by Howard S. Katz
9-7-09
Dear Mr. Norris:
You are wrong.
Now you must listen to my song.
The price of gold hit nine-nine-eight.
To break $1,000 is its fate.
(Note to readers: With gold ready to break above $1,000, we have an interesting opportunity to look into the minds of competing traders in the markets and find out what they are thinking. After all, for every speculator who makes money in the financial markets someone else must lose. For every long there is a short. For every buy there is a sell. In this sense the markets resemble your friendly neighborhood poker game. At the end of the night, there are winners and losers, but the total won or lost for all players is zero.
This means that to be a winner you must be smarter than the other fellow. If you can see the truth better than he can, then you can be a winner. We are fortunate this week that Floyd Norris, of the New York Times has come out with a clear statement of his economic views. Since the Times is, far and away, the most influential paper in the world, this gives us a unique insight into what the world is thinking, or will be thinking in the next 6-12 months. This gives us an important advantage in planning our trading strategy. Therefore, this week’s article is devoted to an analysis of Mr. Norris’ views)
Mr. Norris states:
“If victory [in the financial markets] is to be had, it will owe a lot to the willingness of American policy makers to set aside cherished policies and simply create money. And that is one reason it is appropriate to pause and celebrate an unheralded bicentennial: The father of the greenback, Elbridge Gerry Spaulding, who was born 200 years ago in 1809.”
“Bernanke: Greenback’s New Father,” by Floyd Norris, NYT,
9-4-09, p. B-1.
Well, there it is. Floyd Norris sets forth the exact opposite of the gold bug view. He believes that economic victory depends on the policy “simply to create money.”
The modern advocacy of this policy goes back to 1928 when two Americans, William Trufant Foster and Waddill Catchings, wrote a book entitled The Road to Plenty in which they argued that the road to plenty for a society is to simply create money. Let us first analyze this idea from a scientific point of view.
One essential tool of science is to always check one’s theory against the facts. What are the facts concerning the creation of wealth? Which societies have been rich, and which societies have been poor? And what have their policies been with regard to the creation of money?
Economic history has a clear cut verdict on this. Most countries have been poor, and I mean Afghanistan poor, Bangladesh poor or North Korea poor, for most of history. One historian commented that, when George Washington drove to his inauguration in 1789, he used the same type of vehicle used by Julius Caesar in 44 B.C. In 1833 years, there had been no economic progress. But then, starting right about 1790, there was a burst of economic growth such as had never before been seen. It started in Britain and America, which made incredible economic progress over the course of the 19th century, and it then spread to certain near-by countries who imitated them.
The dramatic increase in wealth can best be described by the population figure for England. From 1300 A.D. to 1750 A.D. the population of England ranged from 3 million to 6 million. During this time the population was held in check (in all countries) by the fact that half of all the children born died before puberty. Thomas Hobbes described human life as, “nasty, brutish and short.” There simply was not enough food in the world to keep these children alive. But then, from 1790 to 1900 the population of England rose from 9 million to 33 million. The extra wealth being created by the new system was keeping these children alive.
The comparable figures for the U.S. are a little under 6 million in 1790 and 76 million in 1900. But the U.S. benefited from immigration. England had a net outflow of people over this period. Her population increase was solely due to an increase in wealth (which enabled her to buy the food to keep her children alive).
What were these policies which led to such an increase in wealth, specifically in two countries? One of the policies was hard money. Washington, and the other Founding Fathers, put the U.S. on the gold standard when they wrote the Constitution in 1787. This limited the growth in the money supply to new discoveries of gold. And since the supply of new gold grows very slowly, this led to a long period of stable prices. The wholesale price index was the exact same in 1933 as it had been in 1793. This stability of money allowed people to make good economic decisions and increase both their personal wealth and the wealth of the country. England adopted the gold standard after she defeated Napoleon and kept it until 1931.
Now if the two greatest economies in world history both were based on a gold standard, this sounds like a powerful argument for not changing a good system. In modern lingo, “If it ain’t broke, then don’t fix it.” What is Mr. Norris’ argument in favor of creating money? Defending Spaulding, he writes:
“paper money did not set off sharp inflation over time.”
Norris, Ibid., p. B-7.
This is not true. Prices in the U.S. doubled between 1861 and 1866. Then, with the war over, Congress set about reducing the nation’s money supply preparatory to the resumption of the gold standard, which was accomplished in 1879. Along the way, silver was demonetized. The system from 1788 to 1861 used both gold and silver as money. After 1879, silver was no longer money. This further reduced the money supply. Thus 1866-1896 was the greatest period of price decline in American history. An average good which sold for $1.00 in 1866 sold for 30¢ in 1896. In 1900, the Times itself sold for 1¢. (Today it costs $2.00.)
What happened during this unique 30 year period when the U.S. not only failed to recognize the need to create money but went to the opposite extreme of destroying money? Well, this is the period when the United States moved into the lead as the greatest economy in the world. In 1866, Americans (as most peoples) rode horses. By 1896, they were starting to drive automobiles. Just a few years later they would be flying in airplanes. Rich Americans in 1896 had telephones. Many Americans of 1896 had electricity. The telegraph and the railroad were already in use Radio was just around the corner, and. motion pictures were just a few years away.
In short, if you could time-travel back to 1896, you would find a world not too different from what we have today. If you time traveled to 1866, you would feel yourself to be in a historical era with old fashioned people and technology. And this enormous change occurred in the span of one generation.
