 15. This is at the request of the United States Government.
At a meeting of the Privy Council held this morning at Buckingham Palace, Her Majesty the Queen approved a proclamation appointing Friday, 15th March, to be observed as a Bank Holiday throughout the United Kingdom.
The banks are, however, being asked to provide their domestic customers with normal cash requirements in sterling.
The authorities are requesting that the stock exchanges also be closed.
What happened? Why did the government of the United Kingdom, upon the request of the United States, find it necessary to have a Bank holiday, and suspend the trading of its stock and gold markets for an unspecified period of time? Why did the United States feel it necessary to make this request?
There is much not said in this press release from Buckingham Palace. To fully comprehend the great importance of this momentous event of monetary history, I must first give a brief history of money from 1944 to 14 March 1968.
When this press release was issued, the United States by international treaty, had promised to pay one ounce of US Treasury Gold for every $35 paper US dollars presented to the US Treasury by foreign central banks.
In 1944, the post war monetary regime was created at an international conference convened in New Hampshire, USA. The recommendations of this conference were called The Bretton Woods Accords. The BWA was submitted to, then ratified by the United States Senate and then signed into law by the President. The $35 paper US dollars to one ounce of US treasury gold, was a statutory requirement pending upon the United States Government after the Bretton Woods Accords was signed into law.
With the enactment of the BWA, several things happened. The World Bank and the International Monetary Fund were created to safeguard the post war international monetary system.
Gold was to play an instrumental part in the post war monetary system, but in a manner only bureaucrats and members of academia could conceive of. Gold would no longer function as money for international payments. Rather, the US dollar was to function as money for international payments, with non monetized gold backing the US dollar.
So, the BWA did not revive the classical "Gold Standard" of the pre August 1914 era. The classical gold standard held that gold was money and nothing else was money. Paper money in a gold standard is only a callable debt, payable in gold upon demand, by its issuer to any holder of the paper note. The classical gold standard, by intent, made inflation with paper currency impossible. This was not so with the BWA. The Bretton Wood's Accords had a loop hole, I believe by intent, big enough for an ocean of liquidity to flow through. And soon, it did.
The BWA made the US dollar the "world's reserve currency", and nothing else was. This made the US dollar function as gold once did in the settlements of international payments between national central banks. This feature of the BWA officially excluded gold from serving as a medium of international payment. This is true to the present day. To reassure the international community that the United States would not issue excessive paper dollars, the dollar was fixed to the price of gold at a ratio of $35 paper dollars for each ounce of US gold held in the bullion reserves of the United States.
This important clause in the BWA was intended to guarantee the honesty of the issuer of the new "world reserve currency" - the United States and its paper US dollar. Whenever paper money replaces gold money for payments, honesty is always the primary issue. When physical gold is used in payments, no one is allowed to buy more than they have in gold to spend. Gold plays no favorites no matter who you are.
In a gold standard, when your gold is gone, you must stop your spending and go back to work to earn more gold. When paper replaces gold for payment, this is true for everyone, but those people who control of the monetary printing presses. The only check on the spending of those who control the monetary printing press is self control. History has proven that self control, when it comes to paper money, is a much rarer commodity than gold.
In 1945, the government of the United States promised not to print more units of the world's reserve currency (the US dollar) than it had in gold to back those paper dollars. This was the critical check against US dollar inflation. In 1945, the quantity of paper dollars in circulation roughly matched the quantity of gold dollars held in the US gold reserves. This was not to be so for long.
The above press release issued from Buckingham Palace, marks the point in time when the British government would no longer assist the United States in maintaining the fiction of the $35 paper US dollars for an ounce of US gold held in reserve. Her Majesty's government since 1960 had assisted the United States Government in a fraud. For the past eight years the UK had redeemed its own gold to honor American gold obligations. On 14 March 1968, the United Kingdom had decided that enough was enough, and withdrew from the London Gold Pool.
Looking at my above chart, we can see the fraud in hard data. By 14 March 1968, the United States had issued 3.97 paper dollars into circulation for every one dollar in gold it possessed in its reserves. This was clearly a violation to the letter and spirit of the Bretton Woods Accords.
