Saturday, February 15, 2014

A Monetary History

In a pamphlet written in 1981, "Gold, Peace, and Prosperity: The Birth of a New Currency," there is a section where Ron Paul gave an overview of how money was ruined. For us to grasp how the global monetary system reaches the existing critical stage, we have to take a look at four significant events in monetary history:

  • Gold Coin Standard

  • Gold Bullion Standard

  • Gold Exchange Standard

  • Managed Fiat Currency Standard


The deterioration of the monetary system has undergone a long and slow process, which resulted from a series of decisions of the US Congress. The Gold Coin Standard was the monetary system prior to the Gold Reserve Act of 1934, the law that served as the basis for the Gold Bullion Standard. 

Twenty-one years earlier, the way had been paved for the deterioration of the monetary system caused by the Federal Reserve Act of 1913. For Ron Paul, the establishment of the Federal Reserve is just an implementation of an advice mentioned by Karl Marx on 1848 in Communist Manifesto where the latter talks about the "Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly." It shows that there is a 65 year gap from the time Marx shared such idea until the approval of the Federal Reserve Act of 1913. 

The formation of the Federal Reserve was followed by massive inflation in the 1920s with the "economic interventionism" of both Republican and Democratic administrations that culminated in the Great Depression of 1930s.

Gold Coin Standard

The Gold Coin Standard protects the people from the attempts of the government "to inflate, control the economy, run up deficits, and fight senseless wars, . . . ." But for central planners, the Gold Coin Standard was a great barrier that must be removed. Such desire was fulfilled through the "Gold Reserve Act of 1934, which outlawed private ownership of gold, prohibited the use of 'gold clause' contracts, and abolished the gold coin standard. This "law created the gold bullion standard," which lasted "for only ten years."

Ron Paul mentioned that the Federal Reserve was established under the influence of "American Bankers Association and the nation’s biggest bankers, such as J. P. Morgan and Paul Warburg." The goal was to protect their industry "against bank failures and to provide a more 'elastic' currency," where bankers and big corporations would greatly benefit. 

Ron Paul quoted the words of John Maynard Keynes in 1919 as an appropriate description of what happened in the formation of the Federal Reserve: 

“There is no subtler nor surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Gold Bullion Standard

The establishment of the Gold Bullion Standard opened the way to sow seeds destructive both to US and world economy. It prohibits private ownership of gold and considered the making of "goldclause contracts" illegal. For Ron Paul, this did not only violate American's "constitutional rights," but also removed the protection of the people "from spendthrift and untrustworthy government."

After WW2, gold had kept entering the US until 1948. This "massive accumulation of gold in the U.S. Treasury" gave an opportunity to return to "full gold coin standard." However, leaders that time ignored the legislation introduced by Congressman Howard Buffett of Nebraska, and instead, they went to "Bretton Woods, drew up an agreement with bankers from other nations, and set America on a disaster course." 

Gold Exchange Standard

The "monetary reforms" created at Bretton Woods, New Hampshire on July 1944 provided the basis for 44 countries to form the WB and the IMF, which started operation in 1946 under the "new" Gold Exchange Standard, that gave permission to treat USD "as good as gold" and be considered as the "international reserve currency." The goals of this new monetary system is “to maintain exchange stability and stimulate world economic activity,” in which in the eyes of Ron Paul is "nothing more than an international Federal Reserve System." This agreement lasted for 27 years.

Managed Fiat Currency Standard

The Bretton Woods agreement died at the age of 27 on August 15, 1971 when President Nixon closed the "gold window," and refused to redeem the USD overseas with gold. A great door has been opened for massive inflation that made the bureaucrats, politicians, international bankers, TNCs, and some labor leaders to celebrate. Managed Fiat Currency Standard was born. 

As a result of this new monetary system, the US found a well to provide fund for the "Vietnam War and the Great Society, as well as massive business malinvestments." With the end of Bretton Woods agreement, the USD also died on the same date in the sense that its connection to gold has been removed. 

Personal Remarks

Remember that Ron Paul wrote all of this 33 years ago. Many things have changed since then. Personally, I only have a superficial knowledge about the four key important events in monetary history. Among many information that I encountered so far, two subjects caught my attention - exportation of inflation and transfer of wealth. 

Ron Paul mentioned that keeping bigger portion of printed USD outside of US shores would give an appearance that the American economy was not really in bad shape as analyzed by the critics of the Fed. The danger is that once countries who hold the depreciated USD began to feel the harm of the excessive quantity of USD to their economies, and will decide to return them to their source. That's the time that the American people will realize the extent of economic devastation caused by massive inflation coming from the Fed.

Concerning wealth transfer, I just want to mention two ideas that I consider popular these days. The first one is taken from the Bible where many Christians believe that a time will come that the wealth of the wicked will be transfered into the hands of the righteous. I just could not understand how they seem to believe that the existing global economic crisis would usher into the fulfillment of their favorite biblical passages. The second idea is inspired by information explosion. It is believed that the advent of the Internet opened doors of opportunities for entrepreneurs. The successful will experience this transfer of wealth. Ron Paul was talking about a different kind of wealth transfer. He describes the kind of wealth transfer that is actually happening in the real world caused by the existing monetary system. This is a transfer of wealth "from the less well-off to the well-to-do." 

In concluding this article, a question comes to my mind. Giving a grade to Federal Reserve, IMF, and WB on the basis of their performance, we could say that after more than a century (in the case of the Fed) and 68 years ( in the case of IMF and WB) in existence, it seems that these financial institutions failed to achieve their goals. Are the stability and stimulation of world economy their real goals? Or are these goals just subtle devices only good in paper to convince the public but hiding the real agenda behind "noble intentions?"