And what a generation! Giant railroads were built which spanned the American continent. (In 1620, the first English settlers found natives living here who did not even know that there was a west coast.) From 1866-1896, the real wages of the average American worker rose by 90%. (In the generation of 1972-2002, real wages fell.) Great scientists arose who conquered nature and made it do man’s bidding. Great businessmen arose who took these great inventions and made them affordable to the common man. (John D. Rockefeller, whom you all know as a “bad” man, reduced the price of kerosene – the main fuel of the day – throughout his business career. I will tell you the truth, Mr. Norris. I don’t think that that was a bad thing, and I would not call the $4.00/gal. price of gas of summer 2008 a victory. It was not a victory for the common people of America.
Now let us turn this little scientific game around, Mr. Norris. Why don’t you find me one or two countries which followed your recommendation to create money and which achieved economic success? How about Germany of the period 1914-1923? They created money like crazy. Prices multiplied by 726 billion times. over this 9 year period. The middle class was wiped out, and a few years later, in resentment, they voted for Hitler.
“The survivors of the German debacle did so by purchasing gold early in the process.”
Michael J. Kosares
Another case was modern Zimbabwe where prices multiplied by more than a trillion. In a nation which had been the bread basket of Africa, we saw pictures of emaciated, starving people. Another case was post-WWII Italy, which acquired the nickname “the sick man of Europe.”
There is not a single case in history where a country got wealthy by creating money. Indeed, the greatest success story of post-war Europe was Germany. Post-war Germany had learned her lesson and created the least amount of money in Europe during the 2nd half of the 20th century.. The other nations of Europe thought so highly of Germany that they created the euro, a new currency which was an imitation of the old deutschmark. And here is the U.S. running a chronic balance of payments deficit, massive budget deficits, unable to make a better car than the Japanese. All you have to do is to review the story of the Big 3 American auto companies over the past year, and you realize that anyone who calls this “victory” does not have the slightest knowledge of economics.
It is such foolish theories which dominate our society. It is a shame because Adolph Ochs, the man who made the New York Times a great newspaper, was a gold bug. He supported the gold standard and William McKinley against William Jennings Bryan in the election of 1896, when the phrase “gold bug” was first coined.
Paper money is not some brilliant new economic theory. It is nothing more than government sanctioned counterfeiting. The counterfeiter may get rich, but only because the rest of us get poor. The counterfeiters themselves love it, and they handsomely reward those immoral enough to shill for them. Alan Greenspan is a good example. In the 1960s, I used to attend his lectures at which he denounced paper money. Then, when the bankers waved money and fame in front of his face, he was only too happy to do their bidding. Printing money does not create wealth. It is great for the counterfeiter personally. It makes him wealthy, but it makes everyone else poor. And it has never brought the slightest benefit to any country in the history of the world.
In 1933, the Democratic Party gave the privilege to create money to the commercial bankers. The idea that they wanted to rob from the rich to give to the poor or that F.D.R. was a traitor to his class are gigantic world-class lies. If you are not a banker, then this system operates to make you poorer, and now Obama, with his $trillion dollar deficits, and Bernanke, with his $trillion Fed balance sheet are taking paper money to a new, higher level. I can assure you that, when prices in the United States explode to the upside, then Floyd Norris will come up with some scapegoat to divert the public wrath from Bernanke, just as the Times did with Greenspan vis a vis the housing bubble.
The problem is that to support paper money as a political issue these people find it necessary to denigrate gold, both as a political and an investment issue. Because the modern Times has betrayed Adolph Ochs, the Times of today is a fount of misinformation on the subject of gold. As this misinformation spreads over the world, the price of gold is depressed below what its fundaments would warrant, and this presents a great opportunity for gold bugs to buy at very inexpensive prices.
If you are in cash (in any of its variations), you will lose. If you hold fixed income investments, if you have a savings account, if you have an agreement (like an insurance policy) to be paid in the future, you will be cheated. Your wealth must be in real goods. And of these real goods which are permanent, storable and convenient to exchange, gold has proven over many centuries to be the best store of value. In 1933, 20 one-ounce gold pieces could buy you a car. They can still buy you a car. In 1933, one such gold ounce could buy you 200 packs of cigarettes. It can still do so today. In 1933 one gold ounce could buy you 400 cups of coffee or 400 trips on the NYC subway.. It buys you 400 cups of coffee and 444 subway trips today. If prices double over the next 10 years, the money you have in your savings account will buy you half as much. But gold will retain its value.
The people denigrating gold are agents of the paper aristocracy. They want the paper aristocracy to win, and for that to happen you must lose. This is why gold is undervalued. They keep talking it down. If you listen to them, you will lose.
Right now gold is poised at the $1,000 mark. It came up to this point in March 2008 and again in Feb. 2009. In both these cases, I recommended selling for the near term and standing aside. But this time is the charm. Who are you going to believe, the people who have been lying to you since 1933 and have been wrong on every major economic event or the people who have hit the nail on the head again and again?
To help people deal with these difficult times, I publish an economic letter, the One-handed Economist ($300/yr.). To check it out, please visit my website, www.thegoldspeculator.com. I also blog on current events and other moral and political issues at www.thegoldspeculator.blogspot.com. This week’s blog is on the recent death of Ted Kennedy. It will probably be the only thing you read on the subject which does not bore you to tears.
If gold can cleanly break $1,000, then that level will become support. It will be a floor instead of a ceiling, and there will be good times ahead for the gold bugs.
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Posted by D.Stewart Armstrong in Articles