In 1968, inflation was defined as an increase in the total stock of money in circulation; rising prices were understood as the effects of this inflation in the paper money supply. This concept of gauging monetary inflation in terms of the inflation's effects on prices was conceived by those who wished to confound the understanding of the public of what the "policy makers" were doing to their paper US dollars.
If inflation is understood as an increase in the total supply of money in circulation, then the effects of inflation would be rightfully placed upon the shoulders of the monetary "policy makers." However, by changing the definition of inflation to its effects upon prices, the "policy makers" could now blame union wage hikes, OPEC, or the corner drug store's greed in rising prices. Shame on Academia for assisting in this fraud called the Consumer Price Index (CPI). History will record that CPI measured inflation was a fraud upon the paper US dollar in both its conception and execution.
Few people understand this in 2006, but enough did in 1960. The word was getting out. The United States was issuing currency in excess to its gold reserves. With the mathematical certainty of the law of supply and demand, as the United States increased its issuance of paper US dollars into circulation, all existing paper US dollars would lose value over time. Prices were going to rise because of this. The prudent in the early 1960s understood that the dollar was still a valuable asset, but the decision of the United States to inflate the reserve currency would make their paper US dollars a wasting asset in the years to come.
It was not done in secret; one only had to subscribe to Barron's to get this information. A run on the US gold supply was on. Paper US dollars were presented to the US Treasury and their owners demanded that the United States fulfill its legal obligations of surrendering one ounce of US gold for $35 US paper dollars. This run on the US gold reserves would continue until August 1971.
The United States itself soon refused to redeem its own paper money for its gold reserves. On 15 August 1971 "Nixon Closed the Gold Window." Secretary of the Treasury; John Connally told the world: "the dollar may be our currency but it is your problem." Had President Nixon not done so, the United States would have lost all of its gold.
President Nixon is blamed for the collapse of the Bretton Woods Monetary Accords, but as you can see in the above table, much damage was done before he came to office in 1969. His closing of the US gold window was the predictable end of a long chain of mendacity and machinations by central banks and governments internationally. But remember, the dollar is the American dollar.
Gold prices today would still be at $35 an ounce had the United States Government restricted its issue of paper dollars "Currency in Circulation" (CinC) to the limits of its gold reserves. They did not as we can see below. This chart explains why inflation is currently defined by its effects rather than its root cause.
The above chart was constructed using the same data series of dollars paper and dollars gold we saw in the first chart, but brought up to date for February 2006. This amazing inflation of CinC will prove to be problematic for the future value of the US dollar. The US dollar is still the world's "reserve currency" but for how much longer? With the certainty of thousands of years of history supporting me, I can say that only gold and silver can be trusted as a form of money that will keep its value over time. I will show in part 2 of this article that wealth is walking rather briskly towards the dollar exits.
President Kennedy allowed the United States to conduct its "monetary policy" outside the frame work of the Bretton Wood's Accords. This conduct was in contempt of the laws of the United States and a legally binding, ratified international treaty. It would be accurate to state that since the Administration of President Kennedy, global monetary policy has been one of no monetary policy.
If the modern monetary standard is the dollar standard, whose value is secured only by the ever growing supply of US Treasury Debt, then the current monetary standard is one of endorsing monetary inflation with no limits. This is no monetary policy, but it is an accurate description of the current state of affairs with the US dollar.
As the United States has a two year election cycle where its citizens get to vote for those politicians who promise the most for their votes, an inflationary dollar policy will remain an entrenched fixture until economic catastrophe strikes.
This flood of paper US dollars into the economy has to have its impact felt somewhere. So for decades, the "policy" formulated by the Wall Street / Washington Axis was to attempt to funnel the inflationary price effects into financial assets, while stemming the effects of inflation away from cost of living items. This is why for decades, housing values and stock prices have gone up while oil and basic commodities have trended down or remained steady. I am sure that much downward pressure was also applied to gold and silver prices. Seeing precious metals increasing their valuations is always the big bug-a-boo of any inflationist.
Today, prices are only the effects of "policy," dictated by entrenched "policy makers" who have deemed it necessary and appropriate for "sustained growth." Their motives are as many as there are "policy makers": favorable public opinion polls, utopian visions of social justice, or the size of their year end bonuses are all factors in this inflationary "monetary policy."
Today, one seldom hears the old axiom from the early age of computing, where it was said that "dirt and water in, equals mud out," but this is a valid concept. I have come to the conclusion that currently all too many "policy" decisions are made constructed from bricks of mud.
Type in the words "London Gold Pool" to Yahoo or Google and one receives a massive amount of information. In writing this article I used the internet search engines at least a dozen times to verify names and dates. In the comfort of my home, I found facts that years ago would have cost me money for parking to spend a day of my time at a research library. Not any more. Today, what can be found with a computer on the internet is simply amazing!
What concerns me about the internet is not what can be found using a computer, but what cannot be found. The data in a digital format, used in my first two charts was something I could not find on the internet. I've spent considerable amounts of time looking for these, and other historical series on the internet, as well as making phone calls to sources. I could not find this information in a digital format. I don't believe this data is available in the digital public domain.
To obtain data on the US gold reserves and CinC, I personally had to pay quite a bit for parking and spend many more hours than I care to remember. Entering numbers from old issues of Barron's into a spread sheet is a tedious task. As a consumer of financial and economic research, it seems obvious to me that financial authors seldom use the historical data series published decades ago in Barron's. Petty costs and tedium have raised a wall between this data and the computer. I believe that this is why all too few in finance and economics are aware of this rich source of information.
I would be pleasantly surprised if I were wrong, but I suspect that most college professors teaching Economics 101 have neither seen these two charts, or have the means to construct them. Without this data, what is the point of teaching Bretton Woods or Nixon's closing the gold window? This expansion of CinC and its effects upon the US dollar were major news stories in Barron's all during the 1950s - 1970s.
The fact is, college professors don't spend much time at all on the origins and consequences of past inflationary eras. The Failure of Bretton Woods occurred in the life time of many senior economists. These economists remember what a home, a hamburger and their college tuition cost them in 1971, and what students are paying now. What a difference 35 years has made!
It seems to me that current ECON 101 as taught today is only an explanation of how the current "policy makers" manage our current inflationary age. Any reference to the time before inflation became a permanent and accepted fixture in our world rates only a dismissive comment in main stream academia.
With the computer, the world now has fantastic access to information. But the computer has brought with it censorship of information more effectively than a totalitarian dictator could ever achieve.
The August 1981 introduction of IBM's Personal Computer (PC) has had tremendous effects upon the financial industry and schools of economics. However, the PC has proved to be the bane to the larger body of financial and economic knowledge that existed previous to 1981.
The digital format of the PC has effectively eliminated an enormous body of source material for economic research. Decades long, statistical data series recorded on paper with ink is not the preferred medium in the digital age. Go to any college and clearly students generally use computers for research, not old reference books. The compiling of old economic data series from decades ago is not considered material to complete a course objective in economics. The digital archives are a wide but shallow pool that does not contain the great body of information that existed previous to 1981.
Today, what rests undisturbed on book shelves, just feet away from busy students gazing at their computers, is as far away from these undergraduates, (and I suspect their professors) as the American continents were to Europeans before 1492. Until someone makes the effort to digitalize these decades old data series, this is how it will remain.
Because the digital age was born concurrently with the great American bull market in stocks, our information age is an epoch of ignorance of past bear markets. In front of a CNBC camera, it is not hard to be bullish on high tech stocks and bearish on gold and silver when your digital data sets begin in the 1980's!
To prove my point, lets look at the below chart of the Barron's Gold Mining Index and the much more modern XAU.
Most professional opinions on the gold mining industry are based upon the XAU options index. However, the Philadelphia Stock Exchange did not trade options on the XAU until 19 December 1983. This means that most opinions on gold mining are based upon information whose genesis occurred a full three years after the October 1980 top in the gold mining shares.
A strategic, long term understanding of the gold mining industry is not possible using the XAU data series. The impact of wars, social unrest and monetary treaty abrogation are not contained within the XAU's record. The current public information on the gold mining industry is tightly contained within the digital information bubble. It is time to add five more decades to the digital record.
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